hardware

Five years ago I used the Cook Doctrine (put forward 12 years ago) to assess the possibility of Apple's entry in the car market. That doctrine states, among other things:

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.

Tim Cook

I concluded that it was not a question of if, but of how and to what degree Apple could make a significant contribution. How in terms of control of the technology and to what degree in terms of significance of contribution.

It was a tough call five years ago and it's still a tough call today. Arguably the failure of initial efforts to meet the Cook doctrine have caused resets and reboots and pivots which means no entry is visible in the near future.

But there is another effort that Apple has undertaken in the automotive space which might be indicative of their intentions and capabilities.

This is an effort that hardly gets mentioned and was dismissed as immaterial a long time ago but I would argue it has made a contribution. It's also unique for Apple in being a licensed software technology made available to hundreds of licensees and extending a software and services strategy to non-Apple hardware.

I am speaking, of course, of CarPlay.

CarPlay was announced almost exactly 6 years ago. It implements a unique division of labor between the iPhone and the on-board hardware. A division that keeps most of the computation and data on the phone but displays and allows inputs through the car. As a result it can evolve with new versions of iOS while keeping car inputs and outputs functional even when they age well beyond the lifespan of several iPhone generations.

It can be argued that CarPlay is a necessary "connector" for the iPhone for that one hour a day that many iPhone users spend in their cars. It is effectively a better way to control the iPhone and have it be the "brains" of the infotainment system. In that regard it's very similar to Apple TV: controlling the "dumb" TV without having to be a screen. The difference here is that CarPlay does not need an Apple remote.

But how is this significant? It improves things, sure. It improves most in-car experiences related to making calls, music, navigation, calendar, messaging, podcasts and news. It also seems to have traction.

The measure of any product introduction should be adoption and in that regard CarPlay could also be seen as significant in its departure from the Apple play book.

Because the adopters are not users but carmakers, the decision to deploy it depends on it being licensed and put into cars that are produced and made available. Quite a different set of hurdles, these are the "orifices" that Steve Jobs famously riled against.

One of the aspects of adoption by institutions vs. adoption by consumers is that whereas consumers are influenced by an early adopter calculus followed by the observation and imitation of others, for institutions there is a long delay with indecision followed by a rush to do adopt in unison with competitors. In other words, the adoption curve for consumers is a continuous gradual uptake whereas for institutions it's a flat line followed by near-vertical step function.

We can see this with the following graph showing the number of car models supporting CarPlay for the model years they represent.

2014 and 2015 were very tepid but 2016 and 2017 saw huge leaps in adoption. Since then there has been a steady filling out of support. At this point in time about 600 car models support CarPlay which is very nearly all the models available in the US market and a substantial number for the markets where the iPhone is widely used.

So is CarPlay significant and can it provide control? On the control side the answer is a tentative yes. CarPlay creates an iOS bubble in the car and it sustains the iPhone ecosystem with no incursions by alternatives likely. [Android Auto which seems to have a similar degree of adoption does the same for Android but there is no "pull" of switchers from one to the other.] Anecdotally, CarPlay support has become a hygiene issue with carmakers. Having it offers few advantages but not having it may repel users.

On the significance question, the answer should be "it depends". The support seems substantial but it's hard to assess market share of models as a complete list of car models available is not easily obtained. Apple has effectively injected software in a lot of cars and done so relatively quickly. By licensing it has amplified its reach much in the way Microsoft did with Windows and the Intel PC in the 90s. The speed is remarkable because everything in the car industry happens very slowly.

More than 1000 licensed car models in 4 years. This is quite a feat.

But the software touches only a fragment of the car. Infotainment is important, perhaps more than anything else the user perceives about the car experience. But it has not changed what the car is. It has not made driving safer nor more productive or more efficient.

Messaging and calling and mapping/navigation notwithstanding, significance needs to be measured in more important terms. The iPhone is significant precisely because an iPhone is not a Phone. The Apple Watch is significant because it's not a Watch. AirPods are significant because they are not just acoustics.

CarPlay would be significant if it made the car something it isn't and not keep the car being what it is. We know it should be something else and that is what we are all waiting for.

In March 2016 Ben Bajarin and I put on an event called SUBSCRIBE where we asked, among other things,

• How will the online services business models evolve?
• How will hardware affect software and services and vice versa?
• How will  users, usage, and capital connect?

Now is a good time to look back on that event.

For the keynote I prepared a model which predicted the mobile ecosystems for iOS, Android and Chinese Android over the next 5 years (to 2020). The methodology involved taking a measurement of the revenues of the top internet service companies, building up the categories these companies occupied, estimating how much of those revenues are through mobile distribution and then splitting the result among the three platforms of iOS and the two Androids.

Adding to that the "native" app and content revenues for each platform would yield the Ecosystem total value. Applying a growth rate would offer some visibility into the future.

The following images are screen captures of the Perspective presentation.

Of course there are several potential errors in this methodology. The categories were not all inclusive. I used Social, Media, Search, Maps, email, Messaging, e-commerce, Travel, Enterprise, Storage, Transportation, Travel and Other as the top level categories. There are many products and services who would end up in Other. Moreover, these categories were anchored by the top companies in each category and the share of the top names was not always clear. Finally, the growth rates for these categories were based on historic trends which could change either way.

The online services ecosystem (all platforms) was thus estimated to be $450 billion in 2015, growing to $820 billion by 2019 and $914 billion by 2020.

The mobile split would vary by segment but would be roughly 75% by 2020 (25% would not be mobile). The final assumption was based on the split among the existing mobile platforms. I put a multiple of roughly 50% for iOS and 35% for Google Android and the rest for China Android.

Multiplying all these assumptions gave me a figure of $275 billion for the iOS portion of the global online services market in 2019. (Incidentally, Android was estimated at $207 billion and China Android $110 billion.) Note that this does not mean this was an expectation of Apple's revenues or that this was the opportunity of Apple obtaining any percentage of this revenue. It was simply the value of what would transact through iOS, a platform which would act as a commerce enabler. This was to be the size of the iOS "ecosystem" or co-dependency between Apple and the companies delivering through its platform.

Ecosystems are a powerful idea. As I recall, this term applied to mobile was coined by a Palm executive in the late 1990s when he referred to the value of all the apps built for the Palm Pilot. The biological term refers to the system of multiple species living in close proximity. It implies an equilibrium as each species benefits from the others and the environment. There might be predators and prey but biodiversity is the successful construct.

The idea of an ecosystem for a platform was also the core strength of Microsoft's Windows which created the network effects around it and it has been the goal of every platform since. The nature of computing and networking implies that these systems grow faster and are more resilient than the more traditional value networks of other businesses or industries.

Now this ecosystem was something we wished to highlight in 2016 as a core strength for Apple. It was not considered as such at the time and I thought putting a figure of $275 billion in 4 years' time was a way to highlight the potential. Time since has proven us right.

This week Apple highlighted the result of another research team who attempted to measure the iOS ecosystem. Their conclusion was that billings and sales facilitated by the Apple App Store Ecosystem in 2019 was $519 billion. More than twice the amount I had so optimistically forecast four years earlier.

The authors also emphasize that this is a conservative estimate and should serve as a baseline.

I feel partly vindicated about that figure as my attempt at a figure was intended to highlight the scope of the ecosystem and it is better to have underestimated it than overestimated it. The authors' methodology was also similar in being bottom-up summation of components by categories of services but the information available today is enhanced by the new data Apple made available on subs and Services revenues and install base.

Note that in the graph below the salient data points of subscribers (red triangles) had not begun until 2017 causing the acceleration in Services revenue (yellow line). Note also the additional square points representing install base.

