Apple – The thin line.

Apple needs to strike a very delicate balance with its partners.

• Netflix’s gripe with Apple is symptomatic of the problem that Apple faces and the difficult waters it must now navigate to keep its premium margins in hardware.
• In addition to snubbing Apple’s new TV app, Netflix has now dropped support for AirPlay citing technical reasons around guaranteeing the quality of the experience which no one is going to believe.
• Not least because Netflix is still supporting Chromecast which, in my opinion, can lead to a more hit and miss user experience than AirPlay.
• The real reason, which everybody knows, is that Apple’s move into integrating content channels together and launching its own content is a direct competitive threat to Netflix (see here).
• Apple has effectively done to Netflix what it did to Spotify some years ago which by some measures is now ahead in the US (see here).
• When it comes to preferences and recommendations, video is much easier than music as there are far fewer items to be catalogued and the metadata that is offered with those items is more detailed and specific.
• Hence, if Apple went all out on content creation, which it clearly has not, it could represent an existential threat to Netflix.
• Consequently, if Netflix allowed itself to become swallowed up by the iOS ecosystem, its brand and user loyalty would most likely suffer.
• Content is rapidly fragmenting as creators increasingly want to distribute the content themselves leading to a requirement for the user to flip from one app to another.
• What users want is to have everything in one place that is indexed and readily available which is what Apple wants to provide.
• This is because this will increase loyalty to the Apple iOS ecosystem which, outside of smart TVs, is only available on Apple devices.
• The problem that Apple faces is that its core hardware market has run out of growth forcing it to look elsewhere.
• Services is the obvious place to enter because it is exclusive services that keep users loyal to one ecosystem or another.
• Apple’s core differentiation for several years has been its unique position as a distributor of the apps and services of 3^rd parties in the most easy, fun to use and easy to discover way.
• I have long been of the opinion that it is Google’s inability or unwillingness to bring Android up to iOS’s level of quality that has allowed Apple to continue earning premium hardware margins rather than anything special being done by Apple.
• Services are not Apple’s core strength and the only service that it has that is really sticky is iMessage.
• Moving deeper into services is an obvious move but it brings it into conflict with a number of services whose availability is a central pillar of the iOS proposition.
• This is why Apple has to tread very delicately.
• It needs to have enough exclusivity to maintain its brand and hardware price but not so much that the key 3^rd parties that support the iOS proposition are alienated.
• This is why I am not a huge fan of Apple’s services strategy.
• The hardware business is so large that services will hardly make any difference to the company’s financial performance and yet they risk annoying some of its core partners.
• Staying ahead of the Android user experience is the key to the medium term for Apple, even it does mean little or no growth.
• Apple’s shares have had a great run already in 2019 and I think that it is time to take some or all of the money off the table.