Apple Questions for 2018

The beginning of January is a great time to embrace the unknown found with the new year. Instead of trying to manufacture clarity with a long list of predictions for the new year, there is much more value in embracing the unknown and asking questions. This is my fourth installment of Apple questions. Previous years' questions can be found below:

Here are my Apple questions for 2018:


  • New iPhones. How many new iPhones will Apple launch in 2018? In 2017, Apple unveiled three new iPhone models simultaneously for the first time with iPhone 8, 8 Plus, and X. This dynamic makes 2018 the most interesting year yet when it comes to contemplating the company's plans for new iPhone models. 
  • Larger iPhones. Will Apple introduce a larger iPhone? One of the more pronounced multi-year trends with iPhone has been a move to larger form factors. A strong case can be made for Apple to introduce a larger version of the iPhone X. By removing the home button and front-facing bezel, an iPhone with a 6.5-inch screen and Face ID would end up being close in size to the iPhone Plus. 
  • Face ID 2.0. Will Apple unveil a second version of Face ID with additional features and capabilities? Examples include working at closer proximity to one's face or when flat on a table.
  • iPhone SE. Will Apple update the iPhone SE? A 4-inch smartphone screen is looking increasingly out of place in today's smartphone landscape, not to mention Apple's product line. However, the iPhone SE represents Apple's entry-level option into the iPhone ecosystem. In addition, iPhone SE is Apple's ticket for building a supply chain and assembly network in India.
  • Pricing. How will Apple expand the iPhone's pricing spectrum in 2018? Apple has been aggressive at cutting entry-level iPhone pricing while introducing higher-priced SKUs at the other end of the spectrum. 
  • Naming. What is Apple's plan for iPhone nomenclature going forward? While iPhone X certainly stands out in the naming department, the name adds a new twist when it comes to marketing new iPhones.
  • Upgrade Cycle. Will the iPhone upgrade cycle continue to extend? The average iPhone user is holding on to their iPhone for a longer amount of time before upgrading. A continuation of this trend will have a significant impact on the iPhone business.
  • Overserving Users. Will we see additional evidence of Apple overserving customers with iPhone? If a portion of the iPhone user base feels like their needs are being met with older iPhones and less advanced features, Apple will face a new challenge with iPhone.  
  • India. How will Apple alter its iPhone strategy in India in order to improve accessibility?
  • New User Growth. How will Apple respond to slowing new iPhone user growth? The company appears to be running out of pockets of premium smartphone users around the world. In order to expand the iPhone installed base, Apple will either have to appeal to increasingly loyal premium Android users or begin to move down the pricing pyramid to appeal to Android users in lower price tiers. 


  • New iPads. Will Apple unveil news iPads? Apple does not necessarily follow an annual schedule for iPad updates as it does with iPhone. 
  • Face ID. Will iPad receive Face ID in 2018? Face ID is the future, and it's inevitable that the technology will make its way over to iPad. However, there are many questions surrounding the timing of such a move and the actual implementation.
  • iPad mini. What is Apple's plan for the 7.9-inch iPad mini? The form factor is becoming increasingly awkward in a product line containing larger iPads and iPhones. By removing iPad mini 2 from the lineup last year, the iPad mini form factor lost its place as the lowest-priced, entry-level option for the iPad ecosystem. 
  • Pricing. How aggressive will Apple become with entry-level 9.7-inch iPad pricing? The company slashed 9.7-inch iPad pricing to $329 ($299 for education institutions) last year. There is likely room for Apple to become even more aggressive with 9.7-inch iPad pricing. 
  • Education. Will Apple unveil new iPad features specifically targeting education? Management is well aware of iPad's weakened position in the classroom due to school districts and administrators tailoring curricula to cheap Chromebooks. 

Apple Watch

  • New Apple Watches. Will there be a new Apple Watch unveiled in 2018? While Apple seems to be following an annual cadence for Apple Watch updates, running too fast with assumptions can be dangerous when contemplating such a young product category. 
  • New Form Factor. Will Apple alter the Apple Watch form factor? With only minor cosmetic changes year-to-year, Apple has maintained the original Apple Watch form factor unveiled in 2014.
  • Upgrade Cycle. Will Apple begin to reveal assumptions regarding an Apple Watch upgrade cycle? A revised Apple Watch form factor would speak volumes as to how Apple is thinking about a potential Apple Watch upgrade cycle. 
  • New Features. Which features will anchor a new Apple Watch? Similar to iPhone, Apple likely wants to have two or three marquee features to anchor a marketing campaign around a new device. The easy answer has been "better and improved health sensors." However, the past two years have shown that Apple has been focused on the device gaining independency with key Watch features. In 2016, the key feature was GPS. Last year, it was cellular connectivity.
  • New Watch Bands. How many new Apple Watch band collections will Apple unveil in 2018? 
  • watchOS 5. Which new features will anchor watchOS 5? Apple's strategy to choose quality over quantity with watchOS 4 worked out well for the company and Watch owners. 
  • New Partnerships. Will Apple introduce new Apple Watch partnerships? Instead of expanding the number of partnerships, Apple has been focused on strengthening its existing ones with Hermès and Nike. However, 2018 may be different, especially if Apple sees the need to remove oxygen from the fashion or endurance smartwatch niche in which Fossil and Garmin are playing, respectively. 
  • Pricing. How aggressive will Apple become with entry-level Apple Watch pricing? 
  • Sales Disclosure. Will Apple begin to disclose Apple Watch unit sales? A strong case can be made for Apple to take advantage of strong Apple Watch sales momentum and disclose unit sales. Apple Watch revenue can continue to be lumped in with the Other Products line item. 


  • New MacBook Pro. Will Apple unveil a new MacBook Pro in 2018? As with iPad, Apple doesn't necessarily follow an annual cadence when it comes to Mac updates. However, Apple management has indicated it is aware of some user complaints with MacBook Pro. Historically, Apple has been quick at addressing issues and problems, assuming Apple views MacBook Pro complaints as legitimate problems. 
  • MacBook Air. Will Apple continue to sell MacBook Air? The model increasingly appears to be merely a placeholder in order for Apple to sell a Mac portable for less than $1,000.
  • Mac Pro. Will Apple unveil the new Mac Pro and standalone display in 2018? We know a new Mac Pro is coming, but the big question is when. 
  • Mac mini. What are Apple's plans for Mac mini? Despite Tim Cook strongly signaling a new Mac mini is in the works, there continues to be a debate as to whether the Mac mini even has a future at Apple. 


  • New AirPods. Will Apple unveil new AirPods in 2018? We know a new AirPods case designed to work with Apple's new AirPower wireless charging pad is in the pipeline. There are plenty of new features, including various health-related items, that can be added to AirPods. The question is if any of those features will get the green light to market, especially when Apple is looking to position Apple Watch as the health monitoring device. 
  • Additional Colors. Will Apple sell AirPods in a color other than white? While there is likely consumer interest in various AirPod colors, it's not a given that AirPods will follow Apple Watch bands and come in a range of color options. 
  • Additional Sizes. What is Apple's stance on offering various AirPod sizes?


  • Launch. When will Apple launch HomePod? Given the company's statement on HomePod launching in "early 2018," a CY1Q18 launch would make sense. 
  • Features. Will Apple unveil new HomePod features that weren't announced on stage during WWDC? There is still a decent amount of unknown found with HomePod, especially when it comes to how the device is designed to be used with Siri and other Apple products/services.
  • Pricing. Will Apple launch HomePod at $349? It would be unprecedented for Apple to change the price of an unreleased product between unveil and launch. 

