Apple Services – The big blue.

New services a drop in a big blue ocean of hardware.

• In the face of stagnating hardware revenues, Apple has brushed up its services portfolio that have almost zero chance of taking up the mantle of growth from the hardware business.
• The new and updated services include:
  • First, Apple TV and TV+: The new TV app is essentially a further consolidation of Apple’s media offering into one seamless and integrated digital location.
  • From a user perspective, this is exactly the right way to go as TV content is becoming more fragmented and dislocated as content creators increasingly want to distribute their own products direct to consumers.
  • The new TV app brings in the streaming services that have decided to work with Apple, content purchases and rentals from iTunes and a new service called Apple Channels.
  • These are effectively streaming services within the app to which the user can subscribe directly for a fixed monthly fee.
  • Showtime and HBO are the leading examples.
  • Apple has also created its own channel called Apple TV+ which will feature at least 6 shows fronted by a selection of household names across the genre spectrum that will also carry a monthly fee.
  • Apple did not specify how much it would be, but based on competitors, I would expect this to be around $9.99 a month.
  • Second, Apple Arcade: which is another games subscription service but with a difference.
  • All of the others (except Tencent’s) are focused on console quality games but Apple Arcade is clearly focused on mobile although it will work on any Apple device.
  • The aim is to offer access to paid-for mobile games that are often lost in the sea of free-to-play games giving a platform for these developers.
  • There is no multiplayer angle to this at all as it is simply a subscription that offers unlimited online and offline play of 100+ titles.
  • This service was not priced but I would expect to come in somewhere around $7.50 a month.
  • Third, Apple Pay and Apple Card: Apple Pay continues to fare reasonably well and Apple has made some incremental updates to make the service more wide-ranging and easier to use.
  • It also announced Apple Card with the card issued by Goldman Sachs and transacted by Mastercard.
  • This is a credit card that is definitely easy to apply for and use as well as much better at tracking one’s expenditure and payments.
  • It also offers 2% cash back on a daily basis and has no fees at all.
  • Consequently, it looks like a great deal as long as one owns an iPhone and lives in the USA.
  • This is a big enough market for this to be a success without any further expansion.
  • Fourth Apple News & Magazines: Incremental updates were announced to the Apple News app but also a new magazine service.
  • This will feature 300+ magazines that have been redesigned for the small screen.
  • The focus is on the user experience and includes animated photographs as well as floating text and a really good look and feel.
  • However, Apple is offering just 10% of the magazines that competitor Readly is offering (3,000+) at the same price of $9.99 a month.
  • Apple’s will be pushing this as default on its devices, but I really struggle to accept that one-tenth of the content is worth the same even when it has been tarted up to look nice on mobile.

Take Home Message.

• Apple has recognised that it needs to work on its Digital Life services and in that regard, today’s announcement represent some progress.
• However, it remains very far short of offering anything like the quality of services that Google offers in Search or Maps, Facebook in Social Networking and Instant Messaging or Tencent in Gaming and Instant Messaging.
• Consequently, these services are going to incrementally increase brand loyalty to the Apple Ecosystem and make a tiny financial contribution to the company.
• It is important to remember that Apple needs 2.1bn subscribers paying $9.99 a month to make it a services company (see here) meaning that far more than this is required to move the needle.
• Apple is hooked on hardware and there is very little bar a complete catastrophe that destroys its hardware business that is likely to change that.
• It is on this basis that the company should be valued and there its valuation looks fair.
• The value argument has now departed following its rally in Q1 2019, but as a hiding place from other concerns swirling around Facebook or Tencent, it still holds water.