What Industries Could Apple Disrupt Next - and Be Worth Its While?

Back when Microsoft was the dominant tech company and Apple was the smaller wannabe that believed it was better, the challenge it faced was how to find a way of creating products and services it could use as a launch pad for its grander ambitions.

That worked out pretty well. Music proved to be a superb platform on which to demonstrate its superiority on a range of factors like design and innovation while MSFT heedlessly iterated its diminishing scale advantage.

A generation later, the question is, what's Act II? Although the acquisition of Beats signals that Apple thinks there is more growth to be wrung out of music, this seems a less compelling opportunity than many others. Not because it is not a huge business, but because in order to make its already large numbers even larger, it must find another elephantine industry - or two - whose size and potential profitability is equal to the expectations Apple sets for itself. And that its believers - the burnishers of its myth - continue to set for it in order to sustain their own dedication.

The magic relies on new tricks, not the line extension of old ones. 

So, the industries with which it is increasingly associated reflect that universal potential: home, auto, health care. All are vast, already open to the wonders of technology as they are already attempting to adapt and adopt, but without, so far, the sort of results that generate jaw-dropping wonder of the kind and propels profits, sales and stock prices further into the stratosphere.

Each has its challenges: regulation, competition, cost constraints and the panoply of similarly frustrating obstacles to overcome. But they are united by their potential and by the force multiplier inherent in the ability of the human imagination to wonder at the transformational power Apple might bring to such quotidian struggles. JL

Scott Anthony and Michael Putz comment in Harvard Business Review:

