Apple – Silent takeover

Apple is slowly consuming more of the economy.

• Ahead of WWDC Apple has released a report it had commissioned to examine the app economy on iOS revealing that while traditional app spending on iOS is broadly flat, usage of iOS to facilitate day-to-day retail spending is still growing extremely quickly.
• The Analysis Group has produced a report that headlines with the claim that the iOS ecosystem transacted $1.1tn in gross merchandise value (GMV) in 2022 up 29% YoY and up 116% from 2019 (see here).
• GMV is split into three categories: digital goods and services (i.e. apps) $104bn, up 2% YoY, Physical goods and services $910bn up 34% YoY and in-app advertising $109bn, up 24% YoY.
• Surprisingly it is China that is really driving these figures as it accounted for $570bn or 50.7% of total GMV in 2022 compared to the USA at just 25%, Europe at 10.5% and RoW at 14.2%.
• Apple only collects its 30% revenue share on the digital goods and services portion and so this study is not pointing to further rapid growth in services revenue.
• However, what it is pointing to is that consumers are finding it easier to conduct their daily expenditure on their phones as opposed to physically going to a store.
• It does not include transactions made using Apple Pay at the point of retail and if this included, I suspect that the overall GMV would be somewhat higher than reported here.
• While this growth is not a direct benefit to Apple by making its revenue grow faster, it is demonstrable of the fact that loyalty to the iOS ecosystem continues to grow which is coming at the expense of Android.
• Another example of this is the US tablet market where Canalys estimates that Apple now has 50% of the US tablet market as of Q1 2023 compared to 38.6% in Q1 2022.
• This market is now relatively small and as such market shares can bounce around meaningfully, but a clear trend is emerging in that Apple is slowly but inexorably growing its share in the digital ecosystem.
• This means that outside of games, iOS is more and more becoming the go-to place to offer any sort of product or service that has a digital element to it.
• While there is no direct benefit in most cases, this activity drives loyalty to the iOS ecosystem which is only available on Apple hardware.
• This ensures that Apple can get away with not offering the highest specification features (meaning more expensive components) and yet still charge a premium price.
• This is evident in its ability to earn 40%+ gross margins on its hardware when its Android competitors often struggle to break 20%.
• This report underpins the notion that the iOS ecosystem is more secure than ever and that it will take a major shift in digital behaviour to unseat it.
• This is where The Metaverse becomes interesting because as remote as this possibility currently is, The Metaverse is the leading candidate to replace the smartphone at the centre of users’ digital lives.
• This is why Apple must address this segment even if it is a total flop because the price of failure should The Metaverse take off and Apple is left behind, is to repeat Nokia’s fate.
• I think next week is far too early to release a device, but I do not expect it to be aimed at consumers but to be more of a teaser for developers so that they have an idea of where Apple intends to go in the long term and can do some tinkering.
• The net result is the immediate term for Apple looks very secure as there is no real sign of pushback against its gradual takeover of the digital ecosystem.
• However, this is fully priced into the shares and even with this excellent state of affairs, real growth is going to be hard to come by.
• Hence, I would continue to look elsewhere.