Horace proposes a classification of analysts and their motives and how to think about the value of commentary. We delve into how Apple executives obtain and preserve authority and talk about the disruptive impact of Nintendo. Also a hint about a new Perspective presentation before WWDC.
Research #Industry · 33 comments
The latest comScore data shows consistent growth in US smartphone penetration. The rate is now 58.4% of adult consumers who own phones. This is up from 20% only three years ago. The rate of growth remains a remarkable 1.2% per month. That's 700,000 new-to-smartphone users every week. The historic average over 3 years has been 1.07%/month This after having crossed over 50% on schedule in August 2012. There appears to be no slowing.
The next milestone I have pencilled in is the 80% mark which I extrapolate to be achieved by October 2014. 80% could be considered "saturation" which would signify a rapid slowing of new user addition. However, that might still not happen until 100%, depending on the availability (or lack thereof) of non-smartphones to buy.
This time frame is important because it would imply that essentially all mobile users in the US (some 234 million) would be a part of one ecosystem in about 2 more years. That's less than the life cycle of the typical mobile contract (and thus the life of one phone). Put another way, by the time a new buyer today is ready to buy the replacement to their phone the market will be saturated.
This implies the mode of competition will be changing to smartphone replacement rather than smartphone adoption. To some degree this is already happening but as the net user gains data shows only BlackBerry and Windows platforms have had any net user declines in the last two years. "Platform churn" is still a relatively rare phenomenon.
How that will change post-saturation will be a crucial determinant to platform growth. The data today points to a higher degree of loyalty for iOS users and potential erosion in the Android user base as a result. There are ways of forecasting this on the basis of survey data as Carl Howe did. However, the data from comScore has already begun to show that Android may have peaked around 54% share. Android share is now at the same level it was in July while iPhone share has grown by more than 6 points since then.
There is a pattern of higher growth into the end of the year and an iPhone plateau into the first quarter, undoubtedly due to holiday buying favoring the iPhone. I don't want to discount the possibility of some change in this pattern but so far there seems to be a plausible reason for it: with iPhone pricing and availability in the US offering no advantages to alternatives, Apple's product is the most popular. Nearly more popular even than all the other competitors combined.
Research #Theory · 22 comments
"So paradoxically, the opinion of those who are highly paid should be treated with suspicion while the opinion of those subject to peer review should be treated with respect. It brings to mind the difference between highly paid fortune tellers and pundits whose methods are obscure vs. poorly paid graduate students whose methods are open to all. Whose opinion is worth more?”
To read more see Horace Dediu on the bad habits of Apple analysts and why Tim Cook shouldn’t be fired - The Next Web
Research #Industry · 34 comments
According to Strategy Analytics 3 million Windows-based tablets shipped in Q1. That is not inconsequential. It would add 4% to the total Windows-based computers and reduce the decline in Windows PC growth to -8% (from -11%). You can see the effect of those units on share in the following graphs.
Note the "boundary layer" of pale blue Macs between the brown-hued Windows and the green-hued tablets.
Including tablets of all kinds, here is the market share growth in Windows PCs.
As the post-PC disruption evolves, Microsoft has made an effort to shift its business model. I discussed this some time ago and there remain quite a few questions about the sustainability of the strategy.
However, there might already be evidence that it's working. The clue is in the growth in Windows revenues at a time when PC shipments (at least traditional ones) are declining rapidly. Some of that might be due to deferrals and software assurance revenues which are insensitive to shipments. However some have to be due to the Surface.
Remember that Surface launched with an RT version priced starting at $499 (which did not sell well) but received a boost in Q1 with the Pro version priced at $899 to $999. If we assume a 80:20 mix of Pro to RT and an average price of $950 for the Pro and $550 for RT, 3 million units would generate at least $2.5 billion in gross revenues. Accounting for retail margins of 20%, Microsoft could still be recognizing $2 billion in revenues. That's a significant portion of $5.7 billion in Windows revenue.
We can back into this figure from another direction: Prior to Surface launch, the Windows revenue per PC shipped (combining Microsoft's revenues and Gartner's estimates) was about $50. After the Surface Pro shipped the revenue climbed to $73/PC.
Assuming the same pre-Surface revenue/PC and given the shipment figures for Q1 we would get about $3.7 billion for Windows. The difference to actual revenues is about $2 billion.
So the extrapolation of Windows royalties approach yields $2 billion in Surface sales and the Price x Units estimate also yields $ 2billion. It would suggest that Surface has had a significant impact already: More than a third of Windows revenues depend on it.