This figure of more than half a trillion dollars of value transacted through iOS should give some pause. It it a very powerful figure that can be combined with the other data from Apple:

• More than 1.5 billion active devices
• More than 1 billion iPhone users
• More than 500 million paid subscriptions
• More than $1/day iPhone hardware revenues for Apple

The half-trillion per year on services implies between $335 and $520 in spending per user (likely closer to $500) per year. This would be in addition to the approximately $365/yr in hardware spending per user (which Apple books as hardware revenue). In the case of the iPhone there is yet more: the cellular network service which may average $350 per year.

To simplify, the "average Apple user" spends $1/day for each device, $1/day for the network and $1.4/day on items bought through the device. Adding a margin of error, that's between $3.4 and $4 per day each user spends. Oh, and there are about a billion such users.

The total spending enabled by iOS thus is close to $1.4 trillion/yr.

That's a significant amount. It's bigger than many industries. There are only about 12 countries with higher GDP (Spain is about the same.)

How does Apple benefit from this?

Apple captures 30% of billings through its App Store. My estimate for these billings were $67.9 billion in 2019 which means App Store billings were 13% of the 2019 ecosystem. Apple's 30% cut of Billings amounts to 3.8% for the whole ecosystem. It's hardly an oppressive number.

If Apple only captures 3.8% what use is this to Apple?

The last decade has seen Apple emerge as the world's largest company in terms of market capitalization, and not doing so with a wild multiple of revenue or earnings, quite the opposite. It did this by creating the world's greatest customer base. Not in absolute scale. Android and Facebook have larger customer bases with multiple billions of users.

No, Apple's one billion users are simply the best billion users. They are the most likely to stick with Apple and they are the most likely to buy more from Apple and—this is crucial—they are the most likely to buy everything else. Those other companies whose sales come from Apple customers have been taking note. They know that Apple customers are desirable customers and choose to target Apple customers, as much as they can. Associating your company with Apple makes a lot of economic sense.

I will admit however that my argument that Apple created a customer base is contrived. The fact is that Apple creates products and services and those products are the root of its power to attract the right customers. By choosing to create the best products it coincidentally chooses to create the best customers. The power flows from product not from pricing or positioning. This is a lesson lost for many.

Developers and regulators might feel Apple's massive power is perhaps too much. In the last decade, the narration around Apple has shifted from Apple being perpetually "doomed" to it being too dominant. Although I'm sure there are some who will try to conflate the two declaring that dominance will inevitably result in doom, most critics of Apple went from laughing (at it) to crying (about its practices).

The argument that Apple should change its practices developed to price as it does, distribute as it does or design as it does because it was too successful or is "unfair" is getting the causality wrong. Dominance won't be altered by a few points of percentage change (on a tiny fraction of ecosystem transactions). Fairness won't be altered when there are thousands of business models and many remain to be invented. Case in point is pornography which is not permitted on the App Store but which exists in abundance thorough other access methods.

The argument is that Apple should be more generous. That it should decrease the "cut" it takes for distribution. Or that it should not enforce revenue split for the customers it exposes to others.

But this is problematic on many levels. The playing field for all developers needs to be level. The customer must be respected and access to that customer should be constrained or certainly metered. Abuses must be policed and that requires leverage.

These practices are inter-dependent and the effect multiplicative, not additive. Apple has a monopoly on iOS and on MacOS and WatchOS and iPadOS. It does this to control the experience, security and safety of the user. It's that control which created the customer in the first place. It should naturally control access to its hard-earned customers.

It does not monetize the distribution of content or apps unless the developer/creator directly charges for the product or service. Distribution is not cost free and to offer it for free is a subsidy which would create additional market and innovation disincentives. The loyalty of Apple users is evidenced by the 600 million paid subscriptions (end of year estimate) that are booked through the App Store. Developers benefit directly as a result.

One could argue that the abundance of services which don't distribute through the App Store is evidence that the system works as intended. Apple's App store front is its property and it reflects its core values.

Being on the shelf in the App Store means you operate on the terms of the shelf owner. If the rules are not agreeable then the half trillion dollars of ecosystem activity is testament to the availability of alternatives.

About a year and a half ago in Lasts Longer I noted that "keeping iPhones in use" became a top priority for Apple's design for sustainability. I considered this provocative because it prioritizes usage and users over units sold, in contrast to how the company was perceived by investors. This new focus was reinforced by the company's dropping of unit shipments data and the addition of Services data including subscriptions count and gross margins.

Apple effectively transformed itself into a services company with customer acquisition, subscriptions (measured by average revenue per user) and retention/satisfaction as key operating metrics. The 1.5 billion active devices and ~1 billion active iPhones and 500 million paid subscriptions are the new data points rather than units sold.

To succeed with this new Lasts Longer strategy, one of the objectives should be that devices become more durable and their durability should in-turn result in more minutes of use and thus more return on initial purchase price. But how can we measure this? We don't have precise data on the use time. We have some anecdotes but no official data. We do know the iOS operating system is now designed to work on older hardware but that does not give us a measure of what is in use.

Luckily we now have an indicator that can help: Bank My Cell published a new data set on various used phone prices. This is a gold mine.

The data consists of prices for about 220 used phone models that changed hands in 2019. The prices are given for the beginning of the year (earliest date when the model was sold) and the end of the year (latest date when the model was sold.)

It's thus possible to see how various models from a number of companies changed in price during the year. The date of initial release of the phones is also given (though initial selling price isn't. It's a bit tricky to determine initial selling price because the model may have been sold for an extended period of time and discounted through that period.)

What we do have allows comparisons between different manufacturers to see, especially for recent (late) models, just how big the drops have been in prices.

I recommend reading the original post to see some of the comparisons between brands. In addition I chose to illustrate some of the differences with the graphs below.

These graphs show phone model prices at the beginning of 2019 (blue) vs. the end of 2019 (red). The models are not individually identifiable but they are shown by the year of introduction. So, in the case of the iPhone, the 2019 cohort (those released around September 2019) are the top line, then the 2018 group is shown in the second line and on down. Thus the oldest iPhones traded during 2019 were iPhones 5, initially released in 2012.

To read the graph, you can scan each line to see the gap between the red and blue triangles to see how much the phones roughly fell in value. The comparison above is between Apple, Google and Samsung.

Here are some patterns I noticed:

• Google phones had larger drops during the year than equivalent iPhones. Just how much the drops were is listed by the original post: "Google lost an average of -51.68% between Jan-Dec 2019. The Pixel 3 (2018) was the fastest depreciating and highest value loss at -56.70% (-$267)".
• The overall picture of Samsung's phones is hard to discern. Flagship Android phones ($700+) dropped in value roughly twice as fast as Apple's. But the the overall picture is messy. Budget phones are mixed with premium and the average pricing seems to quickly go near zero.
• iPhones have a more valuable "mid-range" for models more than 2 years old. Android phones fall hard in the mid range and cluster around zero quickly. This is the heart of the "old but valuable" proposition.

Depreciation rates might seem academic but depreciation is an indicator of a real perception of value and that in itself is a reflection of utility. Users are likely to pay for a used product only if they think it can still be useful in proportion to the price. New product buyers might pay for other things like prestige, status signaling or just wanting to be first. But used buyers are more mindful of what the product can do--they are less likely to benefit from signaling.

Analogously, the used car market often shows the underlying quality or reliability of a car model. If a luxury car plummets in value it means that it becomes a huge burden to late usage, usually due to servicing costs. In previous decades luxury cars were also durable cars but with complexity they became money pits.

