Horace Dediu

This was fun.

You can see the original description and download links here.

 

In 2012 Apple opened 41 stores. The total is the second highest yearly opening rate since the stores first began operating. The highest total was in 2008 when 47 stores opened.

Although it is a healthy total, the surprising story about retail is that stores are not being opened as quickly as Apple's sales and reach are growing. The following graph shows the yearly opening rate.

The line in the graph above shows the change net sales since 2006 (right scale).

The store opening rate has been around 40/yr. during the last five years, up from 30/yr. during first seven but a 33% growth rate it's still a frustratingly slow rate of growth. Consider that during 2007 when Apple opened 34 stores, Apple's net sales were growing at the rate of $7 billion/yr and that in 2012 when it opened 41 stores sales grew about $37 billion or more than 5 times faster.

Although performance for the stores has improved (i.e. the sales per store went up), sales outside of their own retail channel are now a far higher portion of total. 2007 retail revenues were $4.7 billion or 17% while 2012 were $19.1 billion or 12%. You can see the mix by region in the following graph:

Note that these are quarterly figures.  Now consider the split of stores currently open in each region:

We can then conclude that for sales outside of the retail channel, the split of sales and stores is as follows:

• Americas: 37% of sales 69% of stores (63% in US, 6% in Canada)
• Europe: 23% of sales 22% of stores
• Japan: 8% of sales,  2% of stores
• China: 13% of sales, 3% of stores
• Rest of Asia: 7% of sales, 4.5% of stores (all in Australia)

This explains the current mix of store openings, shown below:

In 2012 only about 15% of store openings were in the US. It would seem reasonable therefore to expect that the priority for most, if not all, future openings should be outside the US to address the current sales/retail presence imbalance and to accommodate the bulk of future growth.

Google announced its first computing product: the Pixel. It's not the first Chromebook but it is the first device which is uniquely branded as a Google product (Motorola notwithstanding.)

It's a curious choice given that companies which have "crossed-over" from being service or software oriented to hardware have started with more "mobile" devices. Amazon launched the Kindle as a low-end product and gradually moved it up-market. Microsoft launched with the Surface tablet and then followed with the Pro version as a hybrid laptop/tablet.

It's also curious since Google has spent years contributing to the development of mobile phones and tablets under the Nexus sub-brand. This was an approach consistent with earlier Chromebooks as well.

But the Pixel is a high-end product. It's priced at the top of the range of what a laptop computer might cost (given the dimensions).  Perhaps it's part of a pattern where Google will hone its hardware skills toward releasing a phone or tablet it can call its own. Starting with a more traditional computer is "easier" than trying to deliver on the more demanding smaller form factors.

And yet, the more obvious question is why would Google want to be in the hardware business? Isn't being a web-focused company implicitly suggesting that hardware is a commodity to be farmed off to perpetually impoverished and violently abused OEMs?

The truth is quite different from this. Samsung currently makes far more operating profit from Android phones than Google does from all its operations. 

When looking at the patterns of sales and profit capture for hardware vendors since 2007 the contrast is stark:

Apple and Samsung tower over the fortunes for software only Microsoft or service-oriented Google and Amazon. Although all companies are growing, the value, as defined by the buyer, resides in the whole product. Putting aside all the theory, the numbers are staggering. Google, Microsoft and Amazon are skimming profits but they are not particularly efficient at profit generation vis-a-vis the integrated Apple (and increasingly integrated Samsung.)

The question is which of the companies illustrated above will prosper from the value chain evolution under way?

I'll be speaking at the Harvard Business School Technology and Operations Management Digital Seminar Series on "The evolution of value chains in a computing markets measured in the billions of units per year."

