The last quarter of 2016 was Apple's biggest ever. $78.4 billion in revenues. 78.3 million iPhones. Both records. Earnings of $3.36 ((On shares priced at the time around $105 or 3.2% yield quarterly earnings)) and cash reached new highs. The growth was modest but Services is now not just the second largest revenue but also the fastest growing, on track to doubling in four years.
The reason for this is the vastness of Apple's user base coupled with the loyalty the brand engenders. The company reached one billion active devices more than a year ago and is quite likely to have nearly a billion users. Not just any billion either--the best billion most probably.
The realization that Apple benefits from extreme quantity and quality of customers has led some observers to defer the imminence of Apple's demise. Share prices have risen lately to new highs and the ratios between these prices and earnings have started to come closer to the average of other large companies.
But enough with the reductio ad absurdum. Let's look at the next quarter. The company has been very precise with its own offered predictions (guidance) so it's a simple task to make an accurate forecast. The history of guidance vs. outcomes for revenues is shown below:
Placing the pipper on the upper edge of the guidance range was a safe targeting method for 11 of the last 17 quarters. We have never seen a drop below the bottom of the range but had a few overshoots, some huge. Doing this for the latest quarter and working backwards to the individual product contributions to revenue and using historical margin and cost patterns we can get the following core financial performance metrics:
I sent these estimates to Philip-Elmer DeWitt and I recommend looking at his survey of the other analyst estimates on his excellent Apple 3.0 blog.
Overall, the quarter is shaping up to offer slight growth y/y and indicating a plateau formed after the surge from the iPhone 6 surge in '15. All eyes are on the "super cycle" for the next iPhone.
The reason it's "super" is that the iPhone has a 2+ year cadence for form factor changes and the user base updates on a similar cycle. The demand is vast due to the user base and accumulated age of devices in use. Expectations are that supply will be offered to meet this demand.
If history is a guide then the next iPhone will be the best iPhone ever.
In September 2016 Apple Pay came to support the world's largest public transit system. It happened through the integration with Japan's FeliCa and gave Apple Pay access to 160 million daily transactions.
This, along with many other milestones don't get a lot of attention. Apple Pay is in what could be considered an attritional competition with non-consumption. There are no decisive battles won or lost, only the relentless pressure to make progress against a reluctance to change.
Before I go on, I should make the attrition/decisive type of conflict clear. The terms come from military science. A war of attrition is one where two sides essentially grind against each other and the winner is the one which lasts longest. A decisive battle is one where a conflict is won through a single, acute encounter where, due to either demoralizing or circumstance reasons, one side gives up. It's the knock-out punch vs. the fight to exhaustion.
When applying this dichotomy to competition, we need to be careful about who we define as competitors. Note that I said that Apple Pay is in a fight with non-consumption. It's tempting to say Apple Pay competes with some other payment system like Samsung Pay or Google Pay. But none of these alternatives are as powerful as the existing mix of contact payment systems: cash, credit card magnetic swiping and some other hybrid of codes and user experiences (especially online.)
When seen this way the challenger must compete through persistence. It's impossible for Apple Pay to decisively defeat non-consumption in one battle. It takes literally millions of decisions for adoption: each consumer, each merchant, each bank, each point of sale. It's a relentless grind of pitching, selling, demonstrating and shaming into action.
It's been three years of this type of competition and progress may seem hard to spot. That is because we don't see the big wins. We can only see small wins. The win in Japan, as significant as it might be (160 million daily transactions added to the addressable market) is still small compared to all transactions world-wide.
Merchants tell Apple that 90% of contactless transactions in the US were Apple Pay. Apple sees continuous growth and cited 500% grown y/y in payments last quarter. The total amounts to hundreds of millions of transactions worth billions of dollars.
Anecdotally, the points-of-sale supporting the system are growing. 76% of the top US merchants have agreed to deploy by end of this year. ((Note that that does not mean 76% of all points of sale will have it but rather the commitment at the top is there.))
But the total market is probably measured in billions of transactions and trillions of dollars. There is a lot to go.
On the bank side, the US wins came quickly and thoroughly. 3500 US banks support Apple Pay through their issued credit cards. Globally the figures are unstated with some countries absent completely and others engaging quickly. Australia lags while the UK is mostly on-board.
