Apple’s Challenge: Becoming A Services Company

on June 14, 2013

Much has been said about Apple’s challenges in developing into a services company. Services are core to Apple’s future. Becoming more of a services company is a challenge Apple must meet head on.

I’ve read many articles attempting to outline and critique Apple’s services challenge from pundits and journalists. I find some to be insightful but most are extremely shallow. I hope to add some needed perspective to this discussion.

First Party vs. Third Party Services

I was moderating a panel a few years ago at the Berkeley Haas School of Business. On that panel was a good friend of mine named Tim Chang who is a partner at the VC firm Mayfield Ventures. He said something during our session that I thought was insightful. We were having a discussion about platforms and software and he stated:

“Generally, many popular third party services/features eventually get integrated into the operating system.”

He then went on to describe many popular third party software programs that eventually became integrated into Windows or OS X. Of course, he is correct. The question a platform company, in this case Apple, needs to answer is which services are core to the platform and should be owned, and which services should left to third parties. The answer to this is both strategic and philosophical. We can discern many things about a platform’s strategy and overall philosophy by the types of services they decide to own and build into their platform and the ones they choose to leave for third parties.

Integration is Differentiation

In some cases Apple was first in providing a service, iTunes for example, and in others they were later, such as Maps. In either case, whether they are first to offer a service or add services later that were initially offered by third parties, it is important to grasp a fundamental concept.

Apple’s core services challenge comes to the forefront when other third party services do it better. In the case of Maps, Google did it better. Google had more mapping data and expertise since they had been doing it longer. Clearly, the challenge for Apple was, first and foremost, to build a mapping experience that was at least on par with Google Maps. Some may argue they are close while others may argue they are nowhere close. But for the sake of the foundation I am trying to lay out, let’s assume Apple Maps is now on par with Google Maps. Even if this is the case Apple needs to address the question of why I should use their mapping solution over Google’s, especially given that I have been using Google maps for many years and am comfortable with it. The answer is convenience. Apple can more tightly integrate their mapping solution into the core iOS experience thus making using Apple maps more convenient for the user than a competing service. Interestingly, Apple has done just that with Maps.

I’ve completely switched over to Apple’s mapping solution for the primary reason of convenience. ((I have had no problems with the accuracy of Apple Maps)) I commute weekly all over the Bay Area meeting with people, startups, etc., and often I need directions. Apple’s tight Maps integration into the core of iOS makes it feel less like my guided process is isolated to an app and more like it’s a core experience throughout device. Things like how it works when the screen is off and then only turns on when a key turn or instruction is necessary. Or how seamless it is to exit the Maps application and still get key instructions to pop up as a notification when needed. More importantly, I am convinced that Apple’s deep integration of Maps into iOS is yielding better battery life with the location services. ((I have battery benchmarking between the two I am compiling to validate this)) [pullquote]The fallacy most make when critiquing Apple’s services is to believe that Apple needs to out-innovate competing services. The truth is, all they need to do is out-integrate them.[/pullquote]

iTunes Radio has the same initial challenge as Apple Maps. At a surface level one may look at it and question what it will do that is better than Pandora, Spotify, Rdio, or any number of streaming music services. My family and I are heavy Pandora users and Apple has a particular challenge to get us to move to iTunes Radio. But here again the answer may be in levels of integration that lead to a more convenient experience. This can be in discovery, consistency, ease of acquisition of newly discovered music, etc. If iTunes Radio is more convenient to use, it doesn’t necessarily need to be better.

The fallacy most make when critiquing Apple’s service challenge is to believe that Apple needs to out-innovate competing services. The truth is, all they need to do is out-integrate them. Apple’s advantage is unique in this area because they create the software that runs on their hardware. They will always have an unfair advantage with the services they chose to invest in.

Now this doesn’t mean that Apple should not strive to create services better than competing ones. Only that integration will always be their biggest competitive advantage in respect to their services.