In the used phone market hardware repair and maintenance are less consequential but there is a concern for software support, security and privacy. The serviceability of the battery, the camera quality and the fit and finish of the body matter.

Buyers are not stupid. The market speaks words of wisdom. A phone that is worth more will reflect more inherent utility. Remember that a phone is unlocked more than 80 times a day. If it has 4 years of use then it get unlocked 116,000 times. That's not "uses" but unlocks. Actual usage in terms of taps, swipes, or glances could be triple that figure. There are phones on the list that are 7 years old. It's not unreasonable to assume that a moderately well used iPhone has enabled a quarter million interactions.

Remember that phones are used all day, every day. At home and at work. In cars and in planes.

Even on weekends, and on holidays. And even when you're "social distancing".

In fact, the more physically isolated you are the more likely you are to rely on the phone as your social lifeline. In difficult times the product people turn to first and last isn't one of luxury or frivolity. It's a product that keeps you informed, connected, lets you help others and may even keep you alive.

It's in difficult times that the true character of a product shines through. The smartphone, derided, mocked and blamed for all kinds of societal ills is what we turn to first to avoid getting ill.

The iPhone is the most successful product of all time.

Over 1.6 billion have been sold. Including the iOS products it spun off, the total is over 2.2 billion. Of those 2.2 billion sold, 1.5 billion are still in use.

There are about 1 billion iPhone users.

Economically speaking, iPhone sales have reached one trillion dollars. ((The milestone of $1 trillion iPhone revenues was reached in the fourth quarter 2018 during which time the stock price of Apple fell by 40%.))

Since the iPhone launched, Apple's sales have totaled $1.918 trillion. Of those trillions about one half a trillion was accumulated in the form of  income.

Of that half trillion in income, $360 billion was paid out to shareholders ((As a result, the number of outstanding shares has decreased by 29%)). and $131 billion was paid in taxes.

This sounds like a good business, but no business is good if it is static. What makes a business great is dynamism. The idea is to constantly maneuver for a new or enhanced way of doing business as technologies enable entrepreneurs to fundamentally change how value is captured or allocated.

The iPhone story isn't static, the "pivots" or change in direction are several:

• The App Store, a platform for collaborative innovation where millions of developers are offered the chance to improve the product.
• Accessories, a licensing model for third-party hardware that works with the iPhone
• Distribution through multiple channels
• Integration with other Apple Products
• The marketing of older products alongside new ones at reduced prices
• An expanded product portfolio with a broader range of prices
• Trade-in and financing options

Each of these initiatives contributed to the iPhone growth story but the biggest change in business model was the addition of services. Apple Services grew out of the iTunes business that pre-dates the iPhone and was established to provide content for the iPod.

In 2006, the year before the iPhone launched, Apple customers spent $3.3 billion on iTunes, Software and Services. By 2018 the spending rate was $80.5 billion/yr. It's very possible that this year's spending rate will reach $100 billion/yr. This new division is simply called Services today and consists mainly of third-party apps and third-party content sales as well as licensing.

Recently Apple launched a set of new services that it will offer itself. This includes television, films, financial services and news. Apple already has a music service of its own and file storage (iCloud) both of which are offered as subscriptions.

Apps are also allowed to offer paid subscriptions, and that total has reached 390 million, growing at 30 million a quarter with an expected total of 500 million by 2020. That amounts to one subscription for every other iPhone in use.

Some would argue that even with a $43 billion revenue rate, ($80 billion billing  rate) ((The difference is in the way Apple accounts for App Store revenues: declaring only the 30% portion of sales that it keeps as revenues, and not including the 70% that is paid out to developers. The "billing rate" is what consumers spend, the "revenue rate" is what Apple reports.)) Apple's business is still a hardware business and that comes with low margins, potential for disruption, non-recurring revenues and cyclicality.

This is not the case. Apples's business has high margins (64% gross margin for services, 34% for products), has been resilient over 12 years while attracting hundreds of imitators at lower price points, and has loyalty and satisfaction which results in more than 90% re-purchase rates. Cyclicality is driven by seasonality and product lifespans, not competition.

This common misconception of Apple is why it continues to be valued at a deep discount to not only peer companies who are services oriented (Google, Facebook, Microsoft and Amazon) but also at a discount to the overall market (the S&P 500).

Apple, since its inception, has always been oriented around its customers, not its products. The questions asked by management are "what can the company do to deliver experiences and satisfaction" rather than "what products can the company build".

Every company is bound by its capabilities but the best companies re-shape these bounds because they are defined by priorities.

A priorities-driven company habitually re-designs its processes and its resources. A resources- or process-driven company re-designs its priorities as its capabilities change.

Moving as it does between computers, devices, software, services, retail, logistics and manufacturing means that it's not classifiable as an "x" company where "x" is an industry sector. Rather, the company should be classified by the set of problems it seeks to solve (e.g. communications, community, productivity, creativity, wellbeing).

This disconnect between what people think Apple sells and what Apple builds is as perplexing as the cognitive disconnect between what companies sell and what customers buy.

Companies sell objects or activities that they can make or engage in but customers buy solutions to problems. It's easy to be fooled that these are interchangeable. ((They are only correlated. Purchase decisions are not *caused* by a product's existence. The real cause is a combination of need and supply and time and circumstance of purchase.))

Conversely Apple offers solutions to problems that are viewed, classified, weighed and measured as objects or activities by external observers. Again, it's easy to be fooled that these are the same.

This analysis is, of course, applicable to any company. Here I'm using Apple as a lens. This is because it's just so much easier to tell this story with the narratives and anti-narratives that are so widely disseminated.

For the last two years I've been studying the transportation economy and introducing the idea of Micromobility. Simply, Micromobility promises to have the same effect on mobility as microcomputing had on computing. Bringing transportation to many more and allowing them to travel further and faster.  I use the term micromobility precisely because of the connotation with computing and the expansion of consumption but also because it focuses on the vehicle rather than the service. The vehicle is small, the service is vast. ((If you want to learn about the real future of transportation sooner rather than later, do consider coming to the Micromobility California conference.))

One of the elements of analysis for Micromobility is the notion of Unit Economics. The idea is that each vehicle can be seen as an independent business. It requires an investment, has a revenue attached, requires operating costs and fixed costs and finally, hopefully, generates earnings. A fleet's economics is therefore a multiplication of the unit economics by the fleet size. A similar partial construct exists for mobile network operators where the network revenue is defined by ARPU (average revenue per user). In consumer hardware we also have the idea of ASP (average sales price) and BOM (bill of materials) which describe the revenue and variable cost of each device.

In the case of Micromobility the unit economics is more broadly applied in being an entire P/L statement for each vehicle. One example for the e-scooter sharing company Bird is here. If the unit economics of Bird is consistent across geography and time then the entire business can be valued based on one "average unit". Measuring the health of the business can thus be summarized in BOM, Utilization, Lifespan, Attrition and Cost structure or one unit.

For some time now I've advocated a similar approach for Apple.

The idea is to look at each Apple device sold as a black box that requires investment, generates revenue and, given a certain cost rate, produces a profit. Indeed the company has suggested that this is how it measures itself and has now encouraged us to do the same by withholding measurements that misdirect us away from this method.

Unit sales for Apple are like unit production rate for micromobility. It's certainly important to know how many e-scooters or e-bikes can be manufactured and deployed but it's far more important to know how long each one lasts (lifespan) and how frequently it's used (utilization) and what pricing can be obtained for that use or a per-mile basis.

A restriction on unit production could slow the network's growth but it may not affect the demand measured in miles of distance that users need to cover. A lack of vehicles means users will hire cars or walk or transit or perhaps won't take the trip at all. But once supply is provided the choice of micromodes should compel users to use them.

