iPhone

Apple's Net Sales grew at the rate of 30% in the last quarter. Earnings per share grew at 47%. Both of these figures are the highest since 2012.

It should be noted that although the rate of growth is extraordinarily high, the company never actually stopped growing in the past three years. As the table above shows, net sales has always had positive growth.

Compared with the fourth calendar quarter of 2011, Apple's sales are 61% higher and earnings per share are 54% share. ((Some of the expansion in earnings per share is due to the willingness of shareholders to sell their shares to Apple. 10% of the shares around in 2011 have thus disappeared.))

This degree of growth at this stage in the history of the markets it participates in is a revelation.

Consider:

• The PC market is more than 30 years old. In this mature market the Mac has been outgrowing the Windows platform for 34 out of the last 35 quarters.

 

• The iPhone was announced eight years ago and it still managed to grow at the rate of 57%.

• The market shares of its Mac, iPhone and iPad products are all remarkable only for their paucity.
• The pricing of all their products is more than double the median for their categories.
• Regardless of extreme growth, pricing power, headroom and, most importantly, customer loyalty, the company's prospects are seen as dismal in contrast to its underperforming peers. ((As measured by P/E or FCF/EV ratios vs. direct rivals, technology companies or the S&P 500.))
• Such is the plight of the anomalous.

When the Apple Watch was launched, all eyes turned to the Swiss watch industry. Analysts measured it and asked if it's big enough to be interesting. Industry observers questioned the competitiveness of an entrant vis-à-vis the ancien régime. Marketers weighed in with segmentation hypotheses and how Apple's queer new device might best fit.

These are all mistakes in analysis.

The market for Apple Watch is not the Swiss (or Chinese) watch market. The market for Apple Watch is the number of wrists in the world. To the extent that those wrists will be covered with Apple hardware will determine whether it is successful or not.

Measuring the existing market is a mistake because the existing products are hired for different jobs. Those measurements will yield only an answer to how big that job is.

Assessing competitiveness vs. incumbents is a mistake because incumbents have perfected solving the problems of wrist-worn timekeeping devices over a century. Apple's watch is not a wrist-worn timekeeping device any more than the iPhone is a phone or the iPad is a pad.

Segmenting the market by whatever means are convenient today is irrelevant because the segments are currently positioned on the current jobs to be done. It's no more relevant than classifying the iPhone along the segments defined for phones in 2007. ((e.g. keyboard phones, flip phones, and feature phones))

Some have tried to wedge the Apple Watch among the "fitness tracker" market. This is no more plausible given that fitness tracking is no more interesting than timekeeping is to Watch.

The best way to measure the opportunity is to quantify the "wrist-space-time" continuum and deciding what is and what isn't addressable. The wrist is an interesting place to put a computer and Apple makes computers. The rest is left as an exercise to the reader.

12 months ago I asked How many iOS devices will be produced in the next 12 months?

Based on the analysis of Capital Expenditures (as forecast by Apple in their annual 10K report) I concluded "iOS unit shipments should be between 250 million and 285 million."

The answer turned out to be 247 million. ((Including an iPod touch estimate of 9.5 million)) Including Apple TV the total would probably be around 251 million.

Since last year, I adjusted my model by observing corresponding iOS unit shipments for the calendar year corresponding to each fiscal year. Since the calendar year is offset by one quarter (FQ1 = CQ4) looking at calendar year means looking forward one quarter post-spending. I believe this is more accurate as spending generally happens in advance of production.

The resulting pattern is shown below:

The company is currently anticipating spending $12.4 billion on non-retail CapEx. The spending for last fiscal year was almost exactly what was anticipated in the previous 10K. If we calibrate production (with a 3 month shift) to the 2014 benchmark, then 2015 calendar year would see about 310 million iOS units.

The big question is whether this will include Apple Watches. To answer this we have to make many guesses:

Does the company have a deliberate production plan for Apple Watches? What is the lead time? How quickly can production be ramped given channel and demand?

Do Apple Watches require significant capital expenditures? Do Apple Watches require capital intensity similar to iPhones and iPads? How unique are the watch cases, straps and computing cores? What are the demands of the digital crown, the sapphire crystal, the display?

