Apple started 2020 with another strong financial performance. There were no real surprises. I continue to be stunned by the company’s ability to generate both revenue and profits in highly competitive categories. The US continues to be Apple’s strongest market, which fits with its focus to generate more spend within an ecosystem of more affluent consumers.
I do expect to see more innovative services and products from Apple given that Apple continues to grow spend on research and development. According to a May 2019 CNBC interview with Tim Cook, Apple is acquiring a company every 2–3 weeks. He also said that Apple had purchased between 20 and 25 companies in the past five months. While Apple has a handful of high-profile acquisitions of services or products (e.g., Beats, Shazam, Siri, etc.), many of these acquisitions are much smaller purchases of technology or talent to bolster its photography-, camera-, extended reality-, components-, voice-, or artificial intelligence capabilities — and more. These capabilities are more visible to the consumer at feature level — e.g., compiling my best photos, tagging friends, speed, better photos, improved spellcheck, and so on.
Portfolio Of Wearables Continues To Deliver Strong Growth
The wearables category grew 41% over the course of 2019 based on strong Apple Watch and AirPod sales. Q4 2019 — the holiday quarter — saw growth of 17%. Short supply of AirPods (Pro) likely diminished its revenue somewhat. (I know I waited two months on a pair.) There is still no replacement for the iPhone or smartphone as the “it” device. As the utility improves with each iteration of these devices, they will continue to fit more in the “need to have” rather than “nice to have” category for consumers.
Service Continues Its Strong Growth — Even From A Large Base
Services is second only to the iPhone as a revenue category, though it represents less than 20% of overall revenue. We’re all anxious for Apple to offer us more detail on services revenue. Like the carriers, we need ARPU (average revenue per user) AND the breakout of subscriptions versus one-time fees (e.g., apps). We also want to know how many services (e.g., News, TV, Music, iCloud) each user purchases. This would provide a lot of needed insight on how much more revenue they can squeeze from existing customers versus Apple’s dependency on new customer acquisition. (And, yes, the same would apply to hardware.)
Future Growth Is More Complicated
There are a lot of factors that will drive future success. (See past blogs.) I don’t doubt Apple’s continued ability to turn in strong performances, but doing so will not get any easier. Why?
- Media subscriptions depend on strong content. Competition among films, TV, music, games, and more depends not only on deals with third parties but also original content. My colleague James McQuivey covers this in depth on his blog. The field is very competitive. And then you ask the question, “how is the fragmentation of video services serving customers?” Will consumers pay more for video overall or devote more of their free time to watching content?”
- Apple Pay has strong potential, but consumers still haven’t embraced it. More and more enterprises — both stores and online — have embraced Apple Pay as an option. (I love it and use it any chance I get for the convenience.) However, Forrester’s data shows low-double-digit adoption, with low-single-digit adoption on the Watch.
- Cameras, displays, battery, and speed drive purchases. (See my earlier blogs.) Better cameras, displays, and speed typically want both more battery and a larger form factor. None of these features lower the cost of the device. Pricing power helps Apple, but the game is still expensive.
- Future experiences will depend more on conversations. Volume of chat or voice services to use to learn to improve conversational interfaces aren’t the only predictors of future success but are important ones. So far, Apple plays within a smaller, more controlled ecosystem than some of its competitors. There is an inherent bet here that consumers won’t transact in any meaningful way through conversations in the near future. I do believe that browsers burden consumers with too much cognitive load. We need an alternative, but getting there with a critical mass of consumers will take time.
- Improved experiences will be incremental — and hard to market. Yes, consumers are fascinated by displays, cameras, video games, and battery life today. As we move forward and our phones do the little things for us — proactively setting alarms, reminding us of birthdays, showing us photo composites from our vacation last fall — we’ll become very attached to our phones, but we won’t be able to put our finger on just that thing.
What about 5G? Apple and other smartphone manufacturers can afford to wait. Unlike when 4G was rolling out across the United States, networks aren’t nearly as congested, while the combination of device manufacturers and service providers have conspired to push consumers onto local Wi-Fi networks and made doing so easier. (4G service in my flat is terrible. I hate that I constantly have to switch to Wi-Fi, but I’ve come to accept it.) Streaming video over 4G works well where there is a strong signal. 5G can be faster, but the use case for consumers must be compelling.
And the last wild card that is on my radar is healthcare: When, if at all, will this become a serious revenue stream for Apple?