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Apple used to be about changing the world one magic box at a time. Now it’s fighting to conquer TV drama, healthcare, money, news and much else besides
orty-five feels like half way. You’re not old, but neither are you in the first flush of youth. It’s a good time for a review, to take stock. That’s exactly what Tim Cook is doing at Apple, the firm he runs, as it approaches its 45th birthday.
What he sees through the glass walls of the company’s $5 billion (£3.9bn) flying-saucer-like headquarters in Cupertino, California, is a behemoth that has never been more valuable. Apple’s stock price more than doubled last year; by January 2020, the company was worth $1.4 trillion, more than all the companies in the Dax index of Germany’s top 30 combined.
Yet his business has never looked more complex, hard to manage and prone to risk. It not only has to live up to its absurdly high standards and invent and re-invent the next new thing, it is heading into uncharted waters. Critics and fans alike are asking: does it know what it is any more? Is it playing to its strengths – or spreading itself too thin?
“This is an odd period in our history,” says one Apple executive, speaking privately. “We’re trying all sorts of stuff. Some very ‘Appley’ – like AirPods. Others are very established, like TV shows. It’s a big change from doing one ‘think different’ thing at a time.”
Cook’s diversification reflects the market. The rapid transformation of consumer tech means keeping customers engaged is far more complex than when Steve Jobs was running things, with his design chief, Jony Ive, at his side. Apple is “operating at a breadth and depth we’ve never operated at before”, Cook says.
Take hardware as an example: to add to the Jobs-and-Ive-inspired Mac computers, iPad and iPhone, Apple now sells watches and AirPods. Augmented reality (AR) glasses, and virtual reality and AR headsets for gaming and virtual meetings, are rumoured. To make sure users remain tethered to Apple devices, and to add new revenue streams, Cook is launching new services as varied as original drama on Apple TV+, available on Apple TV; a “news you can trust” service; financial services in a joint venture with Goldman Sachs; and healthcare, exploiting the heart-rate and other sensors in the Apple Watch.
Cook also has the issues that now afflict every big tech outfit, including those in Russia and China, where he faces both political issues and the effects of COVID-19 on production and consumption of iPhones and iPads, both made in China. Apple is also battling the EU’s $15bn fine for its tax structures. And he has to do it all without two key executives who helped to make Apple Apple: Ive and head of retail Angela Ahrendts quit in 2019.
Still, Cook has plenty of reasons to be cheerful. Apple’s core business – making and selling expensive hardware – is booming. Despite a wobbly 2018, iPhone sales rose to $56bn during the fourth quarter of 2019, up eight per cent over the year. A 5G handset, expected in September, will further boost sales.
AirPods, wireless in-ear headphones with built-in sensors and a voice-assistant, are a bona fide hit. Dan Ives, of investment firm Wedbush Securities, says they are the fastest growing of all Apple’s products, with profit margins above 50 per cent. With the noise-cancelling AirPods Pro – around $250 a pair – Ives reckons Apple’s earware may generate up to $15 billion of sales in 2020, and could become the company’s third-largest product by revenue in 2021.
After a slow start, the Apple Watch is ticking along nicely. Apple is now the largest watchmaker in the world by revenue, outselling the entire Swiss watch industry, analysis by Strategy Analytics suggests. It estimates Apple shipped 31 million units in 2019, a 36 per cent rise on 2018, compared with 21 million units for the venerable Swiss brands. Year on year, Apple’s total company revenue, from all hardware and services, rose nine per cent in the last quarter of 2019 to $91.8 billion, an all-time quarterly record.
Away from products and services, Cook has navigated the “techlash” better than any other big tech CEO. He has deftly turned the sector’s most contentious social and political issue – privacy – into a competitive advantage. He rarely misses an opportunity to condemn his Silicon Valley neighbours, notably Google and Facebook, for a business model based on harvesting and monetising their users’ personal information – which Apple does not do.
On the world stage, Cook has avoided the ire of Beijing and, as a result, prospers in the world’s largest consumer electronics market. The firm enjoyed sales of $44 billion in China during the 12-month period ending in June 2019, analysts say. China, Hong Kong and Taiwan constitute Apple’s second-largest market after the US. Back home, Cook has a working relationship with Donald Trump, despite their contrasting personalities and opposing views on many issues (and the president’s mangling of his name: he has called Cook “Tim Apple”). It has paid rich dividends: Trump has spared iPhones, iPads, and other products from the stiff tariffs that have affected other goods imported into the US from China.
But that is where the unalloyed good news ends. Apple’s push into new services takes the firm outside its core area of excellence – premium hardware. In each new market it faces tough, established and well-resourced competitors, which means Cook has little chance of repeating the usual Apple trick of waiting until the time is right to perfect a product that is already out there, and doing it so well it instantly destroys the competition.
In music there’s Spotify and Amazon Music. Apple Music has performed well, attracting 60 million subscribers, but Spotify leads the market with 124 million. Subscription growth in news has been sluggish, Apple insiders concede, because it is battling every big publisher on the planet. In TV, there’s Netflix, Amazon Prime Video, Disney+, AT&T’s HBO Max, Viacom’s BET+, NBCUniversal’s Peacock and Britbox, which offers the best of UK programmes to viewers in the US, Canada and the United Kingdom. Netflix enjoys more than 165 million subscribers and a content budget of $17 billion a year.
Regardless, Apple is taking TV seriously. Cook has lured big names – Jennifer Aniston, Steve Carell, Oprah Winfrey, Reese Witherspoon, former HBO CEO Richard Plepler, ex-Sony Pictures Television execs Jamie Erlicht and Zack Van Amburg, and the film-maker JJ Abrams to its service, but Hollywood’s magic has failed to cast a spell on consumers. Apple hasn’t released subscriber stats for TV+, but Bernstein analyst Toni Sacconaghi claims that fewer than ten million opted for the free 12-month trial Apple offered. This is at most ten per cent of eligible customers, a take-up rate he describes as “surprisingly low”. Disney+ netted 28.6 million subscribers in its first three months.
