ASK NOT TO TRACK: Two years ago,
Apple shocked the world with the introduction of “Ask Not To Track”. For the first time in forever,
a big tech company was siding with the people and preventing data collection. This update
had real consequences as well. Facebook, for example, was losing as much as $10 billion per
year in revenue just because of that little pop up. This isn’t too surprising though as 96% of
iOS users were disabling in app tracking despite Mark’s pleas that they opt in. In the meantime,
Apple was receiving a bunch of praise for giving users the choice. Of course, no one was stupid
enough to think that Apple was actually doing this for the people, but it was concluded that
this was mainly just a marketing strategy. Apple has always advertised the iPhone with the allure
of privacy. So, this move would surely strengthen Apple’s brand loyalty and might even convert some
android users. But, what if I told you that all of that was just stage one? You see, pushing out
Facebook and Google wasn’t actually a defensive move, it was an offensive move. Now that Apple has
effectively shut off everyone else from collecting deep data on iOS users, guess who advertisers have
to rely on to get access to iOS users. The answer is Apple. This wasn’t just something
that Apple stumbled into either. While they like to portray themselves as the hardware giant that
just wants to create the best products possible, Apple is actually becoming a software company,
and the reasoning is obvious. It’s way more profitable. You know how Apple charges ludicrous
amounts for their products? Well, even with that pricing, Apple’s gross margin on their products is
only 37%. Their gross margin on their seemingly cheap services, however, is a whopping 71%. It
looks like offering services like Apple Music and iCloud not only garners less criticism but it’s
way more profitable as well. But, by for the most profitable service in the world is serving ads
and Apple wants a piece of this pie. So, here’s Apple’s master plan to takeover iOS advertising.
FALLING SALES: This might seem like a recent development, but
this story actually dates back nearly ten years to September 19, 2014. This was the long anticipated
release date of the iPhone 6. Rumors had been flying wild for months, people had been camping
outside Apple stores for days, and the hype was unreal. Apple was finally releasing larger format
iPhones. In the meantime, the general public was finally coming around to the idea of spending
several hundred dollars on a smartphone, and for many, the iPhone 6 was their first smartphone
including myself. All of this culminated in Apple selling a ridiculous 220 million iPhones
6s and 6 pluses. Apple had done better than ever before, but this was the peak of iPhone sales.
Every year after that, iPhone sales inched down step by step. This wasn’t really Apple’s fault.
The reality was that smartphone progression was rapidly slowing down, phones lasted for years,
and everyone who wanted an iPhone already had one. But, while this was a reasonable explanation,
Apple couldn’t just tell this to shareholders. If Tim Apple had done this, he probably would’ve
gotten the boot, and be replaced by someone who was quote on quote more ambitious. So,
Tim had to do something. His first instinct was to raise prices. I mean, if you wanna make the
same revenue off of less units, the easy way out is to just raise prices. With the iPhone 7, Apple
increased the price of the plus series by $20, and with the iPhone 8, Apple increased the price
of both series by a total $50. But, by far the biggest jump in price came with the iPhone X which
came in at $1000. In the western world, this phone was memed as the thousand dollar emoji machine,
but this phone actually sold extraordinarily well in China ending Apple’s sales decline.
It seemed like the increased pricing was working, and Apple would double down on this strategy with
their next generation. The iPhone XR would come in at an eyewatering $750, and Apple introduced a new
max version that started at $1,100. We have since gotten more used to these prices, but to this day,
when adjusting for inflation, these were the most expensive iPhones Apple has ever released. And
this quickly became evident in their performance. Sales were terrible. In fact, they were so bad
that Apple didn’t even want to tell us how bad they were. Instead, they would just go ahead and
stop reporting unit sales numbers altogether. Unsurprisingly, Apple would go ahead and reduce
the starting price of the iPhone for the first time ever with the iPhone 11. This led to a much
better response with the public, but this was by no means an endgame for Apple. They were back
to square one and they had to not only address declining iPhone sales, but also find new ways to
grow. They were finding some success with Airpods and the newer Macs, but what they really needed
was a full on new sector. As they looked around them, the answer was obvious. Out of all the
tech giants, they were the only ones focusing on hardware. Everyone else was focusing on software.