In this view, the Apple business can be seen as a base of devices multiplied by the revenue per device subtracting the cost.

In the latest letter to investors Tim Cook wrote that the total number of active devices has increased by more than 100 million in the last twelve months. Given that the figure a year ago was 1.3 billion, the current total must be 1.4 billion. We can also estimate that Apple sold about 303 million devices in 2018. This implies 2 out of 3 were replacements and 1 out of 3 increased the base.

Services revenues were about $40 billion in 2018 (up 28%). Total revenues were $261.5 billion.

Thus for the whole of 2018:

• $194 per active device of which...
• $30 in service revenues per active device

We can repeat the process for costs and earnings.

Through this lens, Apple's business over the last three years can be seen in the following graph:

A few observations:

• The business is remarkably stable over the last three years.
• The top line went from $179 to $165.
• The bottom line (Net margin) per device went from $55 to $51.
• This happened while the base multiplier went from 1.15 billion to 1.4 billion.
• Service revenues are increasing (from $24 to nearly $30)

Seen this way the pattern of service growth at the expense of hardware is clearly evident. This is generally contrary to perception when looking at devices sold per quarter.

This is a three year snapshot but if we were to forecast longer term, the questions that arise:

• How rapidly can the base multiplier rise? It had been rising at 150 million/yr for two years and 100 million for one year. What is the likely increase in the future? What is the saturation point? Is it 1.5 billion (which seems a year away) or is it 2 billion or more?
• How are services ramping? The revenue per device is ramping in an accelerated rate (from $2/yr/yr to $3/yr/yr). How high can revenue per device rise? Is $50/yr possible? Higher?
• Is the ASP increase reducing hardware revenues? This point is contentious and I will write about it separately.

It's going to take a while for this view of the company to prevail but it's clearly the way the company itself operates and how it sets its objectives.

I think Lisa Jackson's presentation at the September 2018 iPhone launch event was perhaps the most interesting and most profound.

Lisa Jackson is Apple’s vice president of Environment, Policy and Social Initiatives. Previously, Ms. Jackson served as Administrator of the U.S. Environmental Protection Agency (EPA). In her role at Apple she has been responsible for the transition to 100% renewable energy use by Apple across all its facilities.

This goal has been achieved and it's a remarkable achievement deserving congratulations. But her presentation was noteworthy for setting a new goal.

She laid out a goal for Apple to eliminate the need to mine new materials from the Earth.

She said that to reach that goal Apple will have to do three things:

1. Sourcing recycled or renewable materials for all products.
2. Ensure that Apple products last as long as possible.
3. After a long life of use, ensure that they are recycled properly.

It's this second point that I thought would bring the house down.

To emphasize the second point she said Apple now strives to design and build durable products that last as long as possible. That means long-lasting hardware coupled with long-lasting software. She pointed out that iOS 12 runs even on iPhone 5S, now five years old. Because iPhones last longer, you can keep using them or pass them on to someone who will continue to use them after you upgrade.

She said that "keeping iPhones in use" is the best thing for the planet.

At this point in the presentation I wondered if everyone would rush out of the room and call their broker to sell Apple shares. One premise of investing in durable goods hardware companies is that value depends on frequency of upgrades. If products are not replaced frequently they do not generate revenues and the company selling them ends up growing very slowly if at all after markets saturate. The smartphone business is certainly approaching saturation and the implication of making Apple products more durable would imply lower revenues from replacements. This anxiety around replacement rates and extended lives is used by analysts to discount future cash flows and if those lifespans are extended price targets come down.

So why would Apple want to do this?  What is the logic of this durability focus as a business model? It may be good for the environment but is it good for the bottom line?

Of course, there would be not much business without an environment and we should all strive for sustainability.  But this is an existential observation, and it's defensive. The important call to make is that Apple is making a bet that sustainability is a growth business.

Fundamentally, Apple is betting on having customers not selling them products.

The purpose of Apple as a firm is to create and preserve customers and to create and preserve products. This is fundamental and not fully recognized.

To understand how this works, if you look at the pricing graph below, you can read it as a story of increasing prices for a decreasing market share. But if you understand that each advance in products increases absorbable ((Insoluble  utility is very dangerous and it's important to qualify e.g. higher storage capacity that people hunger for or better cameras that increase picture taking from features that are neat but don't get utilized)) utility then the cost per use remains steady or declines.

An iPhone at $1200 may be less expensive than an iPhone at $600 if the $1200 version lasts twice as long as is used twice as much each day. The $1200 phone delivers 4x the utility at twice the price, making it half the price. By making more durable products, both in terms of hardware and software, the customer base is satisfied and preserved.

Practically, the initial buyer may resell the iPhone and that 2nd hand devices may be sold yet again. This means an iPhone could have three users over its life and thus it could end up expanding the audience for Apple by a factor of 2 or even 3.

The expanded audience is offered accessories, additional products such as wearables and, of course, services. These residual business models are certainly profitable, perhaps even more so than the iPhone.

Overall Apple has 1.3 billion devices in use and perhaps as many as 1 billion users. This base is certain to expand and it will expand more rapidly with durable devices and software.

This is a hardware-as-platform and hardware-as-subscription model that no other hardware company can match. It is not only highly responsible but it's highly defensible and therefore a great business. Planned obsolescence is a bad business and is not defensible.

Therefore the statement that Apple now prioritizes device and software longevity is very important and I consider it one of the most important statements made during the 2018 iPhone launch event.

Every October, at the end of its fiscal year, Apple files its Form 10K or annual report. In this report the company includes a section titled "Capital Assets" which details expenditures for capital equipment. This is last year's entry:

The Company’s capital expenditures were $14.9 billion during 2017. The Company anticipates utilizing approximately $16.0 billion for capital expenditures during 2018, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.

Note that there are categories of spending detailed and that their order might indicate the degree of such spending, suggesting that product tooling and manufacturing equipment is likely to be the costliest category.

After this report, during subsequent quarters the company may update this forecast of spending. In the last (third fiscal) quarter the entry was as follows:

The Company’s capital expenditures were $11.1 billion during the first nine months of 2018 . The Company anticipates utilizing approximately $17.0 billion for capital expenditures during 2018, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.

Note that the forecast of $16.0 billion was updated to $17.0 billion and the first 9 months' expenditures were $11.1. Since there is only one quarter remaining ((and since at the time the quarterly report is filed, only about 2 months remain in the quarter)) it's reasonable to assume that the company's forecasts are more likely to be precise and that therefore the difference between total expected spending and already spent, i.e.f $5.9 billion remains to be spent.

The actual spending is not recorded quarterly but an approximate value is reported in the Cash Flow statement as "Payments for acquisition of property, plant and equipment". That can be tracked but it does not equal exactly the capital expenditure. For example, the quote above says expenditures were $11.1 billion through first 9 months but the total of all payments for acquisition of PP&E is $10.272 billion.

Minor ((To the extent that $1 billion can be considered minor)) differences, aside, this forecast and actual spending and payments data is significant because it is highly correlated to Apple's overall business. Assuming that the spending on manufacturing equipment and information systems hardware (i.e. data centers) is in support of the iOS device sales and services we can try to show how sales correspond to spending with the following graph:

Here sales are shown as a bar graph and the various spending forecasts and actual payments are shown as lines. Also note that the spending and sales are offset by one quarter. The fiscal year is used for spending and the calendar year for sales. The reason is that spending is presumed to lead sales by approximately one quarter.

There are some notable discrepancies, especially with the 2012/2013 period when spending was brought forward a quarter thus showing a surplus to forecast in 2012 and a deficit in 2013. But apart from that, there is a broad correlation between spending and sales.

