Apple’s Moats Under Siege

Today, we don’t think of Apple as early, hungry, or bold. We think of them as high-quality… premium… curated.

That image of quality, and the level of control they have – those are among the many moats they’ve built over time. Those moats – the hard-to-copy decisions and strategies – are great, but no moat lasts forever. And there are enemies trying to get in…

I can’t wait to tell you the full story, but first we need to define a few terms.

Making a Moat

1. A competitive advantage is exactly what it sounds like – something that a firm does better than their competitors, or something positive they are known for. For example, Walmart has low prices.

2. A value proposition is all the competitive advantages (and also the competitive disadvantages) of a firm… like the full package of strategic choices they’ve made about the product/service they want to offer. Let’s beef-up the Walmart example…

On its own, low prices are something that (theoretically) anyone can offer. So what makes it a huge differentiator for Walmart?

Walmart goes lower than anyone else. But not in a reckless, unsustainable way. Instead, Walmart makes multiple decisions that allow them to have low prices:

• They get suppliers to agree to really low prices.

• Their stores are basically warehouses with cheap shelves and bright, white lights.

• They pay close to minimum wage and aren’t known for customer service.

Together, each competitive advantage reinforces the others, creating a loop – a value proposition — a moat.

Apple’s Value Propositions

I’m over-simplifying, but here are the two reinforcing loops as I see them:

Hardware Loop

1. Premium devices – Apple products are luxury goods that not everyone can afford to have. Despite how popular and ubiquitous they seem in the US (~50% market share), their global market share is only ~17%.

2. High prices – Because of the luxury positioning and high demand, Apple can charge higher prices. The entry level iPhone is 2.5x more expensive than the entry level Samsung phone in the US.

3. Beautiful stores – Assuming you don’t have a broken phone (or something else crappy happening), going to the Apple store is so damn fun. And these stores aren’t just ornamental… they reinforce the premium brand, driving the loop.

But Apple doesn’t only control the hardware… they also control the software underneath it… which brings us to our second set of reinforcing competitive advantages.

Software Loop

1. Simple, secure software – iOS is designed to be as secure and easy-to-use as possible. And they make sure that even the third party apps you install have simplicity and security built in, Apple reviews every single app that wants to be in the store.

2. Cut of revenue – third party app makers are eager to get access to Apple’s luxury-phone-toting users, so they use Apple’s toolkits to build apps. And they happily (sometimes!) agree to pay 30% of all revenue to Apple.

3. Internal app development – With the money from their 30% cut, Apple can invest in building their own apps or buying third party ones. And they have the data to know which ones are popular (side note: RIP to my favorite weather app, DarkSky, which Apple bought, partially copied, and then turned off!).

What’s changing?

Sideloading

I’ve written before about the EU’s Digital Markets Act (DMA), which is basically a set of anti-trust regulations. For Apple, one of the regs hitting them like a ton of bricks is sideloading, which could blow-up part of the software loop.

Under DMA, they can still create the OS for their devices, but they need to allow sideloading (either direct downloading of an app, or allowing other app stores on iOS).

Apple did their best to fight it. They even put together this scary paper…

…but not even cyber-pirate beetles can stop the DMA enforcement, which started in October 2023 and has created a domino of legal responses from firms. We’ve discussed before why firms get spooked about tough regulations, even if they are only in a single market… for Apple, this must be positively terrifying.

Epic Fails

A few weeks ago, Epic Games lost their suit of Apple, where they were arguing they should be able to introduce a direct payment option (side-stepping Apple’s 30% cut)… But they won a very similar suit against Google. So Apple dodged the bullet this time, but it was a very close call. According to Epic CEO Tim Sweeney (and lots of analysts):

What to do?

Something new. You get back to the hungry, bold Apple. You take risks. And if the software loop is getting you into trouble, you double-down on hardware.

Exhibit A: The Vision Pro

I am not most people, but most people ARE NOT excited about AR/VR. We are used to seeing Apple perfect existing tech, putting their luxury spin on it, etc. Venturing into bold new territories is not the norm.

But I think it’s the right play. It’s also a chance (with a new hardware product) to stand-up a new software value proposition. With all the knowledge of how their existing App Store and iOS are being regulated, they can craft a new strategy that incentivizes third parties, appeases regulators, and brings in a dumptruck of new revenue.

I’ll spare you any additional, slobbery fan fiction about how this might go, but feel free to read more in my prior write-up if you’re interested in the Vision Pro.

Exhibit B: The MLS Deal

Apple spent $11B getting exclusive live streaming rights to MLS games for 10+ years. That is a bold step.

Again, I think it’s the right play. It’s essentially the final piece of a new value proposition around sports (scripted sports stories → sports documentaries → live sports). But again, I’ll spare you… read more here if you want to nerd-out on that.

Wrapping up

I ended up using a bit more corkboard, string, and wild theorizing than I planned on… But the more I think about it, the more my theory rings true – if you see a threat coming, you only have two options: do nothing or do something.

If this wasn’t a real threat, Apple would do nothing – staying in the castle and trusting the moats. The fact that they are spurred to action means they see this as a real threat. And it seems they’re taking the right actions at just the right time.

Bonus Bullets

Quote of the Week:

-- Guillaume Verdon (aka “Beff Jezos”) (source)

Quick News Reactions:

• That’s my (Fig)Jam – Figma put out a new set of AI tools called FigJam a few weeks ago, and people are raving about it. Talk about moving on quickly after a split-up! Adobe is probably jealous. Stay nimble, Figma.

• China Spying via lidar? – Apparently that’s what advocates for the US lidar sensor industry are worried about... This is far-fetched, but will probably play with regulators, who could be convinced that Chinese Play-Doh is a national security threat right now.

• India’s Crypto crackdown – seems to be going after both international and local crypto exchanges. This is wild because India is actually much more crypto-open than most countries (especially US). They even have a digital central bank digital currency.

Best of Threads:

Here are some interesting posts from my favorite Twitter replacement.

1.     Link

2.     Link

3.     Link

Tech Jobs Update:

Here are a few things I’m paying attention to this week:

• Big Tech Job Posts: LinkedIn has 5,601 (-11.1% WoW) US-based jobs for a group of 20 large firms (the ones I typically write about — Google, Apple, Netflix, etc.).

• Graph: Layoffs from 2022-2024 (Source: Layoffs.FYI). Note that this is showing in-progress numbers for the current quarter.