Apple’s hit factory

on April 23, 2014

I’ve spent time over the last few months poring over technology and content company financials. I’ve been struck by the fact Apple resembles as much as anything a movie studio, with results much lumpier than most tech companies, driven by big hits. I’ve been meaning to write something about this for ages, but never got around to it. Walt Mossberg has penned a piece making a very similar comparison, though with some important differences. My initial inclination was “oh well, I guess I won’t write that post after all,” but a Twitter discussion with Brian S Hall changed my mind, because there are other ways in which Apple resembles a movie studio beyond those which Mossberg highlighted. And perhaps more than any other studio, Apple resembles Disney.

How so? Well, there’s the obvious comparison about big hits – just as the iPhone is the biggest selling phone, Disney’s Frozen just became the biggest selling animated movie ever, as many of Disney’s previous films have before it. But less obviously, Apple has created a business in which several product lines feed each other in a virtuous circle. I recently re-encountered this diagram from 1967, which shows how Disney thought about all the different parts of its business and how they fed each other:

disney synergyYou might need to click through to see the details, but you’ll see all the different parts in a very synergistic way – movies providing material for books, opportunities for merchandising, ride ideas for Disneyland, etc., with other parts reinforcing each segment of the business, but with the Walt Disney Studio very much at the center.

At Apple, hardware products, notably the iPhone, iPad and Mac, are at the center. But they also feed other parts of Apple, most importantly the parts currently growing most strongly: iTunes, Software and Services, and especially the App Store. Growth rates for Apple’s various reported segments are shown in the chart below, on a year-on-year, trailing 4-quarter basis. Even as hardware sales in all four categories have slowed, growth has stayed fairly strong in iTunes and Software and Services.

Apple growth ratesiTunes, Software and Services (and especially the App Store) in turn are a big part of the appeal of Apple’s hardware, providing a wide range of content, games, productivity tools and so on, which make Apple’s devices more compelling. And though these content businesses once existed almost solely for that reason, they now likely make money in their own right. Then there’s the increasing integration between Apple’s hardware lines with things like iCloud, Notification syncing, Maps and so on, which further strengthens the virtuous circle. These things taken together are some of the reasons why Apple continues to be uniquely successful with its very focused business model, premium focus and emphasis on the user experience.

The challenge for Apple is I suspect investors do see it as a movie studio, but only in the sense it’s a company heavily reliant on hits, about which there’s extremely limited visibility before they arrive. This overlooks two important facts: firstly, the virtuous circle described above, which means much of the appeal of Apple’s two major product lines isn’t the new hardware, but everything else that’s tightly integrated into it. Secondly, Apple is, like Pixar, producing hit after hit after hit, however improbable that may seem. Yes, it’s theoretical Pixar will release a dud at some point, but its core values and creative process ensure it never has so far, and unless those things change it likely never will. And it’s no coincidence Steve Jobs helped found both companies.

So yes, Walt, Apple is like a movie studio. But not quite in the way you suggested it was.