Right on schedule, Apple has unveiled the newest iterations of the iPhone at Tuesday’s annual September Apple Event, along with an updated iPad and Apple Watch. The standard iPhone 11 comes with a second camera and looks the same as last year’s popular iPhone XR with a few new colors, while the high-end versions are modeled after the iPhone XS and XS Max. Now labeled the iPhone 11 Pro and iPhone 11 Pro Max, these new offerings have a third camera lens, a 4- to 5-hour boost in battery life and other minor tech upgrades.
All three have an even larger camera bump to make room for the new lenses, and the company finally responded to criticism over its escalating prices by setting the iPhone 11’s starting price at $699, $50 less than the iPhone XR. These phones will be slightly better than the phone you currently have and will mildly improve your smartphone experience should you shell out for one, but they come at an important time of transition for the company.
In response to stagnating iPhone sales, Apple is in the process of rolling out a suite of first-party digital services and it’s using the market power it built with the iPhone to drive customers to use them so it can show investors continued revenue growth. But that strategy may not pay off as Apple hopes, with regulators mulling a crackdown on anticompetitive behavior the likes of which haven’t been seen in decades.
In response to stagnating iPhone sales, Apple is in the process of rolling out a suite of first-party digital services and it’s using the market power it built with the iPhone to drive customers to use them.
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The iPhone, now in its 12th year, is a mature product and Apple is struggling to reinvent an experience that probably doesn’t need reinvention, which may be why it’s been consistently underperforming expectations. Steve Jobs’ revolutionary smartphone was once responsible for the majority of Apple revenue — nearly 70 percent in some quarters — but in the third quarter of 2019, it sunk below 50 percent for the first time since 2012. Revenue diversification isn’t a bad business strategy; the problem is Apple seemed caught off guard when iPhone sales stopped growing in 2016.
Apple’s trouble with the iPhone has been attributed to a number of factors — everyone already owns a smartphone in key markets, higher prices are keeping people from upgrading, and sales have slowed in greater China and emerging markets — but it’s also true that the hardware just isn’t as exciting as it used to be. The Mac, iPhone and iPad get incremental updates to keep up with industry trends, but there’s often nothing really compelling about them. In a note to investors in June, Mizuho Securities analysts predicted the iPhone would suffer again this year because the new models would “lack novelty,” while Fast Company’s Mark Sullivan criticized the lack of new features in recent models, writing “Animoji isn’t going to get it done.” And the Watch and HomePod aren’t going to save the day, as they haven’t taken off the way the other products did.
In response to a stagnating product line, Apple zeroed in on services as having the greatest potential for revenue growth. Apple’s customers have always liked how the company integrates hardware and software to increase performance and usability, and this new strategy would add digital services to that mix, but the way it poaches those customers is drawing scrutiny from regulators for potential anticompetitive behavior.
Services and wearables — a single category in Apple’s earnings reports — made up 19 percent of revenue in the third quarter, and that’s before the launch of its TV Plus video streaming service and Arcade gaming service. Meanwhile revenue from services jumped 13 percent over the same quarter in 2018, compared to a 12 percent year-over-year decline for the iPhone.
Apple has a captive audience of 1.4 billion people using its hardware products, of which 900 million have iPhones, and it has an advantage over third-party companies when selling services to that massive customer base. It’s easy to install any application on a Mac, but Apple has a lot of control over what people can see, do and access on their iPhones and iPads. For example, the company repeatedly breaks its own rule that push notifications “should not be used for advertising, promotions or direct marketing purposes” to encourage users to watch Carpool Karaoke and sign up for Apple Music — something other app makers could be banned from the App Store for doing.
But it goes further than that. Apple takes a cut of all app sales, in-app purchases and subscriptions on iOS. That’s why Amazon Kindle readers can’t buy ebooks from the Kindle iOS app — they have to go to the Amazon website. But Apple also doesn’t let app makers explain why users have to leave. According to App Store guidelines, “directly or indirectly” discouraging in-app purchases is against the rules.
Spotify, the world’s largest streaming music service, has long called out the unfair advantage Apple gives to Apple Music. CEO Daniel Ek calls the 30 percent cut taken by the App Store an “Apple tax” that reduces competition and consumer choice. Even though Spotify and Apple Music cost $9.99 per month, Spotify customers have to pay $12.99 if they sign up through the app — and the company isn’t allowed to redirect them to their website.
Ek has a legitimate concern. Because Apple controls the platform and offers its own services, it can make those services seem more attractive than those of its competitors. And as it expands its service offerings — into news, video streaming, gaming and more — more companies will be competing on an uneven playing field.
On Tuesday, Apple announced that TV Plus will be free for a year to anyone who buys a Mac, iPhone or iPad — a loss Apple is able to shoulder because, in the end, the services are designed to make the Apple lifestyle more enticing, which requires using the hardware. Competitors like Netflix and Disney, which is due to launch its Disney+ service in November, can’t provide a similar discount because content is core to their business, not an extra they’ve decided to throw some of their $225 billion cash pile at.
Apple is not a monopoly in the traditional sense; it doesn’t have absolute dominance over the desktop, tablet and smartphone markets. But for iOS users, Apple’s control over what they can install on their devices is significant, to the degree that it seems anticompetitive. The company is facing two antitrust investigations in the European Union, one by the European Commission as a result of the Spotify complaint and another by the Dutch competition authority over its punitive App Store terms.
Back on this side of the pond, scrutiny is also escalating. When asked about Apple’s control of the App Store, Democratic senator and presidential candidate Elizabeth Warren stated: “Either they run the platform or they play in the store. They don’t get to do both at the same time.” In short, Apple can run the App Store or offer a suite of services — it can’t do both. But that’s exactly what it’s trying to do.
As Apple shifts from delivering innovative products to selling digital services to its enormous, captive user base, it further justifies the growing push to regulate or break up large tech companies. These companies use their control of key platforms to funnel users to their own products, making it difficult for third-party companies to compete, but regulators may finally be preparing to act just as Apple is hoping to wring as much profit as it can from that advantage.