Apple Event Analysis: Apple & Industry Impact

Apple Event – Fall 2019 Edition

iPhone sales now account for less than half of Apple’s revenues, and sales are slowing as people hold onto their phones longer. Worse, Apple won’t have 5G until next year, so going into today’s Event, expectations were pretty low. What could Apple possibly do to convince consumers to upgrade now, and if they don’t upgrade now, are Apple’s services compelling enough to generate real revenue while they wait?

Surprisingly, Apple had fairly good answers to these questions. First, Apple’s new hardware was not confined to new iPhones, but also included a new iPad and Apple Watch. Apple is already well ahead of the competition in both tablets and wearables – nobody else is even close – but Apple continues to invest in the categories to drive growth. With these products and the hot-selling AirPods, consumers can buy further into the Apple ecosystem even if they don’t upgrade their phones. Apple’s newest subscription services may not appeal to everyone, but Apple is not pricing them at a premium, increasing the chances that they will be able to build a base. But the iPhone remains Apple’s most important product, and the new phones offer a compelling value proposition: significant improvements to battery life, better cameras, faster performance, and a $50 drop in price for the iPhone 11 relative to the iPhone XR from a year ago. As an additional sweetener, Apple throws in a year of Apple TV+ content.

iPhone 11

The iPhone improvements are iterative, and Apple is playing catchup in some areas, such as wide-angle lenses and Night Mode. There is also no 5G version of any of the new iPhones, which is not a problem for most consumers outside of South Korea today, but it could become an issue in China when networks start going online en masse in the coming months. In most other geographies, the technology is still evolving too rapidly and 5G network footprints are too limited to matter to mainstream consumers for at least another year. Anyone currently using a phone that is two or three years old will see obvious improvements in the camera, enormous jumps in battery life, and performance gains that will see them through years to come, as Apple keeps its phone software updated longer than other manufacturers. Older iPhone users will be getting big jumps in screen size and FaceID for the first time, but the battery improvements are the key upgrade driver. The iPhone 11 isn’t going to spark a huge upgrade cycle, but Apple has done enough to entice those who are considering buying a new phone to move now rather than wait.

Apple is making the buying process easier with clearer product naming and by expanding its trade-in and installment purchase plans to more international markets. The mainstream flagship is the iPhone 11, and it is a relative bargain. Those not put off by higher price points get “Pro” branding, size choices, and improved features.

The iPhone 11 Pro is identical to the iPhone 11 Pro Max in everything but the display size and battery. Consumers can simply choose the size they want. This is great for consumers with big wallets who like smaller phones. The new rear finish on the Pro models is also welcome: textured without being gritty, and it seems to actively reject fingerprints. Consumers will cover it with a case anyway.

[Updated Sept 23] The iPhone 11 is also the first Apple product with ultrawideband, a short range wireless standard that allows ultra-precise positioning. Potential use cases include tracker pods, cashierless retail experiences, and transmitting head position and data to and from the next generation of AirPods or Apple’s rumored smart glasses project. Apple will likely talk about ultrawideband once some of the use cases are ready; in the meantime, we expect Apple will be embedding the U1 chip in everything it makes going forward to prepare.

Apple Watch Series 5 (and $199 Series 3)

With the Apple Watch Series 5, the company is solving a serious problem it introduced with the very first Apple Watch: it’s not a watch unless you actively wave your arm around or tap on the display. The new Watch does clever things with dimming, colors, and refresh rates to always have time and complications visible without reducing battery life. There are other enhancements, but no sleep tracking, likely because battery life still isn’t good enough for that – the Watch needs to recharge at night. There are new case material options as well, and Apple now allows consumers to pick their Watch case and band rather than getting stuck with specific combinations. This is really hard to do from an inventory management perspective, but watches are highly personal fashion decisions, so it's worth the investment.

To solve the display problem that Apple designed in from the outset, you’ll need to pay at least $399 for GPS and $499 for GPS + cellular. While not inexpensive, Apple Watch has better implementation of iOS notifications, basic fitness tracking, and health features than other smartwatches. Apple’s dominance of the smartwatch market is justified. Apple is using this dominance to create ecosystem lock-in. Apple Watches only work with iPhones, and once a user buys a Watch, they are extremely unlikely to switch to Android.

From a competitive standpoint, Apple’s most damaging move was not building an always-on display into the Apple Watch Series 5, it was leaving the Apple Watch Series 3 on the market at just $199. This presents an almost impossible challenge to Apple’s competitors, who are all stuck fighting each other to get premium Android users to buy their watches. Samsung has a large enough base to target with its Galaxy watch line, but fitbit and WearOS licensees may struggle.

Surprise: New iPads!

iPadOS brings serious productivity features to Apple’s tablet, but Apple isn’t asking consumers to step up to the iPad Pro to take advantage of them. The new iPad is the same $329 as before, with the same bezel and Home button design, but it’s bigger and can be outfitted with accessories that, combined, cost nearly as much as the unit itself: $99 for the Pencil, and $159 for the Smart Keyboard cover. The bottom line: the new iPad is bigger, but it costs the same. The 9.7” iPad it replaces was Apple’s best seller, and the new 10.2” version is going to be a very popular gift this holiday season.

Services

At the beginning of the presentation, Tim Cook stood under a slide that read, “Hardware, Software, Services.” Services are now considered a crucial, and potentially co-equal piece of Apple’s platforms strategy.

Apple did not propose content bundles because it is pricing its services more realistically than many expected.

Apple Arcade provides a large library of casual games with no ads or in-app purchases for the price of one or two in-app purchases ($5/month). There is an enormous market for casual games, but monetizing them has been fraught with ethically questionable – and just plain annoying – purchase mechanisms. Apple Arcade offers a simple subscription model to a lot of games. If the games are good, the service should find a wide audience. That audience will be global: Apple is launching Apple Arcade in 150 countries.

Apple TV+ has an extremely limited content library, but if you like one or two of the shows it does offer, $5/month is not unreasonable. The audience may be global: Apple is launching Apple TV+ in 150 countries, however, Netflix and Amazon have found that consumers in different geographies demand localized or locally relevant content, which is not something Apple is event talking about yet. Apple is not using content as a direct lock-in mechanism for its hardware; you will be able to watch Apple TV+ on Samsung TVs and on the web.

At $5 a month – or free for a year with hardware purchases – Apple TV+ does not price out other services. Netflix’s stock dropped on this news, but it should recover. There is certainly pricing pressure on all the OTT services as the number of options increases, but Apple TV+ on its own is not a Netflix killer.

Other OEMs could offer subscriptions to third party content, but Apple and Sony are the only smartphone companies that can bundle their own shows when you buy a device. Sony will not do this. I asked. Its divisions have long been too siloed to cooperate with each other in any meaningful way, and at this point, it is too late to arrest Sony’s phone sales decline.

To discuss the implications of this report on your business, product, or investment strategies, contact Avi at avi@techsponential.com or +1 (201) 677-8284.