Research

Managing the Mac product line must be one of the most challenging problems at Apple. That may not be obvious given the product's success. Consider what it has achieved:

• The product is in its 32nd year of market presence. A longevity that in unmatched by any other PC maker.
• Apple reached a top five position in the ranking of PC vendors. This was achieved for the first time only this year, far along in the evolution of the market.
• With about $23 billion in revenues per year, Apple places among the top four PC vendors in terms of revenue.
• With an estimated $5.5 billion in operating margin Apple is the most profitable PC vendor, capturing over 60% of the available PC hardware profits.
• The product has retained an average selling price of over $1200 for at least a decade. At the same time the average pricing of Personal Computers has more than halved.
• Although volumes have fallen for three quarters, the product grew volumes and sales for 22 out of 29 quarters. As a result, volumes almost doubled in eight years. ((The unit volumes in third quarter 2008 were 2.6 million. Eight years later they are 4.9 million and could easily be over 5 million in the holiday quarter.))

The contribution of the Mac to Apple's revenues is shown in the following graph.

It's attractive and convenient to contrast the Mac with the rest of the PC industry. A David vs. Goliath tale of redemption. The classic comeback story. But the split between the two old rivals (Windows/MacOS) focuses the mind into a limited view of the computing market. The big change in computing has not been a growing Mac vs. declining PC. It has been a huge surge in mobile device use vs. a decline in PC use overall.

This data is visible in many ways. Browsing data shows mobile overtook PC use this year. Shopping data around Black Friday points in the same direction. Data on user interaction captured by comScore is shown below ((Although US only, the global picture is likely to be even more skewed toward mobile as PC didn't saturated global markets before the smartphone swept to power.))

PC use went from half to a third of time while mobile went the other way: from a third to half of time within only four years. All the data is consistent: mobile use has swept PC use aside.

We can see the contrast simply by placing iPhone, Mac and all Windows PC on the same shipment graph.

This contrast is spectacular.

I bring this contrast up because I believe it is what focuses the minds at Apple. For them it's pretty clear where the puck is going. And not just now. Mobile has been foreseeable as a disruption to computing a decade ago–at least to some of us.

And so what do you with the Mac?

To answer this we have to ask what exactly is the purpose of the Mac in the age of the Mobile device?

Note that this is not the same as asking what is the PC in this world. The PC is not having to share a resource pool with an iPad/iPhone. It does not have to answer for its existence to a phone. PC makers and Microsoft are not fighting with an usurper in their midst. They may see the outsider challenger but it's not an inside challenger. This makes all the difference.

Indeed, because no usurper was allowed to emerge, PC/Windows never moved to a mobile evolution of computing. Microsoft's platform future was lost because the antibodies which eat disruptions were left unchecked.

But Apple's immune system was suppressed. It allowed a disruptor to emerge from within. Apple gave birth to its future by suppressing the reaction to that new seemingly parasitic organism. It took an immense willpower to allow this to happen.

But it takes us back to the question of what to do with the incumbent, the donor of DNA and resources. The parent that sacrificed for the child.

The Mac is thus not treated disparagingly. It deserves and gets respect. It is preserved but with limited responsibilities.

Which brings me to the question of what it is allowed to be and hence what it is. It cannot take on the role of being the future. That belongs to the touch screen devices. It will not morph into a touch device any more than a teen's parent will become cool by putting on skinny jeans. What it will do is become better at what it is hired to do.

The key to the Mac therefore becomes that which the iPad/iPhone isn't: an indirect input device. The keyboard and mouse/trackpad are what define the Mac. The operating system, the apps, the UX, are all oriented around the indirect input method. The iPhone's capacitive touch brought about the direct input method, a third pivot in input methods (first was mouse, second trackpad/scroll wheel). Each pivot launched a new set of platforms and the Mac is the legacy of the second.

It's not obsolete but it is a decreasing share of engagement. Alternate ways of doing the jobs it does well with direct input are emerging on the third pivot but they are not yet good enough. The children are still adolescent and making lots of stupid mistakes. There's still life in the parents.

The management thus has to focus on how to make the keyboard/trackpad interface better while still saying and believing that the future is touch.

In this context the newest MacBooks Pro are a logical extension of the second wave of computing while avoiding cramming them into the third wave. They are defined by their constraints. Seen thusly, the move from keyboard/trackpad to keyboard/touchbar/trackpad is pure genius.

