Apple: Strengthening the Gravitational Pull to Its First Party Software
During the pandemic, 3rd party software has grown rapidly on Apple's highway. To preserve the value of the ecosystem, Apple wants to shift from "pushing" to "pulling" users to Apple's software.
Twitter: @arthurtyson3
The extended period of home confinement has moved digital devices to the center of our lives. We now turn to these devices, and the software applications within them, to meet our baseline needs: purchasing essentials, securing our assets and preserving our bodies. With our baseline needs in order, we seek opportunities to escape “the four walls” to preserve our sanity by collaborating with loved ones over shared content creations via messaging apps, as well as finding escapism via media (video and audio) streaming services. The heightened utility and entertainment value of software applications in challenging times is reflective in broader humanity.
Apple: Basking in Competitors’ Light
During the first three months of the pandemic, per App Annie, mobile app usage has increased by 40%, and app downloads have accelerated by 25 million. 40% of those downloads have come by way of iOS and the Apple App Store. But instead of opting for Apple's owned and operated software (e.g., Apple Music), consumers are turning to competitors:
Netflix (16M net seat adds in one quarter)
Spotify (monthly active users: increased by 29%)
Paypal (21M net new active accounts)
Peloton (155K net new active subscribers)
Competitors, who are software-oriented, understand that beyond products that meet consumers’ needs and well-designed user interfaces, to “pull” a user to one's ecosystem requires flexible promotions tailored to specific audiences, bundles that grab additional wallet share, and strategic alignment of free apps to paid offerings to drive conversions. These pull tactics have enabled competing services to generate some of the largest subscriber bases in the world.
Apple has been able to "ride the waves" of competing solutions subscriber growth. The App Store takes a 15-30% fee for any 3rd party apps sold through the store — their largest source of services revenue at $15 billion. However, as users continue to spend the majority of their “waking hours” inside 3rd party apps, it slowly erodes the utility value of the Apple App Store, not forgetting the devices. We can see how this dynamic played out in my previous blog post, titled “Galaxies (Operating Systems) collide with Planets (software apps),” as many partners, who have large install bases and high engagement, are putting both social and legislative pressure on Apple to relax their fees, rules, and regulations of the Apple App Store.
Hypothesizing the Apple App Store may lose its grip on competing software apps, Apple wants to improve the adoption of its first-party software, which is uniquely integrated across devices, to preserve the utility value of Apple’s core value, namely the devices. And in hopes that first-party revenue will exceed that of 3rd party.
Apple: Pulling Users to Secure their Assets and Bodies
Apple Care+ , Apple’s leading subscription service, is a warranty program that covers Apple device owners’ luxury goods (e.g. iPhone and iPad) with accidental and damage protection. Upon purchasing a device, users have only 60 days to evaluate the level of care they desire – accidental coverage ($9.99/mo. or $200 upfront) or accidental with theft & loss protection ($14.99/mo. or $300 upfront). Believing this timeframe may be too short for consumers who are uncertain about the value of device security, Apple made the strategic decision to expand the timeframe from 60 days to 1 year. The widening of the timeframe expands the consideration set of users. But to further attract those users to the paid offering, Apple wants to bring additional “peace of mind”. AppleCare+ recently expanded their coverage from covering 2 accidents within 24 months to 4. Thus, Apple is strategizing that packaging additional value will convert users to AppleCare+ protection plan. To pay for AppleCare+, customers have two options: either pay the entire amount upfront or pay in installments via the Apple Card.
For customers who would like to finance AppleCare+, Apple wants to attract these users to another "peace of mind" solution, the Apple Card. The digital payment service focuses on preserving consumers' finances - no fees and lite personal finance intelligence for insight -- and securing consumers' identity-- not selling data and safe payments via identity management tools. By bundling AppleCare+ installment plans with the Apple Card, Apple increases all the funnel layers to the Apple Card:
Apple users now have solutions to preserve their devices and finances, but Apple also aspires to help preserve consumers’ bodies as well.
Throughout the world, gyms and workout classes are still closed or operating at minimal capacity. Still wishing to maintain their physiques and the healthiness of their cardiovascular systems, consumers have turned to digital fitness software to maintain their workout regiment while being confined to the home. Per Mobile Marketer, during the pandemic, Fitness app downloads increased by 67% and the number of sessions improved by 61%. Apple, observing the increase in fitness utilization on their devices, opportunistically introduced its new Apple Fitness+ subscription services. For $9.99, users can access fitness classes from top trainers in the world across several fitness genres: yoga, cycling, strength training, rowing, dancing, etc.
