The mobile market was a vast ocean, with a thousand sails competing for the so-called ultimate treasure, one piece.
Nokia was the original king of this empire until June 8, 2010, when a Knight's sword called the iPhone 4 pierced through the heart of Nokia, Apple, put on the crown and had it until today. For the following 12 years, Samsung, Huawei, Xiaomi, and many other regicides set sail, but all failed to overthrow the king of this new era.
In 2022, as always, at the product launching of Apple, we can still feel this king’s ambition. In the new era that may come, or, in every future era, it wants to be this top player all the time.
It seems pointless to choose Apple as a research topic for frontiers of innovation, but we'd like to present to you today the connections between Apple and innovation. Apple was born in innovation, limited by innovation, and perhaps will "die" in innovation, or, is reborn in innovation:
- The Product Launch: In addition to just a rehash of the same old, two products showcased Apple’s ambitions in hardware and software.
- Old Era: As the controller of the innovation world, Apple has placed many shackles on its latter competitors, and these shackles, almost all of them, were generated by the closed loop of the IOS ecosystem.
- The New Era: Endless potentials enabled by the integration of Apple's hardware and software on the supply chain.
The Apple Product Launch: Old Thoughts, New Ideas
In addition to a new color option added to iPhone 13, the new iPad air claimed to be a “small iPad pro”, and the cable cost nearly a thousand dollars. What was most interesting was the $429 3rd Gen iPhone SE and the new powerful desktop.
iPhone SE 3: Integration of supply chain to sustain the outstanding Apple ecosystem
No matter what it is, the design, the specs, the hardware, except from the A15 chips and the low-end 5G balance configuration, there is nothing fancy, nothing special about iPhone SE 3. Even the price is not as low as it bragged about.
However, iPhone SE 3 can play a role in integrating the global supply chain of Apple in this market off-season, making full use of redundant productivity. And the launch of it implicates a deeper intention of Apple.
How to target the lowering-end of the market segment in today’s economical uncertainty, and focus on the long-tail effect, is a common concern for all companies. Apple’s long-tail effect relies on the strong service it provides. Last quarter, Apple’s software service revenue was $19.5 billion, a 24% of increase year-on-year, over twice the overall revenue growth, accounting for 15.8% of total revenue, which was a 6% increase from three years ago. And the gross margin of this business sector reached 72.3%, 1.6 times the overall consolidated gross margin.
The past 4 quarters of Apple’s earnings report have been emphasizing the diversity of end-users SKU and content type, the number of paid users, and application downloads.
And the launch of the iPhone SE 3 is just to tap potential and underserved users of the IOS ecosystem and thus achieve a new growth of end-user services.
The IOS ecosystem is the fundamentals of Apple as the old king, but it is also the reason why Apple might be the biggest "enemy" for other companies.
M1 Ultra Processor: Captain Cook’s Black Pearl
The M1 Ultra is the ultimate work of Apple’s supply chain. If Steve Jobs brought the beauty of Apple’s product design, what Cook brought, after integrating the supply chain, was a strong capability of research and production.
On the M1 Ultra version of Mac Studio, CPU performance is faster than iMac (10-core i9), 90% faster than Mac Pro (16-core Xeon), and 60% faster than Mac Pro (28-core Xeon). GPU performance is 4.5 times faster than iMac (Radeon Pro 5700XT).
At WWDC 2020, Apple officially announced that it will gradually transit from Intel processors to its M-series for iPad, Macbook, and iMac starting at the end of 2020.
Cook: "Apple focuses on hardware and software, service as one experience. Chip strategy is conducive to strengthening the consistency of the experience in the context of terminal diversity. Apple’s strengthened independent layout is more conducive to stabilizing the supply chain."
In the future, Apple may be able to control the development and production of any single part of each product, which is also a profound change brought to Apple by Cook as a supply chain master, after ten years at the helm.
A complete supply chain system is also conducive to Apple having its second biggest sword in the next era: whether it is AI or Web 3.0, the integration of software and hardware will be a must-have. At this point, Apple seems to have more advantages strategically than the high-profile Meta (Facebook).