Apple TV

  • Pricing. Will Apple update Apple TV pricing? Apple increased Apple TV pricing with Apple TV 4K. The move highlighted a company with a very different view of the video streaming box market. 


  • iOS 12. What will be the major themes for iOS 12? A release focused more on quality over quantity in terms of new features wouldn't necessarily be met with much disagreement in some parts of the Apple community.
  • Features. Which features will get Apple's attention? Candidates high on the list include the camera, photos, ARKit, and HomeKit.  


I am giving Siri its own category to reflect its growing importance.

  • Vision. How is Apple going to push Siri forward in 2018? The question is left broad on purpose. There is evidence of the digital voice assistant receiving far too much criticism given what amounts to genuine improvement and advancement in recent years. In addition, there is a growing debate as to how Apple looks at Siri's role in our lives. 


  • Apple Music. What are Apple's plans for Apple Music in 2018? With approximately 35M paying Apple Music subscribers, Apple is about one-third of the way to reaching its unofficial goal of having 100M paying Apple Music subscribers. When taking into account family accounts, there are now between 40M and 45M people using Apple Music. 
  • Apple Video. When will Apple launch its video streaming service? The company continues to build out its Apple Studios division as a billion dollar content budget is put to work to assemble a bundle of original content programming. 
  • Content Bundle. Will Apple combine Apple Music with Apple Video to form an Apple Entertainment bundle? Such a product would certainly give both Apple Music and Apple Video differentiation in what is becoming a crowded market.
  • Podcasts. Will Apple look to leverage its long-standing power as a podcast distributor into something else?


  • Apple Maps. What are Apple's plans for improving Apple Maps in non-U.S. geographies?
  • Apple Pay. Does Apple have a strategy for increasing Apple Pay adoption among U.S. retailers?


  • Acquisition Targets. Which companies will Apple buy in 2018? This question is left open-ended on purpose. One would expect AR companies to remain high on the M&A target list.  
  • Investments. Will Apple take a deeper step into venture capital and tech fund investing? The company has said such investments will aid in the discovery of new technology in an increasingly competitive landscape. 

Project Titan

  • Objectives. What are Apple's plans and objectives for Project Titan in 2018?

Washington and Wall Street

  • U.S. Manufacturing. How will Apple respond to increased pressure from Washington to bring manufacturing jobs back to the U.S.? The company's primary response has been to ratchet up the PR around job creation. Will Apple expand its manufacturing fund for U.S. manufacturers? The company has been gifting sizable amounts of capital to U.S. suppliers in exchange for improved supply of critical components needed for Apple products.  
  • Cash Strategy. When will Apple bring back its foreign cash? Once the cash is in U.S. subsidiaries, how will Apple remove excess cash from the balance sheet? 
  • Buyback. How much will Apple spend on share buyback in 2018?
  • Dividends. What will be Apple's new quarterly cash dividend? The announcement will be made in the spring. 


  • Turnover. Will there be any high-level turnover at Apple in 2018? There is no obvious candidate in the SVP ranks that is either at risk of being removed or close to retirement. The most recent departure was that of former general counsel Bruce Sewell, who retired at the end of last year. 
  • New Faces. Will Tim Cook expand Apple's executive team? The last addition to the SVP ranks was Johny Srouji, who was promoted at the end of 2015 to SVP Hardware Technologies.  
  • Tim Cook's Inner Circle. How will responsibility be split among Tim Cook's inner circle? Jeff Williams, Eddy Cue, and Phil Schiller are each overlooking key aspects of Apple's business. Williams oversees Apple Watch and health. Cue is becoming Apple's content czar, and Schiller was given leadership over the App Store across all platforms. 
  • Power. Which executive will gain power and influence within Apple in 2018? 

Apple Industrial Design

  • Jony Ive. Will we get any surprises from Jony? With Apple Park mostly completed and the new design language for Apple Retail finished, Jony appears to be dedicating time and attention to new product initiatives. 
  • Turnover. Will there be additional turnover in the Apple Industrial Design group? Apple lost an industrial designer in both 2016 and 2017.
  • New Hires. Will Apple add to its Industrial Design group? While Jony may want to make the team even smaller, there is space for one or two new industrial designers. An additional benefit of a few new hires would be adding fresh ideas into the team dynamic underpinning Apple Industrial Design.
  • New Workspace. How will Apple's industrial designers adapt to Apple Park? For the first time, Apple will have one large design studio housing hundreds of designers instead of a web of disconnected spaces. This process will inevitably lead to changes in team dynamics.


  • Product Events. How many product events will Apple hold in 2018? Apple held only two events in 2017 (WWDC in June and the iPhone X / Apple Watch event in September at Steve Jobs Theater). One theory as to why Apple experienced a number of hardware and software delays in 2017 was that the company had to prematurely announce products since there were only two events to unveil them (June and September). 
  • Health and Medical. Does Apple plan to announce new health and medical initiatives? 
  • Public Image. Will Apple alter its public image in 2018? Changes can include a renewed focus on a particular area of the business.
  • New Product Categories. Will Apple unveil a completely new product category this year? In recent years, Apple has unveiled a number of new accessories. In 2015, Apple unveiled Apple Pencil. In 2016, Apple unveiled AirPods. Last year, Apple unveiled HomePod.

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Grading Apple's 2017

Apple had an eventful 2017. Over the span of just a few months, the company updated nearly its entire product line. In addition, we saw Apple unveil a number of noteworthy strategy changes and even a pivot across its major product categories. The year concluded with a handful of high-profile problems including a serious macOS security flaw, delayed software and hardware releases, and the company getting caught in a crisis of its own making involving throttling older iPhones.

Grading Methodology

It's easy to point out the inevitable long list of problems and mishaps Apple experiences in any given year and then conclude that the company went off the rails. By such measure, 2017 was a pretty bad year for Apple. On the other hand, there is little value found in just focusing on items that are traditionally viewed as positives, but are in reality bare minimums for Apple to maintain status quo, such as updating existing products or generating significant amounts of cash. 

There are two ways to judge Apple's performance in 2017: 

  1. Financial perspective. Base the company's degree of success or failure on financial metrics including margins, ASPs, unit sales, and revenue.
  2. Product perspective. Analyze the positives and negatives found with Apple's product strategy.

A hybrid approach is used for my grading process. A successful product strategy will eventually manifest itself in positive financial trends. However, financials are sometimes unable to tell the full story. By using both financial and product perspectives to grade Apple in 2017, the two schools of thought end up complimenting each other, leading to an in-depth review that fully captures Apple's performance.

Report Card

My report card for Apple's 2017 is broken into eight categories.

iPad. After a multi-year stretch of steep unit sales declines, questionable marketing, and an increasingly complicated product line, Apple turned things around with iPad in 2017. Management unveiled a number of significant strategy changes to iPad. These came together nicely to give the product category its best year since 2013, despite unit sales remaining approximately 40% below peak levels.

Signs of light at the end of the iPad tunnel began to appear in 2016 as sales of larger iPads continued to outperform sales of the smaller 7.9-inch form factor. It became clear that the iPad mini was not only contributing to iPad's ongoing unit sales decline, but was also holding the iPad back.

In February 2017, Apple unveiled its first multi-ad campaign for iPad Pro. The ads were noteworthy for what they told us about how Apple management viewed iPad. Traditionally, Apple's argument had been that the iPad is actually a computer due to having features X, Y, and Z. Apple was now saying the iPad Pro isn't a computer. Instead, iPad is better than a computer due to having features X, Y, and Z. 