The capital budget of $10.5 billion in F2014 had to cover the ramping of the iPhone 6/6Plus as well as some of the new Macs, iPads and the Arizona sapphire plant ((Note that some of that would have been in 2013 and at about $0.5 billion, the plant was about 5% of CapEx)). It also had to cover some of the new campus ((The construction cost of $1billion/yr would amount to about 8% of the capital spending (non-retail) )). In previous years the capital budget also covered data center construction ((Including vast renewable energy infrastructure)) which may not be present in the future budget.

The non-retail capital budget is anticipated to increase by 18%. There are more moving pieces next year than usual, but directionally at least, CapEx remains a strong indicator of future iOS growth. Especially as it's given to us a full year in advance.

 

When the iPhone 4S launched, one million units were pre-ordered and 4 million units were sold during its opening weekend. That made the daily rate during the 4S weekend 1.3 million units/day or one third faster than the pre-order rate of 1 million units/day.

When the iPhone 5 launched, 2 million were pre-ordered and "over" 5 million were sold during during the opening weekend. That made the daily rate during the  launch weekend about 1.7 million which was about 15% slower than the pre-order rate. However, a few months later the 5 launched in China setting an opening rate of 2 million in three days or about 666k/day. Adding China's rate to the Rest of World rate yields about 2.4 million/day or about 20% faster than the pre-order rate.

When the iPhone 6/6Plus launched, 4 million were pre-ordered and 10 million were sold during the opening weekend. That made a daily rate during the launch weekend about 3.3 million, again lower than the 4 million/day in pre-orders. However, just like the 5, the 6 launch excluded China. If we assume that a China launch would have run 30% faster than the 5 launch ((Considering that this year China distribution includes China Mobile a 30% increase from two years ago is, in my opinion, conservative)) then my estimate of launch performance for the iPhone range is shown in the graph below:

I included in the graph the various other launch volume data we have available.

I also included lines showing how pre-order volumes relate to weekend values for the products where we know both.

It therefore does not seem improbable that had China been available (and at the time when it will be) the iPhone launch weekend rate for the 6/6Plus combo would have been about 4 million/day. A rate consistent with the history for the product.

When the iPhone launched, Steve Jobs introduced it as being three products in one:

• A wide-screen iPod
• A phone
• A breakthrough internet communicator

 

When the Apple Watch launched, Tim Cook introduced it as being three things:

• A precise timepiece
• A new, intimate way to communicate
• A comprehensive health and fitness device.

As in the Revolutionary User Interface story,  the symmetry in approach to the launch is telling, but what I want to note is that the three things which the iPhone was defined as being are no longer things that it is most used for.

Yes, the iPhone is still a wide-screen iPod which gets plenty of use but I don't think anyone thinks that is a defining feature. It's also a phone, but the Phone is just an app which, for me at least, is not frequently used. I communicate with my iPhone but the go-to app is iMessage or FaceTime or Skype or maybe Email or Twitter. Phone is something I use so rarely that the interface sometimes baffles me. And yes, it's an Internet appliance. Browsing is something I do quite a bit but many of the browsing jobs-to-be-done are done better by apps. News, shopping Facebook and maps are "things which were once done in a browser."

So I wonder whether the tentpole product-defining anchors used to introduce the Apple Watch will be faintly amusing a few years from now.

Of course, the reason iPhone outgrew its tentpoles is because of the app economy. 1.3 million apps does that to a product. When it becomes a platform a product invites collaboration on the problem of innovation. Collaborative innovation explodes the opportunity to discover new needs and uses. How, when and why people use the product changes beyond anyone's imagination.

But this does not mean that the tentpoles used at launch are in any way in error. They are necessary to explain the value of a new category. The audience can't be told "wait and see all the cool stuff you'll be able to do with it". They need to be told why it's useful today. They speak in the language the audience can understand today. Steve Jobs could not talk in the language of apps and services in 2007. The unforeseen became the inevitable.

Tentpoles therefore don't define the product but do provide the starting blocks from which the initial buyers make a cognition leap. And once they're off, the others will know where to go.

 

 

 

My thanks to Eric Jackson for his thought-out questions on Apple. As published in Forbes, here is his Interview With Horace Dediu: What To Expect When Apples Expecting.

A few excerpts:

Q: Do you expect to see a sapphire cover on the new iPhone(s)? Is that material significant?

