Apple, services and moats

  • Apple announced another phone, but pretty much all phones are great now, and most of the dramatic innovation is behind us as the market matures. The one place for really obvious improvement is in cameras, where Apple and Google are using computational photography to get more and more out of the laws of physics

  • It’s more interesting to look at accessories and services, where Apple is building layer on layer of defensive fortification - hardware and software, free and subscription, high margin and low margin, all of which support the core product and some of which bring in a few billion of spare change. This is the iteration/optimisation/execution phase of the market.

  • I’m pretty unconvinced by Apple’s TV service - the shows might be good but there’s nothing unique to Apple’s capabilities or sensibility here and Apple isn’t iTunesing or Napstering TV here. That partly reflects the tech industry’s general failure to break into TV, but maybe it doesn’t matter - Apple‘s budget for buying shows is more than its total cashflow in 2007, the year it announced the original Apple TV and something called an iPhone.

It’s now over a decade since Apple launched the first modern smartphones, and we’re well into diminishing returns. Most of the obvious dramatic improvements have been made, and there’s not much scope for radical innovation left. Smartphones are now pretty much where PCs were in 2007 - it’s not so much that Apple has somehow ‘forgotten how to innovate’ as that the smartphone, like the PC, has passed that stage in the S-curve. Apple and its competitors keep making great phones, and we care less and less.

The one place where obvious improvement is still possible is in the camera. Apple and Google are now leapfrogging each other every year (portrait mode, night mode), and it’s worth noting that most of the improvement is actually from software - integrating multiple sensors and the GPU with software and especially machine learning (this is why they call it a camera system). I wrote about this trend for ‘computational photography’ earlier this year.

The other half of the iPhone story, though, is all the stuff that Apple builds around the iPhone. We often separate this into ‘accessories’ and ‘services’ (especially as Apple talks up ‘services revenue’), but I think we could group all of these together as ‘outworks’.


In this image, there’s the central bastioned fortress itself, and then there are layer upon layer of outworks - structures, earthworks, moats and firing points that create a carefully worked-out system of mutual support and flanking fire, and push the enemy further and further away. 

Hence, everything from the HomePod and Watch to Apple TV, the credit card or iMessage make it more likely that you’ll stay on iPhone, and this applies whether they’re hardware or software, whether they’re paid-for or free, and whether they’re high margin or low margin. This of course goes right back to the original iTunes Music Store, where it was very clear that Apple got far more financial value from all of the iPods bought to use the store than from its commission on sales on the store itself. This was why in 2007 Jeff Zucker (then CEO of NBC Universal) said that Apple should give TV companies a share of revenue from iPod Video sales. Today Apple makes a lot of money from some of these things (when you have a billion users, ancillary revenue adds up), but the defensive value is key. 

There’s the defensive value, and the money, but I think another interesting lens for all of these things is to ask how ‘Appley’ they are. How much do they bring some unique Apple sensibility or unique Apple technical capability, around, say, chip design or hardware/software integration?

First, at one end of the spectrum, the watch or the AirPods involve industry-leading semiconductor work, hardware-software integration, power optimisation, efficient manufacturing at massive scale and a sense of user experience that are all very specific to Apple and very hard for other more modular companies to match. All of Apple’s various capabilities are brought together at a single point (which is why it’s a functional organisation rather than a product organisation). 

Second, there are things where there may not necessarily be any unique primary technology or especially difficult integration, but there is some unique Apple sensibility. Increasingly, I look at this as Apple extending from being a trusted party in your computing experience to being a trusted party in your online experience. The old Mac proposition was that you don’t have to worry if this hardware will work, or if you’re going to break your computer if you do something wrong. The Mac was friendly and safe, whereas the command line was a buzzsaw with no guards. Today the sphere for worry and danger has moved from hardware to news, or online privacy, or business models. That means we go from plug&play hardware or sandboxed apps to curated content: 

  • Can I trust this news? Apple curates what’s in the News app

  • Can I trust this game with my child? Are there loot boxes and adult themes? Apple curates Arcade

The same applies to the credit card, or indeed to the health tools. These do rely on a fair amount of clever engineering and integration, but they also bring a specific brand promise. A points guru might not be particularly impressed with the card’s rewards, but there are no fees, no charges, and a UI that is designed around trying to help you understand what you spend and break down psychological barriers to thinking about it. And, of course, Apple talks a lot about privacy, which is a self-serving point (it has no ad business) but not diminished for that. 