[UPDATE: I've been informed that not all the Windows tablet sales reported by Strategy Analytics are Surface products. As many as 1 million might not be. That would reduce the revenues as calculated to about $1.4 billion. In addition, not all Windows revenues are current with much of that deferred. Actual revenues were $4.6 billion. With both of these adjustments considered, the impact of Surface might be only 30%.)
The Apple Q1 financial performance review with a short look at the impact of warranties on gross margins. The growth question: why financial analysis cannot offer insights into new product creation, and why makers of things think different. Finally, a new installment into Asymcar: why the process of car making is over-integrated, over-serving, and over-concentrated.
5by5 | The Critical Path #82: Adding Rows.
Research #Industry · 16 comments
iTunes (including software and services) revenues in Q1 topped $4 billion and were 30% higher than (re-stated) 2012 Q1 revenues. Accompanying this revenue figure were additional data points from the company:
This data allows for a few inferences:
Note that there is a difference between the amounts transacted through the store and what the company reports. The difference is shown in the following graph
To mark it's 10th year, I wrote a segment for Billboard Magazine describing what iTunes has become. I suppose it's easy to become numb to these numbers, but there is perhaps one way to look at iTunes that is still compelling:
Selling $20 billion a year would put iTunes in the top 20 US retailers and top 50 Global retailers.
Not bad for a 10 year old.
In the March quarter, our gross margin was 37.5%. It was at the low end of our range. We had a few items that on balance resulted in us reporting at the low end. They included mix, in particular, selling more iPads than we had planned, including getting iPad mini into our four- to six-week channel inventory range, some changes in our service policies that required us to make provisions for prior quarter sales, and we had some unfavorable adjustments.
- Peter Oppenheimer, Apple CFO, FQ2 2013 Earnings Conference Call
[my emphasis]
Thanks to Philip Elmer DeWitt for bringing this quote to my attention in the comments to Margin Call 2.
I was curious about the "changes in service policies" and what that might have meant, especially since they seem to have been retroactive (provisions for prior quarter sales).
The 10Q offers more details:
Accruals for product warranty for the three months ended March 30, 2013 include $414 million associated with product sales in prior fiscal periods reflecting the impact of changes to certain of the Company’s service policies and other estimated warranty costs. Of this amount, $224 million is associated with product sales in the first quarter of 2013, and the remainder is associated with product sales in 2012.
- Apple 10Q, Note 6, Page 17, second paragraph.
These service policy changes were made around April 1st and were in response to editorials in the People's Daily, the official paper of the Chinese Communist Party. Though seen as a PR issue, their impact goes beyond the company's image. Changes in warranty policy implies setting aside some of the revenues as an expense, increasing the cost of sales and reducing margins.
The 10Q says that $190 million of the additional warranty set-aside was for prior quarters and that $224 million was for the March quarter.
If we were to subtract the $190 million from the cost of sales the gross margin would increase from 37.50% to 37.93% and if we subtract the full $414 million the gross margin would increase to 38.44%.
The calculations are shown in the following table:
| Sales | Cost of Sales | Gross margin | |
| Q1 | $43,603 | $27,254 | 37.50% |
| Q1 adjusted for change in service policies in 2012 | $43,603 | $27,064 | 37.93% |
| Q1 adjusted for change in service policies in 2012 and 2013 | $43,603 | $26,840 | 38.44% |
If we read 2012 and 2013 as meaning fiscal years then the entire $414 amount is for prior periods (i.e. not for the current quarter) and the gross margin for Q1, excluding one-time items, would be nearly 1 percentage point higher than reported.
The effect of the change in policy would have been very difficult to anticipate when estimating the gross margin, even for Apple's own team three months ago.
It's also important to note that this does not say much about the supposed effect of competitive pressures on Apple's margins. 38.44% gross margin is not as good as last year's, but they're pretty good.
Research #Industry · 159 comments
I expected Apple's margins to improve last quarter. They didn't and so the question I needed to answer is why. Here is a history of Apple's gross margin and operating margin as reported since late 2005:
For a company selling hardware these are extraordinarily high margins. They are higher than those of Google and have narrowed the gap with Microsoft, neither of which has a high proportion of hardware sales:
But they are not growing and the reason is to be found in the reason they grew in the first place: because of proportion of iPhones making up the total sales.
