Telco 2.0™ Research

The Future Of Telecoms And How To Get There

Apple's pivot to services: What it means for telcos

 

Summary:  With iPhone sales apparently peaking, Apple is looking to double its revenue from services over the next four years to approximately US$50 billion, taking it deeper into adjacent markets, such as entertainment, financial services and communications. However, Apple trails behind Google in developing artificial intelligence and needs to extend the reach of its services to capture more behavioural data. If Apple decides to decouple more of its key services from its hardware, that would have major ramifications for Google, Amazon, Facebook and many of the world’s leading telcos. (Dealing with Disruption Stream, June 2017)

Apple in services

  

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Below is a short extract from this 36 page Telco 2.0 Report that can be downloaded in full in PDF format by subscribers to the Dealing with Disruption Stream here. To find out more about how to join or access this report please see here or call +44 (0) 207 247 5003.  

Introduction

The latest report in STL’s Dealing with Disruption stream, this executive briefing considers Apple’s strategic dilemmas in its ongoing struggle for supremacy with the other major Internet ecosystems – Amazon, Facebook and Google. It explores how the likely shift from a mobile-first world to an artificial-intelligence first world will impact Apple, which owes much of its current status and financial success to the iPhone.

After outlining Apple’s strategic considerations, the report considers how much Apple earns from services today, before identifying Apple’s key services and how they may evolve. Finally, the report features a SWOT (strengths, weaknesses, opportunities and threats) analysis of Apple’s position in services, followed by a TOWS analysis that identifies possible next steps for Apple. It concludes by considering the potential implications for Apple’s main rivals, as well as two different kinds of telcos – those who are very active in the service layer and those focused on providing connectivity and enablers.

Several recent STL Partners’ research reports make detailed recommendations as to how telcos can compete effectively with the major Internet ecosystems in the consumer market for digital services. These include:

  • Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed? To find new revenues, some telcos are competing head-on with the major internet players in the digital communications, content and commerce markets. Although telcos’ track record in digital services is poor, some are gaining traction. AT&T, Axiata, Reliance Jio and Turkcell are each pursuing very different digital services strategies, and we believe these potentially disruptive moves offer valuable lessons for other telcos and their partners.
  • Consumer communications: Can telcos mount a comeback? The rapid growth of Facebook, WhatsApp, WeChat and other Internet-based services has prompted some commentators to write off telcos in the consumer communications market. But many mobile operators retain surprisingly large voice and messaging businesses and still have several strategic options. Indeed, there is much telcos can learn from the leading Internet players’ evolving communications propositions and their attempts to integrate them into broad commerce and content platforms.
  • Autonomous cars: Where’s the money for telcos? The connected car market is being seen as one of the most promising segments of the Internet of Things. Everyone from telcos to internet giants Google, and specialist service providers Uber are eyeing opportunities in the sector. This report analyses 10 potential connected car use-cases to assess which ones could offer the biggest revenue opportunities for operators and outline the business case for investment.
  • AI: How telcos can profit from deep learning Artificial intelligence (AI) is improving rapidly thanks to the growing use of deep neural networks to teach computers how to interpret the real world (deep learning). These networks use vast amounts of detailed data to enable machines to learn. What are the potential benefits for telcos, and what do they need to do to make this happen?
  • Amazon: Telcos’ Chameleon-King Ally? New digital platforms are emerging – the growing popularity of smart speakers, which rely on cloud-based artificial intelligence, could help Amazon, the original online chameleon, to bolster its fast-evolving ecosystem at the expense of Google and Facebook. As the digital food chain evolves, opportunities will open up for telcos, but only if the smart home market remains heterogeneous and very competitive.

Apple's evolving strategy

Apple is first and foremost a hardware company: It sells physical products. But unlike most other hardware makers, it also has world-class expertise in software and services. These human resources and its formidable intellectual property, together with its cash pile of more than US$250 billion and one of the world’s must coveted brands, gives Apple’s strategic options that virtually no other company has. Apple has the resources and the know-how to disrupt entire industries. Apple’s decision to double the size of it's already-impressive services business by 2021 has ramifications for companies in a wide range of industries – from financial services to entertainment to communications.

