Hardware + Services (Premium)

Microsoft once referred to its shift to the cloud as software + services, but Apple is undergoing a similar strategy shift today. Perhaps we might refer to it as hardware + services.

As I’m sure you know, Apple held its annual September event yesterday and there were no real surprises: it announced the iPhone 15 family of smartphones, Apple Watch Series 9, and Apple Watch Ultra 2. There are many ways to view this event, with critics pointing out Apple’s ongoing creeping evolution in place of real innovation, while fans will simply appreciate the upgrades, especially if their devices are three years old or older.

But maybe there is a different way to view this event and its announcement. Or, different ways. After all, Apple is a unique company, and it’s interesting watching it adapt to the world it created with the iPhone. That is, now that the iPhone is both dominant and mature, Apple has had to find new ways to grow. And so it has changed, and fairly dramatically, since the first iPhone launch in 2007.

So let’s jump in.

With rare exceptions, Apple has launched new iPhones alongside other new products at a special event each September dating back to 2012 and the iPhone 5. But thanks to the sheer popularity of the iPhone and lengthening upgrade cycles, Apple has sought new avenues for growth via new hardware models and an impressively potent services push. And in recent years, this September event has changed quite a bit too, reflecting the strategic changes at Apple.

Apple’s mix of hardware and services used to be so much simpler. But it has expanded in each area greatly over time, building a cohesive and exhaustive ecosystem that is as lucrative for Apple as it is useful to its customers. Indeed, Apple is today the world’s largest company, with a market capitalization of $2.76 trillion at the time of this writing. Clearly, its leadership has made some good decisions.

To understand how much things have changed, consider the Apple of 20 and 10 years ago. At the close of its fiscal year in October 2003, Apple reported annual revenues of $6.2 billion and the Mac was its biggest business, followed by the iPod. But by the close of fiscal 2013, in October 2013, Apple was a much different company: co-founder Steve Jobs had passed, and though the company was selling roughly five times as many Macs as it had a decade prior, the Mac was just its third-largest business in 2013, and well behind iPhone and iPad, two products that didn’t even exist in 2003.

Ah, the iPhone.

Most people here have at least a rough understanding of the iPhone’s trajectory, and its impact on the personal computing industry and outsized influence. But more interesting to me, perhaps, is how the iPhone evolved over time. Since the first version, Apple has routinely been slow to adopt modern technologies, including 3G, phablet form factors, and USB-C, but it has also shown a kind of maturity in its plodding, methodical update cadence, experimenting in minor ways here and there to get the mix just right. For example, there have been only four major iPhone designs over the years, the original, the iPhone 4, the iPhone 6, and the iPhone X. But the most notable takeaway, perhaps, is that at least three of those are memorably iconic despite the many iterative interim models.

The iPhone has also, of course, gotten physically bigger over the years, aside from those times—with the SE and the iPhone 12/13 mini—that it also got smaller. And there are more of them than ever. In late 2013, Apple made news by offering two new iPhones, the iPhone 5S and 5C, for the first time. Five years later, in late 2018, it sold four: the iPhone XS, iPhone XR, iPhone 8, and iPhone 7, and those latter two were one- and two-year-old models kept in the market to address price-conscious buyers. Now, there are 8 choices: the iPhone 15, iPhone 15 Plus, iPhone 15 Pro, iPhone 15 Pro Max, iPhone 14, iPhone 14 Plus, iPhone 13 (but not iPhone 13 mini), and iPhone SE. This is a literal doubling of models every five years, but the mix is also interesting. The first two of the 2023 models are new but have year-old processors, while the last five of them are older models, so most of the iPhones that Apple sells today do not represent the very latest technology, again, all in the name of lowering the price barrier and countering the more varied choices that consumers find with Android.

During this time, Apple has also grown its iPhone-centric hardware peripheral business greatly. iPhone users in late 2013 were pretty much stuck with wired in-ear headphones and the oddly named EarPods. But by 2018, Apple had acquired Beats, and wireless AirPods were a thing, as were Apple TV and the original HomePod smart speaker. Today, Apple sells AirPods second generation, AirPods third generation,  AirPods Pro, and AirPods Max earbuds, HomePod and HomePod mini smart speakers, Apple TV, an almost uncountable number of Beats-branded products, AirTags, and perhaps the most important accessory of all, Apple Watch. Which of course comes in several different versions itself.

And there is yet another Apple business that didn’t really exist in 2003: Services. Lumped into Software & Other in 2003, it was then Apple’s smallest business unit, with just $177 million in revenues in Q4. Flash forward a decade, and it had hit $4 billion in quarterly revenues. But a year ago October, it was Apple’s second biggest business, with $19 billion in revenues in that quarter. And this whole thing exists almost solely to support the iPhone. Yes, most of Apple’s services interoperate with its other hardware platforms, including the Mac and iPad. But Apple’s entire world revolves around the iPhone. If it didn’t exist, most of the rest of it wouldn’t either.

This was perhaps predictable, given that the iPhone and Services evolved in lockstep. The company launched its iTunes Store in 2003 to serve the iPod, yes, but its iconic App Store arrived in 2008, one year after the original iPhone, and the iTunes Store was a key component of that device. Then came iCloud, its successor to Mobile Me, and AppleCare+ in 2011. Followed by Apple Pay in 2014, Apple Music in 2015, and Apple Card in 2019. All are still out there, all serving Apple’s iPhone users.