​Abstract

2013 will see two billion phones shipped into a market of over 6 billion points of network connectivity for over 4 billion consumers. In addition to phones, there will be a few hundred million more tablets and mobile computers shipped. It's very likely that the majority of these devices will be "smart", meaning designed to be a part of an ecosystem of software, content and services. Contrary to the common assumption that larger markets sustain more competitors, this immense and rapidly growing market has become profitable for only two device vendors. The reason is that the windows for competitive advantage are fairly narrow and although production can be ramped more quickly than ever, the resources needed are available to few.  The frequency and amplitude of market flux benefits only those who can operate at scale and punishes those who can't. Close observation of the investments of these "superpower" competitors shows an extraordinary level of capital purchases of manufacturing equipment, regardless of their nominal position in the value chain. These capital expenses have been growing in proportion to in the frequency of product launches. I present data showing a correlation between manufacturing equipment CapEx and ecosystem success and put forward a hypothesis that this relationship is causal. I also discuss the implications for ecosystems owners with regard to the processes, resources and priorities necessary to succeed in this evolved value chain.​

 

The event is open to the public and taking place March 7th, 3:00PM to 4:30PM in the Cotting Conference Room.

Apple's products are the envy of the world. They have been spectacularly successful and are widely imitated, if not copied. The expectation that precedes a new Apple product launch is only matched by the expectation of the replication of those products by competitors.

This cycle of product mimicry was succinctly summarized by Marc Andreessen regarding a rumored Apple TV product:

And once the television launches, everyone will scramble to copy it. "There's a pattern in our industry, Apple crystallizes the product, and the minute Apple crystallizes it, then everyone knows how to compete."

This idea that the basis of competition is set by Apple and then the race is on to climb the trajectory of improvement is so well understood that it's axiomatic: "It's just the way things are." Apple releases a product that defines a category or disrupts an industry and it becomes obvious what needs to be built.

But what I wonder is why there isn't a desire to copy Apple's product creation process. Why isn't the catalyst for a new category or disruption put forward by another company? More precisely, why isn't there another company which consistently re-defines categories and repeatedly, predictably even, re-defines how technology is used.

Put another way: Why is it that everyone wants to copy Apple's products but nobody wants to copy being Apple?

Note that I don't suggest that there isn't a capability to copy. It may or may not be possible, but capability comes after desire and without desire there can be no capability. What I'm suggesting is that there isn't a desire to "be like Apple". If there were a desire, we would be seeing a massive search and debate into what makes Apple successful. Management consultants would be pounding the pavement pitching the "Apple way". Wall Street would be sizing up companies to a standard of "Apple-ness" and rewarding those who conform and punishing those who don't.

None of this is happening. I can think of two reasons why:

1. Apple is not to be imitated because it's not worth copying. I.e. Apple is not a successful company.
2. Apple is successful but Apple cannot be copied because its success is a magical process involving sorcery.

There is a great deal of evidence for the first hypothesis. The idea of Apple being successful is not something reflected in its stock price. Being valued at a lower P/E ratio than its competitors, and indeed lower than the average company in the S&P 500, indicates that to whatever degree Apple was successful in the past, it's not seen by the vast majority of observers as successful in the future (no matter when you choose to make this observation).

Why should one bother copying Apple if it results in being punished with a low valuation? You work really hard at innovation and then that innovation becomes commoditized very quickly. Why should one bother?

And yet if we look outside the investor community, especially if we ask operational managers and entrepreneurs, there are some who would say that Apple is actually a success story. However, when asking innovation practitioners what makes Apple successful the answers regarding the causality of this success border on the mythical. Answers which reference "skills", "culture" and "teams" abound. The culmination of this hypothesis is the "chief-sorcerer" theory of success which places one magician in charge of casting all the right spells. These resource-defined explanations are unsatisfactory because they are vague. Without specificity they don't help us understand why they can't be copied.

But what about Apple's own opinion of what makes it tick?

Bill C. Shope: How do we think about Apple's culture of innovation today?

Timothy D. Cook: Innovation is deeply embedded in Apple's culture. The boldness, the ambition, the belief that there are no limits, the desire among our people to not just make good products [but to] make the very best products in the world. It's in the values. It's in the DNA of the company.

Now if you look at some essentials for innovation, there is no formula.
If there was a formula, there would be a lot of companies that have a lot of money that would gone out and bought their ability to innovate.

Some of the essentials for us are skills and leadership. Apple is in a very unique, and, in my view, unrivaled position because Apple has skills in software, in hardware, and in services.

