In the late 1990s, the major PC vendors began to be concerned about the future of the PC market. As demand for PCs increased and competition grew, margins plummeted. In the early days of the PC, margins were all above 30% and some cases, as high as 45%. But by the late 1990s, margins were more like 10-15%, and while demand grew, profits were squeezed.
With that in mind, around 1998, PC makers began looking for other revenue streams to tie to each purchase. If they could not get high margins in a PC sale, they needed to find ways to bring in additional revenue connected to each computer sale.
The operative word they all used to describe this idea was “recurring revenue.”
So they reached out to top software developers who either had mainstream apps, creative apps for adding features to Windows, or some unique internet services. They negotiated a small fee from these software developers to include these programs on their PCs.
While it seemed like a good idea at the time, the PC vendors saw this as a legitimate way to keep earning revenue on a piece of hardware that was mainly a one-time purchase. Unfortunately, although this worked for some enterprise PC sales programs, it spawned what was called “bloatware” and ended up being a disaster for PC sales to consumers.
By around 2002-2003, PC vendors were forced to distance themselves from this bloatware fiasco and go back to a business model of just selling PCs and trying to get as much margin as possible through their hardware and software added value features.
On the other hand, Apple kept its business model the same and instead championed innovative industrial design, great hardware, and software to deliver its own value-added experience.
Apple also had strict guidelines on margin strategies. I had a discussion with Steve Jobs around 1998 about margins, a year after he returned to Apple. He told me that he would never “accept margins under 22%,” and in tracking Apple’s hardware margins since then, all margins for Apple hardware have been well over 22%.
Although Apple is historically known as a hardware and software company, over the last 20 years, Apple has delivered the Golden Egg of all recurring revenue models and is the envy of all of its competitors.
Ironically, this recurring revenue model began not with the Mac product line but through the iPod. Apple used the iPod’s model that included a music download store that has become the poster child for Apple creating its fastest growing business today, a category called services.
According to Apple, “The category, which includes businesses like the App Store, Apple TV+, Apple Music, cloud services and others — also grew to reach 860 million paid subscriptions on Apple’s platform, which is up from the 825 million it reported in its previous quarter. This figure is up more than 160 million in the last 12 months alone, Apple said.”
One key to their recurring revenue model is Apple’s ecosystem, which includes hardware, software, and services. Using this focus, they get people to register with them when they buy an Apple product and make it worthwhile by offering them solid warranties, excellent service and bonuses based on their device. As a result, they now have 860 million subscribers on Apple’s platform, making it possible to offer them an ala carte menu of value-added services.
This combination of great hardware, software, and services has made Apple a worthy competitor to all PC vendors, who for most of their existence looked down on Apple and dismissed them as actual competition.
Now Apple is the envy of their competitors who wish they had their own recurring revenue programs, which is no longer an option for any of the major PC makers today.
One key reason they have such a large subscriber base is the continuity ecosystem that Apple has developed across all hardware devices and software platforms.
If you purchased Apple hardware in the last ten years, you know how important this is to move from a Mac, an iPhone, or an iPad to another.
Apple’s continuity software was essential when I upgraded from an iPhone 13 Pro Max to the new iPhone 14 Pro Max. To transfer the data and apps from the iPhone 13, I placed the new phone next to the old phone and pressed a button that seamlessly moved all of that information from the older phone to the new one.
This operation included a tricky function concerning SIM data transfer. My iPhone 13 had a physical SIM, while the iPhone 14 had a virtual eSIM. I was skeptical that this type of cellular transfer would work. Still, the information from the physical SIM was downloaded to the eSIM flawlessly, and I was up and running on the same network and phone number immediately.
I believe that Apple’s continuity software and technology is one of the main reasons people join the Apple ecosystem. They know they will have excellent service with the hardware, software, and Apple’s continuity technology, making it easy to keep all devices in sync, up to date, and much more straightforward than any of their competitors.
The services part of Apple’s business continues to grow. This business today is close to $80 billion, and Apple pundits expect it to become a $100 billion arm of Apple’s business by mid-2023.
This part of Apple’s business is the fastest growing division. Given Apple’s momentum of bringing new customers into their ecosystem, there is no doubt that Apple’s side business will continue to grow and be an integral part of Apple’s future.