The touchbar coupled to the other two inputs is a totally new way to interact with computing products. It's not an "easy" interface as it's not direct manipulation. It remains indirect, a defining characteristic of the second wave. Indirect inputs are powerful and lend themselves to muscle memory with practice. This is the way professional users become productive. The same way keyboard shortcuts are hard to learn but pay off with productivity, touchbar interactions are fiddly but will pay off with a two-handed interaction model. They are not something you "get" right away. They require practice and persistence for a delayed payoff. But, again, that effort is what professionals are accustomed to investing.

This is a leap forward and a big deal. For 32 years the UX model of the Mac has been two-handed typing with one handed gesturing. Now we have the option of two-handed indirect manipulation: one hand on the touchbar and one hand on the touchpad ((the iPad pro already encourages two handed direct manipulation)). Imagine you've been playing guitar with one hand for years and then someone lets you use your left hand. Holy cow.

Even so, it may seem that Apple is pulling punches. The product could have evolved into the full-touch, dual screens, pen input, hybrid model of Windows. But that only makes sense if you don't have a mobile product that is promising the same and tearing up the world at the same time.

You've unleashed a disruptive force and now you're supposed to retrofit the incumbent with the tools to compete. Why not just let the disruptor grow up unhindered.

The Mac is what it is because it's not alone. It's part of a family. It is a parent. It strives to be better but will not take the future from its child.

Horace and Henri go for a drive.

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Source: The Critical Path #186

Berkshire Hathaway, led by Warren Buffett, now owns about $1.4 billion of Apple. Occasionally we hear about various "celebrity investors" taking positions in the company or exiting those positions. The last one I remember was Carl Icahn. He seems to have exited Apple before Berkshire entered. There are some who will act because of these decisions. You should not be one of them.

Nor should the management of the firm act in response to investor decisions or concerns. Management is specifically distinct from ownership in the corporate construct precisely in order to bring professionalism to the role. The manager must set priorities as they see fit, irrespective of what the transient owner might prioritize. The separation of ownership and management is one of the greatest innovations in commerce.

There are many opinions on what priorities should be. Delivering a specific financial ratio, achieving a certain market position, changing the world for the better. These have all been cited as top priorities. I happen to believe that what matters most is the creation and preservation of customers. That is because I see customer creation as causal to the other desirable outcomes and it is therefore the more important priority.

And this is why, whenever possible, I try to deduce how well a company is performing on this metric. The greatest companies (by market capitalization) today are certainly examples of achievement in customer creation. Facebook, Microsoft and Google are members of the "billion user club" or companies that crossed a billion active users.

But do they really have a billion customers? Microsoft has over 1.2 billion users but many (most?) of those users are using computers that their employers provide on which Microsoft software was installed. They may not have made the choice to purchase the tools they are using. Microsoft certainly has millions of customers in the form of "accounts" purchasing its products and services, but It's not likely that there are a billion people who have directly chosen to buy a Microsoft product.

Facebook has over a billion daily users. Facebook users are certainly using the service of their own accord but they are not paying for the service. Quite the contrary, the actual customers of Facebook are companies buying an advertising service offered in the form of exposure to those billion users. The Facebook users are the product being sold, not the buyers. Thus Facebook's total number of paying customers is probably only in the tens or hundreds of thousands. ((Orr Sella @orrsella pointed out that Facebook has stated that they have 3 million businesses actively advertising on their networks.))

Same with Google. We don't know how many accounts Google send invoices to but the number is very likely not even in the 100 million range. Its billions of users are beneficiaries of services but they are not paying Google/Alphabet.

Amazon has many millions of customers, if not billions. Prime membership is above 50 million but not above 100 million. Amazon may some day have a billion customers but there are limits to how quickly that can happen. The growth potential is governed by logistics and that's as much an issue with atoms as it is with electrons.

Which brings us to Apple. Apple does not offer a figure on its specific user count, but we have some viable proxies:

• iCloud accounts reached 782 million in February 2016.
• iTunes accounts reached 885 million in September 2014
• Active devices reached one billion in January 2016. That number is likely above 1.1 billion now. (Includes all devices, hence Macs and Apple TVs).

These figures are also parts of patterns (shown below) which offer an indication of predictable growth.

In addition to the absolute figures and their growth there is also the question of loyalty (frequently cited by the company), switching from other platforms (also frequently cited) and revenues. The company publishes specific figures on service revenues for consumer attached devices showing a run rate of $41 billion/yr in services for their device base.

In combination, a picture emerges which shows that Apple has nearly a billion customers. I can't say how many with any precision but it's certainly above 500 million (on the basis of iCloud and iTunes accounts). It's below one billion because some users have more than one device.