Old Era: Rule Maker and Order Controller
IOS: Apple’s Widening Moat
An interesting question about the Internet lies in who, why, and how it was created. There are many answers to the question, and the Internet has evolved from Web 1.0 to interactive Web 2.0, and now, to the still ill-defined Web 3.0. People have agreed upon open API, uniform standards, and an end-to-end experience that is as free as possible.
Today, even digital giants remain an awareness of the fact that open APIs, common standards, shared data, etc. could all greatly contribute to the further development of the Internet and, in most cases, to their growth. But these companies are not concerned about how the market grows healthily as a whole, but rather about how many market shares they could occupy in that growth.
And one of the biggest obstacles to the growth of the Internet today might be Apple. While it has contributed to the development of the Internet over the past 15 years, its policies have neither benefited the overall digital well-being nor laid a solid foundation for the next generation of the Internet. Instead, Apple is somewhat inhibiting the future of the Internet. It secures its power through charges, controls, and technologies that not only negate the power of open API but also prevent healthy competition. And the actual tool to enforce this control is, obviously, the IOS ecosystem.
Apple’s adverse impact stems from three interrelated and increasingly powerful factors.
Apple believes it knows more about, technology, privacy, or user data than consumers, the developer community, and the market at large. Apple specifies that on its devices:
- Apple enjoys the right to distribute apps.
- Apps need to be approved by Apple for distribution
- Apps need to comply with Apple’s billing policies
The integrated and closed-loop IOS system provides a first-class experience, which has been an unprecedented success, but at the same time is what's wrong with Apple. iOS affects the lives of millions of people every day, and to some extent, Apple has become the de facto regulator of the Internet; a single, for-profit giant institution that wields enormous power.
The IOS system also has an external impact. Developers need to make two versions of their apps, which is no small burden for innovative startups.
Prosperity Destroyer
There is no prosperity in a pool of stagnant water, and to prosper, new winners must be able to live at every layer of the “new economy” without being constrained by one monopoly. Great things are happening right now in terms of users, creators, and innovation. But iOS limits the number of creators participating in the digital economy hinders creativity in their products and business models and makes each transaction more expensive. Most importantly, it hinders the healthy growth of the Internet as a whole.
The commission fee charged on In-app purchases in the App store is an obvious one. The average profit margin for U.S. businesses is between 10–15%, but Apple charges 15% to 30% commission on in-app purchases. It means that for many businesses, the more they are active in their business, the more money they may lose. It’s a terrible system from this perspective. It built up strong ties between iOS’s control over the smartphone audience and the entire smartphone market and could punish the companies that need money the most: innovative startups. Moreover, Apple consistently gives discounts to its biggest partners (Such as Amazon or Vivendi), but never to start-ups. The best example of this is Roblox.
While Roblox is often described as a game, it should be better described as a platform that operates countless user-generated worlds that are accessible on all platforms, supported by an identity and payment system. Roblox highlighted the App Store’s policy changes as its sixth biggest risk factor, although Roblox passed Apple’s approval policy, its growth was still limited by the App Store’s commission cut.
For every $100 in revenue from the IOS version of Roblox, $30 goes to Apple, $31 goes to Roblox’s infrastructure and security costs, and another $11 is taken up by administrative fees. This leaves Roblox with a total of $28 in pre-tax gross profit to reinvest in its platform. And 23% of this $28 goes to R&D, 7% to sales and marketing, and 24.5% is taken by payment to developers. As a result, it currently has an operating margin of about -25%.
Roblox has certainly enriched the digital world and brought in hundreds of thousands of new digital creators. However, for every $100 it creates, it loses $25 and might gain $24.50 in net revenue, while Apple gains about $30 in net profit. Today, the only way Roblox can increase developer revenue is to deepen losses or stop development, which in turn hurts Roblox in the long run.
Roblox essentially reflects the biggest problem with the IOS: there is no platform on the platform. Steve Jobs made it very clear: developers should not use cross-platform development tools, but rather iOS tools. They should make the best iOS apps, not the best apps. But what makes cross-platform games like Fortnite, Roblox, and Call of Duty so powerful is that they connect players on every device, not just the ones made by Apple.
