Everything As a Service – By Ben Thompson

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Combining Manufacturing (Hardware) and Service (Software) Apple created Software and Hardware as a Service effective business model.

The Manufacturing Model

Over time, as economies matured, new types of businesses sprang up like professional services (lawyers, doctors, etc.), transportation, or luxuries like grooming or dining, but it was manufacturing that led to the creation of the critical mass of people necessary to make these sorts of businesses viable.

What makes this model so effective — and so profitable — is that Apple has differentiated its otherwise commoditizable hardware with software. However, by combining the differentiable qualities of software with hardware that requires real assets and commodities to manufacture, Apple is able to charge an incredible premium for its products.

Apple and Services

Apple can (and does) make a significant amount of revenue from people using the iPhone. This is the “services” business model. The fundamental difference between manufacturing and services is that one entails the creation and transfer of ownership of a product, while the other is much more intangible. Moreover, if you want more of a service, you have to pay more. Because services revenue is recurring and not tied to the delivery of a physical item it can scale indefinitely.

Software and the service model

In this, services sound a lot like software: both are intangible, both scale infinitely, and both are infinitely customizable. It follows that a services business model — payment in exchange for service rendered, without the transfer of ownership — is a much more natural fit for software than the transaction model characteristic of manufacturing. It better matches value generated and value received.

The Internet helped the change: it is possible to run software on a central server for multiple clients (spreading the fixed costs amongst them), and there are zero transactional costs involved in calculating usage or in supporting new users (even free ones).

Hardware as a Service

The enabling factor for both Uber and Airbnb applying a services business model to physical goods is your smartphone and the Internet: it enables distribution and transactions costs to be zero, making it infinitely more convenient to simply rent the physical goods you need instead of acquiring them outright.