1 May 2020 | By DF
This is a 9-part essay series on Apple’s Success in China. Part 1 introduces the essay series. Part 2 explains Apple’s product-zeitgeist fit in China. Part 3 looks at product localization. Part 4 looks at Apple’s services in China and relationship with Tencent. Part 5 looks at the complexities of operating in China. Part 6 and Part 7 look at Apple’s compliance efforts in respect of the App Store and iCloud respectively. Part 8 looks at Apple’s investment in DiDi. Part 9 concludes with lessons from Apple’s experience in China.
This part will first discuss Apple's services strategy in China. In brief, Apple's services do very poorly in China, many of which are banned, regulated or generally perform poorly relative to Chinese companies providing similar services. It will then discuss Apple's subtle and tricky relationship with Tencent, the titular frenemy.
Beginning in the fiscal year of 2015, Apple started to break out “services” as a distinct component in its financial statements to “show the full size, scope, growth, and make comments on the profitability of it from a transparency point of view”, marking the start of what is known as Apple’s “services narrative”. According to Apple’s 10-K, such services included digital content stores and streaming services (e.g. iBooks, Apple Music, Apple News+, Apple TV+, and the various App Stores), iCloud, Apple Arcade, Apple Card, Apple Pay, and (somewhat awkwardly) AppleCare. Revenues from Internet software services are typically valued more highly than hardware revenues because of their presumably higher margins. ((The one exception is AppleCare, which is a warranty program and will not be considered a “service” for our purposes.))
There is strategic tension between a services-based business model and a hardware-based business model: “the former ought to maximize their addressable market (by, say, making a cheaper iPhone), while the latter ought to maximize their differentiation”. Apple’s services narrative is significant because it represents a departure from its earlier narrative as a premium hardware manufacturer, a narrative that has served it well during the years in which iPhone sales saw explosive growth. As the smartphone market matures, Apple has seen unit sales of the iPhone slow and possibly ultimately stagnate (in 2018 Q4, Apple announced that it will no longer report unit sales of its main hardware divisions). Apple also does not disclose statistics on the installed base of iPhone. Apple’s focus on narrative could be understood as an attempt to increase its average revenue per user. There are many intricacies in assessing Apple’s services narrative that we will not explore because of limited relevance for our purposes.
Returning to our focus on China, The selection of services available in the Chinese market is remarkably limited. This part will discuss the iMessage, App Store, Apple Music and Apple Pay in greater detail. The issues surrounding iCloud and Apple’s aborted iTunes Movies and iBooks will be discussed in greater detail in subsequent parts of this essay series.
In a sense, the availability and success of App Store and iCloud in China is unremarkable as they are integral to core functions of the modern smartphone (downloading third party apps and cloud backups). Beyond these, Apple has had no real "successful services" in China.
In light of China's restrictive media and financial sector, one can safely conclude that Apple News+, Apple TV+ and Apple card are unlikely to launch in China. The only service that might still stand a chance of success in China is Apple Arcade, a gaming subscription service (China is the largest mobile gaming market in the world). Unfortunately, China was not among the countries where the service was available at launch and I could not find publicly information on this omission.
As a prelude to the subsequent discussion on Tecent (and WeChat), a brief note should be made here on “the dog that did not bark” that is iMessage. Whereas Apple’s iMessage service is a crucial lock-in to Apple’s hardware in the US—where carriers typically offer unlimited SMS and thus iMessage is easily integrated into users’ texting habits—its market share in China is basically non-existent, where WeChat dominates the messaging market. In China, where carriers typically charge for SMS usage, iMessage’s lack of success could superficially be attributed to the afore-mentioned tension between service and hardware: Apple’s device-centric messaging app could not have matched the network effect of Tencent’s device-agnostic WeChat.
However, the compliance angle is probably more important: iMessage is unlikely to meet Chinese laws and regulations requiring a greater degree of content supervision than is technically possible on iMessage’s end-to-end encrypted, privacy-oriented design. As such, interestingly, iMessage remains one of the few end-to-end encrypted messaging service that is officially available but, somewhat paradoxically, whose availability is premised on its lack of mass adoption. Understandably, unlike other services, Apple has also barely promoted the service within China or customized it to fit the preferences of Chinese users (indeed, iMessage is relatively basic compared to other messaging apps, speaking to Apple's weakness in services more generally). Thus, it preserves the convenience for non-Chinese users to continue using iMessage within China while minimizing the regulatory burden that comes from offering such a service to Chinese users at scale.
More generally, this speaks to Apple’s compromise in its services strategy more generally. The highly competitive Chinese tech ecosystem largely exists at the Internet services layer and thus does not compete directly with Apple. At the same time, because of their distinctiveness and effectiveness at catering to Chinese consumers, they threaten to commoditize the smartphone layer at which Apple primarily operates. As such, as we will see, Apple is willing to make substantial compromises to ensure that it expands its services within China in order to ensure the differentiation of its hardware.
iMessage’s privacy-oriented features are also a good point to launch off a discussion of Apple’s strategy to distinguish itself on the basis of its commitment to customer privacy. Apple’s decision to do so can be largely attributed to US discourse that has soured against tech giants such as Google and Facebook for their perceived intrusive and cavalier treatment of user privacy. Thompson has called this a strategy credit, i.e. an uncomplicated decision that makes a company look good relative to other companies who face much more significant trade-offs. This is because Apple’s business model—selling highly differentiated premium hardware directly to consumers—does not rely on user data, unlike the advertising-based business models of Google and Facebook.
But Thompson’s “strategy credit” observation is not true in respect of Apple’s China business. The tension between Apple’s emphasis on privacy and Chinese regulations will be explored in greater extent later in this essay series. The fact that Apple retains “Privacy” as part of its brand and marketing in China is remarkable. On the one hand, its removal would have been conspicuous and draw too much unwanted attention.((Interestingly, Apple has chosen to translate its "privacy is a fundamental human right" quite differently in different regions of Greater China, likely a result of the relative sensitivity of human rights discourse in China.)) On the other hand, some of the services listed as having privacy advantages—Maps and iMessage, for instance—are neither widely used in China nor heavily promoted by Apple, likely a reflection of this tension. I have also been unable to find convincing evidence on the extent to which Apple users in China are motivated by Apple’s privacy-focused branding.
Notably, for the first generation of iPhone, there was no way for third-party developers to create their own applications. As Lashinsky puts it, “the App Store was not Apple’s first instinct”. ((Adam Lashinsky (2012) Inside Apple: How America's Most Admired--and Secretive--Company Really Works.))