The Threat Of A Hollowed Out Apple

Services may supplant devices as the source of Apple's future growth. But it may find that strategy more competitively challenging than it had hoped. JL

Jan Dawson reports in Re/code:

As Apple faces the risk of being hollowed out by competitors, it needs to reinforce its position in services in order to fend off that threat and keep providing experiences that create unique value on its devices versus those provided by competitors. Apple recognizes the existential threat in third-party apps and wants to make sure users aren’t just spending time on its devices, but actively using its services as well.

Just over three years ago, when I was an analyst at Ovum, I gave a presentation at the CTIA mobile industry conference about a possible threat to Apple’s business (here’s the deck). I reviewed Apple’s famous "There’s an app for that" campaign, and spoke about how what had been a strength for the iPhone was becoming a potential threat to Apple’s future success.

I thought it would be interesting to go back and review the key themes of that deck, see how things have panned out and look at where Apple stands today in relation to these threats.

"There’s an app for that"

Back in early 2009, Apple’s ads for the iPhone 3G played up the App Store that the company had added to the iPhone OS the year before (here’s an example). The thrust of the campaign was that there were many things you’d never expect your phone to be able to do, and while the iPhone itself couldn’t do them, there was an app you could download from the App Store which could.

Over the next few years, Apple’s App Store model went through a variety of changes. One of the key challenges Apple had to deal with concerned apps that either the company or its carrier partners deemed threatening. That included, at various times, the Skype app and the Google Voice app, both of which spent time either banned from the App Store or in limbo pending review. In time, these objections and obstacles were overcome, resulting in an App Store that had alternatives for almost every preinstalled Apple app on the iPhone, as shown in these side-by-side screenshots from my original presentation:

The risks of an open app model

In the vast majority of these cases, the apps in the App Store posed no threat at all to Apple and only enhanced the value of the iPhone and its ecosystem. But the same openness that has allowed two million apps to flourish on the iPhone has also allowed in competing ecosystem providers like Google, Facebook, Amazon and Microsoft, with rafts of apps that compete not just with one of Apple’s own apps but, increasingly, big swaths of the iPhone’s built-in functionality.

Microsoft alone has 82 apps available for iPhone, Google has 72, and both Facebook and Amazon have 22. Many of these apps duplicate functionality provided by Apple’s apps, including browsers, photo management, cloud storage, note taking, content stores and players, email clients and so on. In some cases, you could almost recreate my screenshots above with apps from just one of these companies.

The big risk is that these ecosystem providers will come to contribute so much of the functionality on users’ phones that users begin to see these companies, and not Apple, as the most important part of their mobile user experience.

The big risk here is these ecosystem providers will come to contribute so much of the functionality on users’ phones that those users begin to see these companies and not Apple as the most important part of their mobile user experience. Once users spend the majority of their time in someone else’s apps, the device itself becomes just hardware holding someone else’s services. At that point, it becomes easier and easier to switch to devices that put those services front and center.

So Apple’s famous tight integration of hardware, software and services gives way to even tighter integration between someone else’s hardware and the services people actually use. As I’ve written previously, I think this is exactly why Apple is getting deeper into content categories like music and news. It recognizes this existential threat and wants to make sure users aren’t just spending time on its devices, but actively using its services, as well.

WWDC changes the picture again

The interesting thing about last week’s WWDC announcements is how they change this picture in ways that both open up more opportunities for developers and potentially integrate third-party apps at a deeper layer in the OS. On the one hand, Apple opened up new aspects of iOS to developers, including Siri, Maps and iMessage. The company also made it possible to delete (or at least hide) Apple’s preinstalled apps. In some ways, this is "There’s an app for that" all over again, but playing out in three new settings, with all the attendant risks. These third-party apps can now get into parts of iOS previously reserved only for Apple’s apps and a handful of hand-picked partners.

Last week’s WWDC announcements open up more opportunities for developers and potentially integrate third-party apps at a deeper layer in the OS.

On the other hand, this integration can be seen as another plank in Apple’s strategy to refocus attention on the iPhone. If activity around those third-party apps now happens within Siri, Maps or Messages, it provides unique value which isn’t available in the same way on other devices, even if the underlying functionality comes from other companies. Siri, Maps and Messages all get better, and potentially get used more, because of third-party apps, which is a totally different ball game from just seeking to compete more effectively with third-party apps on a standalone basis.

Apple is walking a fine line here between opening itself up to more competition and bringing some of the competition into settings where it does less damage and, in fact, enhances experiences unique to iOS. Importantly, Siri integration in particular is limited to certain domains that don’t include either navigation or music services, two areas where Apple has invested heavily in its own apps in recent years. Though the intention is apparently to broaden the domains addressable by Siri over time, I wouldn’t be surprised if Apple put these domains in particular at the bottom of its to-do list.

The double importance of services

In the context of all this, it becomes clear that services at Apple serve an important dual function. On the one hand, there’s the new revenue opportunity associated with things like Apple Music, the App Store, iCloud and so on, which becomes more important as Apple’s hardware revenue starts to grow less quickly.

But on the other hand, as Apple faces the risk of being hollowed out by competitors, it needs to reinforce its position in services in order to fend off that threat and keep providing experiences that create unique value on its devices versus those provided by competitors. The changes announced at WWDC should help with this, but it’s an ongoing battle in which Apple needs to continue to make meaningful progress over time.