It was 1998 and, as described in ‘Good Strategy, Bad Strategy’, Richard Rumelt asked Steve Jobs how he was going to grow Apple from a niche play into a company well worth more than the $150M Bill Gates had recently invested. Jobs had recently returned to the company he’d founded and was successfully turning things around. Jobs had convinced Gates that investing in Apple, and keeping the company alive, would help Microsoft get past the issues it was having with the Justice Department. Gates invested. Jobs cut all but one of the fifteen desktop computers. He also reduced the number of portables and focused on one laptop. The decision was made to sell directly to customers online.
This focus allowed Apple to cut inventory by 80%. The company was back in the game. But, by its competitor’s standards, Apple was small owning less than 4% market share. And Rumelt, strategist and author, wanted to know how Jobs was going to propel the company forward;
“Rumelt: Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just too strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?”
Jobs: “I am going to wait for the next big thing.”
Is the Homepod a diversionary play?
In the last few days (July 2017) Apple started letting customers test Homekit, its smart home development platform, in stores across the world. A few months ago, Apple announced Homepod its voice-activated smart speaker which, along with playing music as music should be listened to, acts as the hub for all the connected devices with apps built on the Homekit platform. A few connected devices manufacturers — Phillips, Nest, Lutron etc- have built apps on the Homekit platform that you can control through the Homepod, iPhone or Apple Watch.
But this is all ‘me-too’ stuff at this point. Amazon, Google and even Samsung (through the acquisition of SmartThings) all have connected home hubs and developer platforms. In my view, the positioning of the Homepod as a music listening device is a deflection from what I truly believe Apple is planning for the connected home. While Homepod is a critical part of the strategy, it is not the core piece in this puzzle.
Before jumping into what I think Apple’s next play is, the trends do not look so good for the platforms/products where Apple has traditionally made the bulk of its money.
- iPhone: Apple sold its billionth iPhone last year. While that is an amazing feat, and unless Apple is going to retry selling a low-cost version of the iPhone in emerging markets (remember iPhone 5C!), it is safe to assume that the smartphone market is not a growth market. 95% of Americans already own a mobile phone and 77% of those own a smartphone.The iPhone 8, despite the rumored troubles, will sell millions of units but this is not where Apple will gain the next $50Bn of revenue.
- iTunes: Even though Apple Music force plays itself when you get into your car, streaming services like Spotify have eaten into a market that was once dominated by iTunes. And, while the podcast industry has grown with Apple benefiting from being available earlier than anyone else to serve that demand, it seems that fewer people are looking to the platform for their video with reports that Apple’s share of video rentals has “tumbled to between 20% and 35% from well over 50% as recently as 2012”. iTunes is no longer the dominant music platform it once was.
- Macbooks: As PC sales decline globally — with 61.1M units sold in Q2 2017, the industry saw a 4.3% decline and is in the midst of a 5 year slump with 11 straight quarters of declining shipments — Apple is making a move towards capturing market share of college students by throwing in a Beats by Dre headphones with qualifying purchases. When you have to throw in $300 products to sell a $1000 product, I’d suggest business isn’t going so great.
- Apple Watch etc: With little verifiable data on Apple Watch sales numbers, the estimates of 20M units sold (as at Q2 2017) suggest a market that still has a long way to go before it moves the needle for the company.
So where is the market for Apple? What part does the Homekit play in the next multibillion dollar opportunity for Apple? I think it’s in the electricity market.
The Energy Use Case.
A quick glance through the products that are compatible with the Homekit, and a quick glance at the image above, indicate that Apple might be focusing Homekit functionality (at this point) on energy usage related use cases; dimming lights, turning switches on/off, reducing/increasing thermostat temperature, controlling air conditioners etc. Even the Homekit video ends with a sequence of energy related actions occurring in the home.
The energy use case is the most compelling of the connected home use cases (McKinsey). The other two use cases for the connected home, security and convenience, provide less of an opportunity than energy and most of the players in this space will find this out soon enough. Amazon, through the Echo, has focused on (and owns) the convenience use case and Google’s focus with Home is not quite clear (I’ll cover this in a subsequent post). The energy use case makes the most sense as there is no bigger opportunity to own the minds and wallets of your consumers than by building a brand in the home energy space. Think about it, the only thing more important than smartphones and our computers (that grant us access to the internet) is the electricity used to power those devices!
Since we all never quite know what Apple will do next, I’ll strategize a little and suggest that Apple’s next move will be to design a home battery as part of a home energy management system controlled through the hub that is the Homepod or the iPhone. This will enable Apple to capture a share of the $162Bn market for residential electricity services. Yes, $162Bn and that is just the US alone. It’s why Elon Musk/Tesla is heads down barrelling towards developing batteries for EVs and homes. But, if we go back to the Rumelt and Jobs story at the beginning of this article, if we agree that Apple’s strategy has always been to ‘wait for the next big thing’ it is not a stretch to suppose that the next big thing is already here. And it is not electric cars, it’s the simple battery. As suggested in this fantastic Financial Times article (paywall), the technologies that most impact us are the simple ones.
The path for Apple is actually quite straightforward and is laid out;
- Go all in on renewable energy with a 100% renewable pledge and choose to lead the fight against climate change.
- Develop capabilities to store and optimally utilize the renewable energy you capture. Expand these capabilities to your current products in the market. Note: Early this year (2017) Apple was granted a patent for solid state batteries for portable devices. While this is for low-power devices like the Apple Watch, I would not be surprised if the company continues to work on solid-state high-energy batteries. I do not believe these high energy batteries are for electric vehicles, as some suggest, but for the home.
- Develop chips that enable ease of syncing all your devices through Bluetooth Low Energy (BLE) and also optimize battery usage.
- Scale 1, 2 & 3 above into the homes of your customers with a beautiful well-designed product that doesn’t actually compete with the other players in the market but adds new functionality all tied into one use case; energy.
- Shift the market like you’ve done before (iPhone, iTunes) by controlling the platform and the value; the energy that powers the home.
It all boils down to capturing our hearts and minds by focusing on the next thing, beyond our smartphones, with products that delight. Apple has already honed its hardware chops building us delightful products. Apple, with Homekit and Homepod, is now turning its attention to our homes; homes where Apple will soon know exactly how we use energy because all that data is captured by the Homekit platform as it manages all the devices built by other companies. Apple will take the platform and delight approach and once again capture the next big thing.
So how do you win in a market again?