What’s Up War & Peaceniks‽
Today, a combo of two ongoing themes:
The Media Death Stars AND ESHAP Best-Bet-Predictions-for-2022. It’s a molten lava cake of facts. I hope you enjoy!
Unlike Microsoft, Apple is a tech company that IS at the center of most conversations about media and entertainment. On its face, this is odd because the House That Jobs built is still primarily a hardware manufacturer.
In practice, though, it’s easy to see why most view Apple as a star of the Media Universe. Apple Music is the second largest music streaming service. Podcasts are literally named after an Apple product that no longer exists (RIP iPod). Most apps that Americans download come from Apple’s App Store, and 60% of all app revenue in the world is earned by Apple.
If you live in America, Europe, South Korea or Japan, you more than likely downloaded your Facebook, YouTube, Spotify, Twitter, Instagram, Snap, NY Times, Washington Post and Mobile Microsoft 365 apps on your iPhone. It is nearly impossible to make money in the app business without getting your app approved and distributed by Apple. So, it’s obvious why most Americans see Apple as an media company. But in reality, Apple actually produces relatively little media or entertainment.
A brief history lesson is useful.
Apple’s first Death Star was built around the Mac desktop. Steves Jobs + Wozniak launched the Macintosh 128K in 1984 with one of the most famous commercials of all time (ironically, retrospectively, presenting themselves as an upstart rebel fighting “the man”).
The Mac became a monster hit. However, Jobs’ stubborn insistence on high-end design and interface, and his personal beef with fellow Jedi Bill Gates, created a price war that Apple lost, badly.
Jobs was forced out of the company, and – reinforcing the importance of this core issue – due to poor succession planning, Apple never again regained its PC market share.
Jobs (after founding another multi-billion-dollar company, Pixar) came back in 1997, full of piss, vinegar and a vision of the future: Pocket Computing. Apple launched the iPod in 2001, and then iTunes exactly two years later. Combined, these were a laser cannon that near-single-handedly changed music forever.
Depending on your point of view, Jobs’ laser blast might be blamed for destroying the music business, by unbundling the album and eliminating physical sales – a blast from which the industry only recently recovered. The iPod vaulted Apple to a near monopoly in portable music in just over two years. (RIP Walkman.)
In 2007, after a decade at the helm, Jobs announced that Apple was no longer a computing company, in a presentation where he introduced his Death Star II: The iPhone. It was a weapon so powerful, it took over the telephone business, and destroyed numerous companies and industries in its wake (pour one out for Nokia, GPS and analog wristwatches).
The iPhone, due to its cool factor, elegance and dogmatic dedication to built-in obsolescence, is the weapon that made Apple the most powerful media platform on earth. Since 2012, when smartphone penetration in the US became ubiquitous, Apple has dominated the market, with more than twice the sales of its nearest competitor, Samsung.
And while Samsung actually outsells Apple globally, Apple dominates nearly every upscale market, where its very expensive devices demand both outrageous prices and near cult-like dedication.
The iPhone cannon transformed Apple from a third-place PC maker into the worldwide leader of mobile computing – what Jobs accurately predicted would be THE key battlefield of the 21st Century. Apple doesn’t make phones. They make powerful portable computers. They provide their cult members with instant access to any and all information, media and entertainment, anywhere on earth.
Over 70% of all social media access is mobile. 60% of LinkedIn access is mobile. 80% of Facebook usage is mobile. 60% of YouTube views are mobile. 70% of Gmail usage is mobile. Instagram, Twitter, Spotify, Snap, TikTok, and WhatsApp are virtually mobile-only platforms. And in the US, this means these business’ users are overwhelmingly iPhone users, and the majority of their revenues flow through the iPhone.
Ironically, the price war that downed Apple’s original Death Star, the Macintosh, is precisely what powers its Death Star II. By specifically catering to the upscale customers willing to pay 💰 for their phones and far more able and eager to pay for media, entertainment and access, Apple has built a money-machine unequalled in human history.
Elitism IS Apple’s core business.
Apple’s Average Revenue Per User (ARPU) – a Key Performance Indicator (KPI) for most successful companies – is exponentially higher than for any other company of its scale.
Apple controls only about 15% of all app downloads on earth yet generates 67% of all worldwide app revenues. (Read that sentence again. I’ll wait.)
A big the thing to keep in mind about the Media Wars:
Without exception, every other media company on earth relies on Apple for access to their most valuable users.
The iPhone super-pocket computer turned Apple into the first trillion-dollar company. Then, just twenty-four months later, it propelled it to be the world’s first two-trillion-dollar company. All of this, nearly exclusively, due to just one product. Other products are nice and sexy, but make no mistake, historically, the Apple Death Star II runs on the nuclear power created by the most important device since the cotton gin: The iPhone.