As a reminder, the iPhone is a uniquely profitable product. I estimate that it obtains about 50% gross margins. The history of these estimates is shown below:
It remains in stark contrast to the margins Apple obtains for its other products. Much of that is due to the pricing power of the product as shown below:
Notice that even after the launch of the iPhone 5 and the persistence of two previous generations of iPhones (and their lowered pricing) has barely put pressure on pricing.
Contrast that with the iPad. As its breadth of offerings increases, it causes a lower price per unit. The iPhone is now at $613 per unit, even with two older generation products available. (The lowest price was in Q2 2012 when the average price was $608.) The iPad is at $449 per unit, down from $662 at launch three years earlier.
So overall, margin is a function of three things:
The result is seen in this one graph showing the allocation of revenues and margins by product:
So what is surprising? My expectations were met in terms of iPhone units (and exceeded in terms of iPad units). The mix was also something that falls out of the unit expectations. The pricing is also not surprising.
My guess is that the largest contribution to the "reduction of margin" is the increased cost of components. Note that the graph implies that even though iPhone revenues were nearly flat at 3% growth, the cost of those revenues went up by 29%! In addition, the iPad revenues grew 40% while costs went up 65%.
Unit pricing (and implicitly competitive pressure) is still not the primary cause of the reduction in Apple's margins. Indeed, the curious thing is that margins are now at levels seen for most of 2009 and 2010, a time when the iPhone (and iPad) were seen as near monopolies in their respective categories.
I will be in Australia in May and thought to invite local readers to join me for a few hours of in-depth discussion on the future of our industry.
I plan to have an event in Sydney on the 3rd in the morning (9:00 to noon at the Radisson Blu 27 O’Connell. Press Room) and in Melbourne on the 6th in the afternoon (1:30 to 4:30 PM at Victoria University City Flinders Campus: Level 12, Function Room 4, 300 Flinders Street, Melbourne, VIC, 3000).
Nominally, the topic will be: The history and future of computing using disruptive analysis.
I will present recent material (including the latest data from Apple) and we will have a few hours of Q&A.
Tickets are $120 and seating will be limited to 100.
You can register here: Asymco Workshops Australia 2013.
We cover misleading headlines with respect to the iPhone at Verizon while questioning the ebb and flow of media tone on Apple news. We also dive deeper into Asymcar and how to think about car manufacturing. Finally, how to approach industry analysis regardless of your industry.
Research #Industry · 52 comments
I repeat what I’ve mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a “commission” for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.
The job the iPhone is hired to do
The original post on the hiring of the iPhone by operators was anchored in data about the revenue per unit (or price) that the product was able to obtain. The remarkable resilience in the exceptionally high average price showed that the iPhone was still getting a premium for moving users to higher levels of spending on network services.
The evidence was circumstantial however: By knowing the price and knowing it was far higher than competing products and knowing that much of it was paid by the operator and not the consumer (at least not up-front) implied that it was the iPhone, and only the iPhone, that was hired as a network service sales tool.
Now we have more evidence thanks to Ben Thompson (@monkbent). I illustrate the data here as an x-y scatterplot.
The data consists of ARPU (Average Revenue per User) ITU data from 2010 for 60 countries combined with browser share data on a country-level from the current period (sourced from StatCounter).
The first observation is that there is a modest correlation between iOS usage and ARPU. It may not be particularly interesting by itself but it is interesting when compared with the lack of correlation between Android usage and ARPU.
The presumption behind smartphone usage is that it leads to more browsing which leads to more network usage which in turn, leads to more network revenues and, finally, more network investment. If there is no additional browsing then there is a far smaller economic incentive to network operators to invest in infrastructure. It is this link between usage and revenues which I hypothesize drives operators to carry, subsidize and promote the iPhone. And the resilience of this link indicates that it still works.
The ASP data seems to support this hypothesis and so does the ARPU data. The more iOS is in relative use, the higher the network revenue per user. Correlation is not causation, but when combined with data about Android, we can also say that the presence of the primary iOS alternative does not lead to more revenue. In other words, if a lot of iOS is present then revenues are higher and if there is little iOS present then revenues are not higher.
I'm not suggesting that Android users use less bandwidth—the share data is after all relative—but rather that Android use itself does not seem coupled to paying more (or less) for service.
If there is something to be concluded it's that not all usage is created equal. The data regarding how apps and ads are consumed is consistent with a qualitative difference between iOS and Android. This data is more of the same.
It's something of a cliché to say that audiences vary in terms of quality, but that does not make it less true. Indeed, network operators depend on it being true. And so does Apple.