The success of cross-platform tools and experiences might suggest that Apple’s control is not an issue. But this assessment ignores Apple’s attempts to ban the Unreal Engine, the fact that no one knows if Roblox is allowed on iOS or if this was just an accident, and how Apple’s commissions limit apps for similar platforms like Roblox and Snapchat (which, for this reason, does not offer its own “in-app app store”- (although this model is very popular and profitable in Asia).
Apple has worked to avoid another possible middleman. in 2020, the company revised its app store policy so that any iOS app that uses third-party logins (for example, logging in with a Facebook or Gmail account) also needs to support the Apple account system. To simply put, Apple declared that “if you want your app to run on iOS and your app supports our competitor’s account, you must also include our account.”
Overall, Apple’s anti-platform policies and philosophies not only prevent competition on the Internet today but may also hinder the development of the Internet. Apple does not want a new world built on a free and innovative foundation. Where digital items or currency can be freely exchanged between applications and virtual worlds. Apple believes that the next iteration of the Web should be just a “virtual App Store” where your avatar is your Apple ID, your bank is Apple Pay, and your experience is based on Apple’s vision and plan, including time and place.
This is not surprising. The next “Internet” would be the greatest opportunity for market growth and happier consumers and may replace today’s key players (just as Apple’s iOS has replaced various non-smart systems). So Apple can never stop, and for the time being, will have to hold on to the moat of IOS.
Why IOS
As we know, many mobile devices are doing something similar to Apple, running their stores, offering their standards, and developing services exclusive to their hardware. For Apple, the problem comes from the fact that Apple forces the bundling of hardware, operating systems, distribution systems, payment solutions, and services, making it mandatory to accept Apple’s commission charge regardless of any channel.
Regulation to force partial unbundling could be a solution, but that doesn’t mean Apple can’t charge consumers and developers more. Like any retailer, the Apple App Store needs to win over consumers through its branding, curation, availability, accessibility, reliability, and security, and win over suppliers (i.e., developers) by increasing sales after commission cuts.
The problems created by Apple’s control are getting bigger every day, just like the company’s unprecedented strength. The future of the global economy moves further to digital and virtual. Widespread prosperity depends on competing platforms that create value for developers and users and allows the entry and growth of new platforms that do the same. Apple is becoming the controller of the old-age order and the destroyer of the old-age prosperity.
New Era: The King Wielding Two Swords
If IOS is an old sword of Apple, the complete supply chain is a new knife newly hardened by Apple. the release of the M1 Ultra processor once again tells the world that Apple does not want to be only the king of the old era, but also wants to take its place in the great voyage of the new era.
Apple’s future business model may go far beyond the hardware, software, and service in one model. Perhaps in the next cycle, Apple can go into the full-stack service of mobile devices including communication services. Not long ago, Apple’s self-developed 5G baseband completed the design and began trial production, and is expected to partner with the core telecom operators this year for field testing.
And in the future, will Apple enter a new era: to become a giant that builds a metaverse infrastructure?
The answer is likely to be a YES. The six major metaverse technologies: blockchain, Internet of Things, interaction, cloud computing, artificial intelligence, and video games all involve the integration of offline and online supply chains, and Apple is already ahead of many competitors in certain areas.
Take interaction, for example, Apple is working on a patent for technology that weaves sensors and development into an electronic fabric that shows it can be used in meta-universe wearables to enhance the interactive experience, or simply put, smart clothing.
For years, there have been questions about Apple’s lack of revolutionary products. On last quarter’s earnings release call, Cook said that Apple’s products and programs will only be announced when they are mature or close to it, as exemplified by the digital patents above. This is the style dictated by the business model. But it is also a kind of king’s stoicism.
We expect the king of the old era to come up with epoch-making products like the iPhone 4 and look forward to the future embrace of Web 3.0.
Summary
Apple, the king of mobile, can be cluttered with links to innovation. But the moat that Apple has, IOS, the closed-loop system built up by highly integrated mobile devices and applications, inhibits innovation in the current digital world; the strong supply chain that Apple has will be its most important leverage in the next era. How to integrate the existing IOS ecological order into the common interests of Apple and the Internet of the new era seems to be an obstacle that Apple needs to overcome.