Even though it has not happened yet, the trend is pretty clear. Apple will at some point in time have a billion paying customers.

What is more significant than the specific count is that these customers mostly chose to be customers individually. Some may have been given the products as gifts, but the vast majority bought the items for themselves. Apple benefitted from hundreds of million of individual purchase decisions.

Furthermore, having made the decision to purchase, chances are that they will do so again. Apple customers are a recurring revenue stream. In fact, it's fairly easy to calculate that being an Apple customer is equivalent to spending about $1/day on its products and services, indefinitely.

Apple is not there yet, but a billion dollars a day from a billion customers is not inconceivable. That would be quite an achievement.

The following is a list of the best-selling products across several categories:

Car model: VW Beetle 21.5 million
Car brand: Toyota Corolla 43 million
Music Album: Thriller 70 million
Vehicle: Honda Super Cub 87 million
Book Title: Lord of the Rings 150 million
Toy: Rubik’s Cube 350 million
Game console: Playstation 382 million
Book series: Harry Potter Series 450 million
Mobile Phone: iPhone 1 billion

The iPhone is not only the best selling mobile phone but also the best selling music player, the best selling camera, the best selling video screen and the best selling computer of all time.

It is, quite simply, the best selling product of all time.

It is that because it is so much more than a product. It is an enabler for change. It unleashed forces which we are barely able to perceive, let alone control. It changed the world because it changed us.

And it did all that in less than nine years. One has to wonder what it will enable in the next nine.

• What is an innovation? What is the difference between ideas, inventions, novelties, discoveries and creations?
• What is a disruption, formally-speaking? Also, what is it informally speaking? Why the distinction?
• What is Performance (or P-space)? How does Performance relate to utility, quantity, price and other microeconomic concepts?
• What is a new market? How do we distinguish a new industry from a new market.
• Do firms matter? Are firms causal to economic growth?
• What is the role of technology in innovation? Can we innovate without technology? Can we fail to innovate with technology?
• Do firms have life in the biological sense? If not how do we measure their existence?
• What are entrepreneurs? What do they do that’s different than what managers or business leaders do?
• How do you navigate P-space? How do you think about your business and economy in performance terms.
• What is a diffusion? Is adoption a good measure of technological progress? What is the connection between diffusions and disruptions?
• How does Capital map to P-space?
• How can we maximize economic growth? Is there a growth algorithm? What is the role of government policy in growth? What about the role of the creation of customers?
• What is the difference between consumption and non-consumption? What is non-production?
• What are the known forms of disruption? Can there be forms we don’t yet know about?
• Why do customers buy solutions? Understanding the causes of purchase decisions.
• Are profit motives necessary for growth? What motivates individuals, if not profit?

If these questions are of interest to you, join the conversation at DisruptiveInnovation.org.

A merger is the result of two entities in the same business joining forces. It is usually justified through "synergy", a euphemism for removing redundancies from their unity. Arithmetically, the desired outcome is that the resulting organization should be smaller than the individual parts (which is desired if the available market is shrinking.)

An Integration is the answer to the question of "Why two companies in different businesses are better off together." Arithmetically, it suggests that the proposed sum is greater than the individual parts.

The spin-off is the response to a situation where one company houses two unrelated businesses.

For completeness, we can define an acquisition as the purchase of an unequal entity in order to improve the value of the acquirer.

The logic of any of these is that there is a disequilibrium which offers an opportunity to those who can exploit it. What the analysis fundamentally assumes is that the status quo of firm boundaries is not optimal.

Much of the measurement of the balance in the equations assumes that the overall industry is stable and that the problems (technical or market) are largely understood and that there is no learning that needs to happen. Boundaries need to be re-drawn because they are imperfect. Boundaries may have grown imperfect for many reasons: founders/owners were separate, markets and technologies evolve at different rates, resources are inflexible, processes are entrenched and values are outdated.

However, all this arithmetic can be safely thrown out of the window if there is a new industry in the making. If there is no balance to begin with because there is an entirely new problem being posited. That is, not only do we not know the answers to technical or market questions, we don't even know what the right questions are.

When looking at the history of industry creation, the breakthroughs were always about the discovery of the right questions to ask. The early automobile industry was a scramble for solutions to a huge number of technical and market questions: technology, business model, infrastructure, usability, customer segmentation. From 1886 until 1915 there were many grand experiments with thousands of automobile firms springing up. ((Estimated 3000 world-wide))

Early computing, internet, mobile and consumer durables industries went through similar periods of grand experimentation. But the breakthroughs occurred when someone was able to ask (and subsequently answer) a question that nobody had asked before.