Here’s Apple’s revenue by product for 2007 (the year the iPhone launched), through 2013 (the year smart phone penetration in the US grew to over 50%):
And here is Apple’s market capitalization since the launch of their Hypermatter Reactor Core, the iPhone:
Crucially, Apple did NOT repeat the transition mistakes of 1985 Apple or Microsoft’s Ballmer. Jobs gracefully stepped aside in 2011, and in another visionary move, hand-picked a successor who is perhaps the polar opposite of himself – someone who understood that the first gig of the new CEO would be to grow the mother-fucking golden goose.
Given perhaps the toughest act in corporate history to follow, Tim Cook has not disappointed. Cook restructured Apple to focus even more on the iPhone and its related services. He de-siloed hardware and software for the first time and leaned the entire enterprise into making the iPhone into the most desired, addictive and must-have-iest product in the world. Lines around the block at Apple Stores for the release of slightly-but-not-so-different iPhones are proof that Tim Apple accomplished what he set out to do. That market cap chart above ain’t so bad either. And it shows that the astronomical valuation growth actually started AFTER Cook took over.
That brings us to present-day Apple, and Tim Cook’s first, truly risky big move: Diversification.
Around five years ago, Cook & Co. came to the distinct conclusion that Apple cannot live by iPhone alone. And so started Cook’s foray into services and platforms.
It’s Appening
As more iPhones got into more pockets, more people built more cool apps for those iPhones, which Apple distributed and sold in their App Store. The more apps users downloaded, the more revenue those apps generated. And since Apple took a percentage (as high as 30%) of every single app sale, by the end of 2015, Apple was making money on software and media that they didn’t create.
Apple Makes Music
In 2015, Apple announced that iTunes would become Apple Music, shifting from a single unit sales model to a subscription model. Spotify’s early success was clearly the catalyst for Cook’s move. Even so, it took four years for Apple to address what was clearly THE trend in music and it did so in a clunky fashion. The company not only refused to take Spotify’s lead and use a free ad-supported tier to onboard users and create a second revenue stream, but they also bribed record labels to forego free ad supported platforms altogether, attracting a Justice Department investigation into antitrust tactics (which becomes something of a trend). Also, users HATED the new service.
Still, launch they did, and after some stumbles, and numerous redesigns, Apple eventually got the platform into working order. Then, users and Apple both started dancing to the Apple Music. Turns out, recurring revenues are pretty darn nice! Beats the shit out of slinging single-song sales based on whenever Beyonce decides to drop an album.
But all was not rosy in Cupertino. Cook and friends looked across the portfolio, read the analysts critiques and decided the company was far too over-reliant on one product, the iPhone.
Thank You for Your Services
Apple Music, iCloud subscriptions, and revenues from the App Store convinced Apple to lean into its new kid on the block, a segment called “Services.” By then Apple Music’s revenue had increased by 25%, surpassing iPad sales by a whopping $4 billion, representing nearly 10% of Apple’s total revenue. In 2017, Tim Cook publicly laid out on an expensive and ambitious goal of doubling its Services business by 2020, promising to grow it from $25 billion to $50 billion in just three years.
To do this, Apple needed to get aggressive in the development of new recurring revenue services like Apple Music, but also in its dealings with content providers who wanted to use the App Store to access their users’ pockets and wallets. And get aggressive they did.
In 2017, Apple introduced a new app subscription revenue model for the App Store and calcified their policies for revenue splits for all apps. They also created ad campaigns for app searches in the App Store and began making hard-hitting deals for shelf space all over the iPhone. Example: Until very recently, Apple charged Google an astronomical $9 billion a year to be the default search engine on iPhones - a practice that ended just recently, and only due to threats from European regulators (there’s that trend again).
Every single app on the iPhone generates revenue for Apple – even the free ones. Just to gain access to the Apple platform to develop an app, developers must pay a $99 annual fee. In 2017, Apple locked in its 30% cut of all app sales, and all app subscriptions generated in the App Store. Even on free games, Apple takes 30% of all in-app purchases.
Don’t like these terms? Cool. Good luck launching an app without iPhones.
Reminder: While Apple has just 15% of all app downloads, the App Store generates nearly 50% of all smart phone app revenue and 2/3 of app revenue outside of China. In 2021, Apple will gross $85 billion, just from app sales – more than 177% the revenues of Google Play.
Apple also set out to grow and design homegrown services. They began aggressively marketing iCloud to iPhone users, quietly growing this one segment to approximately $5 billion in sales in 2019. They launched AppleTV+ in 2019. In 2020, they launched Apple Arcade (a gaming subscription service), Apple Fitness (their exercise fitness subscription meant to compete with Peloton) and AppleOne, a bundle (or rundle) of ALL their subscription services.
The results?
Again, Tim Apple beat expectations. The Services segment MORE than doubled – reaching $53.7 Billion in 2020, and more than $68 billion in Fiscal 2021.
As for the diversification goal, in 2017, the iPhone was 70% of Apple’s revenues. In 2020, the super pocket cannon was 50% of total sales. In the most recent fiscal quarter ending September 2021, iPhone sales fell under 47% of all revenues, while Services rose to nearly 22%.