This means that the CapEx forecast in October is a good indicator of sales in the following year.

In fact, the relationship is can be shown with four scatter plots, one for each of the published figure:

I caution that this is a yearly forecast and it is revised through the year on a quarterly basis, sometimes up, sometimes down. It's therefore not a perfect indicator and of course the relationship between sales and spending is not perfectly predictable. Note that there are four types of spending that can be measured, two are forecasts (one year and revised) and two are actuals (cash flow payments and reported total expenditures)

We can measure the best variable that fits the sales data through the coefficient of determination or R-squared. The best fit seems to be with Payments for acquisition of property, plant and equipment (R-squared of 0.976).

This gives the formula for yearly sales as 15.915x + 15809 where x is the expected total spending. That spending to date has been $10.272 billion and it's probably going to exceed $16 billion for the year.

Using $16 billion spending total, we can calculate iOS products and services for calendar 2018 of $270.45 billion.

iOS and Services sales to date have been $103.2 billion with an estimate for next quarter of about 54.3 billion (based on guidance) and thus a total through Q3 of $157.5 billion. Subtracting this from the $270.45 billion expectation from the calculation above gives a fourth calendar quarter iOS revenue of $113 billion.

Adding $7 billion for the Mac results in a total net sales of 120billion. This therefore is what I'd put forward as a reasonable target for CQ4.

Note that this is equivalent to a growth of 36% from the 2017 fourth quarter.

[UPDATE: Original version used total sales rather than iOS related products and services (i.e. excluding Mac). The text has been edited to reflect the correct figures.]

The following is a transcript of the comments from Tim Cook (CEO) and Luca Maestri (CFO) at Apple's Q1 2018 Earnings Conference Call February 1, 2018. I color coded my interpretation of the comments into four categories:

• Grey: Background and promotional commentary
• Red: Strategy and signals of what management considers important and may include data beyond the regularly reported numbers.
• Green: Financial data
• Black: Commentary.
• Blue: My commentary, in brackets.

For a quick read of Apple's strategy, read the Red text. These comments are not repeated in financial reports. Highly recommended.

For a quick read of Apple's financial performance, read the green text (which are replicated in financial reports). Read this if you don't want to wade through the financial reports.

For marketing or product material, read the grey text.This is sometimes unique but also repeats product launch information.

----
Tim Cook:  Thanks, Nancy and thanks everyone on the call, and welcome to everyone today. Before we dive into the quarter, I'd like to take a moment to talk about a significant milestone we recently crossed.

Apple's active installed base reached 1.3 billion devices in January and is at an all-time high for all of our major products. 1.3 billion devices represents an astonishing 30% growth in just two years. It speaks to the strength and reliability of our products and our ecosystem, as well as the loyalty, satisfaction and engagement of our customers. It's also fueling tremendous growth in our services business, which I’ll talk about a little later in the call. [This is probably Apple's most important number. For at least the next 20 years this is the key performance metric and it can be used to derive company's valuation. A summary of the history of active devices vs. units sold is shown in the graph below:]

Turning to the December quarter. We're thrilled to report Apple's biggest quarter ever, which set new all-time records in both revenue and earnings. We generated revenue of $88.3 billion, which is above the high-end of our guidance range, and it is up almost $10 billion or 13% over the previous all-time record we set a year ago.

It's also our fifth consecutive quarter of accelerating revenue growth with double digit growth in each of our geographic segments around the world. What makes us even more remarkable is that the quarter we're reporting today was 13-weeks long, while the year ago quarter was 14-weeks. When we look at the average revenue per week in the December quarter this year compared to last year, our growth was a stunning 21%. [The 13-week vs. 14-week year-on-year comparison is repeated several times. The summary differences are shown in the table below:] 

Our growth was broad-based and a key driver was iPhone, which generated its highest revenue ever. iPhone X was the best-selling smartphone in the world in the December quarter according to Canalys, and it has been our top selling phone every week since it launched. iPhone 8 and iPhone 8 Plus rounded out the top three iPhones in the quarter. In fact, revenue for our newly launched iPhones was the highest of any lineup in our history, driving total Apple revenue above our guidance range. [The iPhone X is a huge hit. It drove the average selling price $100 higher y/y. This is not only unprecedented for Apple but for the entire Industry. The average smartphone sells for less than $300 while iPhones sold for $800. The gap is widening. The following graph shows the product mix and the average resulting price.] 

I want to take a moment to recognize the tremendous amount of work that went into creating iPhone 10. Our teams carried out an extremely complex launch from both an engineering and operations perspective, executing an outstanding product ramp that required years of research and development; one that introduced innovative features like an edge-to-edge Super Retina Display and the TrueDepth Camera, which enables face ID. Our customers love these new features and the new gestures like simply swiping up from the bottom, which make using iPhone even more intuitive and enjoyable.

Our team has put the technology of tomorrow in our customers’ hands today, set a standard for the next decade of smartphones and we are very proud of their achievements.

It was another very strong quarter for services with revenue of $8.5 billion, up 18% over last year, and we’re on pace to achieve our goal of doubling our 2016 services revenue by 2020. The number of paid subscriptions across our services offerings passed 240 million by the end of the December quarter, that’s an increase of 30 million in the last 90 days alone, which is the largest quarterly growth ever. [Services has been growing relentlessly for over a decade. This steadiness of growth makes is a juggernaut. Apple is increasingly speaking about subscriptions as the key metric and 240 million is reaching record territory. The rise of Services is shown below (both revenues and consumer spending.)]

We had an all-time record quarter for the App Store with our best holiday season ever. We’re seeing great excitement around augmented reality with customers now enjoying over 2,000 ARKit enabled app, spanning every category in the App Store. In December, when Pokémon GO released its new augmented reality features built with ARKit, it jumped the top of the App Store charts. Last week, on a stop in Toronto, I met developers who are hard at work on creative applications using ARKit from art appreciation to ecommerce, and I was very impressed with what I saw.

Just for months after ARKit launched to the public, we’ve already released ARKit 1.5 in beta to developers around the world, and the response has been tremendous. Augmented reality is going to revolutionize many of the experiences we have with mobile devices. And with ARKit, we’re giving developers the most advanced tools on the market to create apps for the most advanced operating system running on the most advanced hardware. This is something only Apple can do.

In addition to the App Store, several other services had their biggest quarter ever, including Apple Music, iCloud and Apple Pay, all of which saw growth in both active users and revenue.

Apple Pay has reached an important milestone in the U.S. As a result of 50% year-over-year growth in merchant adoption, it’s now accepted at more than half of all American retail locations, which includes more than two-thirds of the country’s top 100 retailers. Now available in 20 markets, global Apple Pay purchase volume more than tripled year-over-year and we’re delighted to be expanding to Brazil in the coming months. [There are no absolute data points on Apple Pay but we do have some scattered growth data. The US data is cited here but in my experience it's more popular in select countries like UK where users are using it habitually]

Today, you can use Apple Pay to take the subway in Guangzhou, China, see a concert at London’s Wembley Stadium or buy a souvenir in Yosemite National Park. In the U.S., we launched Apple Pay Cash in December, and it’s off to a terrific start. Millions of people are already using it to send and receive money with friends and family quickly, easily and securely; to split a bill, pay someone back, or send last minute gift right from the messages app.

It was our best quarter ever for the Apple Watch with over 50% growth in revenue and units for the fourth quarter in a row and strong double-digit growth in every geographic segment. Sales of Apple Watch Series 3 models were also more than twice the volume of Series 2 a year ago. Apple Watch is the most popular, smart watch in the world and gained market share during the quarter based on the latest estimates from IDC. [Apple Watch is growing consistently. The following graph shows my estimates of volume (total 42 million to date) and revenues (total $15 billion) based on all available data and commentary from management.]