[…] arguably, where you can innovate in hardware, [where] you can innovate in software, [where] you can innovate in services; the real magic happens at the intersection of these.

And you know, the iPad is very magical. And it's exactly because our company was doing all of those things. And so for many years this idea ... [which] some people call vertical integration, ... it was out of favor. People thought it was kind of crazy. And we never did.

And so through all of those years, we continued to build. And these skills, this isn't something you can just go write a check for. This is something that you work decades for. Building this experience. And so I think we bring that. I think we're unique in that. I think we're unrivaled in that. I think there are people trying desperately to catch up in that. And I think they're finding that it's not so easy to do.

Tim Cook refers to integration and a great team as unique Apple advantages (but also note the references to magic and belief.) It's a better explanation but it is still hard to understand why nobody copies this approach. Integration is something that can take a long time, but it is possible with a Herculean effort. A few companies are starting to make moves in that direction (e.g. Microsoft.) But efforts are half-hearted. There is no "move the Earth" panic to become an integrated company from Samsung, Google or Microsoft.

Maybe others haven't quite balanced both the cost and the benefit of being Apple. It's clearly still mysterious and unclear why one would want to do this. It's much easier to use what you already have and how you operate to copy what Apple produces rather than how they produce it.

My own suspicion is that Apple is more aware of what makes it special than they are letting on. In other words, I believe that Apple is self aware but being careful not to share what it knows. However, as Tim points out, it's not a formula. There is no silver bullet, no single trick.

It's complex, it's subtle, it defies explanation but it's not magic. It's a process that requires a degree of faith and fortitude. It's collecting but ignoring data and trusting judgement when data tells you to move in a different direction. It's a lot of willful rejection of conventional wisdom. It's asymmetric approaches to competition. It's art as much as science. And most of all, it's a lot of mind-numbing polishing while trusting that only by doing great work is survival even possible.

A review of the Apple Store international roll-out process; a preview of an analysis of Apple's innovation culture as described by Tim Cook; a reflection on the sustainability of growth: personal, institutional and societal.

via 5by5 | The Critical Path #73: The Best Single Invention of Life.

A short interview for iCon where I'll be presenting tomorrow. The interview originally took place on January 9th, 2013.

Jasna Sykorova: You have focused on mobile devices for some time now. What made you to start to give a special attention to Apple related data?

I began to look at Apple in 2005; long before they were in the phone market. I had an iPod and liked the Mac but I did not have particular reason to think about the company. You might find it strange that it was the launch of two very peculiar products that caused me to change my perception of the company. They were the iPod Shuffle and the Mac mini.

These are not seen as important today nor were they back then.  But they signaled to me that something dramatic was happening: the company was shedding its "premium" image. This and the earlier move of iTunes to Windows signaled [to me] that Apple was serious about the mass market and the minimum price that a person would need to pay to become an Apple owner.

This was pivotal to me also from the point of view of disruption theory. If a company takes the fight to the low end it means it protects itself from a low end disruptor and may even enter new markets. So if the thinking is that Apple would disrupt then it would have to get into new categories. I then asked myself what it would target. I told myself (again, in 2005) that Apple will do three things:

1. build a phone
2. disrupt the PC market
3. enter the living room.

1 and 2 are well understood to have happened and 3 is nearly here with Apple TV.

Each of these were tremendous opportunities and it's been fun watching it happen over the last 7 years.

By the way, my expectations were right not because of any insight into the company. I had not studied Apple much at the time. All my expectations came from understanding the psychology of a disruptor. Nor does it mean that what Apple did was deliberately planned. It's possible to predict what people will do even if they don't know what they will do themselves.

Can data tell stories? Can you judge just by data?

Data tells amazing stories but not without an interpreter. Having data without a storyteller is like the tree falling in the forest and nobody being there to hear it. If the data's story is not interpreted then does the story actually exist? Did the data "make a noise"? It's a question for philosophers.

