platform

WWDC 2019 included a vast list of releases and it's quite difficult to summarize. The focus is always on software updates but this year the list seems more exhaustive than usual.

The highlights for me are:

1. WatchOS now includes direct App Store access. This continues the separation of the Watch from the iPhone, on a trajectory that remains predictable.
2. Hearing Health/Noise App/period and trends management extends the iPhone's health maintenance "jobs to be done".
3. AR & Swift extend the platform through Reality Kit and Reality Composer and Swift UI.
4. MacOS improves through a new Apple Music app, Sidecar iPad integration, Accessibility and "Find My" Mac offline beacons.
5. iPad and Mac are beginning to share Apps with Project Catalyst.
6. New Mac Pro and new XDR Display are quantum leapfrog leaps in the high-end performance computing market where Apple has lagged for a few years.
7. Sign-in with Apple is a huge and much needed update to identity management on-line. A big deal.
8. iPadOS introduced as fifth Apple OS. Rather than merging iPad and Mac which would be suggested by Project Catalyst, Apple preserves and sanctifies the modularity of form factors based on their differences rather than commonalities.

If there is one thing I took away as most significant it would be the iPadOS spin-off. I don't quite know how this will change the fortunes of the iPad but in declaring itself a platform distinct from iOS it signals that iPad can evolve rapidly in a new direction. The promise and problem with the iPad has always been that it was great hardware held back by software that was not able to take advantage of it.

The core apps, interfaces and connectivity were all constrained, which is not necessarily a bad thing. Constraints make a system and the constraints of the iPhone made it great. Not having a stylus, not having a menu system and not having windowing meant the UX had to be drastically simplified.

But apparently the iPad could not evolve without a re-evaluation of these constraints. The last iPad Pro release hinted at what was coming: it had a full-size keyboard and an immensely capable processor and screen.

So we saw new features such as split view for the same app, Files folder, doc sharing, USB and SD drives support, Zip/Unzip, Desktop class Safari optimized for touch. Download manager, custom fonts, new text editing gestures (copy/paste/floating keyboard). Pencil latency improvement. All these changes are geared toward "productivity" or Pro use.

And yet, the iPad is not Mac. It will remain separate and target Mac non-consumers. Indeed there are three times more iPad users than Mac users and it's quite possible that the iPad base can expand further with enhancement into productivity.

The iPad has not proven to be either an iPhone or a PC killer. It's just in between. It's not a bowl and it's not a swimming pool. It's a bathtub. And yes, bathtubs are never going to be as common as bowls but they have their uses and are not obsoleted by better water containers.

The Operating System idea here is a bit of a conceit. In terms of the kernel and the core APIs there are vast common grounds between all Apple's OSs. But what Apple calls an OS is not just the core code but also the positioning of the idea _to developers_. By branding iPadOS the company is signaling to developers that they should think about the iPad differently.

To a large extent they already do. Coding for iPad has always required a different design approach. But now perhaps Apple is drawing an explicit line enforcing the distinction.

Going back to the list of highlights above, none of them is a "home run", re-enforcing the idea that the company has run out of big ideas. But hitting 8 base hits yields the same result as two home runs. There is a consistent delivery of improvements here that can't be ignored. There's something to be said for polishing rocks until they turn into gems.

In June of this year Apple reported that it had paid a total of $100 billion to developers. That is the 18th such figure given in the 10 year history of App Store, making the progress of payments and hence revenue and spending easily trackable.

The other regularly reported figure is the business segment revenue where App sales are currently allocated. Now called "Services" this omnibus segment includes many other sources of revenues such as:

• Digital Content (Books, Music downloads, Video downloads--including TV shows and movies and movie rentals.)
• AppleCare, Apple's extended warranty service.
• Apple Pay, transaction fees
• Apple Pro Apps, including Final Cut, Logic Pro, Motion, Aperture
• Licensing including "Made for iPhone/iPad"
• One-time settlements of various lawsuits.
• Other Services revenues which include
• Apple iCloud-related services
• Music Match
• Music subscriptions
• Other third party subscriptions (commissions)
• Third party licenses

This combined Services segment is significant with $35 billion revenues in the last 12 months. This is quite a jump from 2016 when Services had crossed $25 billion. At the end of 2016 Apple said it expected Services revenue to double by 2020. With a growth rate since then of 25% the company is on track to reach its target one year early. ((To calibrate this consider that Facebook revenues for the last 12 months were $48 billion and it now has a market capitalization of $468 billion or 41% that of Apple whereas Services consists of about 14% of Apple's total revenues.))