I expect Sapphire will become a signature feature across many products. I don’t know if they will have capacity to deploy on iPhone this year but on a watch it’s essential. Here’s a clue: if the screen has any curvature, especially around edges, it needs to be sapphire as glass can’t take strain in that shape. The scope of the plant they are building with GT implies that they will have massive volume potential with at least one major iPhone model using the material. It’s a significant material because it allows design freedom in new directions, especially curved (concave) touch surfaces that retain a jewel-like feel. This has Jony Ive all over it.

Q: Is it fair to conclude now based on the 5C and 5S that Apple will never launch a “cheap iPhone”?

Oscar Wilde said a cynic is someone who knows the price of everything and the value of nothing. When I see the word “cheap” I never know if it refers to price or value. And even when we talk about price, an iPhone is cheaper than buying all the things it replaces so it’s always been a low end disruptor in my mind. (I saw a tweet with an image of a Radio Shack ad from the 1980s and every single item available on that page is now a part of the iPhone. It would have cost thousands to buy all those things back then–and dollars were worth a lot more.) Furthermore, I think Apple holds a black belt in pricing. They seem to define their position in the market by anchoring certain prices and “owning” them. Given all that I would say that Apple is not going to move their price points much. They will expand the portfolio and offer some iPhones at $300 but they will be older models. The average selling price (ASP) I expect to remain constant on a year-long average.

Q: In the past, Apple critics were quick to dismiss the new iPad and 5C iPhone as failures upon their introduction.  You never judge. You just report the facts and data.  That said, is there anything about past new Apple products launches that we should look at as a predictor of how a new iWatch might be received by customers?

When the iPad was imminent the great debate was over whether it would run iOS or OS X. Many imagined a touch-based Mac rather than the “big screen iPod touch”. It was a tough call and one which Microsoft could not and still does not make. Therefore, the interesting question for me with respect to iWatch is: What OS it will run? I will be shocked to the core if it does not run iOS. It is my opinion that making iOS work on it is the entire reason Apple is sweating this segment. They are in it because they are trying to make a platform product with a novel user experience and all the power of an ecosystem run on a wrist. It’s as big a problem as getting a phone-sized device to run a touch UI was in 2007. That is the crucial contribution that Apple is making to this next generation of computing. Now you might ask what users are asking for in this segment. The answer is nothing. Nobody is asking for this. As nobody asked for the iPhone (or the Mac or the iPad). It’s a new computer form factor and how it will be used will be determined by the apps written for it. But it will work and be magical out of the box in version 1. This is in contrast to the single purpose or accessory model of wearables we see to date.

Q: As a student of disruption, where is Apple most vulnerable to being disrupted?

Apple is a new market disruptor but much of what is put forward as a threat to it is low-end disruption. I think Apple knows enough about how that happens that it can manage its way around it. The strategy they employ is one of attrition. If you wait long enough a low-end threat tends to wear itself out as it starves of profit and is constantly gnawed-at by alternatives. (You see, if the disruptor cannot manage a profit then they cannot climb up the trajectory to get on top of the incumbent. Being profitable is a key requirement for successful disruption in the long term.) The attrition strategy works as long as you have the fortitude to hold out and the deep pockets to keep improving your product as alternatives flame out. It is my belief that Jobs made sure that thinking is inculcated in the company. So if not low-end is the company vulnerable to new-market disruptors? This is more subtle and the threat here is what Google/FaceBook/Amazon and the other ecosystems are all about. It’s creating new usage models and shifting where consumers place brand value. I think this is more what keeps Apple’s management awake at night. They are not standing still however. iTunes and Software and Services (now with Beats on board) is the way they are staying on top of that threat.

Lots more here.

iTunes/Software/Services revenues grew at 12%. This was the second fastest segment growth last quarter, with the Mac growing at a slightly faster 13% rate. Apple mentioned in the quarterly earnings conference call the for the first nine months of its fiscal year (i.e. since September) the line item iTunes/Software/Services has been the fastest growing part of the business. The following graph shows the growth scorecard for Apple's line items and it shows how the iTunes store is the only line that has been consistently green (growing above 10% for at least seven years.