Throughout its existence, Apple’s strategy has been to use distinctive software and services to help sell its high-margin hardware, rather than compete head-on with Google, Facebook, Microsoft and Amazon in the wider digital services and content markets. As Apple’s primary goal is to create a compelling end-to-end solution, its software and services are tightly integrated into its hardware. Although there are some exceptions, notably iTunes and Apple Music, most of Apple’s services and software can only be accessed via Apple’s devices. But there are four inter-related reasons why Apple may rethink that strategy and extend Apple’s services beyond its hardware ecosystem:

      • Services are now Apple’s primary growth engine, as iPhone revenue appears to have peaked and new products, such as the Apple Watch, have failed to take up the slack. Moreover, services, particularly content-based services, need economies of scale to be cost-effective and profitable.
      • Upstream players, such as merchants, brands and content providers, want to be able to reach as many people as possible, as cost-effectively as possible. They would like Apple’s stores and marketplaces to be accessible from non-Apple devices, as that would enable them to reach a larger customer base through a single channel. Figure 1 shows that Apple’s iPhone ecosystem (which use the iOS operating system) is approximately one quarter of the size of rival Android in terms of volumes.
      • Artificial intelligence is becoming increasingly central to the propositions of the major Internet ecosystems, including that of Apple. The development of artificial intelligence requires vast amounts of real-world data that can be used to hone the algorithms computers use to make decisions. To collect the data necessary to detect patterns and subtle, but significant, differences in real-world conditions, the Internet players need services that are used by as many people as possible.
      • As computing power and connectivity proliferates, the smartphone won’t be as central to people’s lives as it is today. For Apple, that means having the best smartphone won’t be enough: Computing will eventually be everywhere and will probably be accessed by voice commands or gestures. As the hardware fades into the background and Apple’s design skills become less important, the Cupertino company may decide to unleash its services and allow them to run on other platforms, as it did with iTunes.

     

    ...to access the other 34 pages of this 36 page Telco 2.0 Report, including...   

                • Executive Summary
                • Introduction
                • Apple's evolving strategy
                • Playing catch-up in artificial intelligence
                • What does Apple earn from services?
                • What are Apple's key services?
                • Communications - Apple iMessage and FaceTime
                • Commerce – Apple Pay and Apple Wallet
                • Content – iTunes, Apple Music, Apple TV
                • Software – the App Store, Apple Maps
                • Artificial intelligence and the role of Siri
                • Tools for developers
                • Conclusions and implications for rivals
                • Implications for rivals

    ...and the following figures...   

                  • Figure 1: Installed base of smartphones by operating system
                  • Figure 2: Apple's artificial intelligence, as manifest in Siri, isn't that smart
                  • Figure 3: Apple’s services business is comparable in size to Facebook
                  • Figure 4: The services business is Apple's main growth engine
                  • Figure 5: The strength of Apple’s online commerce ecosystem
                  • Figure 6: iMessage is becoming a direct competitor to Instagram and WhatsApp
                  • Figure 7: Various apps allow consumers to make payments via Apple Pay
                  • Figure 8: Apple Pay is available in a limited number of markets
                  • Figure 9: Unlike most Apple services, Apple Music is “available everywhere”
                  • Figure 10: Apple's App Store generates far more revenue than Google Play
                  • Figure 11: Apple Maps’ navigation trailed well behind Google Maps in June 2016
                  • Figure 12: SWOT analysis of Apple in the services sector
                  • Figure 13: TOWS analysis for Apple in the service market

       

      ...Members of the Telco 2.0 Dealing with Disruption Stream can download the full 36 page report in PDF format here. For non-members, to find out more about how to join or access this report please see here or call +44 (0) 207 247 5003. 

       

      Technologies and industry terms referenced include: Digital services, mergers and acquisitions, location based services, personal data, telco strategy, big data, mobile commerce, digital commerce, APIs, business models, mobile advertising, mobile marketing, mobile payments, telecoms, strategy, content, entertainment, artificial intelligence, messaging, communications, machine learning.