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.

Apple as the new Disney

Apple’s talk about services got specific with a bunch of news subscription services. Most of them are sensible and worthy iteration, but the company still hasn’t explained exactly what it plans with its push into commissioning billions of dollars of premium TV (Spielberg! Oprah!). Maybe all of this is about trust: the old Apple promise was that you don't have to worry if the tech works, and the new promise is you don't have to worry if the tech is scamming you. 

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Unbundling innovation: Samsung, PCs and China

It seems pretty clear now that the Android OEM world is starting to play out pretty much like the PC world. The industry has become unbundled vertically between components, devices, operating system and application software & services. The components are commoditised and OEMs cannot differentiate on software, so they are entering a race to the bottom of cheaper and cheaper and more and more commoditised products, much like the PC industry. 

The funny thing about this is that part of the original promise of Android was that it would allow OEMs to avoid this. Part of the promise was that because Android was open, OEMs would be free to customise it to differentiate their products on top of a common platform. But of course, it hasn't really worked out like that. I think there are a couple of reasons why. 

The first is that 'a common platform that OEMs can differentiate on' is very close to a contradiction in terms. Microsoft never pretended to allow OEMs to change Windows in that sense, and it quickly emerged that if you did change Android in any really important way it was no longer part of the common platform, but a fork. This is what Amazon has done with the Kindle Fire, and Google's reaction (as the sole arbiter of what is nor is not a fork) is that if you do that, you lose access to all Google's own apps, tools and APIs for Android. It wasn't entirely clear 4 and 5 years ago how big a deal that would be - how much of the value of a smartphone operating system would be in those embedded meta-services and cloud services from the platform provider. But now it's apparent that if you don't have those then you're really only selling a featurephone, at least as far as a normal consumer is concerned, and the only companies that have the assets and resources to build those things themselves (outside China, which is another world for Android) are Amazon (perhaps) and Microsoft. 

So, as an Android OEM, you can't practically make fundamental changes to Android anymore than a Windows OEM can make them to Windows. What you can do is to try to add value on top. That hasn't worked either, for several reasons:

  • Most of these companies are simply not good at software and services: the operating structures and skills required are totally different and hard to build
  • Anything that they add, even if it's actually really good, is competing with everything on the app store and everything on the internet. So even if they're good at software and do make (or buy or partner with) something good, it's just another app amongst many. The whole point of open platforms and indeed the internet is permissionless innovation - you don't need the OEM's permission to innovate. Again, how can an OEM differentiate by adding things when a user can add anything they want themselves? 
  • If they do anything cool that requires any sort of third party support they probably won't get it, because the ecosystem effects are at the platform level, not the OEM level. Hardly anyone will support something cool that only works on Samsung Android phones (or only some Samsung phones). 

The general point here is that the differentiation moved from one part of the stack to another (or, perhaps, to a new layer). The OEMs' own software used to be a core part of the purchase decision - that was Nokia's advantage with Series 40. But now that way to differentiate has moved up the stack to a new layer that the OEMs struggle to access - it's controlled by Google.  

There's another parallel here, I think, with what happened to the mobile operators. If you go back to 2000, they were all intensely aware of all the cool stuff that was going to happen with mobile and the internet.  They predicted a great deal of it very accurately, but they thought that they would be doing all of it. And of course what happened was that again, that innovation and differentiation layer got unbundled - it moved up to a new layer at the top of the stack, and the handset OEMs and MNOs were equally unable to access those services. Just like the OEMs:

  • The MNOs were structurally bad at making services
  • Even if they were good those services were just one amongst many
  • The network effects for these services ran across the whole internet, not just their customers. 

That is, MNOs tend to be bad at innovation in internet services, but even if they aren't, it isn't their place to provide it. It isn't their place in the stack to make a great video sharing site or a cool photo messaging app, even if they could. The analogy I often use in this case is that for an MNO to get into apps and content is like a municipal water company deciding to get into the soda business - because it knows water, and has trucks, and customers trust its brand. Even if it managed to come up with a great soda, it would still be just another can of soda amongst many. (Continuing the analogy, of course, it also makes little sense for soda companies to think they can get into the municipal water business - nor for tech companies to think they're going to disrupt mobile operators). 

When you unbundle an industry, you get new and different types of innovation in different layers of the stack. The skills you had in the bundled world may well still apply in the layer you find yourself in. Hence Samsung carries on doing interesting and impressive things in components, and can innovate up to a point in handsets, with things like phablets, so long as they do not depend on concessions from other parts of the stack. Equally, for example, Dell created an entirely new type of PC company - the PC company as a highly specialised logistics business - without differentiating at the operating system layer at all. 

But what's happened for PCs and smartphones and, to a large extent, mobile networks is that it's that top layer of the stack, that the PC and Android OEMs  and operators struggle to play in, that's where most of the differentiation happens. That's the stuff that makes the difference between a commodity and something unique. This is obviously something of a wrench. After all, especially for the phone companies and mobile operators, this is what they always felt they should be doing, and now other people are doing it instead, free-riding on top of their work and their investment. 

Samsung, Apple and Microsoft are all strong in two layers: Samsung in components and devices, Apple in devices and operating systems and Microsoft in operating systems and application software. Each of these companies has cross-leveraged these adjacent strengths to create better products and a stronger market position. Samsung has used the scale of the component business and access to those components to drive the devices business and vice versa, despite failing, mostly, to create compelling software differentiation. This leveraging of scale, combined with some great execution, has taken it to at least half of the total Android market. 

The problem is that Samsung is increasingly competing with another sort of scale effect - it is competing with the entire Shenzhen ecosystem. Before, it was competing with individual companies (many of which happened to use that ecosystem), and like Nokia before it was fortunate in the relative weakness of most of its competitors. As for Nokia, that luck was bound to run out. Now Samsung is starting to face competition with new companies who are finding ways to build new types of handset businesses on top of that ecosystem - taking that ecosystem and using it to unbundle Samsung.

The company that everyone talks about here is Xiaomi, which has created the skills to build both good services and software and good handsets. Xiaomi has faced the fork problem by working out how to dance right up to the edge without going over - Hugo Barra described it as a 'compatible fork'. Rather than turning Android into a fork, it has, so to speak, polished it, adding features and services without breaking anything. And so it has created real differentiation at the operating system layer without losing access to Google services, which its devices outside China all use. 

But there are lots and lots of other interesting Android companies unbundling, both within the price range, with some attacking the mid range and there the low end at under $100, and geographically, with companies like Micromax, Karbonn or Blu or Wiko peeling off particular geographies. In effect, this is the Dell innovation - not trying to get into the other parts of the stack (though Dell has moved into other businesses), but at being really really good at your own part. 

This also reminds me a little of Facebook. Facebook's integrated social platform model has been unbundled by mobile, with the social graph that it owns on the desktop being replaced by the smartphone itself as a social platform that all social apps can plug into. Hence, there have been dozens of new and interesting services peeling off parts of the use case or creating new ones. Making good services in this space does not require a totally different type of company, in the way that making good services and running a mobile network require different types of companies, and Facebook's 'constellation' approach to unbundling its apps has resulted in some perfectly good products, but so far none of them has risen above the status of 'just another social app' - they're all just another can of soda.