Consumer spending on Apple services includes more than what it books as revenue since only the (typically) 30% of App Revenues is considered Apple's revenue. Including the payments to developers, Services generated over $65.5 billion/yr in billings. This will reach $100 billion/yr in 2 years. The difference between reported revenues and consumer spending is shown in the following graphs.

I described the visibility into App Store revenues (which is the orange area in the graphs above) but the other sub-segments of Services are much more difficult to ascertain. Of special interest is Other Services which includes very high margin services. As part of that there is a peculiar source of revenues: Google.

It's known that Google pays Apple for the default placement of Google search within Safari on iOS and Mac OS. That payment is registered by Google as a "Traffic Acquisition Cost" or TAC. TAC is essentially payment for distribution where what is granted by the distributor is access to queries (traffic.) This way Apple acts as distributor for Google. So, for that matter, does Firefox which also receives TAC payments.

What is peculiar is that the amount of TAC paid by Google to Apple is becoming staggering.

A few years ago Google was paying over 20% of its revenues as TAC. Recently that ratio rose to 23%. Bernstein analyst Toni Sacconaghi estimated that Google paid Apple $1 billion in 2014 as TAC and that payments to Apple were about $3 billion in 2017. Now Goldman Sachs analyst Rod Hall estimates Google could pay Apple $9 billion in 2018, and $12 billion in 2019.

This is starting to look interesting but is it believable?

My own estimate of Apple's Other Services (which includes TAC revenues) is a run rate of $15 billion for calendar 2018. This makes $9 billion (60%) from Google quite challenging but not impossible. The remaining $6 billion needs to account for Apple's own cloud and subscription service revenues.

Does this make sense given Google's spending? TAC payments to distribution partners in Q2 were $3 billion. The $9 billion/yr assumption implies a $2.25B/quarter payment to Apple. That would be 75% of Google's distribution costs. That also sounds reasonable given the high utilization of iOS relative to any other platform.

An increase to $12 billion for next year is also quite a claim but it certainly is possible. I don't have a basis for making this estimate but the assumption of growth leads me to conclude that the payments are tied to actual traffic generated.

In other words the two companies have an agreement that Apple is paid in proportion to the actual query volume generated. This would extend the relationship from one of granting access for a number of users or devices to revenue sharing based on usage or consumption.

Effectively Apple would have "equity" in Google search sharing in the growth as well as decline in search volume.

The idea that Apple receives $1B/month of pure profit from Google may come as a shock. It would amount to 20% of Apple's net income and be an even bigger transfer of value out of Google. The shock comes from considering the previously antagonistic relationship between the companies.

The remarkable story here is how Apple has come to be such a good partner. Both Microsoft and Google now distribute a significant portion of their products through Apple. Apple is also a partner for enterprises such as Salesforce, IBM, and Cisco. In many ways Apple is the quintessential platform company: providing a collaborative environment for competitors as much as for agnostic third parties.

 

The iMac launched May 6 1998, exactly 20 years ago. It is not the most significant computer to ever exist. It was a clear descendant of the original Mac which established the "all-in-one" desktop computer category. That category, to which it still belongs, is a modest segment. The last time Apple reported portable sales separately was in late 2012 when the desktops/servers and pro systems combined made up only 20% of all Mac sales by units. If iMac were 10% of Mac sales, it would represent about 2 million units in 2017.

Desktops evolved into laptops and personal computing evolved into pocket  computing. Becoming more personal means more intimacy and this is leading to wearable computing. There is more beyond that to be sure.

But the iMac is a historically significant machine. It allowed Apple to start on a new trajectory. It did this by first offering a financial lifeline. Sales of Macs, which were at the time the only source of revenues for Apple, increased from 2.7 million to 3.8 million a year. This at a time when Windows PCs were shipping about 100 million units. That was enough to ensure survival. Today Mac units are five times higher while Windows PCs are about 2.5 times higher. The following graph shows the impact of iMac on the Mac's trajectory. 

Second, the iMac was the first host of OS X, an operating system built on Unix which made it extremely flexible. iMac gave Apple the space for OS X to be developed and to be optimized for various hardware. The experience with OS X and its inherent scaleability (down as well as up) meant that it could be considered for the post-PC devices of the future.

Lastly, iMac's design screamed "consumer product" which went from signaling inferiority to superiority. It set a standard for novelty, creativity and dynamism in the category that was considered second-rate. In the early 2000s consumers began to lead in the adoption of new technologies. DVD drives, internet connectivity, wifi, instant messaging, media consumption exploded. All the while institutions, hung up on legacy, began to block technologies. At this pivotal moment, the iMac spoke with its looks. It didn't just imply a new order, it stated it.