And then the world changed.

The smartphone market experienced its first-ever quarter of contracting sales in the fourth quarter of 2017. And so Apple started expanding its Services business dramatically. In 2019, it added Apple TV+ and Apple Arcade. And then the pandemic struck in 2020, throwing Apple’s plans, and ours, up into the wind like so much confetti. That year, Apple held a September special event, as always, but not for the iPhone. Instead, that event focused on Apple Watch (Series 6 and SE), a new iPad Air with the A14 Bionic chipset and an iconic, iPhone/iPad Pro-inspired design, an 8th generation old school iPad, and several more services: Apple Fitness+ and Family Setup, both for Apple Watch, and Apple One.

Apple One is interesting. It has always provided a way for Apple’s most loyal customers to subscribe to three different tiers of Apple services at a lower overall cost than doing so individually. But what it really speaks to is the maturation of that Services business, which by then included Apple Music, Apple TV+, Apple Arcade, Apple News+, Apple Fitness+, and various tiers of iCloud storage.

During a separate October event that year, Apple delivered the iPhone 12, iPhone 12 mini, iPhone 12 Pro, and iPhone 12 Pro Max, the latter two with 5G capabilities, and the HomePod mini. The delay, we were told, was because of pandemic-related supply constraints. But the addition of a “mini” iPhone was the start of a two-year failed experiment, with lower-than-expected sales triggering a rethink and a new “go larger” strategy.

But the pandemic did more than delay one iPhone launch. It also caused Apple to switch from live, in-person product launches to a series of increasingly over-produced virtual events with slick, Hollywood-style production and special effects. Don’t worry, they’re just as groan-inducing as ever.

September 2021’s special event was a return to pre-pandemic form in that Apple led with new iPhones, the iPhone 13, iPhone 13 mini (a lame duck at launch), iPhone 13 Pro, and iPhone Pro Max. There was a new Apple Watch, of course (Series 7), and a bit of Apple Fitness+ news. But Apple also launched a new iPad mini with the same design as the iPad Air and yet another mainstream iPad.

In September 2022, Apple announced the iPhone 14, iPhone 14 Plus (a larger version, replacing the mini), iPhone 14 Pro, and iPhone 14 Pro Max, but it also expanded the Apple Watch family dramatically by releasing three main new models, the Series 8, Apple Watch Ultra, and a new Apple Watch SE. There was also a new-generation AirPods Pro and some more Apple Fitness+ news. But no new iPads.

This year, the field got even smaller, with Apple focusing its September event only on two products, iPhone and Apple Watch, the least ever. And there was no major news from a lineup perspective. As usual, there were four new iPhones, the iPhone 15, iPhone 15 Plus (possibly a lame duck, given that the Plus versions have not sold well either), iPhone 15 Pro, and iPhone 15 Pro Max. And there were only two new Apple Watches, Series 9 and Ultra 2. No new services. No new peripherals. No other new products.

The expansion of Apple’s hardware and services offerings over the past several years were all responses to a changing world, one in which customers are upgrading hardware less frequently, its products are ever more mature (making it hard to deliver meaningful improvements), and the market is pretty much saturated. It’s also feeling pressure from the outside—customers and Wall Street alike—to continue its heady growth, which given its pace of the past 20 years, will be difficult.

Or impossible, barring a new product breakthrough. Consider a high-level view of the financials (data here). Apple’s revenues crested in 2021, and for only the second time in the modern era, since 2010, it has experienced three consecutive quarters in which revenues were lower than in the year-ago quarter. Apple is probably now experiencing its first-ever full fiscal year (in the modern era) in which it didn’t grow, but shrunk.

There’s no way to reliably predict future growth from this data, but given the factors described above, it is possible and even likely that Apple will plateau unless something changes.

And things are changing, just not for the better. For example, Apple has finally started feeling the impact of the increased scrutiny and regulation of Big Tech worldwide, most notably by the European Union. It has recently embraced the right to repair after fighting these efforts for years. It has bowed to EU rules requiring USB-C connections in its most recent iPhones, some of which were re-engineered for easy battery replacement, meeting the requirements of another EU rule (and one that Apple had resisted publicly).

But its biggest fights are yet to come: Apple has partially fended off a legal challenge to its abusive App Store policies in the U.S., at least for now, but the EU’s new laws concerning so-called gatekeepers like Apple will be harder to avoid. So the next few years should be interesting.

Yes, Apple is in a good position to navigate and survive these difficulties. But the biggest issue, really, is where it can find future growth, as its Services business is reaching maturity too, alongside established Apple platforms like iPhone, Mac, iPad, Apple Watch, Apple TV, and AirPods. All of which Apple has squeezed everything it can from, in every way imaginable. Today, Apple sells a bewildering range of models across all its major hardware families, as noted, and its one moonshot is the coming Vision Pro mixed reality headset. This will not be a mainstream product, or success, initially if ever.

But what else can it do? Its secret work on smart cars has amounted to nothing so far, though that could change. And there are Android innovations that it can and should adopt in iPhone and other devices, like folding displays. But even if that all comes together, explosive growth will remain elusive, I think.

So it’s unlikely we’ll ever see another iPhone or iPod. But if the past few decades have taught us anything, it’s that betting against Apple is a fool’s errand. Love them or loath them, Apple’s leadership has consistently delivered, creating the most successful corporation in history. And I can’t wait to see what they come up with next.