In the second part of our WWDC wrapup, we delve into the large-scale shift represented by iOS 7. Siri guides us on the journey from navigation to consumption in our latest AsymCar segment, and Horace examines what iWork for iCloud means.
via 5by5 | The Critical Path #88: Siri in the Driver's Seat.
In the first part of a post-WWDC "doubleheader", we look back at AirShow and begin our dive into the keynote, with regard to Apples hardcore product Mac Pro, Mavericks, iTunes Radio, and examining discovery versus playback.
Research #Industry · 85 comments
This week Apple announced that iTunes has 575 million accounts. This is the 8th update (that I know of) over the last four years. The history of this data is shown in the following graph.
The number of accounts has increased by almost a factor of six since late 2009. It amounts to an account growth rate of about 500,000/day or 44% compounded annually. Not bad, but along with this increase what happened to revenues per user?
Looking at iTunes revenue (gross) reveals a picture of revenues/account, shown below:
This can be read as: "Each of the current 575 million accounts generates about half the revenue of the 100 million accounts of 2009." One would expect such a decline as an user base expands and this approximate 50% decline in revenues per account seems reasonable for a six-fold base increase. In absolute terms the graph shows that an iTunes account generates about $3.2/month in transactions.[1] Put another way, during the last year, an average of $40/yr of economic value is generated by every iTunes account.
Stretching further, one could also use the 575 million iTunes accounts as a proxy for "the Apple customer base". The assumption would be that iTunes accounts are attached to some Apple product, be it an iPhone, iPod or Mac. As a bounds check, a total of 865 million Apple devices (which interact with iTunes) have been sold since 2007. Assuming 575 million users does not seem to be a contradiction.
The logic deployed would be that it's unlikely for a consumer to have an iTunes account without owning or using an Apple product. If we take this leap in logic then it would make sense to measure Apple (not just iTunes) revenues per iTunes account. In order to smooth out seasonality I took trailing twelve months' average quarterly revenues and measured the following company revenues per iTunes account.
Note again the reduction in revenue per "customer" as the base grows. The reduction is less pronounced however, with about one third lower spending for a sextupling of the base. One can read this graph as "Three years ago an Apple customer used to spend $400/yr on Apple products but as the number of users increased six-fold the spending decreased to about $300/yr per customer."
The practice of valuing a company by the rate of spending of its customer base is not uncommon, especially when the customer base is relatively loyal. Apple emphasized the importance of customer satisfaction (and, implicitly, loyalty) during its WWDC presentation. It was singled out as the most important metric they track. So perhaps valuing Apple itself on the basis of repeat purchase behavior should be considered.
When framing the value of of the company itself as a function of users (in the form of iTunes accounts) we get the following graph.
The graph measures the Enterprise Value (i.e. Market cap minus cash) on a per-customer (i.e. iTunes account) basis.
It shows that for a number of years—from 2009 until late 2012—Apple's users were valued (implicitly by the stock market) as likely to create a net present value of about $1200 in earnings. The current value is about a third of that, or $440 in earnings. Today's expectation is therefore that each current customer will buy the equivalent of 1.8 iPhones. And nothing more, ever. A few months ago it was expected that each customer would buy three times as much.
Although the rate of spending of each customer is decreasing, the number of new customers is increasing more rapidly. As this is happening the company's equity is being priced such that an Apple user is considered less than half as valuable as she used to be—from 3.2x revenues to 1.5x revenues. This change in user value has been quite abrupt, happening only within the last nine months. What could justify a drop in user value would be a drop in customer satisfaction or loyalty. So far, I have seen no evidence of this happening.
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Notes:
Podcast #Market #Theory · 45 comments
One of the most startling announcements during the WWDC 2013 was iOS in the car. The mockup that was shown seems to indicate the use of the car's in-dash display as an "external monitor" for an iOS device while control would come from inputs using Siri.
The technical details were not released so it's hard to know the protocol used to accommodate this interface. However it seems that it will be generic enough that a number of launch brands signed up for the launch. The list includes Honda, Mercedes-Benz, Nissan, Ferrari, Chevy, Infiniti, Kia, Hyundai, Volvo, Acura, Opel and Jaguar.
Is this a significant opportunity?
Before we get excited, it's important to note that this will likely take a very long time. It won't even begin until 2014 and the number of new models may trickle into showrooms quite slowly. Consider that the time it took for automakers to universally support external audio input (mostly the trivial line-in) was about a decade.
To also curb our enthusiasm we need to realize that the car industry does not produce many units. In 2012 there were over 60 million cars produced (with the following regional mix:)
In contrast, 60 million is about the number of phones sold every two weeks. In 2013 there will be more iPads sold than cars.