To me the incredible aspect of the iMac's entry is its uncanny timing. It came not only just in time to save Apple but exactly half-way between the first two ages of computing. In the following graph showing "share of computing" you can see it as launching precisely at "peak Windows".

In retrospect you have to wonder if Apple, with the iMac, was lucky to survive into this next era or if that era would have ever happened without the iMac. It's a question of causality which quickly devolves into an un-winnable argument about stochastic vs. deterministic existence.

Regardless, the result was felt more than seen. The computing industry was pivoting. The results are seen also in the graphs above. The iMac came right in the middle of the "desert" of platform choice of the late 1990s. By the 2000s mobile platforms detonated on the scene. The iPod was Apple's first entry, in 2001, but it was not a computer. It was an appliance. A stepping stone at a time when the early platform contenders Nokia, Palm, Microsoft and BlackBerry surged before realizing that they did not have sound foundations upon which to build ecosystems. Their advances could not be consolidated.

The spoils went to the later entries of iOS and Android. The resulting disruption was shocking and disorienting. Not only did the old order get up-ended but the magnitude of the new was 100x the old. The iMac enabled at least a trillion dollars of value to be created and made Apple the biggest company in the world.

As you would expect, at the time, 20 years ago, none of this change was anticipated. iMac was a 'cute' computer. Toy-like and obviously unprofessional. It attracted and relished contempt.

So now we are at a point where the second era of computing is at its apex. With markets near saturation, the device business is inflecting from growth to possible stagnation if not decline. There are two platforms--though unlike Windows, Android is fragmented and iOS is not just on one form factor. Nevertheless there is stasis. The touch UI which begat nine billion devices is normative. The next interaction metaphor has not emerged as an obvious successor.

The question for today is what is the new iMac? What is the enabler for change? It's not easy to spot. It is not the thing of the future but it points to the future.

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.

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.

 

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

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

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

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

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

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

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

This contrast is spectacular.

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

And so what do you with the Mac?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bernard Desarnauts had a great idea a few weeks ago: the world needs an event to discuss Apple Watch. After recovering from the shock of not thinking of it first and then from the shock that nobody else had either, I immediately agreed and along with Ben Bajarin and Farshad Nayeri, we quickly rallied to organize and anchor this event: Glance: A Deep Look at Apple Watch.

We had some big questions to answer:

• What is the strategy for Apple Watch? Is it an object of beauty and desire, placing Apple in the "luxury sector" or is it a computer infiltrating what is otherwise a technology-free zone with utility in an asymmetric attack?
• How can developers discover the killer jobs to be done? Beyond tentpoles what will the primary reasons people will use the watch? What does the data tell us so far? What can be observed from interviews?
• Given the sales performance to date, what can we expect from the product? What is the addressable market? What will be the installed base? How quickly will it grow?
• What is the platform strategy, especially with the cadence of OS releases? Is Apple treating this as a separate platform? Will it eventually become independent of the iPhone as the iPhone cast off its dependence on the Mac/PC?
• What is the hardware strategy? What are the constraints from manufacturing, materials, battery life and screen space? What will be the replacement schedule? What is the role of modular internal designs?

We realized that we did not have the answers. So we recruited a great cast of participants to help us:

• Bob Moesta, the founder and developer of the theory of jobs-to-be-done marketing agreed to do a live interview to understand what jobs watches, and in particular Apple Watches, are hired to do.
• Josh Clark, the premier UX designer who wrote Designing for Touch will explore the question of user experience in glanceable space.
• Liza Kindred is considered the top expert on fashion tech–she’s writing the book on the future of commerce–brings keen understanding of wearables.
• Abdel Ibrahim the most prominent blogger and writer on the topic of Apple Watch. Has forgotten more about the Apple Watch than you will ever learn.
• Carolina Milanesi one of the most respected technology market analysts, now at Kantar and often quoted on all things Apple.
• Greg Koenig, product designer at Atomic Delights will educate us on the atoms that make up the Watch.

Investors who will participate in panel conversations:

• John Lilly Venture Capitalist, Greylock Ventures.
• Mari Cross of AngelList
• Glenn Solomon  GGV Ventures.
• Josh Stein Draper Fisher Jurvetson.

Special guest: Jean-Louis Gassée, former head of Apple Engineering, current VC and everything in-between will have a fireside chat with Tim Bajarin Legendary technology analyst who has been around long enough to see furthest ahead.