However, the third category, I think, is stuff that a cynic might say Apple is doing because it can, and perhaps should, but where it can be hard to see what Apple is doing differently. Apple was obviously rather late to streaming, subscription music. It does bring a story around manual curation of playlists on top of an essentially commodity streaming product. But, it’s not quite clear to me how important that curation really is as a selling proposition. 

This applies even more to the new ‘Apple TV Plus’ subscription TV service. We’ve seen promotion reels and trailers for what look like good TV shows, but absolutely nothing that’s specific to Apple. They’re not solving a problem or changing anything about the TV experience or product. Apple just paid a bunch of LA people to do LA stuff, and put the result in an app. The shows might all be great, but any of them could be on Netflix, Amazon or HBO. Apple is using this to drive purchase and retention of iPhones, with free access for a year, and it may well be effective at that, but it’s no more ‘Appley’ than free pizza for a year.  

I’m also not sure how ‘defensive’ TV is, or indeed any content, given there is now little or no lock-in from content. As I wrote here, in the old days, when you bought music on iTunes (or indeed bought VHS tapes), you were locked into that platform, and if you switched to a different device you lost access to everything you’d bought. But music is a streamed subscription now, so you lose very little by switching between Apple Music and Spotify. Unlike music, the subscription TV platforms, Apple TV Plus included, have exclusive content, but if you cancel them you’re not losing anything you ever felt you owned, any more than you were if you cancelled HBO or AMC, and you can always turn it on again. There’s no lock-in. These platforms have to keep you month by month with each new show - unlike iTunes, they’re not locking you in with what you already committed to. That in turns means that content has marketing and retention value - but then so does free pizza. 

There’s also an irony here. The reason that people wanted Apple to get into TV in the past was that the TV experience was terrible, especially in the USA, and people wanted Apple to transform it in the same way it had transformed music. Apple has been trying for a long time - the original Apple TV device was announced in late 2006, and indeed the broader tech industry has been trying since at least the early 1990s. Now it’s finally happening, but it’s not being driven by Apple or Microsoft or any of the big tech platforms. Tech has created new alternatives to long-form TV (everything from Youtube to Twitch or Tiktok), but the changes in television are coming from within the TV business, and though arguably Netflix has catalysed that, Netflix is a TV company, not a tech company.

This is why Apple and Google’s TV dongles feel like such an anti-climax, and it also makes me think that Apple’s decision to spend actual money commissioning TV shows is an admission of failure - after all, it never set up a record company or a mobile network (or MVNO). TV isn‘t getting Napstered or iTunesed - it isn’t getting swallowed by someone else’s aggregation platform (or at least, not so far). And yet, Apple is reportedly spending $6bn (over an undefined period) on commissioning TV shows, which is more than its total operating cash flow in the year the iPhone and Apple TV were first announced ($5.47bn), but now just a line-item in the marketing budget. A mobile computer turned out to be a much bigger opportunity than TV.

It should be clear that I’m pretty skeptical of the TV Plus project, but that shouldn’t take away from the broader story - that Apple is, mostly, doing things that are entirely natural and correct for this stage of the smartphone S Curve. 4bn people now have a smartphone, 5bn have a mobile phone and there are only about 5.5bn people over 14 on earth - this is a maturing market, with a maturing product. Apple won the high-end, Google won the rest, and this is now the time to optimise, iterate and execute, while thinking about what might be next. Glasses? Cars? Remember, Apple was working on the iPhone for 5 years before it launched, and Apple’s R&D budget is now larger than its total revenue in 2005.