If there’s one certainty in life where Apple is concerned, it’s that it targets the premium end of the market. Apple would tell you that it aims to make the best products, and that these cost money to make. A more cynical observer might say that Apple aims to make the highest margins and makes the products (and adds the marketing) it takes to achieve this.
But either way, the company has always targeted those customers willing to pay the big bucks for premium products. That approach has meant that while Samsung sells almost twice as many smartphones as Apple, it’s the Cupertino company that hoovers up almost 80% of the total profits in the industry.
But there are signs that Apple may be broadening its horizons …
In a way, Apple has long aimed to have a range of products to appeal to consumers at different price points. In Macs, for example, we had the Mac Pro versus the iMac for the desktop market, and within the iMac range we have the 27-inch 5K flagship and the 21.5-inch 4K option at the more affordable end. For laptops, there’s the now very expensive MacBook Pro range at the top end while the MacBook Air still hangs in there at $999.
In iPads, the iPad mini has always served a dual purpose: providing a more portable form-factor for those who found larger iPads too unwieldy, but also a more affordable entry point for those who wanted an iPad but whose budget didn’t stretch to the more expensive ones.
In iPhones, Apple typically kept its older models on sale as a somewhat cheaper entry point.
But the company has more recently been more actively targeting mid-market smartphone buyers by specifically designing products for them. There was the failed iPhone 5c initially, and the iPhone SE today. The latter also emulated the iPad mini in targeting both budget-conscious consumers as well as those of us who prefer a more pocketable device.
The iPhone SE has been a big success for Apple. It became the third best-selling smartphone in the U.S. and achieved even higher satisfaction ratings than later and more expensive models. It’s almost certain we’ll see a new model next year.
And just this year Apple launched a low-cost 9.7-inch iPad costing just $329, less than half the cost of the cheapest iPad Pro model, and roughly a quarter of the cost of the most expensive one. The company’s recent earnings reports strongly indicate that this has been a massive hit.
Finally, we come to services revenue. Tim Cook noted in the company’s Q2 earnings call that Apple’s services business was ‘well on the way‘ to the size of a Fortune 100 company in its own right – and confirmed that it hit this milestone in Q3.
Services revenue climbed 22% year-on-year to total $27.8B in the last 12 months. That’s not just a Fortune 100 sized business, but – as the WSJ noted – more than Facebook’s total revenue for 2016. As the above Business Insider chart shows, services are now worth more to Apple than either Mac or iPad.
The WSJ again:
“The business is really impressive when you think about it in terms of scale compared to other publicly traded companies out there,” said Jeff Dillon, chief executive of Jackson, Mich.-based Dillon & Associates, which counts Apple among its largest holdings. “There’s a long runway to go there.”
That ‘long runway’ is another way to say that the more hardware devices you sell, the more money you stand to make from services. Apple’s 30% share of app sales is a big chunk of it, of course, but there’s also its take from other iTunes sales, Apple Pay, iCloud storage, Apple Music and its doubtless profitable AppleCare business.
In fact, if you look at the trends in Apple’s income, growth in iPhone, iPad and Mac sales is all below that seen in 2015. But services revenue is soaring.
That’s not to say that Apple is going to head too far downmarket. The App Store makes twice as much money as Google Play despite a much smaller market, and that’s precisely because Apple targets better-off consumers who are willing to spend more on apps and other services. But targeting the mid-market should significantly increase its market for services income.
And the killer feature of services revenue is that it’s recurring – and even does so reliably in the case of subscription services like iCloud storage, Apple Music and Apple’s cut of in-app subscriptions. That’s particularly important at a time when people are holding onto hardware longer.
And there’s one especially attractive element of the mid-market: students, and those early in their careers. There’s a decent chunk of these people who would like to buy Apple kit but can’t quite manage or justify it at present. If you can bring them into the ecosystem now, they will become premium product customers in the future.
So it makes perfect sense for Apple to broaden its target customer base. It will never go after the budget market – the hardware margins are too slim, and the prospect of significant services sales too poor. But going after the mid-market is a gain in the short-term, and likely a far bigger win in the long-term.
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