Are any other value chains it can disrupt in industries both desperate enough to be vulnerable — and big enough to fuel Apple’s further growth beyond its current $171 billion in annual revenues.
After an unprecedented decade of growth, analysts wrote off 2013 as a year to forget for Apple. Most pundits agreed on what was wrong — a lack of breakthrough innovation since the passing of founder Steve Jobs. But in our view, Apple faces a deeper problem: the industries most susceptible to its unique disruptive formula are just too small to meet its growth needs.
Apple has seemingly served as an anomaly to the theory of disruptive innovation. After all, it grew from $7 billion in 2003 to $171 billion in 2013 by entering established (albeit still-emerging) markets with superior products — something the model suggests is a losing strategy.
Back in 2008, we suggested that the key to Apple’s success was that it had perfected a particular disruptive strategy we dubbed “value chain disruption.” That is, rather than employ a new technology to disrupt a company’s business model, an upstart disrupts the entire breadth of an entrenched value chain by wresting control of a critical asset. Thus Apple’s integration of its iPod device, iTunes software, and iTunes music store disrupted the existing music industry value chain from the record labels to the CD retailers to the MP3 device makers. The key to Apple’s success was that Steve Jobs was able to convince the major record labels to sell its critical asset — individual songs — for 99 cents.
Achieving such a wholesale disruption of an industry is exceeding rare because the key players in the existing value chain typically have controlling rights to the scare resource, which prevents a new value chain from forming. And they are understandably loathe to give it up. But at the time, the music labels were under attack by upstarts giving their offerings away for free and were embroiled in a fairly hopeless effort to sue Napster and other music-sharing services into oblivion. In relation to nothing, 99 cents looked pretty good.
The deal Jobs struck allowed Apple to form a new digital value chain for the legal distribution of music content with itself at its center, reaping high margins on its iPod hardware. Apple quickly became the largest music retailer in the U.S. The record labels grumbled that Apple sucked the lion’s share of the profits out of the industry, but it was too late.
Jobs and Apple were able to run this play again with the introduction of the iPhone. About a decade ago, wireless carriers like AT&T, Verizon, and Sprint tightly controlled the wireless telecom value chain through the critical asset – so-called “walled gardens” they had placed around their service that prevented users from putting any nonauthorized content on their phones.
Jobs made the iPhone’s success possible by negotiating the famous deal in 2007 with the then-struggling AT&T Wireless which, in an effort to distinguish itself from its rival carriers, surrendered control over phone content in exchange for exclusive access to the iPhone in the U.S. for three years. As a result, Apple was once again able to create a new value chain, with the App Store playing a role similar role to the iTunes store, and once again reaping high margins on its hardware.
AT&T’s deal with the devil allowed it to grow substantially, but it started a process that has led wireless carriers to increasingly complain that profits have shifted from them to the device and content producers. Customers now decide first what mobile value chain they will join (Apple or Android), and choose a carrier second.
Today, Apple sits at a crossroads. In our view, the question facing CEO Tim Cook isn’t how Apple will remain “insanely great” without Jobs at the helm. It’s whether there are any other value chains it can disrupt in industries both desperate enough to be vulnerable — and big enough to fuel Apple’s further growth beyond its current $171 billion in annual revenues. After all, even modest 6% growth at this point equates to more than $10 billion in new revenue.
Let’s look at four value chains Apple could disrupt, each of which in markets that, on the face of it, seem large enough to offer hope: television, advertising, health care, and automobiles.
The TV market is immense, and Apple has a toe in the door with its Apple TV, a special purpose device that allows users to stream content from the iTunes library and a select group of partners to existing televisions. But by this time, content owners like Time Warner and cable operators like Comcast have learned from the music and mobile phone industries and won’t cede sufficient control over content to enable Apple to disrupt the entire value chain. So, at the moment Apple TV is a $1 billion line of hardware that is so small, relatively speaking, that Jobs dismissed it as a hobby. What’s more, Apple already has to contend with competing offerings from start-ups like Roku and other tech companies like Google and Amazon, both of which have introduced set-top boxes with streaming content services.
Just as traditional television will be with us for many more years, so will traditional television advertisements. The market looks more than big enough for Apple, and it has made several acquisitions that edge onto the market, including Quattro Wireless (a platform for mobile advertising) for $250 million in 2010. But the critical asset in that value chain is the viewership data that Nielsen provides, which sets the price for advertising. And Nielsen has no reason to cede control of it.
Apple might try to compete with Nielsen directly by offering up a superior metric, such as a measure of audience engagement or a way to track actual transactions generated by a broadcast advertisement. That’s not entirely impossible, given the obvious limitations of Nielsen ratings as a predictor either of audience size or of a commercial’s ability to increase sales. But that approach would take substantial investment, and the fight with entrenched incumbents on their own ground would be fierce.
The delivery of primary health care in the United States is ripe for disruption. Apple might conceivably go beyond what seems to be inevitable forays into the fitness and health-monitoring markets to create new disruptive ways to diagnose and deliver primary care and support the ongoing treatment and management of chronic illness. Doing so would require some nifty regulatory maneuvering. It would also require the company to crack a problem that has flummoxed Google and Microsoft: the creation of a simple, common electronic medical record, which could function as the glue of a new primary care value chain.
IBM with its Watson computer seems to be positioning itself as a vital partner for the world’s most complicated problems, but Apple has a demonstrated history of bringing elegant simplicity to the kinds of everyday problems that serve as the core of primary care. Our view is this is the most complicated of the organic options and therefore the one with the lowest chances of success, but the one that also has the most upside potential.
These first three paths are primarily organic in nature. But what if Apple followed through on rumors that it might acquire Tesla, Elon Musk’s rapidly growing electric vehicle company?
Tesla is clearly attempting to disrupt the automobile value chain by building charging stations and battery factories and challenging independent dealers with direct sales. Perhaps combining with Apple would help Tesla navigate the complicated regulatory challenges facing its deployment. However, rather than leveraging preexisting assets at the center of the sprawling petroleum-powered car value chain to disrupt it, Apple and Tesla would have to invest heavily to create an entirely new one. Apple’s vast assets would certainly help Tesla wage that battle, but the required investments would be gargantuan.
None of these options is a slam dunk, of course. If they all end up being strategic dead ends and Apple can’t find another mega-industry value chain ripe for disruption, perhaps the company needs to consider something more radical. A recent article in The Economist counseled Warren Buffet to break Berkshire Hathaway into smaller pieces. Perhaps Cook should consider a similarly radical decision to break Apple up so that the remaining pieces are small enough to again love niche opportunities that aren’t quite so difficult to pull off. Otherwise, Apple’s next decade runs a high risk of looking like Microsoft’s last — steady performance, attractive cash flows, but an overall sense of stagnation.