Is Apple Inc. About to Hurt Its Ecosystem?

A report from Billboard claims Apple could be on the verge of doing the unthinkable, giving its competitors Samsung and Google a major gift.

Sam Mattera
Sam Mattera
Apr 1, 2014 at 9:00PM
Technology and Telecom

Apple (NASDAQ:AAPL) is considering bringing iTunes to Google's (NASDAQ:GOOGL) mobile operating system, Android, according to Billboard. Such a move would be a departure from Apple's current business model, and could erode a key argument for longtime shareholders, making it easier than ever for Apple's customers to defect to products made by rival firms, including Samsung (NASDAQOTH:SSNLF).

On the surface Billboard's report doesn't much make sense, but it's worth exploring why it would be such a tremendous mistake.

Why David Einhorn is comfortable holding Apple for the long haul
Hedge fund manager David Einhorn has been an outspoken Apple bull, and it's been one of his fund's largest holdings since 2010. He has argued repeatedly that Apple's ecosystem insulates its business from competition, protecting it from the market forces that brought down its predecessors. He summed up this rationale in an interview with CNBC last November:

People look at Apple and ask, "Is it the next Motorola or BlackBerry?" People paid fancy multiples for those stocks and got crushed and they don't want to go through that again. But I think Apple's a little bit different from those companies, because the ecosystem component [drives] recurring sale[s]. If you have an iPhone, you're more likely to buy the next iPhone. They have over a 90 percent renewal rate on that basis, which is something those other companies never had.

As Einhorn notes, Apple customers are notoriously loyal, not just because they like the products but also because the company makes it so difficult to leave. A customer who's heavily invested in Apple's ecosystem (via purchased movies, apps, books, and music) is one who's likely to stick around. Switching to a rival device is possible, but would mean giving up access to most, if not all, digital purchases.

Samsung is jealous
Apple's chief rival, Samsung, is obviously envious of this ecosystem. It has gone out of its way to cultivate its own customer loyalty, and has achieved some modest success, but still lags far behind Apple.

Samsung doesn't control the Android operating system, making it easy for owners of its Galaxy phones to defect to handsets manufactured by Google's other hardware partners. This means that, while Samsung's dominance may seem overwhelming today, it could eventually fall by the wayside, replaced by some other manufacturer peddling devices with the exact same operating system.

In an attempt to counteract this disturbing possibility, Samsung has gone out of its way to push alternatives to Google's services -- its own app store, access to exclusive services like Milk Music, and Galaxy-only wearable devices. Samsung's changes to Android were becoming so substantial that Google had to pressure the Korean handset maker to stop. Samsung ultimately caved to Google's demands.

Making it easy to ditch the iPhone?
If Apple were to bring iTunes to Google's mobile operating system it would undo much of the lock-in effects of its ecosystem, undermining the very force Samsung is working so hard to replicate.

If longtime Apple customers knew that they could easily access their digital purchases on an Android device, they would have little reason to stick with Apple's hardware. Sure, some things wouldn't carry over (apps) and many customers would likely stay if for nothing more than familiarity with Apple's products and user interface. But if iPhone owners decided that they preferred Samsung's newest Galaxy, it would be easier than ever for them to make the switch.

iTunes music is in decline
For that reason, I think it's unlikely that Billboard's report is accurate. Unlike the decision to bring iTunes to Windows, which ultimately facilitated the iPod's success, Apple has nothing to gain by porting iTunes to Google's platform; to do so would only put Apple's legendary customer loyalty at risk.

That said, it's worth noting the context of Billboard's report -- it comes on the heels of a decline in iTunes music business, a disturbing trend that I've highlighted before. Even though total iTunes revenue is growing, paid music purchases are slipping industrywide -- down 5.7% last year -- fueled, at least partially, by the growing popularity of music streaming services.

That itself is a threat to Apple's long-term success -- if people aren't buying music, it's difficult to lock them into an ecosystem in the first place. I doubt Apple is going to help accelerate the process by porting iTunes to Android.