Apple’s Embrace of Smart TVs is Smart, Necessary, and Late (Premium)

Earlier this week, we learned that Apple’s iTunes and AirPlay services are coming to Samsung smart TVs. But it’s not just Samsung. Instead, Apple has finally woken up to reality and is embracing smart TVs across the board, and from a variety of manufacturers. And this action says a lot more about Apple’s future than do the words of its executives.

Apple, as I’m sure you know, delivered a blockbuster warning about iPhone sales last week, setting the stock market on fire and jeopardizing the retirement savings of billions of people in the process. But as I later wrote, no one should have been surprised by this warning, let alone Apple, since we’ve had months, if not years, of warnings.

Apple’s problem is simple: It’s a one-product company and that one product is no longer growing. Is, in fact, in danger of becoming an ever-smaller asset over time. In doing so, it will take Appl down with it, and this one-time trillion-dollar beast will be shown to be as mortal and vulnerable as any other one-hit-wonder in Silicon Valley. I’m looking at you, Facebook.

Apple has known about this problem for years: We reached peak iPhone—and thus peak Apple—over two years ago. Since then, the upgrade time-frame has grown from two to the three years (explaining the iPhone upgrade program) and, more recently, is growing past that (explaining the low-cost iPhone battery replacement program and the first-ever instance of an iOS version actually making older iPhones work better). But the collapse has accelerated recently, as evidenced by a 20 percent decline in new iPhone sales year-over-year (YOY) thanks to the lackluster iPhones XS and XR (leading to Apple doubling the value of iPhone trade-ins). Maybe that giant “Apple Jacks” price hike played a role. OK, not maybe.

All those parenthetical actions above were incorrectly seen, especially by Apple bloggers and fanatics, as evidence that Apple loves its customers. But that’s hilariously incorrect. Instead, Apple loves only the money that those customers can generate. And since the traditional way of wringing cash out of the faithful—selling them expensive new iPhones on a regular basis—is no longer working, the company has started implementing a new strategy. Which they brag about now, by the way. It’s called Apple’s Services business.

Tim Cook’s open letter to investors about the iPhone sales shortfall is chock-full of references to this quickly-growing business. Apple’s “results in China include a new record for Services revenue,” he noted. The Services business experienced “all-time record revenues” in the most recent quarter “and the vast majority of Services revenue is related to the size of the installed base, not current period sales.” In fact, revenues from services in the last quarter was $10.8 billion, “a new quarterly record in every geographic segment.” Apple, Cook says, is very much “on track to achieve [Apple’s] goal of doubling the size of this business from 2016 to 2020.”

About that.

In the year-ago quarter, Apple’s Services revenues were $8.5 billion, a gain of 18 percent YOY. If Apple hits Cook’s $10.8 billion figure noted above, that means that its YOY growth a year later will hit … 19 percent. That’s barely any growth in this all-important business at all.

Worse, it’s a tiny percentage of the revenues generated directly by iPhone sales (which were $62 billion in that year-ago quarter). And that’s not going to change in the recently-concluded quarter given the numbers Apple just provided in Tim Cook’s warning letter.

Of course, Thurrott Premium members already know this: I pointed out the delta between iPhone and Services revenues back in November after I saw a crazy set of charts on CNN that was trying to prove, graphically, that Services would somehow make up for any iPhone shortfalls. That cannot happen until Services grow. Many-fold.

And that can’t happen.

Unless, of course, Apple opens up its services beyond its closed iOS ecosystem. And that is exactly what it’s doing.

We already know that Apple is bringing AirPlay, its Chromecast and Miracast alternative, to a wide range of smart TVs this year from LG, Samsung, Sony, and Vizio. And I expect all of them to support iTunes and Apple Music as well, and for all of these services to expand to even more TVs and devices. Think Roku. And Amazon Fire TV. You didn’t think the recent deal with Amazon to sell Apple products on the e-tailer’s website was all there was to that, did you?

Apple is not a company that likes to partner. In fact, it actively seeks to undermine and replace every single company it partners with, ensuring that it controls as much of its destiny as possible. But there are obvious examples where Apple has been forced to partner in order to grow important new businesses. These include iTunes for Windows, the only way the iPod would have ever thrived, Safari for Windows, and, more recently Apple Music for Android. AirPlay and iTunes map into this strategy very obviously.

Apple, as you must know, is readying its own online TV service. Like the stupid-expensive HomePod smart speaker, that TV service could only see limited success if it was relegated only to the iOS installed base, which, by the way, I see as shrinking in the years ahead. If Apple is serious about this being a new generation of revenue growth, it will need to bring it to as many entry points as possible.

And again, that is exactly what it’s doing.