We will explore Apple Watch as a very curious interaction between form and function, luxury and utility, exclusivity and ubiquity, tiny screens and big audiences, short attention spans, big data.

We have developers, designers, investors, marketers and analysts contributing to what could be the biggest leap in computing since the smartphone.

If you are interesting in becoming one of the innovators on this newest of platforms or planning a strategy to invest, or even (actually especially) if you are a skeptic, you can't miss this conference.

Join us for Glance, a deep look at Apple Watch, downtown San Francisco, December 10, 2015.

Early bird pricing is $495.

If you miss early bird, and you're an Asymco reader, there is still a 30% discount.

Since writing Peak Cable six months ago, surveys, research and analysis have contributed to the themes of unbundling the TV package. The data under scrutiny is, as usual, the data that can be gathered. Unfortunately the data that can't be gathered is where the insight into what is happening may lie. For instance, what matters for an entertainer is not how much you're watched but how much you're loved. Measuring love is done poorly with data on payment for subscriptions.

A better proxy might be time. Liam Boluk makes the point in his post that "focusing on cord cutting or even cord shaving largely misses the point." Don't follow the dollars, he says, follow the time or engagement. "Relevance" is what matters.

His data shows how linear TV has fallen by roughly 30% among the young (12-34) in the last five years. The trouble for the TV bundle (and advertisers) is that this is the most culturally influential group. They are also the group which will grow into the highest income group over the next decade. And this group does not love TV.

We have to remember that it was the youth who drove early radio, TV and consumer electronics markets. Those young are now the old which still cling to the old media, served by companies that grew old with them. They are the "high-end" customers with which Nielsen itself has grown. They have the most money to spend and they are the targets for the ads ((no longer the Pepsi generation, they are the Depend and Viagra and pharmaceuticals generation))

Paying $150/month to watch incontinence and erectile dysfunction ads—at a time not of your choosing—is preposterous for the young. They may like the programs but not the way they are packaged, delivered or interrupted. They are not smarter than their parents. They, like their parents, took to new technology more quickly. What makes the technology new is also what lets its makers separate the content from its delivery. These new technologies allow "modularizing" or unbundling that which was was integrated/bundled and thus allow their developers to focus on the customer's real jobs-to-be-done.

Unsurprisingly, incumbents have responded by throttling access to original programming–an asset over which they still exert influence as distributors. Netflix and Amazon are taking the path of responding with their own blockbuster productions. Although Silicon Valley has more capital to deploy than Hollywood  this battle of attrition is by no means one that incumbents will win, and generally, it's not going to be pretty.

Tweaking the nose of the incumbent might not be the way to establish asymmetry. The better tactic may be to help the system survive but offer a "short-term alternative". This is how iTunes took on and won Music. When Napster and file sharing created a clear and present danger to the industry, Apple's approach of a controlled alternative allowed the industry to finally move to a digital download model.

An observer in 2004 would have said that Apple was bowing to the industry and providing it sustenance against "disruptive" free music. However, as behavior shifted to an overwhelming preference of iTunes downloads over physical media, the music labels found themselves in an untenable negotiating position. They had to concede on DRM, pricing and bundling itself. The music disruption occurred with a tacit acceptance and collaboration by the incumbents.

Is history repeating? Looking at the situation around TV today, the strategies of the challengers can be summarized in a similar way:

1. The content low-end: Now, YouTube, Twitch. Then, Napster, Gnutella
2. The distribution low-end: Now, Netflix, Amazon. Then, incumbent music download sites.
3. The nominally sustaining: Now Apple TV. Then, iTunes

Apple cannot play an "ignore me" strategy because as much as investors think the company is irrelevant, everything it does is closely watched by anybody who might be even remotely touched by it. Especially in entertainment.

In addition, due to brand considerations, the company cannot ship low-quality or no-quality product, including material that sits on its platform.

They have to do something different. Something more complicated and something that takes much longer.

What Apple best contributes asymmetrically is a new experience. The experience allows new behavior, new usage models and hence new loyalties to emerge. The loyalties create affinity which shifts the "love interest" for the user. The new Apple TV attempts to provide such a contribution. Not only in terms of the experience but also for becoming, finally, a platform for developers, who will try to make the product itself better in collaboration with Apple. Thus the "new experience" flips when bits which are streamed cohabit a device with bits which expect a consumer response.

This "appification" becomes an interesting experiment in behavior alteration. Will "couch time" change from pure passivity to partial interaction?