ATTRACTING THE MASSES: Apple likes to market themselves as the
premium company making premium priced products, and based on public sentiment, it seems like
this messaging has stuck really well. Everyone views Apple products as expensive, luxurious,
and exclusive. But, ever since the disaster with the iPhone Xr and Xs, Apple has actually been
making their products more accessible than ever. Back in the day, Apple would discontinue their
previous iPhones as soon as the new version came out. But, nowadays, they’re keeping around the
older generations for years, and they have models priced as low as $429. In fact, if you look at
the pricing of the SE, 12, and 13, it’s not much different from the pricing of the Pixel series
which is known for offering great value. Apple will never advertise this though. As Google has
found out first hand, most people don’t actually want a value product. What they want is a premium
exclusive product, but for a value price, and this is precisely what Apple has been offering.
They have their fancy pro series, and their $1000 stand, and their $700 wheels to establish the
status of their brand. But, their real revenue drivers are their lower priced products. I mean,
if you’re smart about your trade ins, you can get an iPhone that’s 1 or 2 generations old from your
carrier for $100 $200 bucks max. You might even be able to get it for free. This strategy doesn’t
just apply to iPhones either. Apple has made their lower tier products value centric across
the board. I mean, you can literally get the iPad 9th generation for $329. Even if you spring for
the iPad Pro, it’s still substantially cheaper than the flagship iPhones. The same thing can be
said about the Mac lineup as well. Apple was already offering great value with the M1 Mac
Mini that came it at $700, but they’ve taken this to another level M2. Despite all the inflation,
Apple didn’t just keep the price the same, but they actually knocked it down to $600. At that
price, the M2 Mac Mini is arguably the best value desktop computer on the market period. You can see
similar trends with the Apple watch and Macbook lineup as well, but, wait a minute, why in the
world is Apple doing this? Wouldn’t these lower priced products just exacerbate their revenue
and profit margins? Well, yes and no. Obviously, these lower priced products will have much more
modest revenue per unit and margins, but they’ll also sell better. This will keep the overall
revenue from each sector relatively stable or even growing. But, net margin will indeed go down and
that’s exactly what Apple experienced for much of the 2010s. Between 2012 and 2020, Apple saw their
net margin fall from 27% down to 20%. This might not sound like a big deal, but when we’re talking
about hundreds of billions of dollars worth of revenue, this translates to tens of billions of
dollars worth of less profit. This is why Apple’s net income didn’t increase all that much during
this time period despite their revenue nearly doubling. Apple was ok with this though because
they had something much bigger in the works, and this was just stage one: user collection.
SOFTWARE GIANT:
As Apple offered more value driven products and locked more people into the Apple ecosystem,
they were simultaneously doubling down on their services. Likely the most notable example is Apple
music. Fun fact, Steve Jobs actually hated the idea of music subscriptions. He said that even
Jesus couldn’t sell music subscriptions, and this was really the premise of iTunes as whole. The
idea of iTunes was that people could buy virtually any track in the world and keep it forever for a
reasonable 99 cents. But, Apple scrapped this idea altogether in mid 2015 when they announced Apple
music. If you’ve been living under a rock, Apple music is a music streaming subscription similar
to Spotify. But, unlike Apple’s brand image, Apple music was once again reasonably priced. In fact,
Apple Music was priced identically to Spotify. Pair this with Apple’s beautiful integration with
their devices and you end up with 88 million users paying you $10 or more every single month. I mean,
that itself is nearly a billion dollars per month. But, that’s nothing in comparison to their cloud
business. iCloud is once again priced basically identically to Google drive, but it comes along
with the whole Apple aesthetic and convenience. And boom, by 2018, Apple had an estimated 850
million iCloud users out of which 170 million were paying. Apple had found a golden strategy. They
didn’t have to reinvent the wheel by any means. They just had to take already popular services,
integrate it into the Apple world, and offer it for the same price. And boom,
they suddenly had tens of millions if not hundreds of millions of paying subscribers. They deployed
this same strategy with Apple TV, Apple Arcade, Apple News, Apple Fitness, Apple Care, and who
knows what else. This was working relatively well by the end of the 2010s, but the real explosion
didn’t come till the pandemic. Suddenly, everyone was at home and they needed even more virtual
entertainment than before. They needed more music, more games, more TV, more media. They
also had a bunch of money saved up from not going on vacation and not going out nearly as often. So,
they resorted to spending much of their money on tech and guess who was in the perfect position to
take advantage of this? Well, it was actually all of the big tech companies which of course included
Apple. Within the 12 months following the start of the pandemic, Apple’s revenue grew by over a
$100 billion and their net income nearly doubled. And today, Apple boasts an impressive 935 million
paid subscribers world wide. In other words, ⅛ of the world has some sort of paid Apple based
subscription. Apple had done it, they successfully transitioned from being a hardware giant to being
a hardware/software giant. But, Apple wasn’t satisfied. They wanted to take it one step
further as they were still missing out on the most lucrative service of them all: advertising.