Henry Ford asked, "What would enable everyone to have a car". The result was  not a better car but a better production system.

Steve Jobs asked, "What would enable everyone to have a computer". The result was not a faster computer, but a more approachable computer.

Akio Morita asked, "What would enable young people to have their own music". The result was not a better audio quality but a smaller audio player.

Kiichiro Toyoda asked, "How can a car be built without faults". The result was not a bigger factory but many smaller ones.

Jeff Bezos asked, "What would cause people to do their shopping online". The result was not a lot of unique sites but one infinite one coupled to a logistics and computing service.

Having great taste in questions turns out to be the principal quality of the successful industrialist: The creation of economic value and power well beyond the boundary of the firm itself.

When the correct question is asked, resources can be efficiently marshaled to answer it. The wrong or incomplete question leads to inefficient resource allocation. And so the architecture of the solution can be built. If the new problem statement is a technical one then an integrated implementation is required. If the new question identifies non-consumption then a modular implementation is required. Each of these approaches suggests different customer sequencing strategies and different application of resources and processes.

There is no right architecture for industry creation. What matters is asking the right question.

So is Elon Musk, today, asking the right question?

The presumptive question seems to be "What would enable everyone to have an electric car?" This is not a great question if it is seen as a continuation of other such questions: "What would enable everyone to have a safe car" or "an efficient car" or "a reliable car" or "a fast car" or "a second car" or "a fashionable car" or "a bigger car", etc.

These previous questions were answered by introducing sustaining improvements or modules to the existing production systems. The following graph shows the speed of adoption of various automobile technologies. Hundreds more were introduced and all could be shown to have roughly parallel adoption curves. None of these introductions changed the structure of the industry. ((The industry changed through revolutions in production systems)).

To make electric cars therefore all one has to do is to reduce the cost of electric components for carmakers. They certainly make lots of cars and can make lots more. So why not give them the economic incentives in the form of components to build electric ones? ((Incidentally, hybrid cars are slow to be adopted because the modules are not available as such. Each manufacturer is struggling to match Toyota's solution through internal development—a decade-long process.))

Tesla seems to be an attempt to incentivize carmakers to build electric cars by setting an example. Maybe it will succeed but this is not a reliable or even viable way to build a defensible business. Envy generates the wrong competitive response, usually. If that business cannot be defended then it will perish and so perhaps will the acceleration.

And so we come to the question of whether the defensibility of Tesla relies more on integration. By adding ancillary businesses, can it sustain itself and perhaps eventually pivot away from a commoditizing business (car making)?

Through the addition of a business building batteries and then a business selling home power storage and now adding a business selling home solar power provisioning, the car business becomes a module in a larger system.

So is Musk effectively asking "How to accelerate a global transition away from hydrocarbon energy?"

This gets more interesting as a question. The production, storage and use of energy have been modularized over a century and a half from the wood era through the hydrocarbon era. Perhaps the renewable era will be characterized by integration and de-networking or edge-enabled production. If so the energy problem needs to be solved through a re-integration and a new set of business models. Production and consumption can be coupled and thus production can be decentralized.

But is the answer Tesla+SolarCity? An integrated approach is appropriate if the technical problems are very difficult and cannot be solved through collaboration across firm boundaries and if buyers are eager for great leaps in performance. Join forces if introducing a new measure of performance, solving an unmet job to be done.

A modular approach is appropriate if the problem is one of scale and reach. That is, remain separate if the problems are with finding and building new markets (competing against non-consumption) and if customers are eager for convenience or conformance while being largely satisfied with performance.

This is the crucial dichotomy: The business architecture needs to match the point of time in the evolution of the prevailing measure of performance. Consider this proposed integration an experiment to determine what performance we should measure and thus where we really are.

When Spotify and Pandora were starting their streaming services many were quick to point out that Apple was about to be disrupted. The future, they said, was streaming because (young) people could not be bothered with ownership of music and the limitations of a personal collection. Who would want to pay for a few hundred songs when they could listen to millions for free?

This perception continued and became more vocal over the years. Seven years in fact. Spotify collected 20 million paying subscribers while Apple did nothing. Pandora grabbed 80 million active listeners and possibly 4 million paying subscribers while Apple did nothing. The boat had sailed and Apple was not only not on it but oblivious that there was a boat in the first place.

