Apple’s business model is self-perpetuating, and the company’s success over the last ten years has set it up do things that no other company can — like anachronize wallets.
Tim Cook, speaking at President Obama’s Summit On Cybersecurity:
We can imagine a day in the not-so-distant future when your wallet becomes a remnant of the past. Your passport, your drivers license, and other important documents can be digitally stored in a way that’s safe, secure, and easy to access — but only by you. After all, we shouldn’t have to trade our security for the convenience of having all of this information at our fingertips.
In other words, Apple is working today to turn your iPhone into a digital wallet tomorrow. You’ll store your important information in the secure enclave and access it via Touch ID. The combination, as Cook said, is safe and secure, and makes your information accessible only to you.
That Apple can imagine wallets becoming remnants of the past is incredibly revealing. It demonstrates grandiose ambition and masterful product management. Wallets have existed for hundreds of years, and Apple thinks it can anachronize them — if that’s not ambitious, I don’t know what is.
In 2013, Apple released its first Touch ID-enabled product, introducing people to fingerprint authentication. In 2014, Apple announced Apple Pay, introducing people to the concept of paying for things with fingerprint authentication. And in the not-so-distant future, once people are used to paying for things with their phone instead of their wallet, Apple will reveal how your phone can replace your wallet entirely. The feature rollout is slow and deliberate, and each step builds on the previous one — product management at its best.
But as much as Cook’s comments reveal about Apple’s ability to execute on ambitious ideas, they actually reveal something larger and far more important. They reveal how Apple’s success over the last ten years has set the company up to do something no other company can. Only Apple has accumulated the customer trust and cultural influence needed to spark a mass transition to digital wallets.
This dynamic applies to more than just wallets, though. Apple’s success over the last ten years has uniquely prepared the company for future success. This is because the company’s business model is self-perpetuating: Today’s success is a foundation for tomorrow’s. And over the last decade, Apple has created many foundations for future success that its competitors don’t have. This disparity will lead to a bifurcation of mobile technology.
Apple’s business model is straightforward: It aims to make the best products in the world by designing hardware, software, and services in tandem. Because Apple’s products are meaningfully different than those of its competitors, the company can charge a premium for them, which it invests into making better products. These new products are then sold at a premium, and the company then takes some of that premium to design the next generation of products. It’s a self-perpetuating cycle: The premiums from one generation of products funds the development of the next.
Apple’s OEM competitors have a different business model. PC makers like Dell and HP license Windows from Microsoft, and any component that one company uses can also be used by the other. If Dell releases a computer with a screen that consumers are willing to pay a premium for, the company will make some extra profit for a little while, but as soon as HP catches on, HP will purchase the same screen and sell it inside a comparable computer — and at a lower price. So HP will undercut Dell, then Dell will undercut HP, and then HP will undercut Dell again — etc. — until there’s no extra profit to be made from selling a computer with that screen. This dynamic applies to every component consumers are willing to pay a premium for, not just screens. Since PC makers can’t meaningfully differentiate their products from one another, they have nothing to compete on but price.
Smartphones are a similar story. OEMs like Motorola and HTC license Android from Google, and any component that one company uses can also be used by the other. If Motorola releases a phone with a better camera that consumers are willing to pay a premium for, Motorola will make some extra profit for a little while, but as soon as HTC catches on, HTC will purchase the same camera and sell it inside a comparable phone — and at a lower price. So HTC will undercut Motorola, then Motorola will undercut HTC, and then HTC will undercut Motorola again — etc. — until there’s no extra profit to be made from selling a phone with that camera. Android OEMs can’t meaningfully differentiate their products from one another, so they have nothing to compete on but price.
Niceness and Economies of Scale
Over the last decade, Apple has learned how to manufacture complex products with incredible fit and finish at a scale that’s unprecedented in human history. Apple manufactured 34,000 iPhones per hour last quarter, yet iPhones feel nice in a way that few objects, manufactured at any scale, do. This is because of the way they’re made and because of the materials they’re made with.
Apple invests in manufacturing innovation and uses premium materials because its goal is to make the best phone in the world, and the nicer your iPhone feels, the better it is. Android OEMs, on the other hand, either don’t make enough money to invest in manufacturing and materials the way Apple does, or they don’t see a return that justifies the investment. iPhones are nicer than Android phones because of Apple’s business model.
Apple’s business model has produced another advantage as well: massive economies of scale. As John Gruber explained in The New Apple Advantage:
But now that Apple’s products are more popular, we’re beginning to see another benefit to Apple’s lesser degree of configurability: greater scalability. Apple needs larger quantities of fewer different components to manufacture the same number of computers as other companies. It’s not just the economies of scale that all companies get when they sell 3 or 4 million laptops in a quarter — it’s greater, because Apple’s 3 or 4 million laptops sold share a larger number of the exact same components.
