Press release

Simon-Kucher & Partners Commentary: The Secret behind Apple’s New Strategy

Sponsored by Businesswire

Apple’s long-awaited entry into subscription video has drawn a sharply
critical response. It’s true that the timing is odd: Rumors are swirling
that another giant, YouTube, is about to exit the very same space Apple
is poised to enter. It’s also true that the lineup of celebrities
onstage at the Steve Jobs Auditorium – Steven Spielberg! Jennifer
Aniston! Oprah! Big Bird! — seem designed to impress your dad rather
than the Brooklyn twenty-somethings caught spontaneously dancing in
company advertisements. Furthermore, estimates of Apple’s investment in
original programming pegs it below 15% of the amount Netflix has
budgeted for the same period, leading pundits to conclude that Tim Cook
is in over his head, leaping without looking, or simply desperate for a
solution to faltering iPhone sales (more on that later).

To be sure, Apple has released some total disasters in the past – I am
wearing one on my wrist – but let’s not count out the plucky company
from Cupertino quite yet.

As advisors to some of the world’s biggest brands on questions of
revenue strategy and pricing, we at Simon Kucher & Partners often get to
see industry trends before they are evident to the rest of the world. In
Apple’s announcement, we hear the echo of something larger, a tectonic
shift which is quietly defining the future of one of the largest
industries in the world.

An index created by tech platform Zuora shows that subscription
businesses have grown 300% in the past seven years, far outpacing S&P
500 growth over the same time period. “Once customers can get the
outcome they want, without having to worry about owning the physical
assets,” notes CEO Tien Tzuo, “that’s where the demand goes, and that’s
where new revenue streams are created.”

For Apple, the “physical asset” in question is that money-making machine
without equal: The iPhone.

Yes, you love your iPhone today, but will you still love it tomorrow?
Sales, measured either as new users or upgrades, have flagged, and unit
sales of iPads and MacBooks have actually slipped from 2017 to 2018.
Billboards unfavorably comparing the iPhone with the Samsung Galaxy or
the Google Pixel can be seen on any major urban thoroughfare – such as
the US 101 between San Francisco and Cupertino. It has been a long time
since a new iPhone really astonished the world, aside from its price tag.

The iPhone pricing problem can be described as a local maxima trap.
Apple could introduce distinctive new features, but that would require
higher prices, costing them customers. Alternatively, Apple could lower
the price, but that might restrict their ability to introduce those same
distinctive new features, which might also lose customers. What’s a
massive multi-national corporation to do?

With their wildly ambitious new plan, Tim Cook & Co completely
short-circuits this conversation. To extend the metaphor above, they are
done with dating and would like to finally settle into a more permanent,
till-death-do-us-part-style arrangement with consumers. Above all, they
understand that seeking the hand of an increasingly fickle and
commitment-averse population is an all-or-nothing proposition.

That helps to explain why Apple is trying hard to prove itself every bit
as attractive as rival suitors like Amazon Prime, one cloud-accessible
feature at a time. It also provides a logical basis for Apple’s
willingness to cannibalize its music download revenues, which accounted
for more than $1BN just a few years ago, with unlimited Apple Music.
They are even willing to permit a bit of device infidelity: Despite the
name, Apple TV Plus does not require an Apple TV, and can be accessed
using competing televisions from Samsung, Sony, Vizio, or LG.

All Apple asks in return is that you give them total ownership over your
digital world. The mantra is: The more Apple you get, the better off
you are
– safer, happier, more fulfilled. If you can view it on a
screen, load it via the cloud, hear it over AirPods – Apple wants you to
access it, stream it, and most importantly pay for it through their

The “paying for it” part may be the most important of all. The
newly-announced Apple Credit Card could be the dynamo that drives this
new flywheel, integrated as it is with all everything else Apple does or
plans to do. Its cash reward structure offers 3% back on Apple products,
and 2% back on anything bought with Apple Pay, with no annual charge or
other fees. While the rest of the world is carping that these rewards
are hardly better than many cards already on the market, watch this video
(or better, show it to anyone under 30).

…and you’ll quickly see that arguing in support of, say, the Chase Slate
Card is like coming out in favor of the Zune.

It’s a nearly frictionless decision for Apple. Simply avoiding merchant
fees will allow them to finance the bulk of their cash-back program, and
that’s before they see the first dollar of revolving balance interest.
More importantly, it’s frictionless for the consumer. A recent study by
a team from the University of Illinois at Urbana-Champaign found that
mobile payments increased the quantity of retail transactions by 23%;
meanwhile, an earlier study by MIT professor Amy Finkelstein found that
integrated payment systems (think FastTrack or EZ-Pass) permitted a 20%
– 40% price increase. For a company in a local maxima trap, this sounds
like a get-out-of-jail-free card. Meanwhile, the steady drip, drip, drip
created by constant cash-back notifications on every single purchase
(below) sends the perfect dopamine-fueled reminder that this marriage is
truly made in financial heaven.

Students of Apple’s stock will note that this is hardly a secret, since
it is writ large on the company’s public financial statements. Services
have crept up from $24BN in 2016 to more than $37BN in 2018 – topped off
with a spectacular $10BN in the final quarter of that year.

With all these moving parts, it’s important not to miss the big picture.
This is not about a piecemeal investment in video, publications,
streaming music, gaming, cloud storage, or payments. It is about
bringing them all together to create a fundamentally new relationship
with the customer, one that may entirely up level the company’s

About the Author

is a Partner at Simon Kucher’s San Francisco office. He
specializes in developing high-growth revenue strategies, conducting
effective go-to-market planning, and achieving recurring revenue

Simon-Kucher & Partners, strategy & marketing consultants: Our
focus is on TopLine Power
®. Founded in 1985,
Simon-Kucher & Partners has more than 30 years of experience providing
strategy and marketing consulting and is regarded as the world’s leading
pricing advisor.
The firm has over 1,300 employees in 38 offices