In addition to its revenues, iTunes can also be measured in terms of billings (or gross revenues). The billings growth rate is even higher at more than 25%. This is mostly to the more rapid growth of apps relative to a decline in music. As Apple only records the 30% it keeps as "revenue" for apps the overall growth in apps is less visible in its accounts.

The relative performance of billings vs. reported revenues is shown in the following graphs:

Note the estimated split between media types and software and services. The software and services portion of the business had sales of $1.9 billion while the revenues from third party content/apps sales reached $2.6 billion.

The value of this data is that it encompasses an almost complete view of the Apple ecosystem. As almost all content and transactions are tracked and reported and one can get a very precise view of the economic value of the ecosystem. ((In addition to iTunes/Software/Services Accessories could also be considered as part of the ecosystem. The value of Accessories and licensing as Apple reports it adds another $6 billion to iTunes/S/S)) (( What is missing are ad revenues through apps which don't use iAd )) (( What is also worth asking is what is the size of alternate ecosystems such as those of Microsoft, Google etc. ))

From the launch of the iPhone the value of Apple's ecosystem has grown more than 600% which is faster than overall sales growth (approximately 400%). If ecosystem value grows more rapidly than underlying hardware sales the question that emerges is when would the ecosystem transaction value exceed that of the business is supposedly supports.

Today the iTunes/S/S ecosystem is about $20 billion/yr. iPod, iPhone, iPad and Mac sales are about $150 billion/yr. It does not seem likely that the former will overtake the latter. If that were the case then one wonders why build a business entirely predicated on retailing and services without the support of hardware revenues. Something along the lines of Amazon.

Seven years after the iPhone was launched, 70% of the US population is using smartphones. Smartphones existed before the iPhone so the category is older than seven years but as far as adoption goes this is nearly the fastest ever.

The CD Player reached 55% in seven years and the Boom Box about 62%. If measuring the period between 9% penetration and 90% ((which I consider the "economically attractive" period of growth)) the smartphone in the US will have a lifespan of about 9 years starting in 2008. Before this period, the product was largely experimental and participating vendors ((Palm, BlackBerry, Nokia)) mostly failed. After this period most products will be "commoditized" with decreasing margins and increasing consolidation.

The rapidity of growth is all the more remarkable given the penetration is at the individual, not household level. The total user base is therefore over 270 million rather than the 115 million usually targeted by consumer technology, nearly 60% more purchases. This is also remarkable because the product has a shorter lifespan of use (two years) than is typical for other consumer technology products ((e.g. TVs, Refrigerators, Radios, etc.))

We are therefore now in the "Late Majority" phase of the US market. This is not a surprise. The inflection point in the market occurred in mid 2012 so we've been in this phase for two years already. It's not therefore controversial to predict two years of continuing though decelerating growth.

As Geoffrey Moore explained, the marketing of technology products needs to be varied as we get into different phases of the market. Innovators (first 2.5%) need to be sold on the premise of novelty itself. Early adopters (next 13.5%) seek status and exclusivity. Early majority (34%) seek acceptance and Late Majority (34%) seek pragmatic productivity. Laggards (last 16%) seek safety.

One aspect of this adoption cycle that is misunderstood is the role of pricing. The assumption is that pricing matters more as adoption increases. This is misunderstood because pricing always matters and therefore it never matters. Pricing is one of many elements of marketing mix and at any time there are product choices across a wide spectrum of pricing. Pricing is also a signal which can be elaborately obfuscated through bundling and unbundling.

One way to illustrate this is to consider how Apple products behave in the late phases of markets. Apple products have notoriously firm pricing.

The revenue per unit of Macs, iPods, iPhones and iPads remains stubbornly consistent. This is not to say that each unit sold is the same price. The company tweaks "the mix" of mid, low and high products to keep the average selling price constant. But fundamentally the average remains constant which means that regardless of market phase, Apple retains its margins.

So as we look forward to the last two years of growth for smartphones, how will Apple fare?

There are weak signals that it will do rather well. I looked at two sets of data for clues: the number of new-to-smartphone users being added each month relative to the increase of usage of either iPhone or Android.

