Apple’s Privacy Paradox (& Selling Out To Ads)
ASK NOT TO TRACK:
Two years ago, Apple shocked the world with the introduction of
“Ask Not To Track”. For the first time in forever, a big tech company was siding with the people
and preventing data collection. This update had real consequences as well. Facebook, for
example, was losing as much as $10 billion per year in revenue just because of that little pop
up. This isn’t too surprising though as 96% of iOS users were disabling in app tracking despite
Mark’s pleas that they opt in. In the meantime, Apple was receiving a bunch of praise for giving
users the choice. Of course, no one was stupid enough to think that Apple was actually doing
this for the people, but it was concluded that this was mainly just a marketing strategy.
Apple
has always advertised the iPhone with the allure of privacy. So, this move would surely strengthen
Apple’s brand loyalty and might even convert some android users. But, what if I told you that all
of that was just stage one? You see, pushing out Facebook and Google wasn’t actually a defensive
move, it was an offensive move. Now that Apple has effectively shut off everyone else from collecting
deep data on iOS users, guess who advertisers have to rely on to get access to iOS users. The
answer is Apple. This wasn’t just something that Apple stumbled into either. While they like
to portray themselves as the hardware giant that just wants to create the best products possible,
Apple is actually becoming a software company, and the reasoning is obvious. It’s way more
profitable.
You know how Apple charges ludicrous amounts for their products? Well, even with that
pricing, Apple’s gross margin on their products is only 37%. Their gross margin on their seemingly
cheap services, however, is a whopping 71%. It looks like offering services like Apple Music and
iCloud not only garners less criticism but it’s way more profitable as well. But, by for the most
profitable service in the world is serving ads and Apple wants a piece of this pie. So, here’s
Apple’s master plan to takeover iOS advertising. FALLING SALES:
This might seem like a recent development, but this story actually dates back nearly ten years to
September 19, 2014. This was the long anticipated release date of the iPhone 6. Rumors had been
flying wild for months, people had been camping outside Apple stores for days, and the hype was
unreal. Apple was finally releasing larger format iPhones. In the meantime, the general public was
finally coming around to the idea of spending several hundred dollars on a smartphone, and for
many, the iPhone 6 was their first smartphone including myself.
All of this culminated in
Apple selling a ridiculous 220 million iPhones 6s and 6 pluses. Apple had done better than ever
before, but this was the peak of iPhone sales. Every year after that, iPhone sales inched down
step by step. This wasn’t really Apple’s fault. The reality was that smartphone progression was
rapidly slowing down, phones lasted for years, and everyone who wanted an iPhone already had
one. But, while this was a reasonable explanation, Apple couldn’t just tell this to shareholders.
If Tim Apple had done this, he probably would’ve gotten the boot, and be replaced by someone
who was quote on quote more ambitious.
So, Tim had to do something. His first instinct was
to raise prices. I mean, if you wanna make the same revenue off of less units, the easy way out
is to just raise prices. With the iPhone 7, Apple increased the price of the plus series by $20,
and with the iPhone 8, Apple increased the price of both series by a total $50. But, by far the
biggest jump in price came with the iPhone X which came in at $1000. In the western world, this phone
was memed as the thousand dollar emoji machine, but this phone actually sold extraordinarily
well in China ending Apple’s sales decline. It seemed like the increased pricing was working,
and Apple would double down on this strategy with their next generation. The iPhone XR would come in
at an eyewatering $750, and Apple introduced a new max version that started at $1,100.
We have since
gotten more used to these prices, but to this day, when adjusting for inflation, these were the most
expensive iPhones Apple has ever released. And this quickly became evident in their performance.
Sales were terrible. In fact, they were so bad that Apple didn’t even want to tell us how bad
they were. Instead, they would just go ahead and stop reporting unit sales numbers altogether.
Unsurprisingly, Apple would go ahead and reduce the starting price of the iPhone for the first
time ever with the iPhone 11.
This led to a much better response with the public, but this was
by no means an endgame for Apple. They were back to square one and they had to not only address
declining iPhone sales, but also find new ways to grow. They were finding some success with Airpods
and the newer Macs, but what they really needed was a full on new sector. As they looked around
them, the answer was obvious. Out of all the tech giants, they were the only ones focusing on
hardware. Everyone else was focusing on software. ATTRACTING THE MASSES:
Apple likes to market themselves as the premium company making premium priced products,
and based on public sentiment, it seems like this messaging has stuck really well.