In March 2017, Apple announced a number of iPad strategy changes. Apple took the iPad Air 2 and gave it a new processor, screen, name, and $70 price cut. The changes, which added much-needed simplicity to the iPad line, amounted to Apple doubling down on larger iPad form factors. In addition, Apple was convinced that a lower-cost 9.7-inch iPad would entice existing iPad owners still on their first iPad to upgrade. 

Apple continued to run with iPad at WWDC, dedicating 21% of the keynote to iPad. Management announced an all-new 10.5-inch iPad Pro, which replaces the 9.7-inch model. The 10.5-inch screen iPad, with a 20% larger screen than the 9.7-inch model, supports full-size on-screen and smart keyboards. Apple announced significant software features for iPad via iOS 11, including a dock, drag and drop, a redesigned keyboard, and a files app. 

The result of Apple's numerous iPad changes throughout 2017 were iPad sales surprising to the upside. As seen in Exhibit 1, on a trailing twelve months basis, iPad unit sales have grown for the past three quarters. The holiday quarter (1Q18) will likely represent the fourth consecutive quarter of iPad unit sales growth. 

Exhibit 1: iPad Unit Sales - Trailing Twelve Months

Screen Shot 2018-01-03 at 5.16.09 PM.png

iPad milestones in 2017:

  • Unveil a revised iPad marketing strategy.
  • Become ultra-aggressive with 9.7-inch iPad pricing. 
  • Introduce an all-new 10.5-inch screen form factor.
  • Push significant iPad software improvements in iOS 11.

iPad issues in 2017:

  • There are still genuine questions as to just how fast Apple is pushing iPad in order for the device to serve as a viable Mac alternative for content creators.
  • iPad still faces an uphill battle in education settings. 

Grade: A

Apple demonstrated the willingness to take some big risks with iPad in 2017. Pricing and marketing changes may end up being a much larger deal for iPad sales in 2018 than software enhancements found in iOS 11. 

Apple Watch. Apple Watch had a banner year in 2017. Apple sold approximately 18M Apple Watches during the year, up a whopping 70% from 2016. As shown in Exhibit 2, Apple Watch sales have become so strong that there is now more upside found with management disclosing unit sales rather than keeping them hidden and just providing sales clues

Exhibit 2: Apple Watch Unit Sales - Trailing Twelve Months

In March 2017, Apple unveiled its spring 2017 Apple Watch band collection. This was the first time that Apple unveiled a significant update to Apple Watch bands outside of a keynote. 

At WWDC, Apple's watchOS 4 portion of the keynote was among the company's strongest segments. Along with some user interface tweaks, new watch faces, such as the Siri face, turned the Apple Watch into a completely new kind of device. Apple is relying on machine learning to provide Apple Watch wearers personalized information based on their daily routine. 

However, the Apple Watch highlight in 2017 occurred in September at Apple's inaugural event at Steve Jobs Theater. In fact, Apple Watch was the strongest segment of Apple's presentation. Apple has found a use case specifically designed for the Watch - health tracking - and has been successful in wrapping both product and ad marketing around this new use case. Health-tracking capabilities such as the new heart-tracking capabilities are intriguing. Such moves help shine light on Apple's goal with Apple Watch: make the device an indispensable product for the mass market by positioning it as a lifesaver, literally. 

Apple Watch Series 3 ended up being a pleasant surprise given how Apple was able to add LTE connectivity without making Apple Watch that much thicker. Items such as building the antenna directly into the screen reveal how Apple is head and shoulders above the competition in the wrist wearables space. 

Apple Watch milestones in 2017:

  • Launch a cellular Apple Watch with very few hiccups.
  • Position quality over quantity in terms of new features found with watchOS 4. 
  • Introduce compelling new Apple Watch band options throughout the year.

Apple Watch issues in 2017:

  • Apple has plenty of work ahead of itself to improve Apple Watch adoption, which still stands at less than 5% of the iPhone user base.
  • There are questions as to just how widespread third-party developers outside of the health/fitness segment can take advantage of Apple Watch in a sustainable way. 

Grade: A+ 

While there are obvious items to improve with Apple Watch, there is no legitimate reason to deny Apple Watch the A+ that it deserved in 2017. It was an all-around great year for Apple Watch.

iPhone. There are two ways to look at the iPhone business in 2017. The first is through a product lens. The second is using a business lens. From a product perspective, the iPhone business is thriving. Based on my time with iPhone 8 and iPhone X, the devices are successes as each represents an improvement from its predecessor. The iPhone 8 provides a better user experience than the iPhone 7, and the iPhone X provides a better experience than iPhone 8. In addition, Apple continues to hit the nail in the head in terms of iPhone marketing and focusing on camera enhancements. 

With iPhone X, Apple launched one of its more significant technological accomplishments in years. Removing the home button and the very popular Touch ID could have derailed the entire iPhone business if done poorly or incorrectly. Instead, Apple nailed it. iPhone X is a big win for various teams at Apple including designers, engineers, and product marketers. 

From a business perspective, the iPhone story is more complicated. A growing number of concerns have appeared. In early 2016, it was clear that the iPhone's growth story was winding down. As seen in Exhibit 3, over the subsequent six quarters since 3Q16, much of my iPhone growth concerns have materialized. While it is still possible for Apple to report stretches of iPhone unit sales growth, the days of 40% to 50% growth are over. Given a number of factors, Apple is now much more dependent on iPhone upgraders to maintain unit sales. This adds more risk to the overall iPhone story, especially given how the iPhone upgrade cycle is extending.

Exhibit 3: iPhone Unit Sales - Trailing Twelve Months

At the same time, there is early evidence of a portion of the iPhone user base becoming satisfied from a feature perspective with older iPhones, similar to what took place with the iPad business years ago. On the flip side, features like the iPhone Upgrade Program and the fact that Apple is still pushing noteworthy updates on an annual basis will likely help to offset some of the headwind found with a portion of the base being content with less. In addition, Apple continues to do very well when it comes to maintaining iPhone margins and ASPs, a byproduct of Apple expanding the iPhone pricing spectrum. 

It was hard to ignore what seemed like an outsized number of iOS bugs in 2017. Some were more of a nuisance variety. Others were more embarrassing and even worrying for Apple. In addition, after a very promising start, tepid ARKit developer adoption took some of the wind out of the AR sails, although we are still in the very early stages.

Apple then suffered an iPhone crisis this past December when it was revealed that the company was slowing down CPU performance for older iPhones in order to avoid iPhones from shutting down due to degrading batteries. The crisis was of Apple's own doing given the company's complete lack of transparency surrounding its actions. iPhone throttling is a big problem for Apple, indicative of longer-term issues involving iPhone users holding on to their iPhones for longer. 

iPhone milestones in 2017: 

  • Launch iPhone 8, 8 Plus, and X.
  • Successfully position Face ID as an alternative to Touch ID on iPhone X.

iPhone issues in 2017:

  • Structural growth issues.
  • iPhone upgrade cycle is getting longer.
  • No clear strategy for boosting iPhone sales in India. (Apple has no intention of dropping iPhone pricing to levels needed for significant sales.)
  • iPhone throttling crisis.

Grade: B+

The iPhone throttling crisis and various iOS 11 bugs do not wipe out the legitimate successes Apple saw with iPhone X in 2017.

Mac. The Mac business entered 2017 on crutches. Apple had just released the highly controversial MacBook Pro a few months earlier. Questions were building regarding Apple's commitment to the pro Mac user.