It was the third consecutive quarter of growth for iPad revenue, thanks to the strength of both iPad and iPad Pro. Based on the latest data from IDC, we gained share in nearly every market we track with strong outperformance in emerging markets.

Worldwide, almost half of our iPad sales were the first-time tablet buyers are those switching to Apple, and that’s true in some of our most developed markets, including Japan and France. In China, new and switching users made up over 70% of all iPad sales.

For Mac, we launched the all new, iMac Pro in mid-December. It’s an entirely new product line designed for our Pro users who love the all-in-one design of iMac and require workstation class performance. It's the fastest, most powerful Mac ever, delivering incredible computational power, for simulation and real time 3D rendering, immersive VR and complex photography audio and video projects. Worldwide, 60% of our Mac sales were the first time buyers and switchers and in China, that number was almost 90%.

We're looking forward to getting HomePod in customers’ hands beginning next week. HomePod is an innovative wireless speaker, which delivers stunning audio quality wherever its placed in the home, thanks to the advanced Apple engineered hardware and software.

Together with Apple Music, HomePod gives you instant access to one of the world's largest music catalogs. And with the intelligence of Siri, it’s a powerful assistant you control through natural voice interaction. We're very happy with the initial response from reviewers who've experienced HomePod ahead of its launch, and we think our customers are going to love this new product.

We believe one of the key issues of the 21st century is education. And because of that, we've strengthened our commitment and investment into initiatives like everyone can code. To find the innovators of the future, we need to nurture the students of today. Our App Development with Swift curriculum, which is available free on iBooks, has been downloaded more than 1.2 million times worldwide with almost half of those coming from here in the United States. It’s also being taught in dozens of community colleges across the country, putting practical skills in the hands of today’s jobs seekers.

I was in London two weeks ago as we announced that the program was expanding to more than 70 colleges and universities in Europe. Millions of students around the world will have the opportunity to add Swift to their coding vocabulary and gain skills that are essential for today’s economy.

This is an exciting time at Apple and with the best lineup of products and services we've ever had and a set of initiatives that show how business can be a force for good in the world. We could not be more excited about our future.

Now, for more details on the December quarter results, I'd like to turn over the call to Luca.

Luca Maestri: Thank you, Tim. Good afternoon, everyone. Our business and financial performance in the December quarter were exceptional, as we set new all-time records for revenue, operating income, net income and earnings per share.

Starting with revenue, we’re reporting an all-time record, $88.3 billion, up nearly $10 billion or 13% over the prior record set last year. It is our fifth consecutive quarter of accelerating revenue growth. As you know, the December quarter a year ago spanned 14-weeks compared to 13-weeks this year, which is important to consider as we have set the underlying performance of our business this year. When we look at average revenue per week, our growth rate was even higher at 21% with growth across all product categories for the third consecutive quarter.

Our results were terrific all around the world with double digit revenue growth in all our geographic segments, an all-time quarterly record in the vast majority of markets we track, including the U.S., Western Europe, Japan, Canada, Australia and Korea, as well as Mainland China, Latin America, The Middle East, Central and Eastern Europe, and India.

In Greater China, we were very happy to generate double digit revenue growth for the second quarter in a row and in emerging markets outside of Greater China, we saw 25% year-over-year growth.

Gross margin was 38.4% at the high end of our guidance range. Operating margin was 29.8% of revenue. Our net income was $20.1 billion an all-time record, and up $2.2 billion over the last year. Diluted earnings per share were $3.89 also an all-time record and cash flow from operations was very strong at $28.3 billion.

During the quarter, we sold 77.3 million iPhones, the highest number ever for a 13-week quarter. Average weekly iPhone sales were up 6% compared to December quarter last year with growth in every region of the world despite the staggered launch of iPhone 10. We established all-time iPhone revenue record in nearly every market we track with double-digit growth in all of our geographic segments. iPhone ASP increased to $796 from $695 a year ago, driven primarily by the launch of iPhone 10 and the success of iPhone 8 and 8 Plus.

We exited the December quarter towards the lower end of our target range of five to seven weeks of iPhone channel inventory with less than 1 million more iPhones in the channel compared to the December quarter a year ago, in line with our growth in average weekly unit sales. Customer interest and satisfaction with iPhone are very, very strong for both consumers and business users.

The latest data from 451 Research indicates U.S. customer satisfaction ratings of 96% or higher across iPhone models. In fact, combining iPhone 8, iPhone 8 Plus and iPhone 10, consumers reported an amazing 99% satisfaction rating. And among business customers planning to purchase smartphones in the next quarter, 77% planned to purchase iPhone. Our customers are also incredibly loyal with Kantar's latest U.S. research, reflecting a 96% iPhone loyalty rate, the highest ever measured. [Customer satisfaction is the second most important figure after active user base. Combining these two figures yields the recurring revenue value of the company. Remember what Deming said: the most important measurements for a company's value are the multipliers of a satisfied customer and a dissatisfied customer--these numbers never appear on any financial report but they are applied to all the numbers on every report].

Turning to services. We had a terrific quarter with revenue of $8.5 billion, up 18% year-over-year and up 27% in terms of average revenue per week; that is an acceleration to the 24% services growth run rate that we experienced in the September quarter.

The App Store set a new all-time revenue record. The Store’s all-new design is off to a fantastic start with quarterly store visitors, transacting accounts and paying accounts, reaching new all-time highs. During the week beginning December 24th, a record number of customers made purchases or downloaded Apps from the App Store, spending over $890 million in that seven-day period, followed by $300 million in purchases on New Year’s day alone.

And according to App Annie’s latest report, the App Store continues to be the preferred destination for customer purchases by a very wide margin, generating nearly twice the revenue of Google Play. Across all our services offerings, paid subscriptions reached $240 million with growth of 58% over last year and they were a major contributor to the overall strong growth in services revenue. [Apple has half the user base of Google Android. This is based on Google's May 2017 report of 2 billion active devices vs. the 1.3 billion that we just got from Apple. And yet these users collectively spend twice as much on apps. This ratio of "half the users, twice the spending" has been cropping up in individual developer anecdotes and can also be seen in other metrics of engagement and consumption. This should not be surprising as it conforms to the Pareto distribution of economic value.]

As Tim mentioned, it was our best quarter ever for Apple Watch. And when we add to this us from Beats and AirPods, our total revenue from wearables was up almost 70% year-over-year. In fact, wearables were the second largest contributor to revenue growth after iPhone, which is impressive for a business that started only three years ago. In total, our other products category set a new all-time record with quarterly revenue exceeding $5 billion for the first time. [Wearables now includes more than watches but watches are likely still the dominant product.]

Next, I’d like to talk about the Mac. We sold 5.1 million Macs during the December quarter, which translates to a 2% year-over-year increase in average sales per week. Mac performance was particularly strong in emerging markets with unit sales up 13% year-over-year and with all-time records in Latin America, in India, Turkey and Central and Eastern Europe. On a worldwide basis, the active install base of Macs was up double-digits year-over-year to a new record.

It was also another growth quarter for iPad. We sold 13.2 million units with average iPad sales per week up 8% over last year’s December quarter. iPad sales grew strong double-digits in many emerging markets, including Latin America, the Middle East, Central and Eastern Europe and India, as well as developed markets, including Japan, Australia and Korea. The active install base of iPad has grown every quarter since its launch in 2010, and it reached a new all-time high in December, thanks to extremely high customer loyalty and large numbers of first-time iPad users. [iPad is clearly recovering from a long decline. ASPs are rising as it's being positioned as a PC alternative. Its low end functions are being absorbed by large screen iPhones.]