Everyone
views Apple products as expensive, luxurious, and exclusive. But, ever since the disaster with
the iPhone Xr and Xs, Apple has actually been making their products more accessible than ever.
Back in the day, Apple would discontinue their previous iPhones as soon as the new version came
out. But, nowadays, they’re keeping around the older generations for years, and they have models
priced as low as $429. In fact, if you look at the pricing of the SE, 12, and 13, it’s not much
different from the pricing of the Pixel series which is known for offering great value.
Apple
will never advertise this though. As Google has found out first hand, most people don’t actually
want a value product. What they want is a premium exclusive product, but for a value price, and
this is precisely what Apple has been offering. They have their fancy pro series, and their $1000
stand, and their $700 wheels to establish the status of their brand. But, their real revenue
drivers are their lower priced products. I mean, if you’re smart about your trade ins, you can get
an iPhone that’s 1 or 2 generations old from your carrier for $100 $200 bucks max.
You might even
be able to get it for free. This strategy doesn’t just apply to iPhones either. Apple has made
their lower tier products value centric across the board. I mean, you can literally get the iPad
9th generation for $329. Even if you spring for the iPad Pro, it’s still substantially cheaper
than the flagship iPhones. The same thing can be said about the Mac lineup as well. Apple was
already offering great value with the M1 Mac Mini that came it at $700, but they’ve taken this
to another level M2. Despite all the inflation, Apple didn’t just keep the price the same, but
they actually knocked it down to $600. At that price, the M2 Mac Mini is arguably the best value
desktop computer on the market period. You can see similar trends with the Apple watch and Macbook
lineup as well, but, wait a minute, why in the world is Apple doing this? Wouldn’t these lower
priced products just exacerbate their revenue and profit margins? Well, yes and no.
Obviously,
these lower priced products will have much more modest revenue per unit and margins, but they’ll
also sell better. This will keep the overall revenue from each sector relatively stable or even
growing. But, net margin will indeed go down and that’s exactly what Apple experienced for much of
the 2010s. Between 2012 and 2020, Apple saw their net margin fall from 27% down to 20%. This might
not sound like a big deal, but when we’re talking about hundreds of billions of dollars worth of
revenue, this translates to tens of billions of dollars worth of less profit.
This is why Apple’s
net income didn’t increase all that much during this time period despite their revenue nearly
doubling. Apple was ok with this though because they had something much bigger in the works,
and this was just stage one: user collection. SOFTWARE GIANT: As Apple offered more value driven products and
locked more people into the Apple ecosystem, they were simultaneously doubling down on their
services.
Likely the most notable example is Apple music. Fun fact, Steve Jobs actually hated the
idea of music subscriptions. He said that even Jesus couldn’t sell music subscriptions, and this
was really the premise of iTunes as whole. The idea of iTunes was that people could buy virtually
any track in the world and keep it forever for a reasonable 99 cents. But, Apple scrapped this idea
altogether in mid 2015 when they announced Apple music. If you’ve been living under a rock, Apple
music is a music streaming subscription similar to Spotify. But, unlike Apple’s brand image, Apple
music was once again reasonably priced. In fact, Apple Music was priced identically to Spotify.
Pair this with Apple’s beautiful integration with their devices and you end up with 88 million users
paying you $10 or more every single month.
I mean, that itself is nearly a billion dollars per month.
But, that’s nothing in comparison to their cloud business. iCloud is once again priced basically
identically to Google drive, but it comes along with the whole Apple aesthetic and convenience.
And boom, by 2018, Apple had an estimated 850 million iCloud users out of which 170 million were
paying. Apple had found a golden strategy. They didn’t have to reinvent the wheel by any means.
They just had to take already popular services, integrate it into the Apple world, and
offer it for the same price. And boom, they suddenly had tens of millions if not hundreds
of millions of paying subscribers. They deployed this same strategy with Apple TV, Apple Arcade,
Apple News, Apple Fitness, Apple Care, and who knows what else.
