By Tripp Mickle
The iPhone is running out of juice. To go beyond the device that
made Apple Inc. a global colossus, Tim Cook is betting on a suite
of services -- marking the company's biggest shift in more than a
decade.
The chief executive's strategy, years in the making, takes Apple
out of its comfort zone into areas where it has failed in the past,
and that today are replete with risks and competition. Apple will
take a giant leap toward its goal on Monday, when it plans to
announce video- and news-subscription services that it hopes will
generate billions of dollars in new annual revenue and deepen ties
between iPhone users and the company.
In some ways, Apple helped create its own predicament when it
launched the app industry a decade ago. The goal was to make the
iPhone more powerful.
Over time, though, apps and services, from Spotify to Netflix to
China's WeChat, have often become more important to users than the
devices that run them. That allows consumers to hold on to phones
longer or switch to less expensive versions. In January, Apple
reported its first decline in revenue and profit for a holiday
quarter in over a decade.
By contrast, revenue from the services business grew 33% last
year, to nearly $40 billion -- accounting for about 15% of the
company's total of $265.6 billion.
The company's ambition in video is to become an alternative to
cable, combining original series with shows from other networks to
create a new entertainment service that can reach more than 100
markets world-wide. It is the tech giant's latest attempt to
reinvent television, something it has tried to do for about a
decade with limited success.
On Monday, the tech giant plans to unveil the first footage from
some of its new original TV shows, according to people familiar
with the event. Apple has used a $1 billion budget to buy dozens of
original TV shows in hopes it can land a breakout hit. It has cut
deals with Hollywood stars including actor Reese Witherspoon and
director J.J. Abrams, who have been invited to attend Monday's
event on Apple's campus, according to those people.
Apple declined to comment for this article.
Apple hasn't said what it will charge for the programming.
People working on the projects said the company plans to charge a
fee, after previously saying it would be free to Apple device
owners.
The original series will be delivered in a new TV app that staff
have been calling a Netflix killer. It will make it easier for
people to subscribe with a single click to channels such as Starz,
Showtime and HBO, with which Apple has been negotiating to offer
their shows to users for $9.99 a month each, people familiar with
the talks said.
Apple has been negotiating to bring its new TV app to multiple
platforms, including Roku and smart TVs, according to people
familiar with the talks -- an unusual move for a company that has
long preferred to limit its software and services to its own
devices. Some of those distribution agreements are expected to be
announced Monday.
At the same event, Apple plans to showcase a revamped News app
that includes a premium tier with access to more than 200 magazines
-- including Bon Appétit, People and Glamour -- as well as
newspapers, including The Wall Street Journal. It plans to charge
$9.99 for the service and believes the premium news content can
lift engagement on its devices, people familiar with the plans
said. The New York Times earlier reported on the Journal's
participation.
As part of the arrangement, much of the Journal's content will
be available through the service, although certain types of stories
-- particularly general news, politics and lifestyles news -- will
be showcased, while business and finance news won't be displayed as
prominently, according to people familiar with the situation. The
deal will result in the Journal hiring more reporters focused on
general news to help feed Apple's product, one of the people said.
The Journal sells its own subscriptions for $39 a month.
The news subscription offering follows Apple's 2018 acquisition
of a Netflix-for-news app called Texture. The deal gave Apple
rights to most major North American magazines for at least five
years and up to two decades in an agreement that splits revenue
50-50 between the tech giant and publishers such as Hearst
Magazines and Condé Nast, according to people familiar with the
deal.
The terms rankled some newspapers Apple courted, including the
New York Times and the Washington Post, which sell monthly
subscriptions for $15 and $10, respectively. The Washington Post
and New York Times aren't participating in the new app, according
to people familiar with the situation.
Pushing services
When Apple last found itself on the ropes in the early 2000s,
co-founder Steve Jobs reinvented the company by pushing it into
mobile devices. The iPod and its accompanying iTunes service
revived a company that was largely dependent on Mac computer sales.
The subsequent iPhone helped Apple become the first company to
surpass $1 trillion in market value last year.
Mr. Cook, who succeeded Mr. Jobs, is attempting a similar feat
in the approaching twilight of the smartphone era. He began pushing
the services strategy hard in late 2017, after Apple launched its
10th-anniversary smartphone, the iPhone X. While a big price
increase to nearly $1,000 was helping boost revenue, the iPhone X
wasn't selling more phones, and higher prices made sophisticated,
lower-cost rival devices more appealing.
Mr. Cook, who had vowed earlier that year to double Apple's
services revenue by 2020, began meeting regularly with the services
division.
At the monthly sessions, the 58-year-old CEO has peppered the
team with detailed questions. He wanted services team members to
tell him which apps were selling well, how many Apple Music
subscribers stuck with the service, and how many people were
signing up for iCloud storage, a costly service that required
spending billions of dollars to build data centers around the U.S.,
according to people familiar with the meetings.
"You couldn't say, 'I don't have that information. I'll get that
tonight, ' " said one person involved. "You had to have a
dictionary of backup."
Apple's biggest source of services revenue comes from
distributing other companies' software through its App Store. The
company is now battling Spotify and Netflix, two of the most
popular apps, over its practice of taking 30% of sales or
subscription revenue from apps.
Netflix recently stopped letting users sign up for its service
on Apple devices, and said it won't participate in Apple's video
subscription service. Spotify AB this month filed an antitrust
complaint in Europe claiming Apple abuses its control over the App
Store, something Apple denies.
Apple's music-streaming service, its biggest attempt so far to
build its own subscription business, has about 50 million global
subscribers -- far behind Spotify's 96 million.