At first Apple launched a half-hearted streaming service and then a paid service finally showed up with Apple Music in mid 2015. Since then the company managed to add 15 million subscribers. A tiny number compared to the 900 million iTunes accounts it had reported a year earlier. Pathetic. The number of music subscriptions relative to iCloud accounts, iTunes accounts and active devices is shown the the graph below.

It may be paltry compared to the count of users Apple may have in total, but how does a 15 million user base in 1 year compare with the growth rate for the incumbents Spotify and Pandora?

The following graph shows the ramps for Spotify, Pandora and Apple Music since their moments of market entry. The accumulation of users by Apple looks to be the fastest yet.

This is, of course, due to a maturing use case. Apple did not have to educate people to the notion of music as a subscription. It could just announce it and users would discover it and just sign up, especially if they were already iCloud subscribers and had a credit card attached to their iTunes account.

But that's the whole point. Apple did not have to move first in music subscriptions. It did not even have to move second or third. When it did move it could just skim the market and add to its already healthy Services revenue (orange line in the first graph above.) Missing the boat in music in this case meant capturing all the value quickly and with minimal expense.

Fundamentally, Apple's entry into music subscriptions was a sustaining effort. Streaming sustained Apple rather than disrupting it. The difference may seem merely one of semantics, but it is also the difference between life and death for a challenger. Meaning matters.

This is a cautionary tale for those who would pronounce every new idea as "disruptive" to Apple or anyone else on the basis of novelty alone. The tests for disruptiveness are easy enough and it behooves the analyst to apply them before dropping the d-bomb.

At WWDC 2016 Apple offered a set of new data points to illustrate its ecosystem's robustness.

First, the number of registered developers increased by 2 million in the last year to a total of 13 million. That is a growth rate of 18%. To compare this total consider that Oracle claimed in 2014 9 million Java developers and IDC claimed in 2014 there were 18.5 million software developers in the world, of which 11 million were professional software developers and 7.5 million were hobbyist developers. It's therefore possible that Apple's "market share" among developers is close to 70%.

Second, App installs have now reached 130 billion. The cumulative growth is shown in the graph below:

The rate of growth is also shown in the following graph:

Note that the rate of growth continues to increase and is now above 30 billion/yr. It turns out that apps continue to be a popular download item. The size of the audience continues to grow (see graph below) and it's therefore understandable that activity in the store continues to grow.

Third, the rate of payment to developers has also increased to over $20 billion/yr., with the total payments having reached $50 billion.

The graph above shows the derived payment rate (in green) relative to the download rate (blue). Although not completely parallel, the overall correlation is plain to see.

Fourth, there are more platforms than ever (four device and three services). As a result, Apps and services continue to outgrow traditional content revenues. Gross revenues for iTunes/Apps/Software/Services/Licensing is shown below:

Overall, economic activity transacted directly through Apple's platforms is approaching the run rate of $40 billion/yr. It continues to grow at about 20%, so it's foreseeable that it will reach at least $50 billion/yr.

It's hard to compare to other ecosystems as metrics vary but this rate alone places Services as one of the larges businesses in the world (service or otherwise).

There are other ecosystems "on top" of iOS which transact outside the Apple systems (and hence are not reported in the total above). These include Facebook, Google, Uber, Amazon and other economies which use iOS devices to enable engagement. These add up to hundreds of billions of dollars in transactional value. My estimate is that all mobile services are at least $250 billion/yr today and will reach $800 billion/yr in 2020. Apple is and will continue to be the home or enabler to the majority of this revenue.

But the more profound point to be made is that this ecosystem relies mainly on direct payments by the beneficiaries of the service or content. Apple contents itself with the $35 billion it can transact through its own storefronts because it feels that the business models are compatible with its brand.

When it comes to all the ways of "monetizing" platforms, this may be a very conservative strategy but it's one that also avoids the potential pitfalls of social scandal.

 

Why is an expert on disruptive technology “worried” about financial innovation?

 

Excerpt from "Chaos Is Hard to Predict”

Does technical innovation always end in displacement/ replacement?
The professions being challenged include physicians, lawyers, consultants, and analysts. Algorithms and sensors could conceivably displace some subset. However, it’s not a certainty. One way to fend off automation displacement is to redefine and change the scope of the profession.

The classic example is from the birth of the Industrial Revolution. As machines replaced certain tasks, new jobs were created which required higher skills and hence edu- cation, leading to universal matriculation and eventually the popularity of higher education. Professionals need to “invent” new jobs for themselves as a means to keep disruption at bay.

Read more: CFA Institute Magazine.