This was working relatively well
by the end of the 2010s, but the real explosion didn’t come till the pandemic. Suddenly, everyone
was at home and they needed even more virtual entertainment than before. They needed more
music, more games, more TV, more media. They also had a bunch of money saved up from not going
on vacation and not going out nearly as often. So, they resorted to spending much of their money on
tech and guess who was in the perfect position to take advantage of this? Well, it was actually all
of the big tech companies which of course included Apple.
Within the 12 months following the start
of the pandemic, Apple’s revenue grew by over a $100 billion and their net income nearly doubled.
And today, Apple boasts an impressive 935 million paid subscribers world wide. In other words, ⅛
of the world has some sort of paid Apple based subscription. Apple had done it, they successfully
transitioned from being a hardware giant to being a hardware/software giant. But, Apple wasn’t
satisfied. They wanted to take it one step further as they were still missing out on the
most lucrative service of them all: advertising.
BRING IN THE ADS: Apple wasn’t just gonna start offering ads
like Google or Facebook though. As we all know, Apple likes to do everything the Apple way with
finesse and clever positioning. So, they decided to leverage public angst. The shady habits of
Google and Facebok were no longer a secret. Their business practices were very much public knowledge
and people hated them for it. Now of course, people didn’t hate it enough to switch, but they
did hate it enough to complain. So, what better way to create an advertising monopoly than to
side with the public and block out external data collection. This was a win win win win
scenario. One, Apple was hurting the brand image of their competitors by basically suggesting
that what they were doing was wrong. Two, they were hurting the revenue and bottom line
of their competitors big time.
Three, they were bolstering their own brand image as the privacy
king. And four, they had ultimate control over all advertising within the Apple ecosystem. We
should also note that Apple has been experimenting with more tame advertising for several years
now. They’ve been selling ad spots within the App Store and Apple News since 2016 actually. So,
they’re be no means complete newbies to the space, but they’re about to this to the next level. Since
August, Apple has been hiring a substantial number of engineers to work on some sort of large
scale ad platform. It’s expected that this new platform will essentially be Apple’s version
of Google or Facebook Ads. But, wait a minute, Apple can’t just bash on Google and Facebook for
years and turn around and do the exact same thing right? I mean, Tim Cook himself has argued that ad
driven business models are inherently invasive of privacy.
So, how could Apple make such a pivot
without destroying their branding? Well, the answer is likely by introducing an Apple twist.
In other words, they’ll throw in some encryption, some decentralization, and some anonymity and
they’ll frame it as something that protects privacy. We can already see something along these
with their hide my email feature. If you’re not familiar with this feature, it basically allows
you to generate a proxy email address when signing up for websites or emailing people. Apple
doesn’t read or process any of the emails that go through this proxy address. I suspect that they’ll
implement something similar when it comes to ads. Maybe all of the data that they collect will be
stored locally on your device which will check off the decentralization checkbox.
After that, maybe
they’ll use some sort of anonymous proxy tunnel that’s end to end encrypted to connect advertisers
to your device. This way, they can claim that they nor the advertisers know your data themselves.
They’re simply a proxy that connects advertisers and end consumers while protecting your privacy
or atleast that’s what the pitch will probably be. THE FUTURE OF APPLE:
In the end, Apple was the only mega tech company that didn’t drive most
of their revenue from software and services, but over the past several years, this has
been rapidly changing. The reality is that smartphones have hit a plateau and Apple can
only introduce the next iPhone that’s better than ever before and increase the price so many
times. In fact, I believe that it’s just a matter of time until Apple drops the number naming
scheme on the iPhone. Before you know it, the new iPhone will be called the 2027 iPhone
as opposed to the iPhone 19.
This will no doubt reduce the hype surrounding iPhone launches,
but that’s ok. By then Apple will not only be a software giant, but they will be a full on
software company. Their iPhones, Macs, iPads, and Watches will simply be a vehicle to sell their
real money producers: subscriptions and services. It looks like the latest effort in making this
vision a reality is getting into ads, and that’s why Apple really shut out external tracking.
What do you think about Apple getting into the ad business? Comment that down below. Also, drop
a like if you respect the business decision by hate the implications. And of course, consider
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