Apple is pivoting to services, but will that work in China?

Latest quarterly earnings show Apple’s services business grew 13% worldwide

Apple

Karen Chiu

Published: 10:36pm, 31 Jul 2019

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This article originally appeared on ABACUS

Everyone’s waiting longer to upgrade their phones these days, so Apple has been focusing on bolstering services to boost earnings. The strategy seems to be having some success. The company’s latest quarterly earnings show services revenue grew 13% year-on-year.

Looking at Apple’s array of services, it’s easy to see how this strategy works in the West. But what about China? Is Apple’s pivot to services an effective move in a country that doesn’t have access to the iTunes Movie store and isn’t used to paying for music?

THE WECHAT EFFECT

For starters, one big barrier for Apple is WeChat.

WeChat’s multitude of features -- bolstered by an array of mini programs from third parties -- means it can handle almost every situation from inside the app itself. While outside China you might use one app to message someone, another to call a taxi and a third app to pay for dinner, inside China, all of that can be handled by WeChat.

Mini Programs: The apps inside apps that make WeChat so powerful

Since WeChat is virtually identical on iOS and Android -- and since people in China spend most of their time inside WeChat -- the differences between iOS and Android matter less in the country. In fact, it’s the one place where people are more likely to switch between iOS and Android. Recent data shows that more Chinese iPhone owners have been switching to Android handsets compared to a year ago.

And that’s a challenge for Apple. If a user knows she might easily ditch her iPhone for, say, a Huawei phone, she’s probably less likely to commit to an Apple service. Why pay for a year of iCloud storage when you can’t use that service on your Huawei phone in a few months?

WHO PAYS FOR MUSIC ANYWAY?

In the US, Apple Music has more paid subscribers than main rival Spotify. The landscape couldn’t be more different in China. There, the vast majority of listeners use one of Tencent’s three music streaming services. Apple Music, which launched in the country in 2015, has so far failed to make a dent.

Part of the reason could be that China is still warming up to the concept of paying for music.

While piracy has largely gone down over the past few years, most people are still reluctant to spend on online music. Tencent Music reported last year that only 3.6% of its users paid for music services in the second quarter. Across the industry, it’s estimated that only 4% of free listeners choose to upgrade to paid subscriptions, according to market intelligence platform Soundcharts.

KARAOKE AND QR CODES

Part of Apple Music’s weakness in China could also come down to domestic tastes. Most Apple services look very similar across markets, whether you’re in the US or Japan. While that uniformity has long been part of Apple’s appeal, it also provides an edge for local services that are more attuned to local needs.

Tencent Music’s services are full of features that are popular in China, like live-streamed sessions from artists and karaoke recording, which lets users cover their favorite songs and share it with friends. These aren’t present on Apple Music.

Apple teased its upcoming Apple TV+ streaming platform earlier this year, with offerings targeted mainly at a Western audience. (Picture: Tony Avelar/AP Photo)

Apple Music is hardly the only Apple service overshadowed by homegrown giants. More than three years since Apple Pay arrived in China, the app’s market share is still negligible. Instead, more than 90% of users prefer offerings from Alibaba and Tencent. Alipay and WeChat Pay allow users to pay using QR codes (and more recently, facial recognition), which are far more prevalent in China than NFC, the contactless payment method that Apple uses.

(Abacus is a unit of the South China Morning Post, which is owned by Alibaba.)

WHIMS OF THE GOVERNMENT

The App Store appears to be a particularly bright spot for Apple in the past quarter. It saw double-digit growth in every region, according to CFO Luca Maestri, and much of the success in China came from games.

But as Maestri notes, that improved performance was helped by new approvals of key game titles from Chinese authorities. It’s one indication of the colossal control China’s government has on the fortunes of tech companies.

This is why Chinese companies are careful to comply with demands from censors and regulatory authorities. Just shortly after state media accused Tencent of contributing to gaming addiction among the country’s youngsters, Tencent added stringent ID and facial recognition checks to its games.

If Apple plans to bring its upcoming gaming service Apple Arcade to China, any titles will have to comply with the government’s strict censorship rules.

YOU CAN’T PAY FOR SOMETHING THAT DOESN’T EXIST

It might seem obvious, but for Apple services to make money in China, they’ll have to be in China.

But Apple’s catalog in China is missing some key offerings. Apple Books and iTunes Movies were both shuttered in China, reportedly at the demand of state regulatory authorities. Apple TV isn’t available either.

All that gives Chinese consumers fewer reasons to embrace the Apple ecosystem. And that makes it all the easier to ditch the brand when it comes time for a phone upgrade.

For more insights into China tech, sign up for our tech newsletters, subscribe to our Inside China Tech podcast, and download the comprehensive 2019 China Internet Report. Also roam China Tech City, an award-winning interactive digital map at our sister site Abacus.

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