In early 2017, Apple shocked many by convening five outside journalists for an on-the-record 90-minute briefing to talk about the Mac. Apple had changed course and was now working on a new modular Mac Pro and standalone display. The decision to reveal its hand well before a finished product was ready certainly seemed to be born out of desperation as Apple tried to limit possible defections within the highly influential content creation niche. Fortunately for Apple, much of the migration chatter is likely just that, talk. Regardless, Apple now seems fully committed to catering to the niche, which should alleviate some of the concerns held by users in that community.

While Apple continued to demonstrate a vision for the Mac's future, the product category is increasingly representing Apple's weak point. In fact, it became clear in 2017 that the Mac is Apple's Achilles' heel. At its core, there are genuine questions to ask regarding whether Apple should be dedicating more resources to come up with improved alternatives to the Mac or betting on increasingly niche Mac models targeting less than 0.1% of the Apple user base.  

Mac milestones in 2017: 

  • Launch iMac Pro.

Mac issues in 2017: 

  • Questions surround Apple's Mac portable strategy and the broader direction for Mac in a mobile world.

Grade: C+

It's easy for some to look at the new MacBook Pro and instantly give the Mac an "F" in 2017.  Such an action would ignore the tangible positives found with Mac in terms of iMac Pro and the decision to dedicate resources to pro Mac users. 

Accessories. The primary product categories within Apple's accessories bucket include AirPods, Beats headphones, and Apple TV. Despite ongoing AirPods supply issues during the first half of 2017, the product had a stellar year from a sales perspective with Apple shipping as many as 12M units. With Apple TV, Apple continues to make progress on a number of fronts. Management has decided to take a very different approach to the video streaming box market than the competition has as seen with higher Apple TV pricing at a time when the trend is a race to the bottom.   

Accessories milestones in 2017:

  • Ramp AirPods supply throughout the year.
  • Launch Apple TV 4K with the revised Siri remote.

Accessories issues in 2017:

  • HomePod launch was delayed to early 2018. 
  • Questions surround Apple's willingness to cede market share in the TV streaming box space to competition. 

Grade: A-

AirPods' A+ offsets lower grades for Apple TV and the delayed HomePod.  

Services. Apple's Services category is officially comprised of iCloud, AppleCare, Apple Pay, Apple Music, and Apple's various app and content stores. For this exercise, Apple Maps and Siri are also included here. Apple isn't a services company. Accordingly, it's difficult to point to any particular Apple service as being head and shoulders over the competition in 2017. Instead, Apple's focus continues to be found with making sure that its various services offer an all-around good customer experience. This goal often involves deep services and hardware integration. Apple Pay on Apple Watch is a prime example. Controlling Apple Music playback via Apple Watch is another example. 

As seen with ongoing issues with Apple Maps and Siri, Apple has plenty of services work ahead of itself. However, there are signs of progress. Apple Maps in the U.S. is legitimately good. Meanwhile, Siri on Apple Watch has never been better.

Services milestones in 2017: 

  • Continued momentum found with the App Store and Apple positioning itself as an attractive platform for third-party paid subscriptions.  

Services issues in 2017:

  • Apple Services quality is highly dependent on geography with notable issues in key Apple markets including China and India.  

Grade: B-

It's easy to look at something like Apple Maps in India and instantly slap an "F" on Apple Services. However, this ignores the tangible progress made in 2017 with various Apple Services. 

Financial Strategy. There weren't too many negatives found with Apple's financial strategy in 2017. Apple continues to generate more cash than it needs to fund the business. Management spent an amount equal to 90% of its free cash flow generation, which is cash left over after funding the business, on share buyback and quarterly cash dividends during FY2017. Even after taking into consideration capital management activity, Apple's net cash remained around $150B. Apple spent approximately $700 million on announced M&A during the year, more than half of which is attributed to the recently announced Shazam acquisition.

Apple's pricing strategy continued to intrigue in 2017. Many of Apple's newest products, such as Apple Watch and AirPods, are underpriced in comparison to the competition. Even iPhone X at $999 ended up being not as outlandishly priced when compared to competing premium flagship offerings from other smartphone manufacturers. As shown in Exhibit 4, average selling price (ASP) trends remained intact despite Apple cutting entry-level pricing for iPhone and iPad. Overall margin trends were benign as higher-priced SKUs containing a higher margin offset lower-margin SKUs at the opposite end of the pricing spectrum. In addition, higher-margin Apple Services revenue is likely offsetting margin pressure in Apple's other product categories. 

Grade: A+

Exhibit 4: iPhone and iPad Average Selling Price

Other. There were a number of other highlights during the year that don't neatly fit into one of the preceding categories.

Final Grade

Apple had a good 2017. Taking an equally-weighted average of the grades from the preceding seven categories, Apple earned an A- for its 2017 performance. When giving iPhone, iPad, Apple Watch, and Services additional weight in comparison to the other categories, Apple still earned an A-. 


Much attention was given to Apple's various software bugs, delays, and mishaps in 2017. In addition, there was an increasing amount of skepticism facing Apple and its approach to voice-first interfaces, the smart home, and the broader "post device" narrative in 2017. However, upon closer examination, Apple made genuine strides in most of its product categories. With the company's broader bet on hardware, Apple provided a sneak peak at its dramatically different view on hardware's role in our lives going forward. In addition, Apple's growing momentum with wearables bodes well for the company's near-term prospects in many industries and fields that the company is said to be suffering in.

A missing piece to Apple's report card ends up representing a crucial ingredient for future report cards: Apple R&D. A sizable portion of Apple's attention during any given year is given to unannounced products. It is difficult to assess the progress Apple is making with R&D given the company's strict stance on secrecy and keeping ideas hidden until they are ready for prime time. One way to judge Apple's R&D progress is to look at M&A. Along those lines, it looks like Apple Glasses continue to be a high priority based on Apple acquiring SensoMotoric Instruments and Vrvana.  In addition, Apple's transportation ambitions remain intact as judged by various clues pointing to the company expanding its autonomous car R&D efforts.

An interesting exercise to conclude Apple's annual review involves thinking of how 2017 will be viewed in a few years. I continue to think that Apple finds itself in the early stages of the wearables era. With Apple Glasses positioned as the most likely new product category (HomePod will be positioned as a music accessory), 2017 will likely be looked back at as just another year in the run-up to Apple having a full-fledged line of wearables products. Meanwhile, transportation initiatives continue to represent a long-term focus for Apple. 

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Apple's Growing Bet on Hardware

Apple isn't a hardware company. Nevertheless, hardware's importance to Apple continues to grow. Apple is now overseeing a supply chain and manufacturing apparatus responsible for producing more than 300M gadgets per year. As Silicon Valley increasingly bets on services and intelligent assistants, many are making a critical mistake in downplaying hardware. As Alan Kay, a tech industry pioneer, once said, “People who are really serious about software should make their own hardware." Apple is betting that Kay's advice will remain relevant in the future. Apple is doubling down on hardware in order to become the most powerful software provider in the wearables era. 

Hardware Strategy

The vast majority of Apple's products are assembled by contract manufacturers in Asia. This wasn't always the case. In the 1990s, Apple owned its own factories. However, the company was imploding financially from a bloated product line and a costly manufacturing apparatus. Apple's supply chain and network of factories just weren't efficient. In March 1998, Steve Jobs hired Tim Cook as SVP of Operations to save Apple, literally. Cook's initial tasks included quickly drawing down excess Mac inventory in addition to laying the groundwork for Apple's outsourcing strategy. 

