With the launch of its new iPhones just round the corner Apple could be forgiven for feeling rather more positive about its smartphone outlook than it has for a while. The sheen has worn off its number one competitor Samsung, with cheap Chinese and Indian competitors seriously eating into its market share and the investor community realising that the smartphone business is actually a lot like the music business: you are only as good as your last hit. But if Samsung is a major label, measured solely on market share and sales, then Apple has managed to partially maintain the role of big indie, where the quality of its output is just as important. Apple’s Eddie Cue believes that Apple are on the cusp of product strategy renaissance. Crucially, Apple’s CE product portfolio has become wide enough now, especially with the acquisition of Beats, to allow Apple some innovation freedom. I think this could translate into an iTunes phone before the end of 2015.
The Mainstreaming of Apple’s Customer Base
Apple’s customer base has changed from the vanguard of the tech savvy early adopters to a much broader group including large swathes of early followers, later adopters and even mass market laggards. The iPhone was primarily responsible for the transformation and while it has brought undoubted success has also caused Apple problems. As a company with a small product number of products in its portfolio, especially within the mobile category, Apple has never been able to play the ‘Hero Phone’ strategy of phone specialists like HTC and Samsung. So while those companies have been able to sway those all-important investors with small selling but super-specced uber phones, Apple has, until the launch of the 5C, had roll its entry and hero devices into one single new product. But even the combined strategy of the 5C and of targeting lower end consumers with older models still leaves Apple little room to be truly adventurous with its product strategy, for fear of alienating its mainstream users.
As I wrote about previously, the acquisition of Beats presents Apple with the opportunity to innovate with more freedom in the Beats product ranges and then take the innovations that work best there back into the Apple product portfolio. Even if Apple more tightly harmonizes its two divisions’ product ranges, Apple will still be left with a larger and more segmented product portfolio, giving it more ability to super-serve important niches. This is where Apple’s music device strategy renaissance can come into play.
Music Changed Apple
When Apple launched the iPod in 2001 it was the start of a musical journey for Apple. I remember attending Apple analyst briefing sessions in those early iPod days and being the only one there interested in this small little side project. Of course over the following years the iPod, with music at the core, took Apple’s product strategy in an entirely new direction. You might say that music changed Apple. But even by 2004 the winds of change were stirring: the launch of the iPod Photo with its colour screen was the first tentative step towards turning Apple’s portable device strategy from music to something much bigger. The iPhone and iPad are the current culmination of that shift, multimedia devices that do many things for many groups of people. Not one thing for one group of people in the way the iPod did.
The strategy has been inarguably successful but just as music stopped looking like it mattered so much, it started biting Apple in the behind. Spotify and other streaming subscription services started stealing Apple’s best iTunes music customers, turning them from downloaders into streamers. That in itself should have been an irritation rather than a problem. But these most valuable of customers now have much less reason to stay with Apple when the buy their next phone because their Spotify playlists will work just as well on Android as they will on iPhones.
Apple’s New Music Strategy
Apple needs a stand out music value proposition to win them back. A subscription service built around Beats Music and iTunes Radio will be the fuel in the engine but will not do enough on its own quickly enough. While Beats Music may have different features from Spotify the fundamentals are essentially the same (millions of songs, c $10 a month). So iPhone owning Spotify customers are unlikely to switch straight away just because it’s there.
Apple needs more. That ‘more’ can be delivered in two ways:
Apple has always been in the business of loss leading with music to sell hardware. Once that was a growth strategy now it assumes the urgency of defence strategy. That should persuade Apple to heavily subsidize the price of a subscription. In the near term this could be 3 month Beats Music trial plus a discounted $5 subscription offer at the end of the trial free with one of the forthcoming iPhone 6 models. Longer term it should translate into something much more ambitious.
The iTunes Phone or The Beats Phone?
Before the end of 2015 I expect Apple to launch a music specialist phone. Whether that is branded as an iTunes Phone or a Beats Phone will depend on who wins the internal branding wars at Apple, but expect it to be one of those labels. The device will be squarely targeted at the music aficionado and will crucially combine the music subscription and device into a single purchase by hard bundling a music subscription into the device cost. It will likely also be squarely focused on pushing Beats hardware sales so it may be both bundled with a Beats Bluetooth headphones and also be the first iPhone without a 3.5mm stereo jack, instead offering Bluetooth only.
The broad feature set could look something like this:
• Hard bundled Beats Music subscription
• Unlimited iCloud access
• Ad free iTunes Radio
• Top level UI music apps
• Bundled Beats Headphones
• Bluetooth only headphone support
This strategy is Apple’s best shot at reclaiming its wavering aficionado fan base but be in no doubt, it would also be a game changer for the digital music space by once again tying the importance of music experiences to device not just app.