Gruber wrote that in 2011, and his point stands today. Because Apple buys massive quantities of relatively few components, its economies of scale are larger than any of its competitors’. Apple can sell a product at one price, but if another company was to sell the exact same product, it would have to sell the product at a higher price to make the same amount of money.
Together, these are an incredible foundation for future success: Apple can manufacture products that are nicer than its competitors’ products, and because of the company’s massive economies of scales, it can sell them at unbeatable prices, too.
Since Steve Jobs returned to Apple, the company has integrated hardware and software better than all of its competitors, but over the last decade, Apple has become the best chip designer, too. It started in 2008, when Apple purchased P.A. Semi. Then, in 2010, it bought Intrinsity.
The acquisitions quickly bore fruit. In 2012, Apple released its first phone with a custom CPU core. In 2013, Apple released the first phone with a 64-bit CPU. Then, in 2014, Apple released a product containing the A8, a chip so well designed that it’s denser than the comparable chip made with Intel’s most advanced manufacturing process.
Apple can design chips that are better than the chips used by its competitors, and it can customize them specifically for the products they’re used in. As a result, the hardware-software integration that makes Apple products Apple products will grow stronger over time.
Over the last decade, Apple has become arguably the best retailer in the world. Apple Stores are in prime locations and are among the most profitable stores on Earth. And the company’s 450+ retail stores are a foundation for future success.
The challenge of selling Apple Watch illustrates their foundational nature. Apple Watch is technology combined with jewelry, a product that must be experienced to be fully understood.
Jewelers, however, are unequipped to sell technology, and technology retailers are unequipped to sell jewelry. But because Apple has its own stores, the company can redesign them to sell a product that’s a combination of both.
Without Apple Stores, there would be no place to properly experience the Watch, so it would have a far smaller chance of success. Apple Stores are a crucial foundation for Apple Watch — and Apple’s competitors have nothing truly comparable.
Cultural Influence and Customer Base
Over the last decade, Apple has acquired so much cultural influence that Apple Watch, the company’s first intentional entrance into fashion, landed on the covers of fashion magazines around the world. It’s also acquired a monopoly on the best customers. In The iPhone and the Minority Majority, Ben Bajarin explains:
Countless times we hear from global carriers that they prefer Apple’s customers. Apple brings them a lower risk customer with higher credit. Apple brings customers who spend more and thus have higher annual revenues per user. From discussions I have had with retailers looking to support Apple Pay, they make the point that it is iPhone customers they want in their stores. These customers spend more, plain and simple. We see the same reality in the app stores. Apple makes their developers more than 2x the revenue of the Google Play store — with less than half the user base. Amazon’s most profitable customers are on iPhones. Google’s most profitable customers are on iPhones. Carriers [sic] most profitable customers are on iPhones. Even Microsoft is learning their most profitable customers are on iPhones. I could rattle off statistic after statistic that highlights this reality. Apple’s customers are higher value customers and their growing installed base means they are amassing one of the largest, if not the largest, installed base of premium customers on the planet.
Today, Apple’s cultural influence and customer base are intimately related: The company’s cultural influence increases its lock on the best customers, and its lock on the best customers increases its cultural influence.
Additionally, third parties — software developers, accessory makers, etc. — know that Apple’s customers are the ones most likely to spend money on their products, so they design for iOS first. This, too, is a self-perpetuating cycle: Apple’s customers are the best customers, so third parties prioritize them, which increases Apple’s cultural influence, which draws more people to iOS, giving third parties even more incentive to prioritize it over other platforms.
The Coming Bifurcation of Mobile Technology
It all comes down to this: Apple can manufacture products that are the nicest and the fastest, sell them in stores its competitors don’t have anything truly comparable to, and at prices its competitors can’t match.
This will bifurcate mobile technology.
Apple customers will get the best of everything. Apple’s hardware and software will be the best, and they’ll be designed for one another. App developers, accessory makers, and other third parties want Apple’s customers to be their customers, so they’ll design for iOS first.
If you’re not an Apple user, you’ll be a second-class citizen. You’ll get a lesser user experience, and third parties will consider you a secondary priority.
Apple’s focus on hardware, software, and services is inherently riskier than focusing on hardware, software, or services, as Apple’s competitors do. But Apple’s approach also has more potential.
And the coming bifurcation is the result of Apple finally realizing that potential.