These metrics were not the result of a downturn of iPhone sales (though the past year has seen some slowing due to a lack of chips). This shift, by design, was created by a steep incline in Services revenues, along with an uptick in wearables (notably watches and ear-pods) – meeting Apple’s goal to diversify their revenue stream from solely focusing on the iPhone to include more subscriptions.
And all this is why The House that Jobs Built and Cook Annexed is just minutes away from becoming the first three-trillion-dollar company in world history.
Happy ending, right? Not so fast.
Apple’s App Store dictatorship is being challenged on countless fronts. Major content providers, such as Spotify, Tinder, Epic and a slew of other developers, accuse Apple of monopolistic behavior via the “Apple Tax,” that 30% cut Apple takes of each app purchase. They claim the tax itself is onerous, and Apple’s denial of creating alternative payment methods for apps in their App Store is the definition of anti-competitive.
Epic, whose Fortnite represented 13% of all gaming app sales in the app store prior to their fight, took Apple to court, and won (mostly).
While the judge did not force Apple to change the percentage of their tax, and another judge has stayed the order while Apple appeals, this feels like a first big chink in the Apple Dam. Spotify and Peloton are pissed about the Apple Tax, and claim Team Cook gives their own services such as Apple Music and Apple Fitness preferential treatment. It’s safe to expect they and others will join Fortnite’s battle royale. Simultaneously, there are bills winding through both houses of congress, and in many laws working their way through legislatures in Europe, aiming at the Apple App Store/Google Play app duopoly. There are few things that Elizabeth Warren AND Josh Hawley agree on - but regulating Big Tech is one.
Meanwhile, in homegrown services, things are not all Ted Lasso’s biscuits and Apple Pie.
AppleTV: A Plus?
AppleTV+ may have some good shows (the Emmy-winning Ted Lasso), but in the fight to dominate TV’s Attention Economy, AppleTV+ is still relatively unarmed. Netflix has tens of thousands of titles and 214 million subscribers. Disney+ has Marvel, Pixar, and my personal obsession, Star Wars – not to mention a great bundle with Hulu and ESPN+, which will now have the NHL and NFL – and has reached 110+ million subscribers in just 2 years. Amazon has The Lord of The Rings, The Boys and free shipping of roller skates and toilet paper. HBOMax has 50,000+ hours of programming, Succession, Friends, The Big Bang Theory, Space Jam and 25 big blockbusters a year. Even Peacock has 209 episodes of The Office.
Apple’s decision to forego acquiring a big library to fill out its service, and keep people streaming, puts it at a huge disadvantage in the Streaming Wars. And it shows.
Increased competition has created an opening against the market-maker Netflix. Disney+ and HBOMax have made big inroads in relatively little time. But note: Disney+ and AppleTV+ launched in the same exact month, yet Disney+ has 350% the usage of AppleTV+. When combined with Hulu, which Disney owns, the Mouse House has nearly seven times the mindshare of Apple. HBOMax launched nine months after AppleTV+, yet still has managed to attain 250% the viewing of AppleTV+.
Yes, Ted Lasso won Apple the Emmy for Best Comedy Series. Yet, in applying for a union contract with IATSE (representing the stagehands and crews on most film and television productions in North America), this summer, AppleTV+ claimed to have fewer than 20 million subscribers. Two years after launch. That’s less than 20% of Disney+ subscribers, and less than half of HBOMax subscribers.
TV is a hit-driven business – which why every single successful TV outlet in history plays the portfolio game, developing and producing many originals to find that one hit. But it’s also a retention business. So filling out streaming shelves (what we used to call the schedule) with library comfort food, and lots of are still the table stakes.
Prime has some hit shows for sure, but their library content is uber-voluminous. The issue is not that Apple’s programming is bad, it’s just that, by comparison, they don’t got any! Without a compelling and consistent reason to use the service, users abandon it. And once they do that, no length of free trial can win them back.
SO, iNU?
Apple does not report the number of subscribers on Apple Music, Apple Arcade (their gaming service) or their subscription bundle Apple One. What Apple will tell you is that they now have 745 million subscribers via the App Store – which includes their own services AND third-party apps. Which is about as clear as cataracts.
And while you have to admire the moon-shot Cook has taken and succeeded with on Services, what seems to escape most analysts as they drive Apple’s market cap towards three-thousand-million-dollars, is that 20% of their NET REVENUE comes from the Apple Tax, which is, at this very moment, at substantial risk.
As the late-great Biggie Smalls might say: If you don’t know why Tim Apple has spent so much time and money fighting Epic… now you know.
Which has all been a very long way of getting my to my fourth ESHAP-BEST-BET-PREDICTION-FOR-2022:
Apple is gonna buy something big with all dat cash in 2022.
(My predictions for Apple’s 2022 are for Premium Peaceniks only.)
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