Cook began to rethink Apple's supply chain, going so far as to get suppliers to move closer to Apple's new assemblers. Apple soon discovered that manufacturers and assemblers in China were capable of meeting the company's high standards like no other. It was around this time that Apple began its long-standing partnership with Foxconn, the company's largest product assembler. Cook also instituted a just-in-time inventory production system which addressed excess inventory issues that nearly crippled Apple. 

While much attention has been placed on Apple's contract manufacturers, little is reported on the degree to which Apple works with its suppliers and assemblers. It is not uncommon for Apple designers to spend weeks, or even months, at factories in China. Apple does not design a product in California and just send final manufacturing instructions to its assemblers. The amount of collaboration that occurs between Apple and its various suppliers and manufacturers would surprise most outsiders. 

Even though Apple doesn't own factories, the company does own a significant amount of equipment and machines housed in third-party factories. As of the end of September, Apple held $54B of machinery, equipment and internal-use software on its balance sheet. A significant portion of this total is machinery used in the production of Apple's products.

Expanding the Bet on Hardware

Apple's bet on hardware continues to grow. In the past, controlling hardware still amounted to Apple being dependent on others to provide the core technology and components. Apple began to see the value in controlling its own destiny by owning the core technology powering its devices. 

In 2010, Apple unveiled the iPad. The device was powered by an A4 processor, the first Apple-designed chip. The A4 was made possible by Apple's P.A. Semi acquisition two years earlier. Jumping ahead seven years, Apple now has a range of processors:

  • A Series: iPhone and iPad
  • S Series: Apple Watch
  • W Series: AirPods, Beats, and Apple Watch
  • T Series: Mac

Back in September, Apple introduced the A11 Bionic chip in iPhone 8, 8 Plus, and X. The chip includes the first Apple-designed GPU solution. There is now an increasing amount of evidence that Apple is moving into modem design and power management chips. Apple's end goal is to create a system-on-a-chip (SoC) that includes Apple Ax processors, GPUs, and LTE modem chips.

Apple's current hardware strategy is all about controlling the experience found with its products. In the past, differentiation came from simply doing both hardware and software. Differentiation is now found when there is tighter control over the core components powering products. 


It's easy to think of Apple as just an iPhone maker. More than 210M iPhones are sold per year, and no other Apple product comes close to surpassing iPhone in terms of unit sales. However, iPhone is only one piece of Apple's hardware story.

According to my estimates, Apple sold 322M gadgets in FY2017. This total includes unit sales from every major product category and accessory powered by Apple software (iPhones, iPads, Macs, Apple Watches, AirPods, iPods, Apple Pencils, Beats headphones, and Apple TVs). After a down year in 2016, when Apple shipped 8% fewer devices than in 2015, the company returned to unit sales growth in 2017. In fact, Apple shipped 7% more devices in 2017 than in 2016. 

Exhibit 1: Apple Gadget Unit Sales

Apple gadget sales include: iPhones, iPads, Macs, Apple Watches, AirPods, iPods, Beats headphones, Apple Pencils, and Apple TVs.

Apple gadget sales include: iPhones, iPads, Macs, Apple Watches, AirPods, iPods, Beats headphones, Apple Pencils, and Apple TVs.

Additional accessories such as Apple Watch bands, iPhone and iPad cases and covers, and various charging cords and cables push the total number of Apple products sold in FY2017 well past 400M.

Along with demonstrating Apple's success at selling mass-market items, these sales numbers illustrate the ability of Apple's supply chain and manufacturing apparatus to produce hardware at scale. In fact, there aren't too many companies operating at Apple's hardware scale. While Samsung doesn't disclose smartphone sales, industry estimates peg the company at selling approximately 300M smartphones per year, which includes a wide range of models. Every other smartphone manufacturer is selling fewer smartphones than Apple is selling. Meanwhile, the world's largest PC makers and other consumer electronics companies don't have the sales required to come close to matching Apple in terms of hardware sales.


Apple's hardware scale is about to undergo significant changes. The upcoming wearables era will prove to be a game changer for hardware sales. As there are a little under a billion users, it is not inconceivable for Apple to eventually ship a billion gadgets per year. While this may seem hard to believe considering Apple sold 322 million gadgets in FY2017, the wearables era will likely be defined in terms of ecosystems consisting of different wearable devices. An Apple product line including Apple Watch, AirPods, Beats, and Apple Glasses, combined with a user base of more than one billion people, will lead to massive demand for hardware.

We are already starting to see the beginning stages of wearables impact Apple's manufacturing apparatus. According to my estimates, Apple sold nearly 30M wearable devices in FY2017, up from 10M devices in FY2016. Nearly one out of ten gadgets Apple sells is a wearable. Looking ahead, it is possible we will see Apple sell 50M wearable devices in FY2018 as Apple Watch and AirPods are seeing remarkable momentum in the marketplace. Both Apple Watch and AirPods are products that contain the potential of one day selling in the hundreds of millions of units per year. Meanwhile, it is inevitable that Apple will one day sell a pair of augmented reality glasses

Exhibit 2: Apple Gadget Unit Sales by Product

Note: "Other" includes Apple Pencils, Apple TVs, and Beats headphones. Wearables include Apple Watches, AirPods, and select Beats headphones.

Note: "Other" includes Apple Pencils, Apple TVs, and Beats headphones. Wearables include Apple Watches, AirPods, and select Beats headphones.

Hardware Prowess

In many ways, Apple's product event this past September at Steve Jobs Theater demonstrates the scope of Apple's hardware prowess. Apple unveiled a cellular Apple Watch and iPhone X, two products made possible only after years of intensive collaboration throughout Apple. The amount of collaboration required puts the company's extensive efforts with Apple Park, a campus designed to improve collaboration within Apple, into perspective.

Everything from the iPhone X's OLED display to the neural engine found inside the A11 Bionic chip come together to produce an experience that would be impossible to create by a company focused just on software or hardware. Similarly, the W2 and S2 chips found in Apple Watch Series 3, along with the ability to include cellular without jeopardizing device thickness or even battery life, is remarkable. After placing big bets on hardware for decades, Apple is now in a position where its hardware capabilities are opening doors for Apple software and services.

While Apple's hardware bets are already providing the company a competitive advantage over peers with smartphones, tablets, and wearables, the long-term implications of Apple's hardware strategy are still being underestimated. Apple is well-positioned to build the most formidable supply chain and manufacturing apparatus for wearables.  Apple now finds itself making bets in terms of controlling core components in products.  The company is also investigating new manufacturing techniques and processes that will give the company an advantage over peers in the wearables space.  This may be better measured in decades than in years. Apple has never seen a scenario like this play itself out before. This is unchartered territory.

Google, Microsoft, Amazon, and Facebook have been busy talking about a "post device" era in which the very idea of a device fades away. Instead powerful voice assistants and cloud services powered by artificial intelligence ultimately gain power at the expense of hardware. Apple is betting on a very different future. Apple sees a world in which hardware gains power in our lives. Apple is moving to the point at which it will have near complete control over every major component powering its device. Whether it is seen in new kinds of displays, smarter cameras, or custom silicon, hardware has a role to play in pushing more intelligent software and services. Instead of tomorrow's winners being those companies controlling powerful software and services, the winners will be companies shipping hardware that can melt away allowing the user to interact with software with as few barriers as possible. 