Active users of fitness apps, generally, pair a fitness wearable that tracks and monitors their workouts to assess performance. The Apple Watch is the leading fitness/health wearable (and smartwatch) with over 29 million Apple Watches being sold in 2019 – taking 38% of the share of total fitness wearables sold. Apple wants to leverage Apple Watch’s market-leading position to get users to consider, and more importantly adopt, Apple Fitness+. But understanding the love for the Apple Watch, and Apple’s brand, is not equal across user groups. Apple is tailoring its Apple Fitness+ promotions to attract audiences across target groups:
Hardcore Apple fans: Apple Watch purchased via Apple’s physical or digital stores will receive a 3-month free trial of Apple Fitness+.
Causal Apple Fans: Apple Watch purchased via Best Buy will receive a 6-month free trial of Apple Fitness+.
Non-Apple Fans: Apple Watch purchased via CVS Aetna Wellness program will receive a 12 month free trial of Apple Fitness+.
Apple believes that after users experience Apple Fitness+, and the deep integration with their Apple Watch, free trial users will be inspired to convert to the paid subscription – accelerating conversion rates. After attracting users to solutions that meet their baseline needs; namely preserving their bodies and securing their assets, Apple desires to pull users to meet their media & entertainment needs.
Apple: Attracting Users to Joy & Entertainment
Last fall, for $4.99/mo., Apple released Apple TV+, a service that includes Apple's original content, 3rd party subscription services (e.g., HBO), and movies for purchase and rentals – an operating system for users premium video content needs.
To accelerate the adoption of its new video service, Apple offered a one-year free trial of Apple TV+ when a consumer purchased a new Apple device. Per industry speculation, the promotion fast-tracked the Apple TV+ user base to 10-33 million subscribers. However, only half are active users — 5 to 15 million. Apple device owners overlooked Apple TV+ for Amazon Fire and Roku, which have active users based in the US amounting to 42M and 40M, respectively. To grab video streaming share, Apple TV+ wants to entice users with partnership bundles and promotion offerings on new distribution platforms. Apple recently partnered with ViacomCBS to create a CBS All Access and Showtime bundle for $9.99 that users can access via Apple TV+ subscription. While the bundle is anticipated to increase conversion rates and drive engagement within Apple TV+, the profitability of these users, initially, is minimal. The two services cost $9.99 each, meaning that for Apple to create the bundle they have to pay ViacomCBS, at least $5 (wholesale price) per month per subscriber —potentially $60 in costs on an annual user. Apple is willing to take the “financial hit” on these users because they are hopeful that users of the bundle will frequent Apple TV+ to discover other offerings that may be purchased via Apple TV+. Inevitably, this would drive high margin Apple TV+ transactions. Although the bundle is extremely desirable, Apple TV+ is limited on distribution across platforms.
Due to the limited adoption of the Apple TV devices, Apple TV+ was released beyond Apple’s wall-garden of devices on to 3rd party Smart TV manufacturers: Samsung, LG, and Sony. But Apple TV+ was not distributed on Vizio, the leading Smart TV in the US. After 2019, Vizio Smart TVs had an install base of 13 million, and forecast that another 7 million will be sold in 2020. With the opportunity to drive awareness on 13 to 20 million Vizio TVs, Apple wants to encourage users to consider Apple TV+ by offering a 3-month free trial. Despite spending some upfront money to acquire these users—free user trial costs-- Apple believes that upon users testing the value of the service, they will be encouraged to subscribe to Apple TV+, and make additional transactions within the services. More than just attracting our “eyes” to their service, Apple wants to tug our “ears” to their services as well.
Apple Music, Apple’s on-demand music streaming service, which is by far Apple's most successful entertainment service, has a subscriber base of 83 million. From industry insiders, there is a belief that adoption has slowed, especially given the lack of PR announcements about subscriber goals achieved. Apple drove most of its user adoption by “pushing” the service on Apple devices. Nonetheless, users with a lower affinity for music need a robust free service to ”pull” them to the paid offering.
The formula of having free become the gateway to a paid subscription has worked masterfully for Spotify, in which 40% of their paid users are acquired via the free tier. Drawing inspiration from Spotify, Apple wants to strengthen its freemium music service, Beats 1 Radio.
Beats 1 Radio is Apple's human-curated radio station that operates in 100 countries features programming from some of the world’s top radio DJs and hosts, such as Zane Lowe, Ebro Darden, Joe Kay (shout out to Soulection Radio), and Matt Wilkinson, etc.
The personable interviews, newly released track segments, and live performances are part of the cultural zeitgeist for music; these segments are recorded and distributed across the internet that immediately goes viral. However, the Beats 1 Radio shows and brand doesn't draw a parallel in consumers' subconscious that the shows are derived from Apple Music. And if they want to hear the shows on-demand, they must subscribe to Apple Music. To reduce this brand confusion, Apple rebranded Beats 1 Radio to Apple 1 Music to truly position it as an awareness funnel for Apple Music.