NPD indicates that iPad had 46% share of the U.S. tablet market in the December quarter, up from 36% share a year ago. And the most recent surveys from 451 Research found that among customers planning to purchase tablets within 90 days, 72% of consumers and 68% of business users planned to purchase iPads. Customer satisfaction is also very high with businesses reporting a 99% satisfaction rating for iPad.

We are seeing great traction in enterprise as businesses across industries and around the world standardize on iOS. For example, Intesa Sanpaolo, one of Europe’s leading banks, has chosen iOS as the mobile standard for its entire 70,000 employee base in Italy; choosing iOS for its security, user interface, accessibility and reliability, Intesa Sanpaolo will deploy native apps to improve employee productivity in customer support, human resources, and marketing across the company.

And LensCrafters, one of the largest optical retail brands in North America, will be using over 7,000 iPad Pros to enable digital eye exams and digital optical measurements in a personalized and interactive experience. We’re also rolling out a new initiative, called Apple AtWork to help businesses implement employee choice programs more easily and offer Apple products company-wide.

Resources from both Apple and our channel partners will enable enterprise IT and procurement teams to buy or lease Apple products more efficiently, streamline the setup of iPhone, iPad, and Mac, and deliver a seamless onboarding experience for employees. We launched the program with CDW in the U.S. last week, and we would be expanding to more channels and regions later this year.

The December quarter was extremely busy for our retail and online stores, which welcomed 538 million visitors. Traffic was particularly strong during the four-weeks following the launch of iPhone 10, up 46% over last year. And across the quarter, our stores conducted over 200,000 today at Apple sessions, covering topics including photography, music, gaming, and app development, and art and design. Just last weekend, we opened our first store in Seoul, Korea and we’re looking forward to opening our first store in Austria in a few weeks. These newest openings will mark the expansion of our retail store presence to 21 countries.

Let me now turn to our cash position. We ended the quarter with $285.1 billion in cash plus marketable securities, a sequential increase of $16.2 billion. $269 billion of this cash, or 94% of the total, was outside the United States. We issued $7 billion in debt during the quarter, bringing us to $110 billion in term-debt and $12 billion in commercial paper outstanding, for a total net cash position of $163 billion at the end of the quarter. We also returned $14.5 billion to investors during the quarter. We paid $3.3 billion in dividends and equivalents, and spent $5.1 billion on repurchases of 30.2 million Apple shares through open market transactions.

We launched a new $5 billion ASR program, resulting in initial delivery and retirement of 23.6 million shares and we retired 3.8 million shares upon the completion of our 12th ASR during the quarter. We’ve now completed over $248 billion of our $300 billion capital return program, including $176 billion in share repurchases against our announced $210 billion buyback program with $34 billion remaining under our current authorization. [An updated look at Apple's cash is shown below]

Turning to taxes. Due to the recently enacted legislation in the U.S., we estimate making a corporate income tax payment of approximately $38 billion to the U.S. government on our cumulative past foreign earnings. This amount is very similar to what we had been accruing on those earnings in our financial results through fiscal year 2017, including the $38 billion payment. We will have paid over $110 billion of corporate income tax on our total domestic and foreign earnings during the last 10 years for a cash tax rate of about 26%. [Apple has paid more tax than any company in history, and is about the make the largest single payment to the US Treasury.]

Our tax rate of 25.8% for the December quarter was close to our guidance of 25.5% as the lower U.S. statutory rate from the new legislation was effective offset by the remeasurement of deferred tax balances.

As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call; we expect revenue to be between $60 billion and $62 billion; we expect gross margin to be between 38% and 38.5%; we expect OpEx to be between $7.6 billion and $7.7 billion; we expect OI&E to be about $300 million; and we expect the tax rate to be about 15%.

Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is $163 billion. And given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral overtime. We will provide an update to our specific capital allocation plans when we report results for our second fiscal quarter, consistent with the timing of updates that we have provided in the past.

Finally, today our Board of Directors has declared a cash dividend of $0.63 per share of common stock, payable on February 15, 2018, to shareholders of record as of February 12, 2018.

From the way Apple reports its revenues you might think that the company has several operating segments. There are the iPhone, the Mac, the iPad for which units and revenues are reported. Then there are Services and Other Products for which we have revenues only.

Services is a collection of all non-hardware revenues and is (finally) being recognized as a non-trivial business. With reported revenues of $26.6 billion in the last twelve months, it's big enough to be a Fortune 100 company and set to double in four years. ((Although a non-zero business, the valuation of Services continues to confound observers who cannot separate it from the hardware businesses it attaches to--which themselves are considered near commodity value--thus paradoxically valuing the overlying asset of Services near or precisely at zero. Incidentally, Facebook is Fortune 98 at $27.3 billion and it is also one of the top 5 largest business by market capitalization.))

That leaves "Other Products" which now becomes the revenue segment that is  "most likely to be ignored." This segment had revenues of only about $11.5 billion in the last 12 months which would place it at only a Fortune 245 ranking, equivalent to a Toys "R" Us or Biogen. How should we value Other Products?

Other includes many hardware products including iPod, Apple TV, Beats, Apple Watch, AirPods and, soon, HomePod. Each is a significant product, with Watch probably the largest single contributor. But since we don't have specific unit numbers, we are left guessing at the contribution of each.

The Watch itself has been a point of scrutiny as it could be initially teased out of the mix through an observation of the before-and-after launch vs. trend-line as shown below:

This separation of Watch became harder to discern after the launch of AirPods. Though they are still very hard to obtain, they might be "moving the needle" by now with a contribution that would muddy the Other category further. Same with updated Beats headphones.

This separation will be harder still with the launch of HomePod later this year. This product is priced at a point similar to the Watch and the quantities sold will be very hard to estimate without Apple's revealing of actuals.

Fundamentally however, all the "Other products" will have a common relationship to the iOS and MacOS hardware: attachment to and integration with a "parent" platform. Apple TV might be stand-alone but I strongly doubt there are many sold into offices or households which don't have iOS usage.

This means that "Other Products" are very similar to "Services" in that there is a dependency on a primary platform and, as it has been argued, they are therefore fragile. If the core platform declines then the Services and Other Products decline as well.

Given this dependency it makes little sense to carve these categories out as separate businesses. They cannot stand alone. They are very much the "children" of the parent platforms.

This is why it's assumed that Services, (a Fortune 100 company) and Other Products (a Fortune 250 company) can be discounted to zero. By focusing attention on the iPhone one can capture all the essential value of Apple. This is in contrast to the "sum-of-parts" valuation that could be applied to a set of independent business units in other companies.

And yet I started this discussion with the point that you might be tempted to look at Apple on the basis of these reported revenue segments. The choice of what Apple reports is arbitrary. It could report no segment revenues at all and publish just one revenue number. This is roughly what Google Amazon and Facebook do. Or it could report segments in some other way. For instance, app store revenues and AirPods could be reported as part of "The iPhone Division". Or maybe it could bundle all iOS devices and services and accessories into another segment called "The iOS Group". Or it could create a "Devices group" and a "Personal Computing" group. Microsoft famously shuffles its revenues into creative segments based on various organizational structures or choice of what it wants to project as its focus.

There is no limit to the ways Apple could slice revenues into segments. The reason Apple does it the way they do is mostly due to historical reasons. The company used to report the iPod separately as a segment but it no longer does. It also used to report Software separately, because, presumably,  it charged for it but now it no longer does. It also separated laptops or portables from desktops.