BRING IN THE ADS:
Apple wasn’t just gonna start offering ads like Google or Facebook though. As we all know,
Apple likes to do everything the Apple way with finesse and clever positioning. So, they decided
to leverage public angst. The shady habits of Google and Facebok were no longer a secret. Their
business practices were very much public knowledge and people hated them for it. Now of course,
people didn’t hate it enough to switch, but they did hate it enough to complain. So, what better
way to create an advertising monopoly than to side with the public and block out external
data collection. This was a win win win win scenario. One, Apple was hurting the brand image
of their competitors by basically suggesting that what they were doing was wrong. Two,
they were hurting the revenue and bottom line of their competitors big time. Three, they were
bolstering their own brand image as the privacy king. And four, they had ultimate control over
all advertising within the Apple ecosystem. We should also note that Apple has been experimenting
with more tame advertising for several years now. They’ve been selling ad spots within the
App Store and Apple News since 2016 actually. So, they’re be no means complete newbies to the space,
but they’re about to this to the next level. Since August, Apple has been hiring a substantial number
of engineers to work on some sort of large scale ad platform. It’s expected that this
new platform will essentially be Apple’s version of Google or Facebook Ads. But, wait a minute,
Apple can’t just bash on Google and Facebook for years and turn around and do the exact same thing
right? I mean, Tim Cook himself has argued that ad driven business models are inherently invasive of
privacy. So, how could Apple make such a pivot without destroying their branding? Well, the
answer is likely by introducing an Apple twist. In other words, they’ll throw in some encryption,
some decentralization, and some anonymity and they’ll frame it as something that protects
privacy. We can already see something along these with their hide my email feature. If you’re not
familiar with this feature, it basically allows you to generate a proxy email address when
signing up for websites or emailing people. Apple doesn’t read or process any of the emails that go
through this proxy address. I suspect that they’ll implement something similar when it comes to ads.
Maybe all of the data that they collect will be stored locally on your device which will check off
the decentralization checkbox. After that, maybe they’ll use some sort of anonymous proxy tunnel
that’s end to end encrypted to connect advertisers to your device. This way, they can claim that they
nor the advertisers know your data themselves. They’re simply a proxy that connects advertisers
and end consumers while protecting your privacy or atleast that’s what the pitch will probably be.
THE FUTURE OF APPLE: In the end, Apple was the
only mega tech company that didn’t drive most of their revenue from software and services,
but over the past several years, this has been rapidly changing. The reality is that
smartphones have hit a plateau and Apple can only introduce the next iPhone that’s better
than ever before and increase the price so many times. In fact, I believe that it’s just a matter
of time until Apple drops the number naming scheme on the iPhone. Before you know it,
the new iPhone will be called the 2027 iPhone as opposed to the iPhone 19. This will no doubt
reduce the hype surrounding iPhone launches, but that’s ok. By then Apple will not only be
a software giant, but they will be a full on software company. Their iPhones, Macs, iPads,
and Watches will simply be a vehicle to sell their real money producers: subscriptions and services.
It looks like the latest effort in making this vision a reality is getting into ads, and that’s
why Apple really shut out external tracking. What do you think about Apple getting into the
ad business? Comment that down below. Also, drop a like if you respect the business decision by
hate the implications. And of course, consider checking out our discord community to suggest
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