From a hardware standpoint, Apple has appeared to have saturated their developed markets. While there can still be some minimal growth (low-single digits) for the foreseeable future, there is not a great deal of hardware growth ahead for Apple. When I discuss this with investors, and even contacts of mine in the supply chain related to Apple products, they question of Apple’s growth in emerging markets continues to come up.
On this matter, and by emerging markets I mean markets like India, SE Asia, and someday parts of Africa, I have concluded hardware growth will be much harder to come by than Apple, and others realize. With India being pegged as one of the larger short term growth opportunities for Apple, I’ll make some broader points specific to India in this analysis.
Apple’s Hardware Challenge in India
There are several important factors to understand when thinking about Apple’s iPhone strategy in India. Firstly, Apple has an extremely low market share in India. Most estimates have iPhone share at less than 10% of the installed base, but it is likely lower than 5%. There are roughly ~400 million smartphone owners in India and that number is expected to pass 700m by 2022. It is a market with as sizable as China but with extremely different cultural constructs which will make Apple’s hardware positioning much more difficult in India than it has been in China.
Price is much more of a factor in India than it is in China, and Apple’s strategy has never been to compete on price. I don’t expect a change of strategy here, which is why I’m less optimistic about Apple’s hardware growth strategy in India. Also, India is a market Google/Android has a stronghold on. With >95% share, India cut their teeth on Android and has been continuing to deepen their dependence on the Google ecosystem. I view the challenge here somewhat similar to Apple’s challenge to penetrate the greater Android base in the US. While Apple has seen favorable switching rates at times, the reality is not being on Verizon day one with the iPhone launch let Android gain a foothold in the US and clawing that back has been a great challenge. For that reason, the US market largely remains a 50-50 split of smartphone OS between iOS and Android. The last point I’ll make here is multiple global smartphone reports I’ve read indicated Android itself has an extremely high loyalty rate. While no Android branded phone has iPhone level loyalty rates, Android itself does with varying loyalty rates between 78-83% depending on the market.
While it is true, Apple is working to be a bit more price-competitive by manufacturing phones in India, they will still be competing against phones with similar specs and lower prices from other Android brands. This, plus the high Android loyalty rates in India in particular, is going to make gaining switchers a challenge.
Services, not Hardware, Is Apple’s Revenue Opportunity in India
Landing on the conclusion that hardware is not an immediate hardware opportunity for Apple, I believe services is the right strategy for Apple to start to develop customer relationships in India. My thesis here is much like the iPod strategy. A little appreciated strategic factor for Appel’s iPod was how it was the mass market entry product to the Apple experience. Up to that point in time, most consumers had never owned an Apple product and thus never had a chance to experience the quality of Apple product and the overall Apple experience. The iPod paved the way for the iPhone for the mass market by offering customers an easy way to enter the Apple ecosystem and experience the Apple brand.
In India, I think services can play a similar role. While I explained how hardware is going to be challenging for Apple in India, I think services could be a much easier sell. A fascinating dynamic of India, today, is how a large part of the Indian culture is to value frugality. Or more specifically, they value the deal and the pursuit of getting value for their money. The iPhone is not well-positioned in India in the value for the money equation; however, Indian’s value media in a much more balanced way than they value physical goods. In some cases, they value rich media more highly than they do physical goods. Bollywood itself is a great example, but broadly speaking Indian’s desire for media content has always been high.
In the early days of cheap tablets, I recall hearing stories from friends who live in India, how a trend was emerging for Indian consumers to purchase extremely cheap tablets, less than $70 USD, and then go to a corner store and pay nearly half the price of the hardware to load their tablet up with movies, games, and other video content. This is a great example to highlight how the value equation between hardware and rich media is quite different in India than other parts of the world.
This is a key part of my thesis as to why I think Apple has a broader short term revenue opportunity in India with their services than with hardware. However, doing this may require a bit of a strategy shift for Apple as it relates to emerging markets.
Cross Platform and Regionalization
American media, particularly movies, are popular globally. However, any effective services strategy requires regionalization and customization of content to the region. This may be even more important in India than in China. However, China is similarly growing in its localized media. While we do not know much about Apple’s cross-platform strategy, for Apple TV+ specifically, it is unlikely said service is available on Android out of the gate.
This is a fantastic debate to have, whether Apple needs to embrace Android with all their services sooner than later, but not one I’ll flesh out here. What I will say is that Apple has no chance with services in India if it is not available on Android. This is critical in my thesis that Apple’s services is their way into India strategically, and would require a bit of an India specific approach assuming Apple is hesitant to bring all their services to Android in other markets.
Apple would also need to continue to invest in India specific media, and if this is done right, it could be seen as hugely valuable by the Indian market.
While I understand the broader argument that brining Apple services to India could hurt their hardware strategy, there are serval ways to think about this point. Firstly, if Apple is extremely strategic here, they can create an experience that hopefully has a path back to their hardware from a services entry point. This does not mean to cripple the experience with Apple services on Android fully, but that they create some experiences that may still be better on Apple hardware. This could be things around AI/ML, or deeper integration and ease of use, etc. The second way to think about this is services being cross-platform is Apple’s opportunity to get a customer who may never have been a customer, to begin with. In every market, there is a huge opportunity for Apple to sell their services to customers who they will likely never get as hardware customers. When you think about the broader services business opportunity, and the potential for pure growth for Apple, the reasons to be a cross-platform start to fall away. Especially if there is a clear strategy to bring a hardware value proposition on the back of those services.
Ultimately, this last point is the one of most interest to me in an era of flat to slightly declining hardware revenue for Apple and a much larger customer opportunity with Apple’s services. How Apple plays the cross-platform game will be a critical part of their growth strategy, but one that does need to be attached to a long-term hardware roadmap.