Beats 1 Radio, now Apple 1 Music, is positioned to appeal to the cool, young and urban audience, as most of the shows derive from the top city centers in the US and wider world. But young and urban are not the only music listeners, as over 90% of Americans listen to music. Residents in suburban and rural areas over-index on Country music, and Gen X and Baby Boomers have an affinity for rock, pop, and R&B. To expand Apple's radio brand to these two target audiences, Apple announced new radio stations: Apple Music Country and Hits. Each of these radio stations will feature shows from top hosts and artists from the respective genres.
The radio station and shows serve a strategic purpose in expanding the top of the funnel for Apple Music by expanding the audience set that would consider Apple Music. As the shows' host and artists will drive awareness of the content with their fan base on social media, they will draw users to Apple Music’s ecosystem to listen to human-curated radio stations, Apple One Music. Then, turning these users into engaged users of Apple 1 Radio, and eventually converting free users to paid Apple Music subscriptions.
Apple created compelling pull tactics to get users to gravitate towards their video and music streaming offerings. But more than meeting users’ escapism needs, Apple has much larger ambitions for users by attracting them deeper into their ecosystem to meet the full body of their lifestyle needs.
Apple: Bundling to meet Users’ Lifestyle Needs
Apple has subscription services that span several dimensions of our lifestyle needs: knowledge & information- Apple News+, achievement & mastery – Apple Arcade, entertainment- Apple Music and Apple TV+, storing creations & shared memories- iCloud, the security of utilities- AppleCare+, and health & wellness – Apple Fitness+. Each of these services’ subscription costs ranges from roughly $4.99 to $14.99. As a result, if a user were to subscribe to all the services, they would spend north of $50 per month. Apple users, although the largest digital spenders, still have limited discretionary funds to spend on subscription services. Consequently, Apple users are forced to spend, on average, only on 1 or 2 services that they truly value. However, the more services that a user subscribes to, the more likely they will never leave the ecosystem.
Amazon fundamentally understands the value of users having multiple subscriptions to tighten the gravitational pull on users to keep them orbiting in their ecosystem. At the center of Amazon’s strategy sits the Amazon Prime subscription, at $119 annually. The main service that pulls people into the subscription is Prime Now, a two-day e-commerce shipping service, that users have a large willingness to pay for — $5 Trillion spent in retail annually. But the subscription also gives users (some) access to Amazon Prime Video, Music, Amazon Drive (storage), Gaming, Audible, and Prime Reading. For no additional cost, Prime users can discover other content offerings they may ordinarily have a medium to low willingness to pay for individually. The packaging of additional value for no extra costs grows non-users’ willingness to pay for Amazon Prime (acquisition) and keeps current users subscribed to the service (stickiness).
Apple, desiring to recreate the guiding principles of the Amazon Prime bundle, recently announced the Apple One subscription bundle. Here, users can subscribe, for one price, to access multiple subscription services to meet their creative and/or lifestyle needs. The anchors to the bundle, to easily pull people in, are Apple Music and iCloud. Apple wants to leverage their large subscriber bases: Apple Music 83M and iCloud 160M, to easily cross-sell (funnel) users to the Apple One bundle.
To tempt users into subscribing, the Apple One bundle is priced at a discount, 30-45%, compared to paying for each service separately. But the discount is meant to entice Apple’s most passionate fans. For individuals and families, who only want to unlock Apple’s entertainment and content creation services (Music, Storage, Games and Video), they will receive a 30% discount on the subscription bundle. But for Apple’s hardcore fans, who want Apple to manage the totality of their lifestyle needs (Content plus News and Fitness), they receive a 45% discount on the cost of the subscription.
As we settle in for the long haul of stay at home mandates and lockdown orders, we will lean even more heavily on software applications designed to meet the full body of our human needs. Apple is hopeful that these pull motions: expanding the timeframe of Apple Care, bundling Apple Care installment payments with the Apple Card, developing promotional bundles with 3rd party content providers for Apple TV+, rebranding Beats Radio, extending Apple Music brand to new audiences, and creating the Apple One bundle, will strengthen the gravity of their first-party subscriptions. Hence, consumers will turn to Apple's software ecosystem, instead of competitors, to find "peace of mind" and seek escapism during their time of need. As Apple’s software services gain share in the software layer of the value chain, it helps to preserve the value of Apple’s flagship product, specifically, devices. That at the end of the lifecycle of their Apple devices, users will automatically purchase high margin luxury goods.