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The End to Apple’s Cash Dilemma

With the U.S. Senate passing its tax bill earlier this month, the probability of a U.S. corporate tax overhaul has never been higher. While differences between the House and Senate tax bills still have to be reconciled in conference, the end to Apple's cash dilemma is in sight. Both bills move the U.S. to a territorial-based tax system. In addition, both bills include deemed repatriation at a 14% rate. (The Senate bill calls for a 14.49% tax rate.) The repatriation tax change alone benefits Apple to the tune of tens of billions of dollars. More importantly, the tax changes will allow Apple to develop a sustainable long-term strategy for managing its cash and balance sheet.

Current Cash Strategy

Apple is a cash-generating machine. In FY2017, Apple reported $64B of operating cash flow, nearly as much as that of Alphabet, Facebook, and Amazon combined. On a free cash flow basis, which is a measure of how much cash is generated after taking into account capital expenditures and other costs associated with running the business, Apple's $50B of free cash flow was $2B more than free cash produced by Alphabet, Facebook, and Amazon combined. Apple has the best business model for generating cash.

Under the current U.S. tax system, Apple owes 35% tax to the federal government on all revenue earned, both in the U.S. and abroad. However, Apple pays tax on foreign profits only when the cash is repatriated, or brought back, to the U.S. This has led Apple, along with other Silicon Valley firms, to keep foreign cash offshore as it is the financially prudent thing to do for shareholders. Deferring repatriation to a later date reduces the present value of tax payments. In the meantime, Apple pays local taxes on foreign profits (a credit is provided for taxes paid to foreign governments) and accrues tax on the portion of cash deemed to be brought back to the U.S. at some point in the future. 

With Apple unable to use cash held in foreign subsidiaries to fund share buyback and quarterly cash dividends, management has been facing quite the cash dilemma. Apple is generating cash internationally at a much faster rate than it is able to spend. This has produced a situation where excess cash that is not needed to run Apple's business has been building on the balance sheet.  As of September 30th, 2017, Apple had $252B of cash, cash equivalents, and marketable securities in foreign subsidiaries. As seen in Exhibit 1, international cash now represents 95% of Apple's total cash, cash equivalents, and marketable securities. Meanwhile, Apple is unable to deplete its U.S. cash totals too much more without jeopardizing company flexibility. 

Exhibit 1: Apple's Cash, Cash Equivalents, and Marketable Securities

Screen Shot 2017-12-12 at 1.40.00 PM.png

One way management has handled Apple's cash dilemma in the near-term has been to turn to debt markets. By issuing debt at a pace roughly equal to international cash generation, Apple has essentially been using debt as a way to utilize its international cash. The company funnels cash raised via debt offerings into share buyback and quarterly cash dividends. This process becomes apparent when looking at Apple's net cash, which is the amount of cash, cash equivalents, and marketable securities on the balance sheet minus debt. Apple's net cash has plateaued at $150B as international cash generation has been offset by capital management and expenses needed to run the business. However, Apple hasn't been able to spend cash fast enough to actually lead to a declining net cash balance. Instead, Apple finds itself in a situation where it is unable to get rid of excess cash on the balance sheet in a prudent way. 

Exhibit 2: Apple's Net Cash

Screen Shot 2017-12-12 at 1.36.05 PM.png

Given Apple’s current balance sheet strategy and assuming no change to the U.S. corporate tax code, the company is on track to soon have $300 billion of cash, almost all of which is located abroad, and $150 billion of debt. Apple will need to carefully manage this growing level of debt as upcoming debt payments come due. This will only strain its U.S. cash needs even further. Simply put, the strategy of issuing debt in lieu of using international cash to fund capital management activity just isn’t sustainable, especially if interest rates rise or iPhone sales slow. Instead, management needs a solution to Apple's excess cash dilemma and an overhaul to the U.S. corporate tax code represents one of the optimal solutions.

Changes Are Coming

Assuming the U.S. corporate tax code is overhauled to include a territorial-based tax system and deemed repatriation at a 14% rate, Apple's cash and balance sheet strategy will undergo two significant changes:

  1. International cash is brought back to the U.S.. Management will bring Apple's $252B of international cash back to the U.S. After taking into account taxes, Apple will have at least $225B of cash, cash equivalents, and marketable securities in U.S. subsidiaries. Assuming foreign cash is taxed at 14.5%, Apple's decision to delay repatriation will have paid off to the tune of tens of billions of dollars as Apple would have needed to pay a higher rate to return the cash. 
  2. Debit issuance pace slows. Apple is currently issuing approximately $30B of debt per year. The only reason Apple has been issuing so much debt has been to offset the ballooning amount of international cash. With at least $225B of cash in U.S. subsidiaries, Apple will no longer need to issue as much debt. A good argument can be made for Apple to continue issuing some low-cost debt in order to optimize the balance sheet and lower the company's overall cost of capital. One potential strategy is for Apple to issue debt at a pace equal to the amount of existing debt payments coming due ($6.5B of principal debt payments come due in 2018 and another $8.9B in 2019). 

Spending Excess Cash

Following repatriation, Apple will have at least $225B of cash in U.S. subsidiaries. After taking into account Apple's $116B of debt and various cash needs including funding organic growth opportunities, SG&A, capital expenditures, R&D, and M&A, management will have at least $75B of excess cash in U.S. subsidiaries following a U.S. corporate tax overhaul. The company has never had more than $39B of cash in the U.S. at any one time. This raises an obvious question: What should Apple do with $75B of truly excess cash? Management has a number of options:

  1. Share Buyback. Apple has been spending approximately $30B per year on share buyback. Given the daily trading volume found with Apple shares, management could increase the pace of buyback without negatively impacting Apple's share price with excessive buying pressure. Apple could also rely on accelerated share repurchase (ASR) programs to handle additional buyback activity. Management has other buyback options at its disposal, including a modified Dutch auction tender offer, which allows Apple to repurchase a sizable portion of itself in a financially efficient and timely manner.
  2. Dividends. Apple is currently spending $13B per year on quarterly cash dividends. Management has telegraphed its intention to increase the quarterly cash dividend on an annual basis. Apple can use excess cash to fund a larger increase to the quarterly cash dividend. In addition, Apple can issue a special, one-time cash dividend. Such a dividend would end up being one of the more straightforward ways to quickly get rid of excess cash.
  3. M&A. Management can use excess cash to alter its M&A strategy and begin buying additional companies, targets with larger price tags, or a combination of the two trends. 
  4. R&D. Similar to M&A, Apple can use excess cash to expand its R&D spending in terms of both breadth (i.e. new industries) and depth (i.e. greater number of bets in existing industries).  
  5. Do Nothing. Apple can choose to do nothing and simply sit on the excess cash. 

Out of the five preceding options, additional share buyback is the best use of Apple's excess cash, assuming shares are trading at an appropriate valuation. Management should funnel a significant portion of the cash bought back to the U.S. into share buyback. The other options either contain too many downsides and risks or just don't make sense for Apple.

For the past few years, Apple management has been using share repurchases (and quarterly cash dividends) to funnel excess cash from the balance sheet to shareholders. These actions have reduced the number of Apple shares outstanding, thereby giving each remaining share a larger ownership claim to Apple's future cash flows and earnings. It's not that share buyback is creating shareholder value as cash moves from the balance sheet to those selling their shares. Instead, share buyback has led to a more optimal balance sheet, which helps lower Apple's total cost of capital. Other benefits found with share buyback include strong signaling effects in the market and the increased probability of investors placing a higher value on future cash flows and earnings. (My stock buyback program primer is available for Above Avalon members here.)

