Apple’s Strategy For Health Kit And HomeKit

The healthcare and smart homes markets will be a lot harder to crack than digital media


Background

Apple’s WWDC keynote session on 2nd June 2014 was bristling with new product announcements including:

  • A new operating system for Macs (OS X Yosemite);
     
  • A new operating system for iPhone, iPad and iPod Touch (iOS 8);
     
  • New features which improve interworking between Apple’s products (e.g. App Extensibility and Continuity);
     
  • A range of new tools for developers, including a new SDK and even a new programming language called Swift;

But the two most important announcements were HealthKit and HomeKit – even though they were granted just 10 minutes in a presentation that lasted over 2 hours:

  • HealthKit: Announced as part of iOS 8, Apple positioned HealthKit as a new ecosystem which will connect users with healthcare providers;
     
  • HomeKit: Also announced as part of iOS 8, HomeKit is another new ecosystem that is aimed at the highly fragmented smart home segment. HomeKit will connect smart home device and service providers with householders.

While the other announcements at WWDC were very important they could be categorised as ‘more of the same’ or ‘business as usual’: what the market wants to see is evidence of Apple entering completely new markets - which will provide the company with major, incremental revenue growth.

Why are HealthKit and HomeKit so important?

If we look at Apple’s recent past – say since 2001, which is when the company launched the iPod – then we can see that the company has had one core strategy which has involved delivering digital media services (e.g. music, books, film, television) to users using an approach that includes a service delivery platform (e.g. iTunes Store and the App Store), device operating system software (e.g. Mac OS X, iOS) and the device hardware itself – which is where Apple derives most of its revenue.

While this ‘vertically integrated’ approach has allowed Apple to transform the music, mobile and personal computing industries these markets are no longer big enough to accommodate Apple’s future growth plans.

Even the announcement of a new TV product or service (which I think will certainly come at some point) would be an extension of an existing product strategy in an existing market and would not allow Apple to enter a completely new market sector.

Apple needs to enter major, new market sectors which can be developed alongside its existing markets.

The healthcare and smart home markets are the next two sectors in line to be transformed by Apple’s vertically-integrated ecosystem approach.

Taking a global perspective, these two market sectors are each worth about $1 trillion annually – dwarfing the size of the markets that Apple is currently engaged in.

The following chart shows how Apple can replicate its current, proven strategy in these two new sectors:

We can get some clues about Apple’s next device initiative by looking carefully at the launch partners for HealthKit and HomeKit (see charts below).

If we imagine how an initial meeting with a potential new partner would have gone then Apple would certainly have been asked what its own plans were for the market. 

Device Strategy: HomeKit

It seems inconceivable that a prospective HomeKit partner would have signed up if Apple said that it planned to compete directly with that partner - by selling smart home hardware, for example.

The launch partner line-up for HomeKit is almost exclusively hardware vendors:

Therefore, we think that Apple has no current plan to introduce a new hardware product for the smart home (e.g. a wall-mounted controller, a heating thermostat or a security sensor).

We think that Apple might choose to license some of its technologies to smart home device vendors (e.g. its Touch ID fingerprint recognition technology) but the company is not planning a smart home hardware product.

This is entirely understandable: with an installed base of 900 million Apple devices (100 million iPod Touch devices, 200 million iPods and 500 million iPhones, 20 million Apple TV units and 80 million Macs) Apple already has approaching 1 billion connected Apple devices deployed in the home.

For the smart home, the challenge is not to introduce yet another device which would place Apple in direct competition with its business partners, but to create an ecosystem which third parties (see below for examples) can use to create a range of new value-added products, apps and services which can work together.

Therefore, HomeKit is primarily a way for users to derive more value from their Apple devices and for Apple to strengthen the relationship it has with its customers. HomeKit is not a major device opportunity that will provide Apple with a massive injection of incremental revenue, as has been the case with the iPhone or iPad, for instance.

Apple has therefore set the HomeKit ecosystem up in such a way that existing smart home technology vendors can accelerate the development of their own businesses. 

Device Strategy: HealthKit

I see Apple’s device strategy for HealthKit quite differently.

In this case, there is a major gap in the device market because no current wearable devices can accurately measure the sort of parameters that healthcare professionals need in order to deliver services such as remote, real-time, location-agnostic management of critical parameters – 24 hours a day.

If Apple was able to develop or harness a sensor technology that could perform this role then this would unlock what could become a huge market, both in terms of device sales and the sale of healthcare services.

We think that the reason Nike decided in April to discontinue its FuelBand product and focus on the service aspect was that the company was exposed to Apple’s HealthKit roadmap (Nike is a launch partner for HealthKit) and decided that it would not be able to compete.

This makes sense if we look at the list of launch partners for HealthKit: we see that they are all health care providers and there are no device vendors:

Apple HealthKit Launch Partners

This provides an open door for Apple to introduce a new device which these players will not feel threatened by.

It seems clear that the new HealthKit ecosystem will be structured rather like Apple’s current ecosystem: healthcare service providers (both existing companies and new entrants) sitting at the top (this layer is analogous to where digital content owners sit in Apple iTunes model), Apple handling service delivery infrastructure and devices and users – who provide the revenue – sitting at the bottom.

Summary

While the key to transform the smart home market is a viable ecosystem that works for the highly fragmented vendor community, the key to transform healthcare service delivery market is a breakthrough new hardware device which is what Apple is rather good at.

It therefore seems very likely that Apple will announce a smart watch product in the coming months. Even at this ‘pre-launch’ stage we can see that Apple is pursuing the same strategy that has worked so well with digital media: while rival smart watch vendors, such as Sony and Samsung, rushed to put a product in the market place, these products were very much devices: there was no grand vision for creating an ecosystem that would transform a whole sector.

Apple is quite likely to use HealthKit to eclipse its main competitors - again.