The point of sale terminals are also largely not an obstacle with the current generations almost all being able to process contactless transactions. The amazing thing about this business is just how many sides there are to this market: merchants, users, Apple, banks, POS terminals, credit card companies, online payment systems, etc.
To see progress at all is surprising. Changing payment systems is extremely complicated due to the breadth and depth of infrastructure. There are already 5 million contactless acceptors in the US. But there are many more points of sale ((How many exactly is actually hard to determine.)) There is a long tail distribution for these systems so saturation will take a very long time.
Apple Pay is however only the first battle. Beside credit cards and cash, inside your wallet are more items that need to move into your devices: access cards, passports, driver's licenses, IDs.
One unsung hero has been the device-based boarding pass. Security and gate agents don't touch your phone so when you are invited to place the phone on the scanner at security or boarding, there is a sense of tangible and visible progress. It was a rare sight a few years ago but I see it more and more each day I fly. The paper-less boarding pass has crossed the chasm into mainstream. Cash, plastic cards and IDs will also be deprecated. All it takes is persistence and time.
We all crave decisive battles and can't stay tuned for the attritional outcomes. Nonetheless that is how most conflicts end up. This is the sort of conflict where a superpower wins and an asymmetric challenger falters. It's resources and processes rather than enthusiasm that matter most.
The iPad has an installed base of over 300 million. This is a far larger audience than that of the Mac (which has somewhere between 100 million and 150 million). And whereas the iPad acquired this audience in about 7 years, the Mac took 33 years.
Curiously however, it is the iPad that is seen as the more fragile product. The iPad is considered to be failing, with a presumption of an end of life in the near future. The evidence of this failure the year-on-year decline in units sold. This is illustrated by the following graph.
Note that the iPad decline is paired with a steady increase in the Mac. The iPad exhibits a four year decrease in overall volumes. This has, as they say, bad optics.
But what is seen isn't all that might be,
If we look further we see that the iPad is still a much loved and much used product. Data from the Pew Internet Survey shows that tablet ownership among US adults increased from 45% in April 2015 to 48% in April 2016 and 51% in November 2016. The rise has been steady. Although this counts tablets, the iPad had 85% share of the U.S. market for tablets priced above $200 so it's a fair assumption that the iPad audience is growing. Similar data exists for the UK.
In addition, user satisfaction with the product continues to be very high. Apple cited that in November, 451 Research measured a 94% consumer satisfaction rate for iPad Mini, a 97% rate for iPad Air, and 96% for iPad Pro. Finally, browsing, shopping and app usage data also show continuing high utilization for iPads.
Furthermore, iPads are still growing in "non-consuming" markets. iPad posted double-digit growth in both Mainland China and India, it continues to attract a very high percentage of first-time tablet buyers.
Finally, within corporate buyers there is a 96% satisfaction rate with 66% purchase intent. Apps and solutions are continually being developed for the platform.
Taking into account that the iPad has a large, stable, engaged and loyal user base that continues to expand and find new uses the optically bad sales data needs an explanation. The simplest explanation is probably the best: iPads remain in use far longer than phones, and perhaps even longer than some computers.
Anecdotally we can see evidence for this. Few iPads are replaced every two years the way phones are. They are not tied to service contracts or subsidized. They are also less likely to be damaged during usage as phones are dropped and banged-up. iPads are more stationary or carried in protected containers. Phones are in pockets, iPads are in bags.
So iPads are longer-lived products and it's perfectly reasonable that people who have them keep using them and more people are joining them but slowly. Note also that the decline in sales seems to be flattening out and perhaps might show stabilization.
Further countering of the iPad in decline idea is the continual improvement in the product. The latest is a refresh of the iPad with more battery life, a better screen and support for Pencil.
Perhaps the iPad will not return to rapid growth, or perhaps it will. But the more likely possibility is that the iPad will level out maintaining steady levels and, perhaps, grow slightly. This flat rather than up/down trajectory is unusual in devices but it isn't when you look at the Mac. And isn't the goal of the iPad to become a computer? If so then perhaps Mission Accomplished.
I was an early user of the first MacBook Air. When that product was launched I saw in it something different: a dedication to a new measure of performance: thinness and conformability. The key image used to launch the Air was the laptop sliding neatly into an inter-office envelope. The implication was that the laptop does not need to have its own special "laptop bag". It could fit into any bag. Users would be able to slip it into all manner of new contexts. It sought to compete with computing non-consumption.