[Edit: The title of the second graph above should be "Number of new US smartphone users per week (3 month moving average)"]

What I'm looking for is a relationship between the rate of adoption of the overall product and the rate of adoption of iPhones. I measured the new-to-smartphone users as the change in user population (per week) and the preference for iPhone as a growth differential. ((iPhone growth in millions of users minus Android growth in millions of users. Positive data points suggest iPhone grew faster in a period and negative points suggest Android grew faster.)) The data shows no perceptible correlation between adoption rate and preference for either platform, however when looking closer there is a  periodicity to the addition of users, especially starting in 2012.

The range is not insignificant, ranging from ~300k users/week to well over 1 million. The periods of growth of users could be due to new product launches or incentives and promotions done by the mobile operators. Whatever the reason, there is some flux.

If we look at the corresponding adoption differential in platforms the relationship seems to be that peaks in adoption are matched to Android preference and troughs to iPhone preference. This might seem logical: after the 50% saturation point, when promotions are run by operators, non-consumers are drawn in and they tend to adopt the "low-cost" product.

However, this is also paradoxical. Why, when we are in a late stage of the market, does the iPhone do well when users are not incentivized to adopt? The graph above shows that as we crossed 70% adoption, 1.4 million more users adopted the iPhone than Android.

Even if we look out to the last six months, iPhone added 15.5 million late majority users while Android added 14.2 million. If promotions decrease for the "late late majority" and laggards then would the iPhone do even better relative to Android?

The only answer seems to be that "low cost" is not what's driving this market. But then again, it never did. Towards the end of the "pre-smartphone" market the most wildly popular voice phone in the US was the RAZR. And it was a premium product.

Catalin Stelian Andrei, Editor of The Day, INTERNET PROTV asked me twenty questions:

1. What phone do you have in your pocket right now? Why that model?

I carry the iPhone 5. The last iPhone I bought was an iPhone 5C which I gave to a family member.

2. Apple is going to launch, form all we know, an iPhone with a bigger screen, long after their market rivals. Is Apple one step behind, being forced to take this road in the fight with Android and Windows Phone devices? Because many smartphone users were hoping that an big screen iPhone, a redesigned model, will be lauched long time ago, and that didn’t happen.

Making bigger phones is easier than making smaller phones. First because miniaturization has always been the most difficult engineering challenge, and second, because a smaller phone has a smaller battery making efficiency much more important. The larger the phone, the simpler it is. The third reason smaller is more valuable is that it’s easier to carry and use. The largest phones cannot be put in pockets and cannot be used with one hand. In the history of consumer, electronics size reduction has been the most consistent measure of performance, and the most rewarding. Usually the most exceptional reductions in dimensions create the highest price and profit bands. There have been niches for larger portable devices but they are consistently a small part of the overall market. If Apple were to introduce a larger device I hope they will be able to solve usability problems and make the category attractive to a larger audience.

3. What do you expect from the new iPhone 6?

I expect it to run the latest version of iOS and, with the new apps developers will ship, that should make the most impact in people’s lives. I imagine health maintenance and home automation will become valuable new franchises. Of course iOS 8 will also run on older iPhones, but I suspect the newest iPhone will somehow run the new software better and have smoother integration with services.

4. What’s the “not to do” lesson that Apple needs to learn for the now iPhone from it’s own past experience or their competitors?

The biggest challenge is to move rapidly with scale. The company has managed to grow from zero phones a year to hundreds of millions. That’s great but it’s still frustrating to wait one year for major improvements. The “cycle time” of innovation for Apple remains one year. I wish it could be faster but perhaps this is also too fast for some. In some services like maps and iCloud and iWork, which are independent of hardware (mostly,) speed is of the essence.

5. The iPhone is the most expensive smartphone on the market right now. In Romania, it certainly is. But where does Apple gains it’s most money from, selling products to users or selling services, like iTunes, App Store? And having that in mind, what will be their next step: better – breakthrough products or bigger, more complete services?

The answer to where a company “gets its profits” is best answered by asking where a buyer “gets his value” from the product. For instance you might answer the question of where a car company gets its value by saying that it’s from making people be in more than one place in a day. So the “differentiation” of a car is in answering the question slightly differently. If it’s hard to see a difference to this answer between cars then it’s hard for any one company to make a profit. For a company like Apple, we need to ask what its users value about the experience and why they are willing to pay for that. My hypothesis is that the brand's value is in making life a little bit easier. That’s what Apple competes on. Of course, some people are not willing to pay to have an easier life and some even want to make their lives more complicated so Apple’s proposal to make life easier, for a price, is not accepted by everybody—which is ok by them. But for many, paying for comfort, productivity and ease of mind is worth quite a bit. The reason Apple is able to gain a premium over the competition is that this value proposal (of paying for simplification) is either weak or non-existent for competitors. Indeed, many competitors compete on the basis of making life more complicated.

