What should Apple do?

Over the last three months, Apple lost over $400 billion in market capitalization which is larger than that of Facebook. Together with Tim Cook’s bombshell announcement of cutting its revenue forecast for the quarter that ended in December, this raises a lot of questions about the future of Apple. Of course, for those of us who follow tech companies, this should not come as a big surprise. Apple had a problem of introducing a new premium price hardware product since iPhone. The slow, albeit steady, growth of the revenue from service cannot make up the loss of annual sales of new iPhones. They have already sent a strong signal last year that they were having a problem with iPhone sale when they decided not to disclose the unit sales number. When Apple agreed to sell its products on Amazon, which means Apple has to share its revenue with Jeff Bezos (can you imagine how humiliating it must have been to Apple?), we already know that Apple is no longer the old Apple that defied all the normal rules that applied to other companies.

So, given all the signals, we should have anticipated some kind of bad news from Apple. At the same time, to say that this is the beginning of the end of Apple, and comparing Apple with Nokia (as some in Korea did, somehow suggesting as if Samsung is doing any better) is complete hyperbole in my opinion. Before we think about what Apple should be doing, let’s think about what is happening now.

What is happening now is that a larger percentage of the current iPhone users are not upgrading their iPhones. That does not mean, however, that they are ditching their iPhones. So, what Apple is losing is the incremental sales revenue that used to come from those who upgraded their phone on an annual basis. However, this does not mean that they are losing their user base, which is extremely important in understanding how the platform ecosystem works. I would start worrying about Apple’s future when a larger number of iPhone users are migrating away from Apple’s very sticky ecosystem.

What Apple has been able to do consistently in the past was expanding its user base with new hardware platforms started from iPod to iPhone. Mac, Apple TV, and iPad were important parts of the platform, but in my estimate, they did not significantly add new users to the ecosystem. And, it was primarily through its iOS / iTunes ecosystem that Apple used to keep those users into its premium-priced hardware products. For Apple, until recently, its ecosystem was not the primary source of revenue. Rather, it was to enhance the value of its hardware. Let me say it again. Apple is a hardware company. Software and ecosystem for them are just features!

So, what should Apple do? See, it all has to do with its business model. It is all about creating a steady revenue stream that can replace the loss of the annual iPhone upgrade cycle. Going forward, we can assume that fewer people will upgrade their iPhone each year. I didn’t, for the first time. That does not mean that they will never upgrade their iPhone. Perhaps the majority of iPhone users will upgrade their phones every other year. So, Apple needs to think about making up the loss of revenue stream from the annual iPhone upgrade. Given the way Apple’s business model is set up, there seem to be two things Apple need to do.

First, in the short term, Apple should try to monetize its ecosystem more directly by offering some type of premium membership model. Amazon Prime costs $120 per year. What can Apple do in a similar fashion? Apple has its music, movie, iCloud, Apple Care, and now its own video contents. How about free AirPod and all those annoying dongles? Can Apple come up with a super attractive membership program that includes both hardware, software and service at a premium price point? If Apple can convert a large percentage of its loyal users to sign up for it, it can stop the bleeding. In other words, instead of making people line up outside of the Apple store for a new iPhone, it can make users give up their credit card so that it can automatically renew their premium membership. It is all about creating a recurring revenue stream.

Second, given Apple’s DNA, they should try to find the next blockbuster premium hardware product. Obviously, this is what Apple has been trying to do unsuccessfully over the last few years, which is why many analysts seem to be increasingly pessimistic. Apple tried it with TV and it did not work. It seems like that it is still interested in autonomous vehicles, which is an obvious next premium-priced hardware platform. Of course, people will not upgrade their cars every year, but cars are much more expensive than smart phones. The good news is that with a strong iPhone user base, Apple still has time. If Apple can figure out how to do the membership right, it will have even more time. Will it be successful eventually? Who knows?

Finally, both of these strategies might require acquisitions. Perhaps, Apple can buy Netflix. Perhaps, Apple can finally buy Tesla from Elon Musk.

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