The Air was launched by Steve Jobs in 2008 and was almost universally panned. It was considered underpowered and the dedication to thinness was seen as irrelevant to what consumers wanted. The stock price fell.
The product went on to become Apple's most popular laptop. It still is. It grew the base of Mac users to over 100 million today.
For the same reason, I was an early adopter of the newest MacBook Retina. The even thinner new MacBook was spectacularly thin. It was smaller than an iPad. It had no ports except one USB-C and a headphone jack. It required dongles for physical connections. It had a new keyboard that barely registered movement and it had a new trackpad that did not move at all but played mind tricks to make you think it did.
As I used it over the last year, I became used to it. It was not my only laptop. I had an older 15 inch Pro, but over time I came to use the MacBook Retina exclusively. I thought I could not do "real work" with it but I managed. I got used to the keyboard. I got used to the trackpad. I got used to the need for a dongle to connect a display. But these challenges were more than offset by delightful improvements. I was delighted by the small power brick and the ability to use any USB power to charge it. I was delighted at the all-day battery life which meant I would charge it the way I charged my Phone: at night. I was delighted that I could use it in places where I could not use a laptop: on any airplane tray, stowing it in the seat back pocket. And I no longer cared what bag I had for my computer. It did not make me productive by completing tasks more quickly. It made me more productive by letting me be do things when and where I otherwise couldn't. I love my MacBook.
Now Apple launched a new Pro Mac laptop.The new Pro laptop has the same (slightly improved) keyboard as my MacBook. It has the same (larger) trackpad as my MacBook. It has the same (but more of) USB-C port. It has something new called a Touch Bar which puts function keys into a touch screen but mainly it feels like a grown-up version of my MacBook Retina. It's faster too.
Overall, the new MacBook Pro feels to me like an evolution of the MacBook of 2015. I remember at the time thinking that this baby MacBook is probably the wave of the future: the new keyboard, new trackpad, new thinness, new USB-C, deprecation of other ports. These required enormous engineering efforts and it would be silly to leave them on only one model. In any case, from where I was standing all these were "better". Not along the previous definition of goodness but along a new definition: making the computer more conformable and easier to put into use in more places. The very ideas that drove the development of the Air of 2008. Indeed the very idea that drove the development of laptops since the 1990s.
What's fascinating to me from a product management point of view is that the groundbreaking new features which re-define the product's direction are not designed to trickle-down from the top-of-the-line to the bottom, but rather that they trickle-up. The low-end product gets the updates first and the the Pro products adopt them later.
And we can even trace this genealogy of features through to an even "lower-end" product: the iPhone. The iPhone "ethos" of usability and conformability has permeated through to the Macs, starting from the lowly and advancing to the top of the range. The question of where Apple's design direction comes from can be answered: the bottom.
All this is consistent with a strategy of "low-end evolution". A way to defend the low-end rather than abandon it in pursuit of what the most demanding customers are asking for. Rather, Apple seeks to incubate a new performance measure. Re-defining goodness.
So is this new MacBook Pro a worthy successor to the MacBook Retina? My attention is riveted by the Touch Bar. It seems a completely new way of interacting but requires discovery and practice. What Apple has to achieve is allow the product to work well without it but also to allow users to evolve their experience with it. Over time we got used to trackpads instead of mice (many resisted the change). We got used to a different, small travel keyboard. We got used to new ports (HDMI vs. VGA) and we got used to wireless everything (it may seem easier, but remember having to always enter credentials vs. plugging in a cable).
The touch bar is a new UI metaphor. It will take time but it is looking at me right now, winking.
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.
I will be presenting my latest analysis of Apple at the Sustain event in San Francisco on Thursday Sept 8th, the day after Apple's keynote, along with Ben Bajarin, Carolina Milanesi who will alsob equipped with their latest market insights.
There is a time to disrupt and there is a time to sustain.
Sustain event is about understanding Apple's levers of control to sustain the iPhone as it moves into direct competition with Android. We will also examine positions of top five technology brands: Apple, Amazon, Facebook, Google, and Microsoft.
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.
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.
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.
In my quoting of the "Cook Doctrine" I cited the primary criteria for Apple to enter a new market:
We believe that we need to own and control the primary technologies behind the products we make, and participate only in markets where we can make a significant contribution.