6. What does innovation means for Apple right now? What are their options for assuring a next decade of success? A new Steve Jobs person or a Steve Jobs tipe of group thinking. How hard is that to achieve?

Innovation is meaningful invention—bringing useful creations to a large number of people who then make use of that creation. The interesting aspect of making money from innovation is that it’s a rare phenomenon, requiring many disciplines to work together. It’s like a big movie that somehow works and becomes widely popular but costs little to make. Many movies are made, few are successful and very few of those which are successful are built at low cost. What we know about technology innovation is that it’s a combination that comes together under strong leadership but that leadership alone is not sufficient. The myth of Steve Jobs is that he was both necessary and sufficient to success. The truth is that he was necessary but not sufficient. To make successful innovations requires strong leadership and teamwork and a process of incentives and passion that is hard to create a formula for. How this works at Apple is its biggest secret.

7. Who are the key Apple employees right now? Do they need another Jobs or do they already have him?

All Apple employees are key. I would say that’s the magic formula. There is no chief magical officer (and there never was.)

8. What will be the next best thing for Apple? […]

I don’t know. It’s probably not knowable.

… Are they capable of another breakthrough in the market?

Yes. This is almost certainly knowable.

9. Is the smart-home project something that will really happen in the next, let’s say, two decades?

If the project requires replacement of existing infrastructure, it will not happen. If the project allows adding new items to existing infrastructure, it will almost certainly happen.

10. Growth comes from the middle and low-end smartphones, according to IDC. Would or would not be a good idea for Apple to release a handset cheaper than the 5c?

If Apple were concerned with growth then they should. But we have to ask why they avoided doing this six years ago. Not only was it obvious to do so but a portfolio strategy was the modus operandi for every competitor and had been for decades. The question isn’t why Apple does not broaden its line-up but why do the others diffuse their efforts and have such poor focus.

11. What feature or software you think would be the main battleground in the future, in the smartphone market? Apps? Battery? Camera?

Integration of all the above. When new experiences and services emerge those who are able to make them usable succeed. Usability requires integration.

12. Who puts more pressure on Apple: Apple itself, Samsung, LG, HTC, Microsoft and Nokia? And how.

I suspect competition is part of motivation but it’s not the entire story. Let’s not forget that Apple is considered to suffer from competitor pressure from software companies, services companies, media companies, hardware companies and everything in between. For instance, Apple is in competition with Microsoft, Amazon, Google and Samsung but the competition is not transitive. In other words Amazon is not perceived as being in competition with Samsung and neither is Google competing with Nokia. So somehow Apple should be sensitive to every perceived alternative to every aspect of its products. This quickly becomes an absurd idea. Apple is a system of things and systems can’t be compared with components.

13. What is Apple’s sensitive spot today. What do you believe Apple fears the most?

Losing people. The problem of retaining talented people is the most difficult challenge, especially when they become very wealthy due to the success of the firm.

14. In 2012, you described the fall of Nokia in competition with Samsung at the Guardian Mobile Business Summit due to the disruption theory: the launch of the smartphone. Is Apple in danger of becoming a victim of the same story in the near future? What technology could replace the smartphone and when?

Yes, every company is vulnerable to disruption. The defense is not to protect against it but to self-disrupt or enable self-destruction. Self-preservation is an instinct in humans so this is psychologically very difficult. The crisis comes not from a technology change but a business model change and that implies a cultural change. Companies embrace any and all technologies which sustain their business models and reject, resist and ignore any and all technologies which disrupt their business models. Changing business models is like a brain transplant; it happens so rarely that we can count it on one hand. By the way, because it’s so rare is why companies who attempt it are discounted by the market.

15. You've been a Nokia executive. From this perspective, how do you see the deal with Microsoft and the future of Windows Phone and the Lumia brand?