In particular the companies mentioned had the following production figures in 2011:
Including the parent companies and all vehicle types they produce, the total is about 30 million units, or about half of the world-wide production. Obviously, not many of the cars produced will have iOS in the car capability.
Therefore the total unit opportunity is not very significant, perhaps less than 10 million a year. Is there a per-unit cost that compensates for this?
This is harder to answer. The way Apple has been licensing accessory makers is through the MFi (Made for i) program. There used to be a flat 10% fee off of the retail price of the accessory sold. However, there may have been changes. The licensing fees are not public and it's quite possible that the price is a flat amount per unit and that it's a negotiable. It's hard to know what terms are being negotiated with automakers but my bet is that it's not likely to be a significant source of revenue per unit.
So the total revenue from licensing the "Made for iPhone" trademark to automakers won't be significant.
But it is significant for the car industry. The significance is that cars have finally risen to the role of being phone accessories. They have acquired the ability to participate in a computing ecosystem. During all these decades when the world has embraced the information society and intelligence has been embedded in the fabric of life, automakers have resolutely avoided being a part of it. Automotive information, connectivity and user experiences have remained in a Galapagos Syndrome-like isolation from reality. The reasons are rooted in the crisis of rigidity that plagues the industry, something I've touched on briefly in The Critical Path podcasts (e.g. Asymcar).
So this is a hopeful development. If.
If it actually moves at a slightly-faster-than-glacial speed.
If sufficient cars get display systems (billions are produced for the pockets of young and old, poor and rich; but cars have to be considered "luxury" to be graced with an LCD)
If standards are adhered to.
If all brands (which operate individually as autonomous divisions irrespective of group-level strategy) accept the notion.
If these and many other conditions are met, it would allow, finally, the migration of autos to the status of information appliances and, eventually, to being hired for jobs that are currently left undone.
Research #Market · 34 comments
The latest comScore US smartphone install base data is in and there are few surprises. iPhone has reached a new record high penetration (39.2%) and user base (54.3 million). Android has reached a new high in user base (72 million) but share at 52% is below the peak reached in November 2012.
This pattern of gradual iPhone share gain in the US has been consistent for over two years even while Android has catapulted into an overall lead. The surprising thing is how Android seems to have peaked in share. There are still 95 million non-smartphone users and there seems to be headroom for growth even though the other platforms have been tapped out. But it does not seem that Android phones have any particular advantage over iPhone. My hypothesis remains that as price is taken out as a differentiation, the adoption of iOS is slightly higher than Android.
Another measure of market performance is the implied net platform user gains which is shown below:
It shows that iOS added more users in the last few months than Android.
The problem is that Kantar Worldpanel measures shipments and their share data shows a seemingly different picture.
In their data Android is shown as selling more units during January through April while Apple sold more during October through December. Of course we don't have the absolute number of units so can't see the effect of higher holiday overall sales volume. Nevertheless, the balance of growth seems to be disproportionately in favor of Android relative to the data from comScore.
To look at the situation more closely I measured the differential in user adds for comScore and the differential in market share for Kantar's data. Then I overlaid the two differentials so that months are matching, as shown below:
There is a similarity to the frequency of oscillation with comScore data showing a delay (as would be expected since their data is sampling over a three month period). However, we are still facing a vertical offset where there is apparently more growth bias for iPhone in the comScore data.
Possible factors which might be explanatory:
Research #Industry #Market · 80 comments
Last week Frank X. Shaw, VP of corporate communications at Microsoft stated:
... most of the people around me were using their iPads exactly as they would a laptop – physical keyboard attached, typing away, connected to a network of some kind, creating a document or tweet or blog or article. In that context, it’s hard to distinguish between a tablet and a notebook or laptop. The form factors are different, but let’s be clear, each is a PC.
Actually this "admission" that iPads are PCs is not something new. Steve Ballmer made the same assertion in 2010 pre-iPad (though calling them slates). Arguably, the notion that tablets are PCs has been dogma at Microsoft for over a decade and Windows running on all form factors has been a strategic guiding principle.
Which is why I've always added the tablet data to the PC data to create a picture of the "personal computing" market. And this is what that picture looks like today:
Note how the share of various platforms has evolved over this brief time span:
Seen this way, Windows has now reached 60% market share and it's likely to dip below 50% during this year. What happens beyond then is harder to imagine. If Windows tablets start growing as fast as the tablet market overall then Windows could stabilize in share. But if Android and iOS tablets follow their phone brethren in growth then it will be far harder for Microsoft to maintain share. But is that cause for concern?
Not necessarily.
The total computing market[1] is likely to expand to over 4 billion users with 1.5 devices per user in the next five years. That expansion implies that 20% share equals more than one billion devices, making such an ecosystem "good enough" for the average developer. It certainly has been good enough for Windows developers to date and they have kept hiring it throughout the new mobile app revolution.