Dividends. A huge increase to the quarterly cash dividend will limit Apple's financial flexibility in the future. Unlike share buyback, which can easily be dialed back at any time, there is more downside found with needing to cut a quarterly cash dividend when business prospects turn negative. It isn't wise from a financial perspective to use excess cash on the balance sheet to initiate a higher quarterly cash dividend, which amounts to a recurring expense stream. Instead, dividend payouts should be tied to earnings and cash flow generation. As for a special cash dividend, many Apple shareholders have no interest in paying the taxes associated with a special dividend.

M&A. Apple has been following a very particular M&A strategy. Over the past five years, Apple has spent $5 billion on M&A buying smaller companies. More than half of that M&A expense total relates to Apple's Beats acquisition in 2014. Instead of using M&A to buy revenue or users, which is a disastrous strategy in Silicon Valley, Apple looks to fill asset holes in terms of technology and talent. While Apple's existing M&A strategy doesn't exclude the possibility of big ticket acquisitions, it does reduce the likelihood of Apple buying sprawling companies with lots of baggage. There is little sense found with Apple altering its M&A strategy to pursue larger M&A deals because it has excess cash to spend.

R&D. There is a growing amount of evidence that Apple has been adapting its R&D strategy to the changing tech and design landscape. While the company remains remarkably focused in terms of R&D spending (Apple spent $12B on R&D in FY2017), management appears to be expanding its interests to include additional industries, manufacturing techniques and processes. Apple has also been moving in the direction of venture capital investing as seen with $1B investments in Didi and SoftBank's tech fund. The moves are part of Apple's effort to improve access to new ideas and upcoming technology. The major takeaway from Apple's evolving R&D strategy is that management is able to fund R&D with organic cash generation. There is no need for Apple to ramp R&D expenditures to get rid of cash. 

Do Nothing. While management has the option to do nothing with the excess cash, such a decision isn't financially prudent. Investors are not valuing Apple shares based on management's skill at running the largest hedge fund in the world. Instead, shares are valued on the degree to which management utilizes Apple's assets to produce future cash flows. Sitting on excess cash ends up being a major liability for Apple. One of the largest risks found with holding too much cash on the balance sheet is Wall Street discounting the cash. In fact, Apple likely saw this scenario play out in the early 2010s, before the company's capital return program was launched. One fear that investors have with companies holding excess cash is that future management teams will waste the cash on frivolous M&A and other questionable investments. This results in the value of the cash being discounted, leading to a lower stock valuation.

Modified Dutch Auction Tender Offer

Apple management will need to dramatically increase its share buyback pace if the goal is to use $75B of excess cash to repurchase additional shares in a timely manner. On paper, this wouldn't seem to pose a problem. However, there are limitations as to how many shares Apple can repurchase without distorting the share price. The company is already repurchasing $30B of shares per year. It just isn't realistic to assume Apple can use open market transactions, or even ASRs, to repurchase an additional $75B of its shares over the next year or two.

Instead, Apple can turn to an alternative mechanism for share buyback. A modified Dutch auction tender offer jumps out as the most appropriate vehicle. In a modified Dutch auction tender offer, a company goes straight to shareholders with plans to repurchase a significant amount of stock. Shareholders are then given the means to indicate interest in selling their shares to the company, at a particular price range chosen by the company. 

With a modified Dutch auction tender offer, Apple would be able to buy back $75B of its stock in just a few weeks at a relatively cost efficient manner. The repurchased shares would be retired and taken out of circulation. More importantly, Apple would be able to buy back a significant portion of itself without causing too much distortion in the marketplace. Modified Dutch auction tender offer announcements have a tendency to initially drive stock prices higher due to the strong signaling effect (i.e. management must be very optimistic about future prospects). On average, companies buy back 15% of outstanding shares with modified Dutch auction tender offers. A $75B tender offer would amount to Apple buying back about 8% of itself. 

Light at the End of the Tunnel

An overhaul to the U.S. corporate tax means much more to Apple than just a different tax rate going forward. A territorial-based tax system will allow Apple to manage future cash generation much more efficiently. The days of Apple being stuck with too much cash in international subsidiaries are numbered. In addition, concerns surrounding Apple issuing too much debt will subside as the company will no longer need to rely on debt issuance to fund share buyback and quarterly cash dividend. These changes amount to a sustainable strategy for Apple to use when managing its massive balance sheet. There is finally light at the end of Apple's cash dilemma tunnel.

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A Stationary Smart Speaker Mirage

We are in the midst of a massive mindshare bubble involving stationary smart speakers in the home. While the press talk up the category with near breathless enthusiasm and positivity, there is a growing amount of evidence that stationary smart speakers powered by digital voice assistants do not represent a paradigm shift in computing. Instead, the stationary smart speaker's future is one of an accessory, and it will be surpassed in prominence by wearables. It's time to call out the stationary smart speaker market for what it is: a mirage. 

Amazon Echo

Despite a number of companies competing in the stationary smart speaker space, Amazon is the undisputed leader. In November 2014, Amazon introduced the Amazon Echo to little fanfare. TechCrunch’s relative simplistic take on the first Echo ended up being very telling:

"Amazon has a new product that doesn’t really have any current equivalent from any other tech company – a connected speaker called Echo that’s always-on, listening for commands that its virtual assistant can then respond to with information or by triggering a task."

Instead of positioning hardware, software, or design as the most critical ingredient, Amazon positioned a digital voice assistant as the Echo's differentiator. Silicon Valley was intrigued, and it is fair to view that initial Echo as having single-handily kicked off today’s smart speaker market. 

As shown by Google Trends, it took another two years for the Echo to go mainstream. Given how Amazon has supplanted a portion of Google search, one can safely assume Google Trends underestimates Echo interest, especially when considering Amazon Prime users.

Google Trends results for "Amazon Echo" in the U.S.  

Google Trends results for "Amazon Echo" in the U.S.  

The 2016 holiday season stood out for Amazon Echo. The company went on to say it sold nine times more Echo devices during that holiday shopping period than during the previous year's. While Amazon didn't elaborate on the reasoning behind the dramatic jump in sales, the most logical explanations were that Echo sales were coming off a very low base in 2015 and consumers were enticed by the low-priced Echo Dot, unveiled in March 2016.


Since the leading smart speaker manufacturers avoid disclosing sales, there is a dearth of concrete sales data regarding the overall size of stationary smart speakers. Therefore, we are left to depend on questionable customer surveys and research firms using mysterious methodologies.

When it comes to the current market leader, it is not in Amazon’s best interest to disclose Echo sales. Given how Amazon already receives near universal praise in the press, there would only be downside found in Echo sales disclosure. Taking the few clues provided by Amazon management in the form of holiday press releases, my estimate pegged Echo sales at around 15M speakers per year during the first half of 2017. To put that sales number in context, Apple is selling approximately 20M Apple Watches per year. Earlier this week, Amazon said that “millions” of Echo devices were sold between Thanksgiving and Cyber Monday. It is reasonable to assume that the company has seen an increase in the Echo sales pace in recent months.

As seen by the massive resource shift occurring across the industry, other companies have taken note of Amazon’s Echo sales. Seemingly every consumer-oriented tech company is now coming up with its own offering for the stationary smart speaker market. Facebook is even rumored to be working on a stationary screen with a speaker.

A Mirage

On the surface, Amazon Echo sales point to a burgeoning product category. A 15M+ annual sales pace for a product category that is only three years old is quite the accomplishment. This has led to prognostications of stationary smart speakers representing a new paradigm in technology. However, relying too much on Echo sales will lead to incomplete or faulty conclusions. The image portrayed by Echo sales isn't what it seems. In fact, it is only a matter of time before it becomes clear the stationary home speaker is shaping up to be one of the largest head fakes in tech. We are already starting to see early signs of disappointment begin to appear.