This is a long story. I can’t really do it justice now but I will say that it seems that Microsoft understands that they need to become an integrated systems company and not a component supplier. The same became evident to Nokia so they needed to merge.

16. You've also worked with people from RIM. Do the have the capacity to innovate?

Perhaps but scale also matters. RIM and HTC may not have the time to grow.

17. Let’s imagine that no big company owns my personal information. If I wanted to sell that to someone, what would be the right price to ask? How valuable are individuals in the war for gaining personal information?

The price of your personal information will be set by auction. It’s up to you to decide if you want to create a reserve price or to let the highest bidder win. As of today most people would trade all their personal information for almost zero price. This will not last and consumers will find out their value over time. I can’t predict how it will change but it will be a combination of offers being made and personal data catastrophes which will act as warnings.

18. Do you believe in phoneblocks project from Motorola?

Only people who want more complicated lives will want to build their own products. There are some such people (for example children) but they are not willing to spend a lot for that complication so the overall market for increasing complexity is small.

19. The last question. What could trigger an Apple fall and when?

The most common trigger for failure is success. To continue succeeding is very hard because motivation disappears. What can cause a crisis of motivation would be that there is a loss of belief that there are problems left to solve.

After n quarters of predictability, Apple surprised with sales performance that was 3.74% above the top of their guidance. This may not seem significant but since instituting a new range-bound guidance method in Q1 of last year the company reported revenue within about 1% of the top of the range.

This is in stark contrast to the wide variance in prior years. The following graph shows the "error" in guidance as the percent difference between reported sales and guidance ((Upper end of range in quarters where a range was given.)).

So prior to last quarter we were lulled into thinking that guidance was very nearly perfectly predicting the company. As I tweeted, it took the "sport" out of trying to do any forecasting. All an analyst had to do is tweak the main product growth figures to hit the sales target and then subtract the (generously provided) operating expenses and (also provided) tax rate to get the earnings. Only unknown to getting to an estimate of EPS was how many shares would still be outstanding. ((The company itself would not know shares outstanding as their buying was opportunistic during the quarter.))

Knowing Apple also means that average selling prices are also very rigidly set in stone so the degrees of freedom in analysis were becoming highly constrained.

But just when you think you spotted a pattern, it changes. The company surprised with performance outside the band. The following graph shows the estimate ranges it has given and the actual revenues delivered. ((Next quarter is also pencilled in.))

So what happened?

The answer seems to be better iPhone performance. The following table shows my expectations, which were tuned to return revenues exactly at the top of the guidance range.

On product shipments/sales I underestimated the iPhone and Mac and overestimated the iPad and iPod. I estimated iTunes accurately and underestimated accessories by 5%. I also generally got the blend of margins fairly close, being 1 point too low on gross margin.

The bottom line was that the Revenue and Earnings surprise could be accounted for through a significant outperformance on iPhone which offset a less significant underperformance on the iPad.

The iPhone grew sales by 14% which more than offset a drop of 13% in iPad sales and was enough to allow net sales to grow by 5%. Since the company guided nearly flat growth, that 5% was a big surprise.

Now one could ask whether 14% growth in the iPhone revenues is a meaningful change in the long-term evolution of the category. This is a difficult question. The way the iPhone is positioned makes it a great success in the premium segment of the market but it does not place it in competition with the perhaps 80% of the market which seems to be defined by a lower price point.

However let's not forget that pricing is correlative to the market but it may not be causal. Purchase decisions are complex and price is one aspect of that decision. But there are many others. Availability, channels, service, brand all play parts. The error of many analysts is to conclude that price and price alone is causal to behavior. That may be so with commodities, but let us not forget that these products and their uses are newly created and how value is perceived has been changing rapidly. Buyers follow a learning curve in terms of discovering the uses and value of products. These learning curves can be modeled and usually show several years (sometimes decades) for most populations between early and late adoption.

We don't know where the iPhone is on the learning curve for any particular region and that means we can still be surprised by how it grows.

Illiteracy is the inability to read and write. Though the percent of sufferers has halved in the last 35 years, currently 15% of the world has this affliction. Innumeracy is the inability to apply simple numerical concepts. The rate of innumeracy is unknown but chances are that it affects over 50% of us. This tragedy impedes our ability to have a discourse on matters related to quantitative judgement while policy decisions increasingly depend on this judgement.