Apple's base of 1.4 billion iPhones, iPads and Macs in use
globally gives it a distribution platform. Yet the businesses of
selling gadgets and services can conflict. To reach the biggest
possible market for video service, Apple would have to offer it on
non-Apple devices -- something it has been loath to do in years
past.
Previous successes with services such as iTunes, which redefined
the music industry, have been offset by troubles with Maps and
Siri.
"They built an organization to make beautiful gadgets and
compete with Samsung and other gray-box manufacturers," said Mike
Levin, co-founder of Consumer Intelligence Research Partners, a
technology analysis firm. "Now, they have to really think about the
services and software that have been so uneven and compete with a
lot of very different competitors."
Mr. Cook has said Apple retains its edge. "Apple innovates like
no other company on Earth, and we are not taking our foot off the
gas," he told investors in January, when Apple reported
earnings.
Apple's stock, while up since early January, remains 20% below
its peak in October. It is currently valued at $900.85 billion.
App resistance
Co-founder Mr. Jobs foreshadowed Apple's services future when he
started iTunes in 2001, offering categories from competing major
labels to make the first successful digital-music store, with songs
available for 99 cents.
When Apple created the iPhone in 2007, Mr. Jobs opposed letting
other companies sell apps for it, fearing they could undercut
performance or introduce viruses.
Apple's software team, recognizing that more apps could make the
phone more dynamic, pushed back and prevailed. The resulting App
Store has generated more than $120 billion in total sales for
developers since it opened in 2008.
It also brought competition from rivals such as Spotify, which
began selling subscriptions in the U.S. in 2011.
The competition led to Apple's biggest deal, its $3 billion
acquisition of Beats Electronics LLC in 2014, so Apple could launch
a competing music-streaming service.
By then, concerns had already been rising inside Apple about the
iPhone's future. The number of devices Apple sold was growing more
than 20% annually as Mr. Cook pushed it into new retailers and
markets, but sales executives told colleagues in 2014 they were
running out of avenues for easy growth, former employees said.
"They were freaked out," one person said.
During a presentation before the launch, the music-streaming
team told Mr. Cook they expected to generate more than 10 million
subscribers in the first year.
"Double that," said Mr. Cook, according to a person familiar
with the meeting. The executives ended up easily clearing the goal,
which encouraged them about Mr. Cook's vision for the opportunity
in services, the person said.
Mr. Cook and Eddy Cue, his lieutenant in charge of services,
started looking for other subscription opportunities. Video was an
immediate priority. Apple's share of movie sales and rentals was
more than 50% in 2012. By 2017 it had fallen to between 20% and
35%.
Apple wanted a service that could beat Netflix, a person
familiar with the company's plan said. After a 2015 effort to
persuade Walt Disney Co. and others to join a streaming-TV service
faltered, Apple's executives debated alternatives, including
acquiring Walt Disney Co. or Netflix, and building its own studio,
people familiar with the discussions said.
In 2017, it hired two prominent executives from Sony Pictures
Television and empowered them to cut deals for more than two dozen
original programs. They scooped up a reboot of Steven Spielberg's
Amblin Television's "Amazing Stories," scored a series about a
morning talk show starring Ms. Witherspoon, and struck a
partnership with Oprah Winfrey.
Apple faces steep competition from big spenders while it plays
catch-up to experienced rivals. Netflix has 139 million subscribers
and is expected to spend $15 billion on content this year. It also
offers a far deeper content library than Apple plans to make
available. Disney, which has decades of experience making hit shows
and movies, plans to launch its own streaming service later this
year.
Morgan Stanley estimates that a combined media package from
Apple that includes video and music could generate more than $22
billion in sales by 2025.
Previously, Apple used software and services to sell more of its
own devices. In January, Apple announced it would put a TV app on
sets made by rival Samsung Electronics Co., making it available to
people who don't necessarily own any Apple hardware.
Apple executives made clear during talks with TV makers that it
needed as broad a reach as possible to compete with Netflix and
others. Last year, Apple announced a similar agreement with rival
Amazon.com Inc. to bring Apple Music to Echo smart speakers.
"We made a mistake with Apple Music, thinking we could go it
alone, and it took a long time to catch up. We still aren't there
yet," the head of marketing Apple services, Jon Giselman, said
during a meeting with one of the company's partners, according to a
person in attendance.
The push into news subscriptions could help Apple battle
Facebook Inc., whose News Feed has helped it become the No. 1 app
world-wide in monthly active smartphone users. It is also the
anchor of a business that Facebook is looking to expand by
emphasizing private messaging, a step many interpret as the first
in an effort to become a super-app like China's WeChat, which
allows users to shop, order food, buy movie tickets and make
reservations on any mobile operating system.
For Mr. Cook's monthly services meetings, the company has
intensified monitoring of apps that benefit and threaten Apple. The
team has created a release radar for the CEO to track apps that are
expected to sell well and other metrics for the apps that have
challenged Apple's business, including iTunes sales decreases
compared with Apple Music subscription growth, said the person
involved with the meetings.
Other successful subscription apps have given away much more
content at lower prices than Apple is expected to offer initially.
Amazon Prime members, who pay $119 annually, get free video content
and discounted music subscriptions. Some inside Apple's services
group wanted similar benefits for iPhone buyers. Mr. Cook and his
leadership team have made it clear that its forthcoming services
will carry a price tag.
"There's this conflict between wanting to become a services
business and acting like one," said the person. "They haven't
solved that."
--Lukas Alpert, Joe Flint and Benjamin Mullin contributed to
this article.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
March 24, 2019 10:31 ET (14:31 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Apple (NASDAQ:AAPL)
Historical Stock Chart
From Mar 2024 to Apr 2024
Apple (NASDAQ:AAPL)
Historical Stock Chart
From Apr 2023 to Apr 2024