 

In Apple's first 40 years it shipped 1,591,092,250 computers ((including Apple II, Mac, iPhone, iPad and iPod touch; excluding Apple Watch, Apple TV and other iPods. Includes Q1 shipments estimated at 63,597,000 Macs, iPhones and iPads)).

This shipment total is higher than any other computer company in its first 40 years. Actually there are no other PC makers that are 40 years old. One computer maker (IBM) is older but they only sold PCs for 24 years and what they still sell they don't sell in high numbers.

That does not make it the top seller in a given year. Looking at only the Mac, Apple's traditional form factor personal computer, Apple has only returned to the top 5 last year. Only if including the iPad it was the top computer vendor in 2011 and including iPhone, it was first in 2009.

After having a 40 year run and after selling more computers than all American and Japanese computer companies put together, how should we think about the next 40 years?

First, clearly Apple shifted from being a "computer company". It has already changed its name to exclude the word "Computer" but that has been interpreted as saying that it sells devices (which happen to also be computers.) The word "computer" is already archaic. We stopped using computers to compute in the 40s. We used them to make decisions, keep track of things, speed things up and then to communicate and then to entertain.

Devices, it seems, are what customers mainly use to do, well, everything. Computing has grown to encompass most activities we engage in. So is Apple then a device maker?

More broadly, irrespective of the name, is Apple at 40 still defined as a hardware company? Certainly Wall Street ((i.e. average people)) still think so. The conversations one hears clearly consider Apple's future to be tied to the sales volume of specific products. At one time it may have been the Mac, another, the iPod and now the iPhone. This thinking is again a legacy of where the company was but mainly it's a reflection of how revenues are reported.

We see a line item in the income statement that says "iPhone" and it has a big number next to it so we, of course, fixate on that big shiny number. But if we were to unpack that number and see why it's so big we would discover that buyers are buying something other than what financial statements report.

Buyers are buying experiences, I hear you say. Yes, but more than that. Much more. They are buying safety, comfort, convenience, simplicity, productivity. They are buying modules to combine with other modules that help to do something. Something better. They are buying hope, satisfaction, escape or vanity. In other words they don't know what they want but know when they have it. They trust products unseen which have a reputation of delivering that which they think they might like, without knowing what that is. By employing the product, and a whole lot more—effort, time, mental energy and repetitive actions—they learn to exploit a product to achieve satisfaction.

Products are enablers, as are experiences and software and ecosystems and services. They are modules used in a melee of activity to make the user feel they are making progress. And if that module is better than no module then it will command a price and if it's better than another module or modules then it will command a premium. And if most people agree then it will be popular with many. And only if all these are true will it create a big number on a report.

And so we must search for other names to call a company that delivers an enabler that may lead to progress. Crude categorization like the reporting of finances leads to self-deception and a loss of opportunity to understand. Firms are often victims of this self-deception because they start believing that customers buy the things they sell. They start to believe that what is on their financial reports is a reflection of the value they create. It's a simple mistake to make, but a mistake which leads to catastrophe. If its data is mis-categorized, by chasing numbers the company runs away from opportunity, leaving it to competitors otherwise unencumbered with knowledge of numbers.

Assuming Apple avoids mis-categorizing what it does, will it be a "solutions" or "services" or "brand" company? Is it, as I used to say, a "blockbuster manufacturing line"?

Yes, and still that's not all it could be. Nor is it enough to understand what will come.

My simple proposal is to think of Apple (and actually any company) as a customer creator. It creates and maintains customers. The more it creates, the more it prospers. The more customers it preserves the more it's likely to persevere. This measure of performance for a company is not easy to obtain. It's not a line item in any financial report.

The closest figure we have is that today Apple has one billion active devices in use. We're not told of the total users or total customers because Apple cannot count people or wallets as accurately as it can count active devices. But as imperfect as it is, this number gives us a way to get close to counting customers.

So we know that at least Apple has created a large number of customers. Knowing total devices sold and number in use means that we can be sure that 63% of all the computers Apple sold are still in use. This means that most customers are recent customers. That is not necessarily good news. New customers are not well understood. We don't know how these new customers might behave in the future.

Will they come back for more of whatever Apple makes? If we look at the history of competitors or technology products in general, chances are they won't. The industries Apple has been a part of are filled with one hit wonders. Companies which had parabolic trajectories and built no loyalties. Statistically speaking, success in Apple's markets is always followed by failure.

But what if we did not seek correlation but looked for causation? What if we ignore statistics about companies other than Apple and focus on statistics about Apple's actual customers? Rather than assume all companies are the same, what if we assume that some can be exceptional?  What if we we look for the anomalies, not the clusters?

