New rumors surrounding Apple (AAPL) illuminate an underlying truth about how the technology giant — and the broader consumer electronics industry — relates to consumers.
One story making the rounds is that Apple will start producing the iPhone 6 in the next few months. Another is that, according to a book set to be released this week, Steve Jobs privately dismissed the idea of making an Apple TV set because it would be a “terrible business.” The reasons: Jobs thought margins on TVs are too low and that “they don’t turn over,” as recounted in “Haunted Empire: Apple After Steve Jobs.” People might buy a TV and keep it five years or or more.
How do these fit together? Simple: Apple and many consumer electronics companies are on an industrial-sized hamster wheel. Their business model depends on a continuous flow of people buying — and then rebuying — the same basic type of product. Wall Street’s requirement that companies grow endlessly also combines with the particularly high growth expectations for high-tech firms.
Companies of course depend on recurring business from customers. In fact, there is a term called “lifetime customer value,” which refers to how much money a person will spend with a particular business over time. Executives try to increase this lifetime value because it is more profitable than having to attract new customers, which can be an expensive process. The more money that goes into marketing to new customers, the less is available to cover other expenses and as profit. Groupon (GRPN) was an example of what can happen when the need to grow becomes too expensive and creates massive deficit spending.
Manufacturing companies have always looked for repeat business from customers, but not at the same rates as in high-tech, where a company like Apple looks to sell people a new iPhone every two years. For instance, vendors of appliances and automobiles offered prices directly to consumers that were much higher, and buyers expected products to work for extended periods of time. Even in consumer electronics, TVs were purchased at long intervals.
Computers were an exception. Because of the rapid increase in power, the machines and programs they could run outstripped previous versions. For many years, consumers and businesses frequently upgraded to gain access to news capabilities the systems and applications could offer. People became accustomed to buying something new on a more frequent basis.
Wall Street liked the growth of tech and insisted that it continue, which put pressure on companies to comply. When Jobs returned to run Apple in 1997, Apple had been in difficult straits. One of Jobs’s moves was to develop the iPod, a less expensive product that would still be attractive to consumers. The device also offered a path for a continuing set of improved versions at prices that well-heeled consumers could afford on a more regular basis.
The wireless communications industry had built a compatible model. Using larger monthly service charges to subsidize hardware, carriers offered new handsets to consumers at apparently low prices but demanded two-year contracts. It was a business model designed to enforce longer lifetime value and customer churn, or turnover, became an important industry metric.
Apple moved into the handset business with the original iPhone. The intent was never to build a device that could satisfy someone for years. Instead, Apple wants people to upgrade to a new model every two years. The result became the primary driver for the company’s growth and profitability.
It is hardly surprising that Jobs might have dismissed the idea of a TV set in a meeting with employees. He was also a master of using the media, so hints that might lead people to expect Apple to release a TV could easily be deliberate disinformation meant to send competitors running down a blind alley.