Apple’s Other Solution

Yesterday we talked about Apple’s dilemma with wholesale transfer pricing power. They came up with two solutions. The first was to vertically integrate. How about Apple’s second solution, becoming a SaaS company?

Another of Tren Griffin’s articles, “The ‘SaaS Plus a Box’ Business case,” provides an excellent explanation on this shift in business model. 

Using Peloton as an example, Tren explains why companies are now using hardware as a conduit for selling software. Apple gets the best of both worlds. They’re making recurring revenue as well as fantastic margins on their phones. There’s no need to sell phones as a loss leader.

In short, this was another way for Apple to keep their options open. If they remained a pure play hardware company, the innovations in technology would hurt them in the long run. If Apple pivoted to being a “SaaS (Software as a Service) plus a box” company, they would continue to improve their BATNA.

Back when Tren first wrote about wholesale transfer pricing in 2013, Apple was generating $4b quarterly for their services. In Q4 2020, that number was $14.5b. Between Apple Music, AppleCare, Apple Pay, Apple TV, etc. there is substantial recurring revenue. Like Amazon Web Services, this newer business segment is growing rapidly.

Times have changed since 2013 when he wrote “If Apple sold the device at a loss and tried to make profit on the music, Apple would be doomed by the wholesale transfer pricing power of the music owners.” Now they have an entire ecosystem of recurring revenue with high switching costs for users. I can’t imagine a world without blue iMessage bubbles.