We might want to ask about the causes of success or failure for a single company. We might want to sample its specific customers.  We might want to observe how Apple's own customers behaved in the past.  We might want to use theories of brand value or theories of network effects or theories of software ecosystems.

These measures, rather than those of "comparable companies" might lead to different conclusions: That customers are loyal, that they will value the brand and that they are invested in a network. In other words, that they will buy from Apple again.

If we then factor in the size and persistence of Apple's audience (customer base) we might conclude that there are factors which will allow it to grow rather than shrink. My analysis based on public data shows that the customer base has been increasing steadily.

Considering this audience and the revenues generated, we can categorize the revenue by active device as follows.

Each bar represents that product's revenue per day in a given quarter (from Q4 2012 to Q4 2015). Each year is therefore represented by a different color. Dark green for 2012, light green for 2013, burgundy red for 2014 and dark red for 2015. For example, each iPhone in use was generating exactly $1/day in revenues (including services and accessories) during the first quarter 2013.

This allocates all of Apple's revenues to these products and by proxy to customers.

In summary, the "average revenue per Apple device per day" is currently $0.68. If we assume one unique user per device then Apple collects 68 cents from each customer each day. ((In reality the figure may be closer to $1, as there are likely to be more 1.2 to 1.5 devices per person.))

Combining the history of customer creation and customer preservation with the value obtained from each customer implies that the next 40 years will be about creating another large tranche of customers whose willingness to spend on whatever Apple creates will be relatively unchanged.

We don't know the limit. One billion was hard to imagine even one year ago. We might see two billion devices in short order. Perhaps not. Perhaps as we have a multitude of devices about us all day the number will become less meaningful. But if the number of middle class customers grows and as Apple keeps its products within their reach, there is no reason to think that there will be a reversal of the last 40 years in terms of customer acquisition.

This analysis contradicts the current perception of the company as reflected by its stock price. That price assumes the audience will wither ((With a P/E ratio of 11, without a change in revenue per user, the only justification would be the audience shrinking by more than 90% over the next 20 years.)) That is not insanity. It is what we could expect if Apple were unexceptional.

We could surrender to correlation and ignore causation but statistics show that such an approach rarely works.

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Incidentally, this and a lot more will be discussed at the next Subscribe conference.

How Apple is managed is one of its enduring mysteries. The idea that a company with $235 billion in sales is managed with a single P/L ((Profit and Loss statement is an income statement usually applied for a subset of a larger company which allows subdivisions to be managed individually.))  is fascinating in many ways. Not least of which is how it allocates resources. The fundamental question of which great idea gets to be funded and which great idea gets to be ignored is the core of every manager's dilemma. The Apple problem is at scale  when each decision's consequences are so momentous. In the case of Apple there are so few projects that reach the market and their impact is so great that one wonders how they can be sure they are doing the right thing.

Conventionally, product development is filtered through a sieve of  metrics, market sizing and impact on top/bottom income lines. These "financial" measures of success are considered prudent and optimized for return on equity (also known as the maximization of shareholder returns).

But this can be a toxic formula. The financial optimization algorithm always prioritizes the known over the unknown since the known can be measured and is assigned a quantum of value while the unknown is "discounted" with a steep hurdle rate, and assigned a near zero net present value. Thus the financial algorithm leads to promoting efficiency at the expense of creation. Efficiency may be the right priority when times are difficult and resources are scarce but creativity is the right priority in a time of plenty. And abundance is what being big is all about.

To allow for some creation large firms create divisions. Some divisions are tasked with "core products" which are measured by a set of firm metrics and some are tasked with "emerging products" which are given a set of loose metrics. This leads to obvious resentment and war between divisions when resources need allocating.

Ominously, the core divisions tend to always win. At the root of divisional power struggles are measurements--the roots of financial metrics. Managers fight with data. "You can't manage what you can't measure" they're taught. But if you have something that can be easily measured and something that is difficult to measure, won't the easily-measured be managed and the hard-to-measure be ignored?

There is a general principle at work here: Managing by measurement is fraught with the pitfall of measuring the wrong thing. Making sure that you're measuring the right thing becomes the value-adding role of the manager. A role that is increasingly being neglected.

The mass phenomenon of measuring the wrong thing because it's the easiest to measure is called "financialization". Financialization is the process by which finance and finances (rather than creation) determine company, individual and society's priorities. It comes about from an abundance of data that leads to fixation on what is observable to the detriment of awareness of hazards or obstacles or alternatives. This phenomenon is more likely when the speed of change increases and decision cycles shorten.