These criteria, often repeated, were certainly in force when Apple chose to enter the watch market. Apple has sought and achieved a significant market share and did so while owning and controlling the primary technologies behind the product.
I now turn to the significant contribution criterion to study the possibility of Apple's entry into the car industry. ((Control of the primary technologies behind the product is a topic for another post.))
The significance test shifts the speculation from whether Apple would build a car, to how many cars is could build. Making a few cars is easy (see first commandment of The Entrant's Guide to the Automotive Industry). Making lots of cars is hard and hence significance in the automotive market (as in watches and phones) means achieving some degree of adoption, a higher degree of usage and a very high degree of profitability.
So what does being significant in the car business mean? Does it mean becoming the next Tesla? The next BYD or the next VW? How quickly?
Fortunately, we have something to compare an Apple entry to. Apple has made a "significant" market entry in phones and others have made entries in cars. If we contrast the rate of growth of Tesla, EVs, and Hybrids ((Of which Toyota has 70% to 80% share)) to the rate of growth of iPhones in their respective US markets, we obtain a test of significance:
The graph shows the percent of sales for the alternative car technologies (and Tesla) vs. the percent of US phone users using iPhones (comScore). Here are the conclusions:
Hybrid cars were introduced in 2000 in the US. They managed to gain 2.5% within 8 years but have not increased to a consistently higher level since.
Electric vehicle sales re-sarted in earnest in 2008 and have gained 0.4% share in eight years. They are still growing, partly helped by significant federal and state subsidies.
Between sales start in 2008 and 2015 Tesla achieved 0.15% share.
The iPhone ushered in a new paradigm within the phone market ((Incidentally the number of phones in use and cars in use in the US is comparable.)) in mid 2007. In the time since, Apple achieved the equivalent of about 35% share of unit sales. ((Significantly more in terms of sales value and over 90% of profitability.))
Between 2002 and 2015 the share of smartphones as a percent of all phones reached over 80%.
To summarize, the range for entrant technology share capture spans between 0.4% (EVs between 2008 and 2015), 2.4% (Hybrids between 2000 and 2015) and 80% (Smartphones between 2002 and 2015).
Within a similar time frame, the range for entrant company share capture spanned between 0.15% (Tesla as percent of US car market) and 35% (Apple iPhone percent of US phone market). ((Toyota's capture of 2% of the market with hybrids may or may not be considered entrant--I chose to consider Toyota an incumbent which took share from others with the Prius))
The differences thus span two orders of magnitude (>100x). Put another way, if Tesla's car entry was equivalent to Apple's iPhone entry they would have delivered about 5.5 million cars rather than the 50.5k they delivered in 2015.
This wide gap in the impact of entry in the two markets has much to do with how modular are the systems being engaged by the entrants. An electric automotive system requires new infrastructure, new user behavior, and, in the case of Tesla, new distribution network and new post-sales support network. Offsetting this partially is a government subsidy.
In contrast, the smartphone communications and computing system leveraged existing infrastructure ((And vice-versa)), consistent behavior, at least initially, and the same distribution and support network. In addition, smartphones benefited from significant hardware and software and services ecosystems which encouraged third parties to add value to the system.
The difference in collaborative development and conforming user experiences (i.e. modularity) between the two innovations allowed the speed of change to be two orders of magnitude faster. The result is what I would consider significance for the iPhone vs. insignificance for electric vehicles to date.
Which leads us back to the question of why Apple would enter this market. If the absence of modularity prevents rapid change, that implies Apple cannot achieve any significant impact from entry.
We could ask the question differently: If they do enter, they could achieve significance only if they change the degree of modularity in the system. Think of it as allowing infrastructure leverage, consistent user behavior, wide distribution, wide support network, ecosystems, and component architecture; allowing rapid scale production and lower costs, etc.
Therefore the only way that Apple could justify entry would be if they "rationalized" the system into a sufficiently modular alternative. Only if we assume that change is possible could we then target share above the 0.1% insignificant change that has been demonstrated. They might even perhaps aim at 1% impact within a few years of entry. 1% was the iPhone target within the first full year of sales.
If system-wide change could be brought about and made uniquely (through some form of sustainable asymmetry) then the foreseeable share possibility quickly reaches the 10% range.
The last time that happened was when Toyota changed the way cars are designed and built. ((VW before Toyota and GM before VW. Incidentally Toyota, GM and VW are now nearly tied as the top three automakers globally.))