The current reporting system is tempting us to draw certain "business unit" conclusions. These boundaries are illusions because Apple does not have business units. It has only one Profit and Loss statement (P/L) and is organized functionally. There is no "head of iPhone" or "head of Mac" responsible for each siloed revenue and cost structure. Instead, the entire business should be seen as a whole because it is managed as a whole.

This is easily evident in how the products are designed and marketed and how they are engineered. The iPhone may spawn AirPods and AirPods may have no value outside the iPhone but the iPhone is valuable precisely because it has AirPods and Apps and Music and iCloud. And Apple TV, and HomePod and whatever comes next. The reason the iPhone can be sold at three times the price of competitor products is because of the Services and Other Products and iPad and Mac symbiosis. This integration drives the satisfaction, loyalty, price and brand value. There there are the Apple Stores and the launch events and the countless details that make up the ownership experience.

The fact is that you can't slice and dice Apple.

There is one Apple and it must be analyzed as a unitary entity. That analysis is therefore difficult. It is easy to pick up the numbers given and study them in isolation. The iPhone, the iPad, the Mac. We all do that.. However we miss a great deal in doing that.

The lesson is that data we obtain leads us to see something but it also blinds us by taking attention away from what we cannot see. All data lies by omission. That which is left unmeasured may be where all the truth lies.

The App Store is almost 9 years old. In that time it has generated about $100 billion in revenues, of which about $70 billion has been passed on to developers and $30 billion was kept by Apple. It's very likely that running the App Store for 9 years did not cost $30 billion so, if it were an independent "business unit" it would probably have been and still be quite profitable.

But Apple does not run "business units" with separate Profit and Loss statements. The App Store is a part of Services which is an amalgamation of non-hardware sources of revenues but that does not mean it's a business. The purpose of Services isn't to turn a profit or define its value through some metric of financial performance.

The purpose of Services is to make the experience for the Apple user better. The combination of good experiences allows Apple to be perceived as a valuable brand and that allows it to obtain consistently above-average profitability through pricing power. I like to emphasize that the iPhone at over $600 in average price is more than twice the average price of all the other smartphones and captures over 90% of all available profits.

This is something that remains after a decade and indeed the price is rising in the face of overall price erosion, all without a decrease in volumes. The sustainability of this exceptionalism is due to no one single thing. It's due to the persistence across all the things Apple does: product, stores, software and services and many other details too numerous to count.

The result is a large and expanding base of satisfied customers and a large and expanding base of partners both in hardware and software and services. The WWDC event this year showed how the ecosystem of Apple is booming with over 3 million new developers and Keynote screenfuls of partnerships. All this makes for a complex picture but it's a real picture.

The latest numbers on Services try to tell this story: 180 billion App downloads from 500 million App store weekly visitors. The download rate is accelerating as shown in the following graph:

The revenue or payment rates can also be shown as accelerating though at a different rate. In both cases, the story of apps is not yet over, regardless of commentary to the contrary. Much of this growth comes from new markets like China and as India joins the iOS world, there is yet more opportunity emerging.

This enables part of the story of Services which can be tracked with several other metrics: reported revenues, iCloud accounts, active devices, and iTunes accounts are highly correlated.

The patterns after a decade are remarkably consistent. One would have thought that with mobile saturation in advanced markets, the content story would be told through horizontal lines. What we still see is the same slopes we've seen since the earliest days.

But the biggest story at WWDC was the re-design of the App Store as a curated content market. The changes are profound: discovery, curation and the surfacing of content have been revamped. It's hard to predict the implications of this but one of the indications of direction was the separation of "Games" from "Apps". This is a jarring idea since if all Apps are content, what makes Games different from other Apps? Is this a genre elevated to a new medium?

I can't yet get a sense of where this is heading, if anywhere, but the remarkable story of Apps is that it's still an ongoing story. We may be on chapter 2 and we can't predict how many chapters remain.

Keep an eye on Apps and Services and developers. They are not lagging indicators of success for Apple. They are very much leading.

In its first 10 years, the iPhone will have sold at least 1.2 billion units, ((Includes forecast for first six months of 2017)) making it the most successful product of all time. The iPhone also enabled the iOS empire which includes the iPod touch, the iPad, the Apple Watch and Apple TV whose combined total unit sales will reach 1.75 billion units over 10 years. This total is likely to top 2 billion units by the end of 2018.

The revenues from iOS product sales will reach $980 billion by middle of this year. In addition to hardware Apple also books iOS services revenues (including content) which have totaled more than $100 billion to date.

This means that iOS will have generated over $1 trillion in revenues for Apple sometime this year.

In addition, developers building apps for iOS have been paid $60 billion. The rate of payments has now reached $20 billion/yr.

Not included in this payment total are "mobile-first" or "mobile mainly" businesses such as FaceBook, Twitter, Linkedin, Tencent, YouTube, Yahoo, NetEase, Pandora Radio, Google Search, Baidu, Google Maps, Gmail, Instagram, Amazon, eBay, JD.com, Alibaba, Priceline, Expedia, Salesforce and Other Enterprise Software, Ride Sharing Apps, AirBnB and many other services which monetize independently of the App Store.

I estimate that the cumulative revenues enabled by iOS across these businesses have exceeded $500 billion, with a rate of revenue soon to reach $300 billion/yr.

The revenue numbers can only hint at the change in behavior among users. An iPhone is unlocked 80 times a day. Assuming 600 million devices in use there are 48 billion sessions on iPhones every day. 17.5 trillion sessions every year. It is these instances of interaction and engagement which are desired by all businesses built on top of the ecosystem.

These instances of engagement must be multiplied by the quality of the customers which Apple captures. iOS users spend more and are more loyal than those on alternative platform thus qualifying the platform as "premium" and thus adding to its value in the eyes of developers, content producers and service providers.

As the install base of iOS increases and as users hire the devices to do more and spend more time with them the virtuous cycle of value creation will continue and accelerate.

There is a temptation to think that such a business is fragile and will be disrupted. Challengers appear daily and the number of iPhone "killers" is not measurable. One can cite the billion users of Nokia phones which defected. One can cite the loyalty of BlackBerry users that evaporated. One can even cite the juggernaut of Windows and how it became impotent. One can cite the vast number of Android devices offered at low prices.

But there are reasons to believe that the iOS empire is far stronger and resilient.

Unlike Nokia's phones, Apple's product is an ecosystem with network effects and dependencies on software and services. It's also a monolithic product with a singular interface and form factor.

Unlike BlackBerry, the iPhone does many jobs--too many to count. Indeed the iPhone evolves and changes its core value over time.

Although different in many ways from Windows there are strong similarities in terms of loyalty and persistence of users. iOS even developed a dominant position in enterprises. Microsoft's attempt to become a hardware company is a testament to the confluence of the two business models.

And whereas Android was originally seen as the "good enough" iPhone, potentially disrupting it, it turns out to be the ersatz iPhone. Chances are higher that users will switch from Android to iPhone and not the other way. Again, the reasons have more to do with the ecosystem and quality of users (which are hard to measure) than with the hardware (which is easy to measure.)

As we look toward the second decade of the iPhone, the expectation isn't one of another "big bang" but a process of continuous improvement. The market is nearing saturation so the goals must be to capture more switchers from Android. Apple has achieved this with the Mac: survival, persistence and eventual redemption.

More exciting is the apparent expansion of a network of ancillary "smart" accessories. The Apple Watch, the AirPods, Pencil and possible new wearables point toward a future where the iPhone is a hub to a mesh of personal devices. The seamless integration of such devices is what has always set Apple apart.