Practically, it's important not to base decision making on data alone. Data only exists about the past. Clay Christensen blames God for making us suffer in this cruel way. The past sometimes reveals patterns that help us predict the future, but it's hard to see some patterns. You may need to look at long time frames and there's never enough data. What is more helpful is to have a theory.

Science works this way. Data helps build a model and the model helps build a theory and that theory is tested over time and adjusted. Unfortunately, we don't have very good theories about how businesses should be run. I used to say that if Business Management was a science it would be like medicine in the Middle Ages: mostly superstition and faith in the powers of individuals. [We need to move forward from this.] That's what I'm doing with my work: trying to build and test management theories. The data is just the first step on that road.

What is the difference between Apple in the time of Steve Jobs and Apple now?

Steve Jobs was a very important influence in the DNA of Apple. I think his influence was so deep that it existed even when he was not there in the 90s and I think it exists to this day. The influence is in the priorities, values and culture of the company. These influences exist in all companies and are very hard to change. They are almost never put in writing or even discussed. They are dogma, constitutions or doctrine by other names.

Processes and assets may change however. I think decision processes will change at Apple. I suspect there will be more discipline in that regard and more rational ways of doing things. That could be good or that could be bad. But the passion to be great will not change. That's what the brand speaks to each employee. They are there because they want to be part of that greatness.

You will speak about Apple's strategy for enterprises at the iCon. Do you consider it a “new wave” of activities of Apple? What chance does it have against the strong corporate players like Dell? And what benefit can iPad have for a company, if any?

If you look at my list from 2005 you don't see Enterprise on there. I think it might have joined the list since then. But it's not obvious yet. The thing is that Apple's approach to Enterprise will not be typical. It will be disruptive. It will be subtle and "easily ignored". This is what I want to discuss. The incumbents are not noticing Apple even as they are losing significant value to Apple in their core markets.

Analysts (and consultants) find all kinds of reasons to downplay Apple's efforts and comfort the organizations who hire them [which is why the approach is generally unfelt]. Also IT is changing in the jobs it's hired to do. These are all good signs that something is happening. Something that will become very quickly a fait accompli.

Yesterday Tim Cook spoke at the the 2013 Goldman Sachs conference:

There's no better place to discover, explore and learn about our products than in retail. It's the retail experience where you walk in and you instantly realize this store is not here for the purpose of selling. It's here for the purpose of serving. I’m not even sure “store” is the right word anymore. They’ve taken on a role much broader than that. They are the face of Apple for almost all of our customers

Last quarter, we welcomed 120 million people in our stores.

We only have a little over 400 [stores]. Last year, we welcomed 370 million into the stores.

We're closing 20 of our stores and moving them and making them larger this year. And in addition to that 20, we're adding 30 more. Those 30 will be disproportionally outside the U.S. That gets us in 13 countries.

And so I'm incredibly bullish on the stores. We're going to continue to invest like crazy in them.

Our team members are the best in the world. And the financial results are great.

Average store last year was over $50 million in revenue.

Who would've thought a store could do that?

On February 6th, 2013 Apple reported that a total of 25 billion songs had been downloaded from its iTunes music store. The previous definitive value was in October 2011 though there was mention of "more than 20 billion" in November. App download totals have recently been much more frequently updated as the following chart shows:

[I estimated 21 billion for the November total.]

The latest two data points point to a surge in iTunes song download rates. Prior to last fall the download rate seemed to be hovering around 10 million songs per day.

The new data implies that the rate may be now perhaps 20 million per day however I would be cautious about this estimate given the latest point being such an outlier. One reason for the surge might be the opening of new stores in previously unserved countries. Another could be the usual post-holiday surge driven by gift cards.

Given this data, it would be interesting to calculate the share of overall music downloads that iTunes has been able to secure.

Based on the samples offered by Apple, and the data from International Federation of the Phonographic Industry (IFPI) we can estimate that in 2011 iTunes captured 90% of digital music revenues and 31% of the total music industry. (I estimate iTunes was responsible for about 4.3 billion downloads and I applied a price per download of $1.1).

