Apple’s subscription push is a lesson for every enterprise

When Apple says it is time to develop services and subscription-based revenues, enterprises in every industry should probably listen.

Apple, iOS, iTunes, services, income, subscription, enterprise
Kevin Schneider (CC0)

Apple really wants app developers to build their business around app subscriptions rather than a la carte app sales, and this reflects an overall shift within the company.

Apple as a service

Apple has invited selected developers to meetings at which it evangelized app subscription models.

This week, it published a video on its developer’s website in which people from Elevate, Dropbox, Calm, and Bumble talk about how moving to a subscription model has given them the opportunity to continue to develop and improve apps regularly rather than pushing every improvement inside one key annual app upgrade.

It’s good business.

After all, as app prices fall below a dollar for an app, developers can see that introducing additional features for sale or switching users to subscriptions may help create a more predictable recurring income.

Developers (just like anyone else) need to be paid for their work. It’s also good business for Apple, which gets to keep a slice of that recurring subscription fee: 30 percent in the first year, and 15 percent for every year that follows. (The company faces pushback from developers on this, with Netflix figuring out how to avoid the charge.)

"Services revenue is a wonderful thing because it is predictable, and in my mind, it should increase the multiple of the company because it's a much more consistent revenue stream," Ian Winer, analyst at Wedbush, told CNBC earlier this year.

Gartner predicts that most of the software industry will offer subscription-based business models by 2020.

“What began as a trickle a few years ago has become a stampede of vendors wanting to make a move to a subscription business model,” analyst Laurie Wurster says.

Subscription model good for everyone?

A subscription model is also good business for customers who should get regular app updates and feature improvements across the life of the app.

That’s fine, but as anyone engaged in attempting to move to digital services from cable TV can tell you, all those subscription costs do add up, until you find you’re spending more than you ever did before.

App habits are also changing. Paid apps account for around 15 percent of app sales, and the apps that do succeed are focused on customer engagement and subscription, Apple has said. Recent Sensor Tower data showed that consumers are spending more in apps, with the average amount spent per active iPhone reaching $58 in 2017, up from $47 the year before.

This is why it seems more likely that we’ll see app developers migrating to offer free apps with additional compelling features made available when you take out an app subscription.

It’s that razor approach to digital — let people have access to the core app, then convert them to a regular payment structure over time. That’s also the more customer-focused approach. Of course, people whose circumstances change will not thank an app developer for locking them out of the content they have created within an app.

Apple is pushing developers to deliver transparent subscription models, and it makes it super-easy to monitor, control, and terminate those subscriptions you may choose to take out.

The bigger picture

It’s not just about developers or customer convenience.

Apple has a larger vision around subscription.

The company has been migrating much of its business toward subscription-based recurring income for years.

This reflects a fundamental shift within the company: It likes selling hardware, but it wanted to build a more robust business around more predictable recurring income.

Apple’s services business is a big part of that push: Revenue in that segment climbed 31 percent year over year to hit $9.5 billion in Q3 2018. (That’s up $3.6 billion since Q3 2017, which is pretty good growth.)

Apple has plans to extend its services.

It is spending billions on creating its own forest of video content, and its recent purchase of Texture gives it an opportunity in the segment of the publishing market that is most defined by subscription — newspapers and magazines.

The company is bang on trend: the U.S. subscription business has been building up at 200 percent annually since 2011.

You could argue that Apple’s popular iPhone Upgrade Program (a zero-interest financing scheme that lets subscribers always have the latest smartphone) also represents a similar shift in which access beats ownership.

You can imagine why Apple would like every iPhone user to hand over their money on a monthly basis — it enables huge business flexibility. CSS Insights argued that by 2018 you’d be able to buy Apple hardware and software and access its media services for a single monthly fee back in 2016.

That move toward life as a services company, in which hardware is just one component of an overall superior customer experience, is not such a big step for Apple: From its retail stores to product satisfaction results, it already has an ecosystem people wish to buy into.

In addition to which, in common with so many U.S. firms seeking to expand their business (subject to political truculence) in emerging economies, Apple also seeks new business models that can be accessible to a wider market of consumers than the relatively affluent who comprise so much of its market today.

Prepare for change

Apple leads, and industries tend to follow.

So, what can enterprise readers learn from this?

The first step is to focus on customer experience when developing apps, to stagger app enhancements across the life of the product to maintain engagement, and to recognize that at some point, much of your business will be making the transition to subscription-driven, rather than cyclical, revenue.

Google+? If you use social media and happen to be a Google+ user, why not join AppleHolic's Kool Aid Corner community and get involved with the conversation as we pursue the spirit of the New Model Apple?

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Copyright © 2018 IDG Communications, Inc.

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