So even if Windows dips to only 20% of the world's computing market it will still be perfectly "viable" for some time to come.
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Research #Market · 35 comments
By the end of May there will be 100 billion mobile apps installed on iOS and Android devices.
Not bad for a five year old medium.
With respect to attach rate, the total downloads/install base are currently 83 apps per iOS device sold and 53 apps per Android device activation. The history of this is shown below:
The sheer weight of Android units will generate more downloads but on a per device basis the iOS devices do seem to consume more apps and the gap is not narrowing. What would be valuable would be the revenue per app on Play (the figure for iOS is about $0.23). That, as far as I know, remains unknown.
Research #Industry · 55 comments
Although discussions related to how Apple will "use its cash" center on acquisitions of companies, Apple's has been busy acquiring, just not companies. It has been buying capital equipment. Capital meaning (in the original sense of the word[1]) the means of production.
Since the launch of the iPhone Apple has spent $21.1 billion on the acquisition of property, plant and equipment. The company has already stated that they will spend another $10 billion or so for the current fiscal year. This has been mostly machinery and equipment used in manufacturing.
The result in asset value is shown below:
[The Net value, shown as a blue line, is after accumulated depreciation. The red line represents spending as reported on the cash flow statement.)
The change in spending year/year (fiscal) is shown in the following graph:
So these are very large numbers, even compared to other capital-intensive semiconductor manufacturers:
Given this enormous spending one could imagine it's the subject of intense scrutiny. However the only question on the subject that I've ever seen was from Steve Milunovich of UBS to which Peter Oppenheimer, CFO offered an explanation:
Steve Milunovich - UBS
…second question would be on CapEx, you spent almost as much Intel does. I think you guys have said you’re not going to become vertically integrated per se but in a sense you are since [you buy] equipment for your partners, could you talk about the strategy here and how much of a differentiator this gives Apple in terms of your ability to ramp new products over time? And maybe a little bit more about how deep you will go in terms of semiconductor components for you, etc.?Peter Oppenheimer - Chief Financial Officer
Sure. Steve it’s Peter. We expect to spend about $10 billion in CapEx this fiscal year that will be up little under $2 billion year-over-year. We expect to spend a little bit under $1 billion in the retail stores. And the other $9 billion is spent in a variety of areas. We are buying equipment that we will own that we will put in partners’ facilities. Our primary motivation there is for supply, but we get other benefits as well. We are also adding to our datacenter capabilities to support all the services that Tim spoke about in answering Ben’s question and in facilities and in infrastructure. So, that’s where the capital is going.
I would say that this is not a very satisfying answer, which is why I thought it merits further questioning[2].
Alas, no.
Whereas there is a constant clamoring for Apple's to use its cash to "acquire" or "buy" something, anything, maybe people not looking hard enough. If you need the satisfaction that comes from knowing that money is being spent, a glance at the Cash Flow statement and Balance Sheet shows that Apple buys the equivalent of one Yahoo! every three years[3].
The main difference with this type of acquisition is that there is less value destruction. Using the capital to ensure access to capacity, differentiation and hence a high margin is better than writing off the goodwill after a few years.
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Research #Industry #Market · 114 comments
Tim Cook was asked the first question (on the iPhone portfolio). His answer is paraphrased here:
We haven't so far. That doesn't shut off the future. Why? It takes a lot of really hard work to do a phone right when you manage the hardware and software and services in it. We've chosen to put our energy on doing that right. We haven't been focused on working multiple lines.
Think about the evolution of the iPod over time. The shuffle didn't have the same functionality as other products. It was a really good product, but it played a different role — it was great for some customers it was strikingly different than other iPods. The mini played a different role than the classic did. If you remember when we brought out the mini people said we'd never sell any. It was too expensive and had too little storage. The mini proved that people want something lighter, thinner, smaller. My only point is that these products all served a different person, a different type, a different need. For the phone that is the question. Are we now at a point that we need to do that?
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At a macro level, a large screen today comes with a lot of tradeoffs. When you look at the size, but they also look at things like do the photos show the proper color? The white balance, the reflectivity, battery life. The longevity of the display. There are a bunch of things that are very important. What our customers want is for us to weigh those and come out with a decision. At this point we think the Retina display is the best. In a hypothetical world where those tradeoffs didn't exist, you could see a bigger screen as a differentiator.
Full interview here, answer begins around minute 37.
Here is how I interpret the answer:
Questions for Tim Cook; a brief look at the grammar of the organization; Xbox One vs. the Spruce Goose and how to avoid knowing too much.
Research #Market · 252 comments
Next week at AllThingsD's D11 conference in LA, Apple CEO Tim Cook will be interviewed by Kara Swisher and Walt Mossberg.
Here are some questions I'm hoping they will ask: