Owning the relationship with your customers. A look at the controversial case of Apple

Humans form relationships with one another. Between two people, a relationship is only strong when each side benefits from it and strives to strengthen the bond over time. If a friend betrays you or harms you, there likely won’t be a friendship any more, right? Once a relationship is formed, the stronger it is, the less it is less effected by others and the more trust there is. If a romantic relationship between you and your boyfriend/girlfriend is strong, you are less likely to be swayed by the opinion of your friends or family. And the people with whom you have the best relationship are the folks you trust the most.

Why do I need to state such an obvious observation? Because it is the same deal between companies and customers.

Relationship between companies and customers

When there is a transaction between a customer and a company, the two parties form a relationship. However and whether the relationship lasts depends on many factors: Is the customer happy? Is the company happy? Are there efforts involved to strengthen the relationship over time? Is there trust? A company like Amazon gains the trust of its customers through Prime & an increasing host of benefits, a variety of choices, quick delivery, easy return and consistency. From Amazon perspective, they have been investing a lot of time, effort and money into cultivating the relationship with its customers. In return, customers like and trust them. Millions of people shop at Amazon. Many, by default, head to the site to look for products. Such a relationship is so strong that it’s not much affected by 3rd parties or suppliers that depend on Amazon. They don’t form much of a bond with customers or the bond isn’t as strong as Amazon’s. The same goes with governments. Consumers, especially in America, don’t usually have the greatest of relationships with governments. Hence, it’s not a high bar to cross for Amazon in this regard. Additionally, because there is trust and a great relationship, Amazon customers stay loyal and locked in (intentionally or unintentionally through Prime), saving the company some trouble from competitors in the retail industry.

I picked Amazon because it’s a household name and an easy example. But the logic applies to every company. I drew a little diagram below. Inside the blue bubble that stands for a relationship, two parties work to build it over time. Outside the bubble, there are factors that can influence it. The stronger the relationship/bubble, the smaller the potential influence. Companies lose competitive advantages because the relationship isn’t as strong any more. Kodak didn’t offer consumers the benefits that digital cameras did; therefore, their relationship was strayed, paving the way for their demise. Nokia had nothing but inferior products and customer experience to offer. That’s why they lost the relationship to other phone manufacturers like Apple or Samsung. Barnes and Nobles lost the relationship to Amazon in the same way.

Imagine that your best friend or spouse is an executive at a company with an opening and an acquaintance reached out to your for help with an introduction. Under normal circumstances like (99% of the time!), however you make the introduction or whether you choose to make it at all is up to you. That is because within the relationship between you and the executive, the two parties determine the rules and whoever wants to leverage it has to respect and follow them. Think about it this way. Advertisers who want to reach Facebook users have to comply with Facebook guidelines. Apps that want to reach Apple users have to comply with Apple. Brands that want to sell to Walmart’s customers in Walmart’s stores, you guess it, have to comply with Walmart. The farther away from customers and the weaker a relationship, the less say a company has on its fate and the more it has to rely on others.

Which brings me to Apple. I want to talk about it using the relationship logic above because the debate is interesting and offer a lot of nuances.

Apple vs Facebook

Facebook’s main business is to sell ads. To be able to help advertisers sell personalized ads, Facebook needs to track users. In the past, Apple allowed Facebook as well as other apps to track users through Identifier for Advertisers (IDFA), which is unique for every device even though users’ identity isn’t disclosed. A few months ago, Apple announced its plan to stop the practice with the launch of iOS14. Specifically, advertisers now have to ask users’ permission to continue to track them across different apps and users have the choice to grant or decline that request. Facebook attacked Apple for being a monopolist and anti-competitive practices. Some said that Apple’s action was self-serving and hypocritical because it is building its own ads machine and it’s likely that Apple’s own ads engine isn’t subject to Apple’s rules as others. Apple critics piled on the criticisms by saying that Apple wields too much power and impedes the growth of the future Internet. Let’s unpack then by looking at the relationship between consumers, Apple, Facebook and other parties.

Facebook has a relationship with its users through its portfolio apps such as the Blue App, Whatsapp, Messenger or Instagram. Advertisers that want to reach the users on those platforms have to adhere to Facebook’s rules and guidelines because they are leveraging a relationship that is not theirs. Obviously, I don’t imagine Facebook would be happy if advertisers wanted to dictate how the relationship should be. After all, they own the closest relationship with their users.

Unfortunately for Facebook, in the case of Facebook users on iOS platforms, they aren’t necessarily the one that owns the closest relationship. Apple does. Hence, using the same logic laid out above, Facebook has to adhere to Apple’s rules and guidelines, in the same way that advertisers have to listen to Facebook. When Apple changed the rules to make cross-app tracking more challenging because they want to bolster their own relationship with their consumers, who is Facebook to say what Apple should or should not do? Would they be happy if advertisers wanted to dictate ads rates with them on their ads platforms?

The same goes with app developers who want to reach out to millions of iOS users. If Apple doesn’t want to have certain apps on their App Store (Overtly sexual or pornographic material/ Realistic portrayals of people or animals being killed, maimed, tortured, or abused, or content that encourages violence / Depictions that encourage illegal or reckless use of weapons and dangerous objects) or if they want to remove Parler in the aftermath of the insurrection on the 6th of Jan 2021 because that’s how they want the relationship to be (for good reasons), they should be within their rights to do so. If they want to charge commission on certain apps to be in the App Store, that’s their rights as well.

Companies love to lock in customers with exclusive service or products that grant them exclusive rights. That makes sense. If you spend money and resources to cultivate that relationship, you should reap your rewards. The same should for Apple. It spends money and resources on building and maintaining not only the App Store, but also hardware and software, why should it not be able to dictate their own relationship with iOS users?

But Apple wields too much power!

Indeed they do. There are currently more than 1.5 billion Apple devices in circulation, 1 billion of which are iPhones. In the US, about 60% of mobile devices are iPhones. That’s extraordinary power that one company possesses. It’s a legitimate concern that a company should not have that much power, especially given the tight grip that the company has on its proprietary hardware and software. However, it’s worth noting that Apple is in this position today because of their own efforts and the lack of competition. Which of its competitors can offer the same integration of services, hardware and software? Amazon is legendary in devotion to customer services, but they aren’t great at mobile production or software. Google owns Android, but they haven’t been great at hardware or customer services. Samsung manufactures phones, but they do not own Android. Hence, it’s not entirely fair to blame it all on Apple. If there is no challenger that can offer the same benefits to drive the end users from the relationship with Apple, it’s hardly 100% Apple’s fault that it happens, is it?

But Apple impedes innovation!

When we look at the fact that there are 1.5 billion Apple devices in circulation, the company can be bottleneck that impedes innovation. I am no app developer, but I can imagine the scenario that developers complain the tools Apple forces them to use aren’t advanced enough to let them do what they want. If that’s the case in reality, it’s a legitimate concern. But if Android were that much better at fostering innovation, why are we still in this situation, given that Android has a bigger market share than iOS globally? Why do we debate on the power of Apple, and not of Samsung or other phone manufacturers? As I imagine, if the operating system were so innovative that users would have no choice but to flock to Android devices, Apple wouldn’t have the power that they have today. In essence, while this can be a legit concern, there isn’t much proof of that.

Imagine that you are in a relationship and someone comes and tells you: well you know, the person you are dating with is what stops you from even better days and more happiness in the future. I mean, that can happen, but you kinda need some proof.

But their privacy policies are self-serving!

Which companies don’t act in their own interest? Even when companies try to uphold their corporate social responsibilities, they try to align them with their P&L and finance. If an environmentally-friendly initiative could make Apple look better, but present a $20 billion hit to their bottom line, I don’t think you would see them take it up. In this case, does it matter whether Apple implements the new privacy policy out of concern for their users or as groundwork for their ads business? Yes, it’s hypocritical if Apple wants to grow their ads business and claims the new policy is for the end users, but doesn’t every company do so? If Apple admitted to doing it for their ads business, would critics be happier? If any other company but Apple did this, would critics voice the same opinion?

But Apple doesn’t apply their own policies consistently and to their own apps!

I do agree that Apple can do better both in applying their rules consistently and in showing whether their own apps are subject to the same rules. With the regard to the first part, Apple does have a relationship with app developers, even though when it comes to shove, the relationship with the end users allows Apple to wield more bargaining power. Nonetheless, it is important for the company to foster the bond with developers. One way to do so is to be more transparent with the App Store guidelines, especially in its actions, and more consistent in their application of these guidelines.

Disclosing the extent to which their own apps are subject to the same App Store rules is a bit more nuanced in my opinion. I don’t think it would change anything if Apple told us Apple’s digital content or subscriptions were subject to the same 15%/30% commission rule. After all, Apple would pay that money back to themselves. If their overall business continues to grow and their margin stays flat like it has for the past few years, does it really matter if a few of their services are unprofitable or not? With that being said, I really think Apple should subject themselves to the guidelines that other apps are and show it to developers. It’s fair to do so and it will help build the relationship with developers. Indeed, pre-loading their own apps such as Apple Music gives it more advantage over Spotify. But as long as Apple doesn’t outright block Spotify or do anything that prevents their competitors’ apps from being downloaded for no reasons, it’s not an egregious abuse of power. That’s just Spotify being subject to the rules of Apple when leveraging the relationship with iOS users.

In sum, Apple is at the peak of their power and having the best relationship ever with users, a relationship that involves other parties such as app developers. The company invests a lot of resources into cultivating the relationship with both end users and app developers. As long as the former is strong (apparently it is now given its strong financial results), it gives Apple enormous bargaining power over anyone who wants to leverage such a relationship. To reduce Apple’s power, the most logical way is to weaken the bond they have with the end users by offering a better alternative, though it’s by no means an easy ask.

In my opinion, relationships with customers become more difficult to maintain over time. Customer preferences change. Old competitors compete harder. New competitors come in to disrupt. Regulations can be detrimental. Culture and leadership can weaken over time. Freak events like Covid-19 can happen. All sorts of problems to tackle. A strong position today doesn’t warrant a strong position in the future. The same applies to Apple. If they labor to maintain their competitive advantages in the future, kudos to them and we should be as generous in our appreciation for such an achievement as in our effort to criticize them and to keep them honest.

Disclosure: I own Apple, Facebook, Amazon and Spotify stocks in my portfolio.