Financialization is creeping into all aspects of society and the extent to which it infects companies is the extent to which they suffer from early mortality.

So is Apple avoiding financialization? How can anyone avoid the tyranny of mis-optimization?

The unified P/L might be a clue. It obviates the need for divisional rivalry and power-based or financial politics. Without divisional P/L, management can be organized functionally with the obvious benefit of de-politicization. The singular P/L does create another problem however: the absence of an alternative resource allocation algorithm centralizes the decision. By centralizing decisions at the highest level, few decisions can be taken and that means each decision has to be right more often. We swap a distributed but financialized process for a central but capricious one.

So how is the central decision process made fair? What guides the allocation process?

I believe that Apple does not avoid quantified decision making. I believe the logic of their decisions is based on a nuanced quantification of the company's customer base. Opting to think about how many customers they have rather than how many things they can sell could offer the Apple manager a better decision tool, avoiding financialization and mis-optimization.

The guiding principle is putting the customer rather than the firm at the center of the decision process. The idea of this change of orientation extends to a re-definition of the purpose of the firm. Apple calls it its "North Star" and it places "making the best product" at that location.

The challenge is how to measure "goodness" of product. It's easy to overshoot "best" and become too good. What regulates greatness is another measurement: absorption of what you create. The true orientation (which Apple won't confess to) is absorbable greatness.

Absorbable greatness is measured through other proxies: customer creation, customer satisfaction, and customer retention. By adding and preserving great customers you can be sure that what you create is indeed the "best". Setting the goal, and indeed the purpose of the firm, as the creation and preservation of customers seems to be the unwritten constitution of Apple.

The idea that the purpose of the firm is to create and maintain customers is not new ((Customer creation is in contrast to the notion that the purpose of the firm is to maximize shareholder returns. The notion of customer creation as primary purpose was popularized by Peter Drucker. The notion of optimization through shareholder value creation was popularized by Jack Welch.)) but it is relatively rarely practiced. The reason is that the data is harder to obtain. The data that comes from sales is crisp and concrete. The data about customers is muddy and soft. In a world where spreadsheets are used as weapons, the crisper the data, the better the ammunition.

Clarity wins arguments but it may not be where salvation or truth can be found. Good judgement in a cloudy reality is a better compass than a clear road map to a fantasy world.

Optimizing around customer acquisition rather than equity returns leads to a new set of metrics. What would these metrics look like for Apple?

The company publicly offers three separate sets of quantity of customers and quality of customers.

In terms of quantity we have:

1. Number of iTunes accounts
2. Number of iCloud accounts
3. Number of active devices

In terms of quality of customers we have:

1. Average selling prices for devices (as a proxy for willingness to pay)
2. Customer satisfaction (as a proxy for loyalty )
3. Services and accessory revenues (post-sales and recurring value)

The following graph shows the historic data for service accounts and corresponding services revenues.

The following graph shows the average price per hardware product indicative of loyalty through stability in the face of growing competition.

The following graph shows an estimate of growth in active devices as a proxy of customer base.

Unlike product shipments and revenue data which follow rises and falls in individual products due to the cyclicality of technology and adoption, these graphs show a smoothness and predictability of customer base behavior.

Looking at Apple this way gives the impression that the company has a large number (nearly a billion) of repeat (subscribed to service) customers. These customers can be seen to spend a predictable recurring amount (average selling price) on Apple's brand. The repetition of these metrics in public commentary suggests that customer acquisition and retention are among Apple's goals.

The key question is whether this is Apple's primary goal.

Seen this way each centralized resource allocation question can be assumed to be prefaced with "In order to create/preserve customers should we...?"

This leads to answers quite different from questions that start with "In order to sell/profit more should we...?"

For instance, offering education products, retail store experiences, healthcare products, green energy initiatives, accessories, content and services make sense even if they may have poor financial "returns". These initiatives score highly on customer retention and satisfaction. They may lead to engagement and repeat sales. Managers working on these initiatives would gain the respect of their peers, leading to more esteem and higher quality output. Finally, and most importantly, these efforts would be preserved regardless of cyclical downturns.

The assessment of analysts should therefore be couched in similar terms: "What is the impact of a new initiative in customer creation and preservation?" rather than "What is the impact of a new initiative in driving revenues and profitability".

We can see immediately why the second question is popular while the first isn't: it's easier to assess an answer to the second because we have the data that allows for its calculation.

This is why asking the wrong questions is popular.

It's not cynicism. It's access to data.