Since 2017, smartphone upgrade cycles have increased from 2 years to approximately 3 years. The extended upgrade cycle is a function of the consumer perception towards marginal innovation in new phones. In addition, the rapid increase regarding smartphone prices has now exceeded consumers’ willingness to pay. Therefore, it can be said that these two factors have led consumers to hold on to their phones longer, which has caused smartphone units to decline year over year.
Also, as the upgrade cycles for smartphones are slowing down and iPhones are reaching their maximum price point. Apple now understands the importance of monetizing users post smartphone purchases. Hence, this is the reason as to why Apple has focused on developing new hardware features and software services that drive usage of Apple’s subscription services (e.g. Apple Music, News, etc..). To drive usage of these services, Apple is positioning each service to appeal to a “human need,” such as love & collaboration, health, safety, exploration and achievement. By anchoring Apple Services around a human need, users will frequently utilize these applications to help navigate their lives. As a result, users will further realize the need of their iPhone, which increases the likelihood of users re-purchasing an iPhone when their smartphone upgrade cycle completes (increasing switching costs). The strategic initiative of hardware innovations complementing software services to solve for “human needs” to drive monetization of Apple Services was pervasive throughout their recent Apple launch event.
Beauty is in the iPhone of the Beholder
The leading product for this launch event was iPhone 11, which was hyper-focused on the camera (dual lens with 12 megapixels). Also, because over half of the planet participates actively on social networks, every user wants professional content creation tools to help achieve his or her most desired aesthetic balance and form. As noted, to assist their users in capturing their highest form of beauty, the iPhone 11 leads with a dual camera system with an additional 12-megapixel wide camera that has 2x optical zoom. The camera will also support multiscale tone, high key mono portrait and portrait mode for pets. For video, users can now record on both front and back cameras in 4K resolution with slow motion and time-lapse capabilities. These rich photo and video creations will force users to hit their iCloud thresholds quicker. Apple is betting that more users will choose the 50GBs iCloud tier ($0.99 per month). Likewise, for those users that already pay for iCloud, they will upgrade to more expensive tiers, such as the 200GBs at $2.99, to store their rich content creations.
Apple TV: The Operating System for Escapism
More than users just creating content, users have an affinity for consuming media, according to NPD 57% of iPhone users streaming video once per month. It can be said that video content is a form of escapism because it allows us to take time from our reality and to connect with our loved ones (family). Apple increased the screen size of the iPhone 11 to 6.1 inches to improve media consumption, to create a compelling “escapism” experience. Also, Apple TV+ (video-on-demand subscription service) has been coupled with this hardware improvement. Apple understands that they are not in the business of competing with Netflix or HBO; Apple TV+ is a complimentary video service meant to attract (acquire) users to Apple TV. The business model for Apple TV+ proves this theory:
- Lite Content Library: 9 show titles
- Low Price: at $4.99 per month
- Aggressive promotion: one-year free of Apple TV+ upon purchasing a new device
Moreover, users may occasionally find an original Apple TV+ show to enjoy. However, it can be said that Apple’s long-term goal is to compete with Amazon Prime Video and Roku. Apple has aspirations of positioning Apple TV as the destination for all users first- and third-party video content needs, essentially becoming the operating system of households “escapism” need. Therefore, as users engage with Apple TV, they are more likely to subscribe to HBO Max, Disney Plus, or Hulu through Apple TV. Likewise, it is no coincidence that Apple TV+ is launching two weeks before Disney Plus. Apple also takes a 15-30% cut from these third-party subscriptions, which further drives its service revenue with high margins.
Apple Arcade: Center for Achievement & Mastery
Another popular form of media on smartphones is mobile gaming. According to TechJury, 25% of mobile downloads on iOS are mobile games, and 62% of smartphone users download a game to their phone. Games appeal to our need for achievement and mastery; that’s why most games are oriented around levels and stages of difficulty. Recognizing the huge installed base of smartphones, content providers rapidly created mobile games. However, most mobile games lose money, as their cost per install is generally greater than their revenue per user.
Attempting to breakeven on the cost of a mobile download, mobile games must aggressively monetize users post download. Thus, that is why one can argue that mobile games have high friction, which is undesirable to consumers because the game experience must stop to introduce an ad or in-app purchase. At the launch event, Apple announced an on-demand gaming subscription service, Apple Arcade, recognizing the pain point for consumers, and the economic challenges for mobile game providers. Now mobile game creators can focus on creating seamless game experiences, then forced game stoppages to create monetization moments. The service will feature 100 titles from popular game creators, such as Sega and Capcom, priced at $4.99 per month. Much like an “arcade,” Apple Arcade leads with games that are adventure and problem solving based. Examples include the Chu Chu Universe, where players have to solve over 100 mind-bending puzzles. Likewise, there’s also Overland, where users go on a post-apocalyptic journey to rescue travelers. Arguably, this type of game can take months to master, which lends itself well to driving subscription retention.
To acquire a games library, Apple licensed the video game content from mobile game developers, essentially becoming an “aggregator” of third-party games. By paying for the games upfront, Apple Arcade is positioned well for “aggregator economics.” That once the subscription revenue exceeds licensing costs, the marginal cost to serve an additional user is zero, which means all profit from additional subscription revenue. Apple strategically wants Apple Arcade to become a profit center; this is telling with Apple Arcade’s short free trial period of 30 days (rather than a year like Apple TV) to quicken their path of generating subscription revenue to breakeven on licensing costs.
