Apple's Changing Business Strategy

Apple’s Problem

The iPhone was always considered a revolutionary product, with certain models like the iPhone 6 touching sales figures of over 220 million units. While this was great for the company in the short term and generated over $18 billion in revenue, it left Apple with the key issue of being overdependent on the iPhone, with over 60% of its revenue coming from this stream alone. Furthermore, since 2018, the unit sales of the iPhone have declined, causing Apple to raise prices to maintain their revenue.

Apple’s Solution

So with Apple’s most significant product at stake, what exactly has Apple done to overcome this challenge?

The answer to this lies in Apple’s 2016 announcement where Tim Cook said Apple would aim to double its revenue from software services by 2020. This effectively meant that Apple was going to transform from being a hardware company to a software services company.

Apple would originally have 3 kinds of products: hardware, retainer and upsell. The first would be the entry product which was the hardware (e.g iPhone). Then there would be retainers such as iMessage and the App Store, which kept the user hooked. The retainer products would increase functionality between devices and create a more appealing upsell item, such as the Macbook.

The transition to software would occur in 3 ways.The first is through Apple using its aggregation power, which is Apple’s ability to use data regarding how customers use certain apps and what they purchase on the app. Apple can find gaps in existing services and apps and carefully develop new products that are in direct competition with those existing in the market. The catch remains, however, that Apple would still receive commissions from App Store purchases and sales meaning they are generating revenue from all sides. This forces Apple’s competitor apps to either increase costs or have lower margins, triggering antitrust cases in the EU.

Although Apple’s 2020 target has already been reached, Apple still seems to be keen to enter the health-care and FinTech space, and has already laid a solid foundation with Apple Card and Apple Watch, with Apple Watch becoming the world’s largest watch manufacturer, beating out established brands like Rolex. Moreover, products like Apple Card in a similar sense to the App Store have a lot of spending data, which can be used to sell financial services, and also push products through advertising.

Apple’s soaring revenue gives it the flexibility to enter completely new industries, such as the automotive sector through the Apple car, and focus purely on innovation.

Conclusion

Apple’s transition is a key example of how company management plays a crucial role in the company’s success. While trading multiples and valuation metrics are all good in helping to decide whether to purchase a stock or not, they are only part of the picture. The company’s general sentiment and management’s ability to pivot and read the market are also key. Understanding a company’s management is hard to quantify and does not allow for a systematic approach, but it holds relevance and is an important indicator of success. You may be thinking how can one judge this as an outsider? The answer to this lies in research and trying to understand what the current management’s background is. What they have done in the past for the company, and what is their vision for the future?