Apple Is Preparing for the Post-iPhone Era

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There have been quite a few shuffles among Apple’s leadership over the past several months, ranging from Apple’s coup in recruiting former Google AI Chief John Giannandrea last spring, to the departure of Siri’s last co-founder and, more recently, the head of the Siri team. Even Apple’s retail arm hasn’t been immune to big changes, with sudden news that Apple’s SVP of Retail, former Burberry CEO Angela Ahrendts will be leaving in April.

Of course, changes like this don’t come without a reason, especially from a company like Apple that commonly plays the long game when it comes to strategic vision. While many of the individual shifts and reassignments may have specific short-term goals as well, it’s becoming apparent to observers that they ultimately form part of a larger overall strategy to turn Apple into a more services-focused business.

According to a new report from the Wall Street Journal, several people familiar with Apple’s strategy have said that several projects have been put on hold while managers are asked to reassess their priorities, all with the aim of transitioning Apple from a company that’s been primarily focused on the iPhone — an area where almost every analyst agrees that growth is slowing, if not becoming completely stagnant — into a services-oriented business.

Apple’s transition into original programming is perhaps the best example of this, and the Journal reports that Apple has been reassigning many of its engineering resources into delivering its impending video streaming solution, under Apple’s Senior VP of Internet Software and Services, Eddy Cue. In fact, the Journal implies that this may be where many of the 200 employees that were cut earlier this year from Apple’s autonomous vehicle team actually ended up.

This is a sign the company is trying to get the formula right for the next decade. Technology is evolving, and they need to continue to tweak their structure to be sure they’re on the right curve.

Gene Munster, analyst at Loup Ventures

Analysts have already noted that Apple’s growth in the area of services is slowing. Revenue from its search deal with Google is expected to plateau this year, and App Store revenue is also decreasing as the installed based of iPhones stabilizes. These two categories alone currently make up almost half of the revenue in Apple’s services category, leading analysts to predict that Apple’s streaming video service needs to be the company’s next big moonshot.

Apple is expected to unveil its new video service on March 25, although many of the details about how its content will be priced — or even which partners will be on board at launch — remain vague. However, as significant as this announcement will be, Apple is also clearly not putting all of its hopes on its video service.

Other projects that are getting obvious priority within the company include Apple’s AI and machine learning initiatives, as evidenced by the hiring of John Giannandrea from Google last spring, and his later promotion to an entirely new position of Senior VP of Machine Learning and AI Strategy, giving him overall responsibility of all of Apple’s AI efforts, including Siri. Giannandrea has been reorganizing the Siri team to mold it into his own vision of the future, and is said to be thinking much more long-term rather than continuing the more iterative approach that the beleaguered team had often fallen into. It’s expected that Giannandrea’s initiatives will give the team some much-needed focus and hopefully vault Siri back into a leading position alongside Amazon’s Alexa and Google’s Assistant when it comes to “smarts.”

Although Siri won’t likely be a direct contributor to Apple’s services revenue — it seems unlikely the company would try to monetize Siri as a service — making the voice assistant smarter and more responsive will be an important component to enhance and personalize services such as Apple Music, Apple News, and Apple’s new video streaming service.

Apple also appears to be strengthening its efforts in home automation, with the recent hire of Sam Jadallah to head up its home initiatives. While it’s not yet entirely clear what that means — or even exactly who Jadallah and his team will be reporting to — a wider-reaching deployment of HomeKit technology would generate services revenue through MFi partnerships with third-party accessory makers as well as creating a “halo effect” around Apple’s content services — especially in light of the recent arrival of HomeKit-compatible TVs that will expand the reach of Apple’s upcoming video service.

Even retail will play some role in promoting Apple’s new services, with sources indicating that Apple has promised its Hollywood production partners that it will install TVs in its retail stores to promote its upcoming original shows. While this likely had nothing to do with the departure of Angela Ahrendts, the responsibility for implementing this will now fall to Apple’s new Senior VP of Retail and People, Deirdre O’Brien.

Taken together, the recent executive shuffles are probably the most significant since Tim Cook took the reins of Apple back in 2011. At that time, Cook was faced with finding a new head of retail operations, following the earlier departure of veteran Ron Johnson, and was also forced to deal with whatever internal issues ultimately led to the dismissal of long-time iOS executive Scott Forstall. Angela Ahrendts was hired as SVP of Retail, Craig Federighi was promoted to SVP of Software, and Eddy Cue’s portfolio was expanded to include Siri and Apple Maps. When the dust settled, Apple was led by an 11-person senior executive team that remained relatively stable for about five years.

According to the Journal, Apple spent $14.25 billion on research and development last year, which represents a 23 percent increase from the year before. Although it’s impossible to know where this money is being spent, with Apple still reportedly working actively on augmented reality, autonomous vehicle, and health projects, it seems likely that the other major strategic focus is going to be on transformative technologies. The iPhone — and smartphones in general — have become iterative in most of their improvements, and it stands to reason that Apple needs to continue its efforts to move on to the next big thing, while building a stable revenue stream of services that will carry it through regardless of where iPhone sales are at.

According to former employees, however, none of this is a surprise to Apple. Tim Cook is legendary for his long-term management focus — a skill he brought to his role as Apple’s Chief Operations Officer under Steve Jobs, where his meticulous logistical planning allowed Apple to easily keep up with demand for even its most popular products. According to sources, Cook has been anticipating the maturing of the smartphone industry since at least 2010, and planning for how Apple would continue to grow into the post-smartphone boom era.

That Apple is doing this at a time when the iPhone still remains strong speaks to Cook’s strategic leadership as well. Two-thirds of Apple sales still come from the iPhone, but the writing is already on the wall and the company has been pointing investors to its services business for about three years now, with Cook telling investors in 2016 that Apple’s services revenue alone was expected to reach the value of a Fortune 100 company by the end of that year. Analysts now expect that revenue to top $50 billion in 2020, and account for about 60 percent of Apple’s revenue growth over the next five years. By comparison, the iPhone has been responsible for 85 percent of Apple’s growth over the past five years.

Apple’s focus on services will not only increase its revenue base, however, but also help to preserve iPhone loyalty and hopefully draw new customers into Apple’s hardware ecosystem. Although Apple is opening up its traditional “walled garden” to other hardware platforms — Apple Music is available on Android devices and Amazon Alexa speakers, and Apple’s video service will be coming to at least some smart TVs and possibly even Roku set-top boxes — the company undoubtedly also hopes that subscribers to its services will be encouraged to purchase Apple products for an even better experience.

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