Apple is stumbling in other new markets. Cook may have lured John Giannandrea from Google to become Apple’s head of AI and machine learning, but the firm remains “behind” on AI, says Vishal Sikka, former chief executive of IT services group Infosys. Take digital voice assistants. Despite pioneering the “online butler” with Siri, Apple has found itself outflanked by Amazon’s Alexa and Google Assistant in both ease of use and smart speaker sales. It takes vast amounts of personal data to perfect voice recognition and other AI, which suits Amazon and Google, since they harvest everything we do, everywhere we do it. Apple’s strict privacy strategy ties its hands.
Two areas where its commitment to privacy might be a competitive advantage are healthcare and financial services. Apple’s Health Kit integrates data from multiple wearable devices, enabling care teams to spot – or even predict – illness. Can a move into health insurance be far behind? The Apple (credit) Card, launched in August 2019 with Goldman Sachs, works well with the increasingly popular Apple Pay, and also exists as a physical titanium credit card. Apple could use it to expand further in financial services, a market in which the other tech giants are likely to struggle.
No one in their right mind would trust Mark Zuckerberg with their cash – as the consumer and regulatory backlash against Facebook’s proposed Libra global cryptocurrency confirms. Apple Pay already accounts for about five per cent of global credit card transactions, and that number is set to double by 2025, recent trend data compiled by Bernstein, a research firm, shows. Apple services, which includes Pay, generated revenues of $12.7bn in the last three months of last year, up almost 20 per cent year on year, analysts say. Digital payments are an immense market opportunity, worth $1 trillion a year in global revenue.
China may be a commercial success for Apple, but it is beginning to look like a reputational risk – and a threat to Apple’s self-anointed role as patron saint of privacy. Last year, at the request of Beijing, Apple began storing data and keys to Chinese iCloud accounts at a data centre in China. Privacy advocates say that doing so makes it easier for the Chinese authorities to monitor what Apple consumers do in the country. The Chinese App Store no longer offers the New York Times app, as well as many leading virtual private networks that can be used to leap the Chinese censor’s Great Firewall. In Hong Kong, Apple removed from the App Store HKmap.live, which pro-democracy protesters used to track police activity, after China’s state-run newspapers published articles criticising it.
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As pro-democracy demonstrations in the territory continue, how long can Apple avoid the problems that have long affected Google in its efforts to prosper in China? Google last year cancelled plans to create a censored search engine for China after staff revolted. The stakes are higher for Apple than any other tech outfit, since it cannot pull out of China because of its iPhone and iPad factories there.
Apple could face political heat for its Russia policies, too. Starting late last year, Apple’s Maps and Weather apps, when used in Russia, have denoted the Crimea peninsula, Ukrainian territory illegally annexed by Russia in 2014, as Russian. Apple argues it “can best promote fundamental rights, including the right of free expression, by being engaged even where we may disagree with a particular country’s law”.
While it battles reputational issues in Russia and China, Apple’s performance in other new growth markets, notably India and Africa, remains weak. Cheaper Android handsets, often made by Chinese rivals Xiaomi and Huawei, dominate emerging markets. Perhaps the new, cheaper, entry-level iPhone which will be launched soon will help.
Cook faces broader questions, too. The departure of Ive and his right-hand man Marc Newson raises again the issue that has dogged Cook ever since he took over from Jobs in 2011: can Apple create a revolutionary successor to the iPod, iPhone and iPad – a product or service that within days of launch, consumers around the world decide they must have? Project Titan, Apple’s autonomous car, has failed to gain traction. The Apple Watch is an undoubted sales success, but it pales in comparison to iPhones or iPads.
Some say Apple’s latest launches show it is losing its desire to “put a ding in the universe”, as Jobs loved to say. Does Cook “want to sell prestige TV for the rest of his life, or does he want to change the world?” Farhad Manjoo, of the New York Times, asks pointedly. Why, Manjoo goes on, has Apple failed to create an ad-free Instagram, new privacy-minded versions of social media services, or a YouTube “that isn’t a haven for neo-Nazis”? Such big ideas “match in scope and daring what Apple was created to do” and would complement Apple’s privacy-first USP.
Others are more optimistic. Apple’s push into new services may seem risky, but they point out the firm has been here before. When it faced bankruptcy in the late 1990s, Jobs reinvented the company by developing services with new devices: the iPod and iTunes revived a firm that was largely dependent on computer sales. “What Cook is trying to do is come up with a new set of iTunes-like services to mate with more varied hardware to create an ecosystem that is simple and compelling,” says one Apple veteran. “Imagine secure communications, iCloud storage, TV, quality news, banking, health, insurance and more, all from the same, trusted supplier on iPhone, iPad, Mac, the Watch and, in future, AR glasses. That would be pretty revolutionary.” And profitable. Such a bundle could command subscription fees of more than £100 a month, analysts say.
No Apple story would be complete without a healthy dollop of speculation. So… we can exclusively reveal (perhaps) that the firm is working on an iPhone 4-like handset with a stainless steel band around the case; new cameras that capture greater depth information to help with augmented reality; an iPad Pro with 3D cameras; Macs abandoning Intel processors for Apple-made chips, which could presage a move into the chip market; and satellites that will beam internet signals to Earth.
President Xi, Jennifer Aniston, Hong Kong protesters, self-driving cars, the loss of two star strikers, deep space, Russian imperialism and a missing mojo – it makes the hit HBO show Succession sound like a documentary, and would be just the drama to take on Apple TV+. Over to you, Netflix.