Apple’s business model

Saw this article today about Gartner, a Boston based advisory firm (and competitor to AMR Research where I used to work) announced that the iPhone is ready for business applications. As my friend Ash had written about earlier, one has to wonder about the future of Apple’s business model.

Apple is the darling of many and people love the products they make. But public consumer product companies, for anyone who has looked at their revenues and earnings are notoriously volatile. Consumer products take a lot of resources to develop and there is no guarantee that they will be successful in the market. This results in revenues that look like a roller coaster which is makes it hard for management to make long term decisions about the company, such as what investments to make, how much to invest in R&D, how much to hire etc.

Any management company worth its salt will quickly try offset the volatility of their earnings by finding additional sources of revenues besides products. Most companies do this by including a service or subscription based revenue. Apple tried to do this without a subscription model by introducing the iTunes platform. This platform ostensibly would allow them to offset the valleys of product revenues through more predictable revenues from individual song and music purchases.

However, this morning’s Financial Times reported

“Apple, which is thought to make relatively little money from the iTunes store compared with its hardware sales, is also understood to be examining a subscription model”

This is interesting news and provides some insight into the crisis that Apple is facing.  As the purveyor of consumer goods which are priced at a premium, Apple is susceptible to the vagaries of the broader economy as a whole. Combine that existing risk with the risk from getting most of their revenues from product launches and suddenly, their outlook is not that strong.

It makes complete sense for Apple to start looking to get more predictable cash flows from a iTunes subscription model, as opposed to a pay-per-purchase model. Observant users will note that the model proposed by Apple in the FT article is not that different from Amazon’s Kindle business model – where the product and subscription are bundled in together at a single price.

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2 responses to “Apple’s business model

  1. How coincidental. I was thinking about blogging about that same exact article and how bundling and 1-time-income hits all of a sudden seems like a veritable option for companies. I would actually expect that the value of the total bundle to be huge, if they really gave away access to a massive library of media.

    Overlay all of this marketing and business model stuff with what people might actually do or *feel* about literally having access to volumes of media at their fingertips and it becomes exciting to think about.

    I dunno for sure, but I also wonder if their m.o. is just more predictable cash flows. with the disruptive convergence device they’ve built, the iphone (and are on the natural course to inviting other innovators to the party), you could envision some sort of internet streaming option that could play a song on demand for…say… 3 cents. or even 6 cents. Maybe customers don’t love a song for a dollar because they keep listening to the same song again and again and again. Maybe they love a song that’s 6 cents that they have access to for a month and then they’ll just get sick and tired of it and not listen to it again for another 4 years. At which time they could subscribe to it again.

  2. Yeah, when micropayments become widespread, that will open up a ton of pricing possibilities. The same debate happened around 4 years ago when Naspter came out with a subscription/all you can eat model and we rarely hear about them nowadays.

    From my personal experience, it was annoying to be tied to a subscription in order to enjoy my music. I still have 20 songs that I can’t play anymore because I no longer subscribe to Napster.

    Apple will not be the only device maker forever, and to tie my content purchases to a vendor is something that makes me very uncomfortable – it’s all about choices!

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