Apple's Future as a Services Business

Provocative piece in CBS news by Jean-Louis Gassée, a tech veteran and VC who is talking about the Apple (AAPL) and Google (GOOG) Rift. He is making the argument that the phone subsidy Apple gets on the iPhone comes from the carriers therefore is transitioning to services, like Google. I'm not sure I buy that argument and I don't think that's what caused the separation.

I think the FCC case just made continuing the board relationship "complicated" and I can almost hear what the lawyers would have said. It makes answering those FCC questions a lot more complicated. More fundamentally, Google has a more "open" view around software and services while Apple tends to be more controlling. The rest is sorta bunk. Via CBS:

Apple's business model is bound to change. In plainer English: Until recently, Apple's profits were built on hardware sales. Everything else, system software or iTunes music revenue only mattered as a way to buttress hardware profits. For example, when iTunes came out, analysts expressed concern that music margins were thin or negative. So what? iTunes's sole role is to prop up iPod and iPhones margins. Apple talks up its software, operating system and applications, spends hundreds of millions of dollars in development and generates modest or no direct revenue from it. It's all in the service of Mac and iPhone sales and profit margins. That's the picture so far, fast becoming the past.

With the iPhone, Apple hasn't just broken into a new product category, it has shouldered its way into a new world of service revenues. Legally call it the way you want, the difference between the retail price of an iPhone, $199, and the pathologists' number, $850, is a service revenue. According to other dissectors, the manufacturing cost of an iPhone would be about $179. So, the retail price covers the product cost, all the margin comes from the service revenue rebated by AT&T. That's a business model change - and for the largest business unit.

Disclosure: No position

Comments

[greenskyrocket:]

And your point is....? You add nothing to the article co-written by Jean Louis Gassée. Did I miss something?

Aug 11 09:59 AM

[Stuff and N...:]

greenskyrocket, I don't think you missed anything. He didn't add any value to the article.

Incidentally, I think it's safe to say that Gassee' doesn't have a clue what he's talking about. An iPhone is a piece of hardware. It is sold to AT&T, or whatever other carrier, but it's a piece of hardware. The revenue from the sale is deferred, but there's no difference between Apple selling, for example, an AppleTV to a consumer and Apple selling an iPhone to AT&T. In both cases, Apple has an end user to support, and in both cases the revenue is recognized over a 2-year term. Claiming that Apple is now a "services company" is just stupid. Apple gets paid to deliver hardware. It doesn't matter who is writing the check to Apple - it matters what they are paying for, and what they're paying for is a handheld computer with a cellular radio built in and some really slick software that ties it all together.

Aug 11 10:08 AM

[Jurassic:]

I recall reading that Apple gets $200 over the retail price of each iPhone from AT&T. The difference is subsidized by AT&T (or worked into your service contract, if you'd like to view it that way ;-)).

So Apple is paid $300 (8GB), $400 (16GB), and $500 (32GB) per phone, by AT&T.

Aug 11 03:58 PM

[Zoltan L. K...:]

What is so open about Google's approach? Its system for advertising? You cannot compare an innovator with a company fiiling old wine into new bottles and transferring its market dominance from one segment to another. Besides, AAPL's software is sold at symbolic prices (hardware is subsidizing it).
Concerning service: Apple is building ecosystems around its products, that is at the core of its development.

Aug 12 11:02 AM