To the orthodox adherents to the religion of linearity of immersive programming this sounds impossible. But why else should a product deserve to exist? A great product is one which changes the user and for Apple TV to become great it needs to engage us to do something different than we do today. It needs to make us feel we are better for using it.

Is this new Apple TV up to it? We'll have to wait and see. But then again, if not this one, then another one will. TV will not remain unchanged forever.

I was always bemused by the notion that the Internet was able to exist solely because most users did not know they could install an ad blocker. Like removing Flash, using an Ad blocker was a rebellious act but one which paid off only for early adopters. But like all good ideas, it seemed obvious that this idea would spread.

What we never know is how quickly diffusion happens. I've observed "no-brainer" technologies or ideas lie unadopted for decades, languishing in perpetual indifference and suddenly, with no apparent cause, flip into ubiquity and inevitability at a vicious rate of adoption.

Watching this phenomenon for most of my life, I developed a theory of causation. This theory is that for adoption to accelerate there has to be a combination of conformability to the adopter's manifest needs (the pull) combined with a concerted collaboration of producers to promote the solution (the push). Absent either pull or push, adoption of even the brightest and most self-evident ideas drags on.

Ad blocking offers a real-time example of this phenomenon. On desktop or even laptop computers ads were tolerable and the steps required to naviagate in order to implement effective ((By effective I mean a combination of whitelists and customizations)) blocking were non-trivial. In addition, no platform vendors were keen to promote products which hindered revenues for their most important ecosystem partners.

Ad blocking as an activity had neither the pull nor the push.

However—and there's always a however—as browsing moved to mobile devices and as ad networks hijacked the relationships between publisher and consumer, ads became detrimental to the experiences platform vendors depended on to remain competitive. Apple first (and no doubt others soon) chose to enable mobile browsers to load third party content blocking software. This is a hesitant first step. No major promotional effort and only the most obscure setting was enabled (defaulting to off).

Nevertheless, it's important to see this action as a "push". The bit that flipped was not of the consumer but of the producer. Movement to a new consuming paradigm and the incessant corrosion of the online experience threatened to taint a platform and something had to give.

Thus the "push" signal was sent and the consumer now has to pick up with a "pull" action. We still have to watch how quickly the pull happens and how network effects of users showing one-another the results will accelerate adoption and whether the push intensifies as the solutions improve.

But from this first enablement, the ecosystem, network effects, distribution and value chain leverage could cause gates to open and ad blocking reach majority followed by universal adoption. Measuring the ease of switching, the independence of the solution from other frictions and basing the estimate on historic rates, I could imagine internet ads will become largely invisible in less than five years.

Alternatives will emerge; the written word will find its business model, yet again. But the current model, contemptuous of the reader and disrespecting of the art will not long last.

During the last quarterly earnings call, Tim Cook said that Apple has seen the highest switching rate from Android ever. That there is switching isn't surprising. We've seen many surveys which show higher loyalty with iOS than with Android. But it's been very hard to spot the evidence in the data which is visible publicly. Both iOS and Android are adding users and sales for both platforms are still increasing.

The switching effect is easier to discern when the market is not growing overall. In that situation one platform's growth has to be at the expense of another. However, some markets do show evidence of "churn" in users.

Consider the ComScore data on US platform users (above). If we look at the last six months' data ((these data are actually three month averages)) we can count that there are about 8.2 million more Americans using iPhones than there were six months ago. At the same time, there are 1.6 million Android users. One million users left the BlackBerry platform and about 700,000 left Windows Mobile. The data also suggests that the total number of first-time smartphone users is about 8.3 million.

Now, we could say that Android recruited all the Windows and BlackBerry users that switched (1.6 gained equivalent to 1.7 million lost) and Apple recruited all the new-to-smartphone users (8.2 million gained by Apple vs. 8.3 million non-consumers).

But this is not very plausible. It's much more likely that Apple converts existing smartphone users while Android converts first-time users.

In this scenario, 8 million non-users first started using Android while 1.7 million BlackBerry and Windows users switched to iPhone. But that leaves the question of what happened to the missing 6.3 million that Apple should have gained.

That's where the switching number comes into the picture. This Scenario 2 is shown in the figure above and suggests that although Android gained 8 million new users, it lost 6.4 million to iPhone for a net gain of 1.6.

Apple may have also lost a few users to Android but overall gained switchers from other platforms, mainly Android. This is what would support Tim Cook's comments.

Thinking further ahead, as the markets mature globally, they may well evolve into the way the US market evolves today. Apple's brand promise ensures loyalty while competing platforms slowly "leak" users. If this sounds eerily familiar then you'd be right. This is exactly how the PC market behaves today.