But there is another form of ignorance which seems to be universal: the inability to understand the concept and role of innovation. The way this is exhibited is in the misuse of the term and the inability to discern the difference between novelty, creation, invention and innovation. The result is a failure to understand the causes of success and failure in business and hence the conditions that lead to economic growth.

My contribution to solving this problem is to coin a word: I define innoveracy as the inability to understand creativity and the role it plays in society. Hopefully identifying individual innoveracy will draw attention to the problem enough to help solve it.

One example is in the following quote:

"Lastly, nationally circulating tabloid Ilta-Sanomat gets a look at Nokia’s fabled tablet computer that was developed nine years before the iPad hit the market. According to the paper, Nokia had its own innovative tablet device ready in 2001, but unfortunately it never made it to the shops. A former Nokia expert Esko Yliruusi says that the project was suspended a heartbeat before the tablet hit the market because it was thought that there was insufficient demand for such a device." ((A video showing the device is here, in Finnish.))

To explain what's wrong with this usage we need some definitions.

The definition of innovation is easy to find but it's one thing to read the definition and another to understand its meaning. Rather than defining it again, I propose using a simple taxonomy of related activities that put it in context.

• Novelty: Something new
• Creation: Something new and valuable
• Invention: Something new, having potential value through utility
• Innovation: Something new and uniquely useful

The taxonomy is illustrated with the following diagram. The position of the circles shows the embedding of meaning ((The size of the circles also suggests degree of effort required and potential reward. Note that this is not a Venn diagram.))

To illustrate further, here are some examples of the concepts.

• Novelties: The choice of Gold as a color for the iPhone; the naming of a version of Android as "Kit Kat"; coining a new word.
• Creations: The fall collection of a fashion designer; a new movie; a blog post.
• Inventions: Anything described by a patent; The secret formula for Coca Cola.
• Innovations: The iPhone pricing model; Google's revenue model; The Ford production system; Wal-Mart's store design; Amazon's logistics.

The differences are also evident in the mechanisms that exist to protect the works:

• Novelties are usually not protectable but since their value is very limited the copying is not seen to cause harm.
• Creations are protected by copyright or trademark but are not patentable since they lack utility.
• Inventions can be protected for a limited time through patents but can also be protected indefinitely by being kept secret. Their uniqueness may also be the means by which they can be kept a secret.
• Innovations can be protected through market competition but are not defensible through legal means.

Note that the taxonomy has a hierarchy. Creations are novel, inventions are creations and innovations are usually based on some invention. However inventions are not innovations and neither are creations or novelties. Innovations are therefore the most demanding works because they require all the conditions in the hierarchy. Innovations implicitly require defensibility through a unique "operating model". Put another way, they remain unique because few others can copy them.

To be innovative is very difficult, but because of the difficulty, being innovative is usually well rewarded. Indeed, it might be easier to identify innovations simply by their rewards. It's almost a certainty that any great business is predicated on an innovation and that the lack of a reward in business means that some aspect of the conditions of innovation were not met.

The causal, if-and-only-if connection with reward is what should be the innovation litmus test. If something fails to change the world (and hence is unrewarded) you can be pretty sure it was not innovative enough.

Which brings us to the quote above. The fact that the Nokia tablet of 2001 not only did not succeed in the market but was not even released implies that it could not have been innovative. The product was only at the stage of perhaps being an invention (if it can be shown to be unique) or merely a creation (if it isn't.) Furthermore, if the product is so poorly designed that it is literally unusable then it is just a novelty. A design, sketch or verbal description might be novel but it does not qualify as an innovation or an invention or even a creation. How far the depiction went toward making a dent in the universe defines its innovativeness.

Why does this matter?

Understanding that innovation requires passing a market test and that passing that test is immensely rewarding both for the creator and for society at large means that we can focus on how to make it happen. Obsessing over the mere novelties or inventions means we allocate resources which markets won't reward. Misusing the term and confusing it with activities that don't create value takes our eye off the causes and moves us away from finding ways of repeatably succeeding.

Recognizing that innoveracy is a problem allows us to address it. Addressing it would mean we could speak a language of value creation that everyone understands.

Wouldn't that be novel?