The addition of Apple TV+ and Apple Arcade gives Apple a total of five subscriptions (Apple News, Apple Music & iCloud) plus third party apps (HBO Now, Hulu, etc.) to drive subscription revenue post smartphone purchase. The ability to monetize users post-purchase has led Apple to lower the price on their flagship phone to meet the price point that consumers are willing to pay. Apple’s iPhone X was priced at $999, and now the iPhone 11 will be priced at $699. What Apple is “beating on” is that the cash flow from multiple subscriptions over a three-year period will exceed the $300 price reduction (higher customer lifetime value). Per their last quarter’s financial report, Apple on average generates 63% margin on subscription “Services” (mostly generated through App Store subscriptions & iCloud).
iPhone Pro & iPad: Helping Prosumers to be Productive Anywhere
Apple replaced its high-end price point (+$999) with new “professional” grade phones, the iPhone Pro and iPhone Pro Max. The “Pro” phones are meant to appeal to users who want the latest tech (prestige), and consumers who have turned into professional content creators (self-actualization). Moreover, due to the ease of using content creation tools (e.g. Adobe) and the improvements to the media quality on phones, consumers have turned into “creators,” such as social media influencers and digital content creators. This new creative profession has produced 17 million digital and social media creators (Prosumers), who are generating well over $7 billion in revenue for 2018. Generally, professional content creators have higher productivity needs. Therefore, the iPhone 11 Pro and Pro Max are the leading products for these creative professionals. The “Pro” phones lead with a higher display screen resolution featuring Super Retina XDR OLED to bring more clarity and richness to photos and video. In addition, these phones feature a third rear-facing camera, an ultra-wide view. So, creators can now choose from three different video and photo angles to find the “right storytelling angle.” The iPhone Pro phones are also manufactured with longer battery life to ensure that professionals can be productive for longer periods.
The emphasis on productivity for creators also influenced the new product improvements for the iPad Pro and iPad OS. The iPad Pro leads with a more powerful chip, A 10 fusion chip, and a smart keyboard to handle the heavy duties of content creation. The iPad Pro also features a higher quality display, 3.5 million pixels (Retina Display), and a 10.2-inch screen to ensure creations can be richly viewed from all angles. Content creators can also toggle through multiple apps and websites to view their content, and need tools to quickly edit. Hence, the iPad OS has new multitasking features. Likewise, some of these features include the Split and Slide view, which allows users to seamlessly maneuver between multiple content creations and social media apps to view and edit work in “real-time.” In addition, the Apple Pencil is providing professional creators with new drawing and sketching capabilities by making it easier to access tools, colors, and shapes by “double tapping” the pencil within the experience.
A deeply integrated and full content creation suite will allow Apple to monetize these users through complementary hardware and subscription revenue. Apple’s productivity hardware, the Apple Pencil and smart keyboard are priced at $99 and $159 respectively. To store rich and dynamic content creations, content creators will need the highest tier of iCloud storage (2TB) at $9.99 per month. Although the iPad Pro price point was reduced by $200, due to cost savings in flash storage, the revenue and profit margin from iCloud and complementary hardware will far exceed the price reduction.
Apple Research: Insight Center for Our Health & Environment
If we want to enjoy the content, improve our mastery, and explore our creativity, we can only accomplish these things if we are in “good health.” However, our “good health” has come under question, as the life expectancy in the US has declined for the past two years. Apple is positioning itself to be a part of the solution by collaborating with leading medical institutions and health organizations to crowdsource data from users to help solve some of our most pressing health and environmental issues. To facilitate data collection, Apple introduced, the Apple Research app that allows users to opt into health research studies to be monitored and tracked, via the Apple Watch, for their health habits. The Apple Research app will cover the following studies, per Apple’s website:
By users participating in research and sharing their most intimate health information, they will patiently wait for the results of these studies to discover how they can improve their health, which will further “locked” them into the Apple Watch ecosystem (increasing switching costs). Thus, by expanding the Apple Watch to a total health apparatus, it will also expand the Apple Watch addressable market. Traditionally, the Apple Watch was aimed to target fitness enthusiasts, who make up 28% of US consumers. Now, because of the Apple Research app, the Apple Watch can target 72% of non-fitness enthusiasts who need health solutions as well. Generally, non-fitness/health club members have a lower wallet share, that’s why Apple dropped the price point of the Apple Watch Series 3 to $199, and to also compete with Fitbit at the low end of health trackers.
Apple: The Self Transformation Ecosystem
During the launch, Apple introduced software innovations that can improve our health (Apple Research), give us the security of our most important assets (Apple Care), bring us joy and connection with our loved ones (Apple TV+), and fulfill our need for mastery and achievement (Apple Arcade). Additionally, these software services were supported with hardware improvements that will allow us to lead productive lives (iPad Pro and iPad OS), achieve our highest form of beauty (iPhone 11), and strive towards prestige and self-actualization (iPhone Pro). By positioning these products and services to address our total life needs, users will ascend to self-identifying with the values and motivations of the Apple brand because their products and services have been a part of their self- transformation journey. The increase in brand loyalty by being apart of a user’s life journey is proven through data. Users that subscribe to multiple services demonstrate a substantial increase in their probability of re-purchasing an iPhone at the completion of the smartphone upgrade cycle , locking users into Apple’s “self-transformation” ecosystem.
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