Looking to 2012, applying a growth rate of 8% to digital sales (same as that of 2011) and an 8% decline in the physical business (vs. 8.7% decline for 2011) we get 98% iTunes share for digital and 37% share for all music. (I estimate that iTunes was responsible for about 5 billion downloads and I applied a price per download of $1.1).

Therefore it seems reasonable to estimate that Apple will reach 97% share for iTunes music in 2013. That assumes a 10% growth in the music download business and translates into 5.5 billion downloads or about 15 million songs per day. That's well within the trajectory seen above.

These data result in the following market overview:

As Apple introduced a new set of revenue categories, the performance of its "minor" businesses has become clearer. The changes include re-statement of what used to be called "Software" revenues as part of iTunes. Apple Software includes sales of OS X, iWork and its pro tools. These products are now sold through the Mac App and since that is a part of iTunes its inclusion makes sense.

However, we have to understand that iTunes now is a blend of many business models. Some, like music, use a wholesale revenue recognition method and have very low to zero margins, others, like eBooks and Apps, are sold using an "agency" revenue model with potentially higher margins and some, like Software, are recognized at full value with very high margins.

When re-stated this way, iTunes becomes much more than a "break-even" business. My own estimate for its gross margin as currently reported is between 15% and 17% but it could be even higher. This allows the following picture to emerge:

These graphs show contributions to Revenue and Gross Margins of the various reported product categories. Note that restatements for Accessories and iTunes only extend back to Q4 2010 and the older "Software" is still shown for earlier periods.

Note also that Accessories are now including some of the revenue that used to be reported as part of iPad and iPhone revenues. This was discussed in more detail here.

There are several observations we can make:

1. iTunes now becomes a steadily and rapidly growing business. Growth over the previous two years averages well over 30% and is consistent across seasons.
2. The absolute revenue number is substantial: $13.5 billion for 2012 (up from $10.2 billion in 2011).
3. Assuming a gross margin of 15% to 17% yields contribution of $2 billion in margin in 2012 and $1.6 the year before.
4. iTunes is now Apple's fourth largest business, having overtaken the iPod in revenues two years ago
5. iTunes growth relative to the Mac means that it could become the third largest business during this year.

When seen this way, as a percent of total, iTunes begins to look increasingly as a viable "leg stool" upon which Apple rests. Note that in the following charts the percent of total for iTunes holds steady while Mac and iPod decline.

Adding the Accessories business (which includes Apple TV and is showing in Orange above) these "other" businesses are already bigger than the Mac. Of course, content, software, accessories and services depend on a healthy device business, but the size of these ancillaries are beginning to be substantial and Apple's ecosystem may begin to be valued more than just as an incentive to buy the devices.

Indeed, if seen in isolation, iTunes+Accessories combined is a bigger business in terms of revenues than any of the other phone vendors except Samsung:

 

We take on the future of TV again, given the developments and experiments hitting the news. Hanging in the air like a big matzah ball is the question of a catalyst to bring long form video to the age of software. Not just digital production and distribution but an integration of software into the product itself. We get there via a quick recap of Asymconf California.

via 5by5 | The Critical Path #72: Bingewatch.

Show Notes & Links

• Asymconf California 2013
• It’s a wrap. Asymconf California | asymco
• Apple’s Calendar Fourth Quarter 2012 Growth Scorecard | asymco
• Margin Call | asymco
• Daring Fireball Linked List: Should Apple Follow Netflix's Lead and Produce Its Own Movies and Shows?
• Netflix's Risky Strategy For 'House Of Cards' - Forbes
• Netflix to debut new 'Arrested Development' episodes in May | Internet & Media - CNET News
• "Arrested Development" Comes to Dive Into Media With Arnett, Hurwitz - Peter Kafka - Dive Into Media - AllThingsD
• Amazon’s Downton Abbey Coup: Bad News For Netflix - Corporate Intelligence - WSJ
• Arthouse Cowboy - Warner Archive Instant Begins Closed Beta Today
• Kevin Tsujihara Named CEO of Warner Bros. - The Hollywood Reporter
• Kevin Tsujihara - WarnerBros.com - The Studio
• Vigil received no bids and other details from the THQ courtroom proceedings | Polygon