100 billion reasons Apple is putting up a fight

Apple at the moment is facing a lot of regulatory pressure, both in Europe and in the US, which leads people to wonder why it wasn’t more flexible in the run-up to the current battles? Let’s be clear: there’s 100 billion reasons why it has put up such a fight.

Apple’s pivot to the provision of services has been an amazing success story for the company. (Remember when in 2016 Apple CEO Tim Cook promised the company would double its services business by 2020?)

Apple’s services income growth has surged

The company quickly expanded the services it provides to customers, which now includes gaming, TV, music, fitness, news and more. Eight years later and the value of the services segment has climbed from around $6 billion per quarter in 2019 to roughly $22billion each quarter today and it continues to increase. Apple’s magic money tree is based on delivering services its customers want to use and enjoy using. 

The services Apple provides might be unique to its platforms, but they aren’t unique to the industry. None of them truly dominate their segment, but competitors complain that they do benefit from being closely entwined with the operating system. 

Once upon a time in Cupertino

One of the complaints around Apple Pay, for example, is that Cupertino hasn’t made it possible for alternative payment services to gain direct access to the NFC chip inside the phone, which means they must rely on Apple’s own Wallet app. Apple says the need to preserve user and platform security in part motivated this, but regulators are forcing the company to open up that system feature to competitors all the same.

That’s just one example. There are other examples. 

In many cases, I think the evolution of the approach has its root in the nature of Apple history. Think to when the beleaguered company — already pronounced “dead” on the front page of Time magazine — focused on improving its platform in isolation. In the end, it actually built a better platform than others could provide. All the same, along the way the company developed a business model that relied on delivering unique solutions within its own garden. And while regulators may be holding their critical mirrors wrong, a little opening up could have saved the company from harm.

100 billion reasons to put up a fight

Once Apple became a global success story, it maintained that now highly profitable approach, in part because the company culture became reliant on that modus operandi. The thing is, at this point, services represent $100 billion in income for Apple, and the company owes it to its stockholders to protect as much of that value as it possibly can, even when forced to change.

Perhaps part of the reason for the company’s reluctance to change is related to the margins it generates on services. These are almost as eye-watering as the revenues — around 70% gross margin according to Apple’s Q4 2023 statements. 

That means Apple knows how profitable services on its platforms can be and means it will not be at all prepared to open up to the extent some competitors want. Opening up to competition is one thing; being forced to subsidize that competition by offering free access to the platforms is another. 

How much is too much?

That’s why so many of the arguments about opening up are rapidly spinning toward defining just how much is reasonable for any platform provider (even so-called “gatekeepers”) to charge for access. To me that’s the only question that should be answered, as it would define what the entire digital services industry is entitled to charge. That’s probably why regulators and the wider industry pretend it’s all about the so-called “Apple Tax,” rather than their own desire to make more money from selling their own digital wares.

While this 21^st Century series of Big Tech Mystery Plays dominates the drama, Apple’s services revenues remain remarkably resilient. Counterpoint says that even through all the legal and regulatory uncertainties, services are likely to generate around a quarter of Apple’s revenues in 2025, with the company expected to reach $400-billion in annual revenue in 2024. That money does, as the company so frequently reminds us, also contribute a huge amount of employment opportunity both at Apple and across its wider partner ecosystem. 

We all keep watching the show

The problems Apple has with regulators will play out over time, and even during that time the company will continue to tweak its business plans to placate critics.  

But it’s not just profit Apple is fighting for. If you kick the regulations being targeted at the company around, you’ll see that in many cases their impact is to tear the existing ecosystem apart — even though billions of us actually choose it above others. 

“I would also say that consumers are free to go where they want if they are not happy with the services; there is a world of Android that offers viable alternatives, both in hardware and services. If they stay with Apple, it’s because there is a value delivered to them,” Creative Strategies President and analyst Carolina Milanesi told me.

Perhaps at Apple the fight for platform integrity is more important even than the money? Perhaps it wants to continue to offer consumers a happy and satisfied existence inside its walled garden. If so, that’s not a struggle it will abandon fast.

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