A closer look at Amazon's Echo line reveals why people are apparently buying millions of Echo devices: they're cheap. Amazon has ushered in a race to the bottom within the stationary speaker space like we have never seen in consumer electronics. In just three years, the stationary home speaker market is now filled with mediocre speakers costing as low as $20. Google has followed suit with Google Home Mini, a cheaper version of its Google Home smart speaker. It is just as expensive to buy a specialty pizza as an Echo Dot or Google Home Mini. Similar races to the bottom were projected in smartphones, tablets, and wearables but never materialized.

Aside from cheap Echo speakers, there is no clear evidence of other speaker manufacturers seeing significant traction. Google Home sales are estimated to be a fraction of Amazon's speaker sales. Meanwhile, there is a similar lack of evidence supporting the idea that higher-end speaker alternatives like Sonos have been able to move beyond niche.

It’s not just that smart speaker prices have collapsed. If the primary value of an Echo speaker is access to Amazon's digital voice assistant, Alexa, there is little additional value found in higher-priced Echo alternatives. While Amazon is not in a rush to provide a sales breakdown by Echo model, my suspicion is that the vast majority of sales are found with the Dot, the cheapest Echo. 

Silicon Valley calls this race to the bottom the commoditization of hardware. Services companies like Amazon and Google use low-cost hardware to seed rich, data-capturing services in our lives. The end goal for these companies is accessing valuable customer data while the vehicle of choice to capture this data is a digital voice assistant. 

Mobile Trouble

It is not a coincidence that the companies placing the largest bets on stationary speakers in the home have either failed or run into trouble with previous mobile strategies. Amazon's entry into smartphone hardware with the Amazon Fire phone was one of the colossal failures in smartphone history. Similar attempts by Facebook to come up with its own smartphone went nowhere. Meanwhile, Google now finds itself running into trouble as Android continues to lose power in the premium end of the smartphone market.

The commonality among the three preceding examples is that each has seen its dependence on Apple grow over time. The lack of a viable, standalone smartphone offering means Amazon, Facebook, and Google have had to rely increasingly on iPhone and iOS to reach their customers. This scenario has irked Jeff Bezos for years and plays a big role in Amazon's hardware strategy. Facebook's Oculus acquisition was born out of a similar mindset with Mark Zuckerberg looking to control Facebook's destiny by owning hardware. Meanwhile, Google has resorted to using the Pixel smartphone to reach premium users becoming disenchanted with Samsung. In addition, Google has begun ramping up its traffic acquisition costs (TAC) to ensure it remains the default search option on iOS.

These companies are not moving into stationary devices for the home because they represent the next frontier in tech or an upcoming paradigm shift. Instead, these companies are incentivized to figure out a way to reduce smartphone usage by unbundling the device. The result is smart speakers piping digital voice assistants that are also available through our smartphones, tablets, and smartwatches.

The fact that companies that did not succeed with smartphone hardware are increasingly betting on stationary devices has been described as a moment of opportunity. Some in the tech community have looked at low-cost hardware powered by digital voice assistants as some kind of hardware disruption – commoditized hardware powered by closed-based services to handle tasks we used to give smartphones and tablets. I disagree. Stationary home speakers aren't a disruption. Instead, they are proving to be a distraction. 


The past 10 years of technology can be boiled down to one overarching theme: mobile devices with a multi-touch interface (smartphones and tablets) becoming alternatives to traditional laptops and desktops. While there have been a few side shows here and there, nothing has come close to matching this one paradigm shift.

While smartphones and tablets continue to get smarter and more advanced, there is no denying that sales growth reflects mature product categories. With already high adoption rates, upgrade trends and platform switching are increasingly becoming the only remaining sources of sales growth. This has led to acceleration in resources being shifted to other product categories in search of the next big thing.

We now find ourselves at a crossroads. The competitive tech landscape is changing. The battle for our attention is broadening into a massive land grab for the most valuable real estate in our lives. Tech battle lines are now being redrawn around three pivotal aspects of daily life: body (health), home, and transportation. 


It would be a mistake to assume that these three categories have jobs and use cases that will require three completely different sets of products. At the same time, it would be equally incorrect to assume the smartphone will remain at the center of our lives. Instead, there will likely be new products and some overlap as to how those products are used. One of the major sources of this kind of overlap is found with the body and home. 


In some ways, the stationary smart speaker market resembles the early wrist wearables market. There was a significant amount of unknown found with where the wrist wearables market was headed: low-end fitness trackers, high-end smartwatches, or some combination in between. It took a few years and Apple’s entry into the market for the landscape to change. 

There are three distinct possibilities as to the stationary smart speaker's future. 

  1. Low-cost hardware to push digital voice assistants. Consumers purchase cheap smart speakers solely based on the accompanying digital voice assistant. Smartphones, tablets, and smartwatches ultimately lose value in this scenario. The winners are services companies betting on intelligent digital voice assistants to capture as much customer data as possible.
  2. High-end accessory. Given how digital voice assistants are already found in smartphones, tablets, and smartwatches, consumers look for standalone speakers to offer something more. That additional capability would likely be superior sound quality. 
  3. Disjointed space waiting for unknown catalyst. A number of players are able to coexist despite relying on dramatically different strategies and core competencies. While market share will likely be used to denote winners and losers, in reality, success will be determined by usage patterns and access to premium users. 

Consensus currently thinks the first option is the most likely outcome for the stationary smart speaker market. This explains the sheer amount of skepticism pointed toward higher-priced speakers like Apple’s HomePod speaker. Meanwhile, Apple is placing its bet on the second or third options coming true. When introduced at WWDC 2017, HomePod was marketed as an iOS accessory that will serve as the best speaker people have ever owned. The $349 price certainly reflects this accessory mindset. While Apple briefly went over how HomePod will be able to serve as a type of smart home hub, it was almost more of an afterthought. At its core, Apple does not think the only function for stationary smart speakers is to pipe digital voice assistants. 


I don’t think stationary smart speakers represent the future of computing. Instead, companies are using smart speakers to take advantage of an awkward phase of technology in which there doesn’t seem to be any clear direction as to where things are headed. Consumers are buying cheap smart speakers powered by digital voice assistants without having any strong convictions regarding how such voice assistants should or can be used. The major takeaway from customer surveys regarding smart speakers usage is that there isn’t any clear trend. If anything, smart speakers are being used for rudimentary tasks that can just as easily be done with digital voice assistants found on smartwatches or smartphones. This environment paints a very different picture of the current health of the smart speaker market. The narrative in the press is simply too rosy and optimistic.

Ultimately, smart speakers end up competing with a seemingly unlikely product category: wearables. In fact, stationary smart speakers and wrist wearables share a surprising amount of similarities. Each is ultimately based on handling tasks formerly given to smartphones and tablets. Two examples are delivering both digital voice assistants and sound. If the goal is to rely on a digital voice assistant, an Apple Watch wearer has access to Siri at pretty much every waking  moment. When simply wearing an Apple Watch, Siri is instantly available everywhere in the home. The same kind of access to Alexa would require five, ten, or maybe even 15 Echo speakers spaced strategically throughout the home (another reason why Echo sales are becoming increasingly misleading - some consumers may be buying a handful of $20 speakers at one time). With a cellular Apple Watch, Siri is now available outside the home even when users are away from their iPhones. Meanwhile, Alexa is stuck within four walls - at least until Amazon unveils its Alexa smartwatch. 

Wearables contain a much more attractive long-term value proposition than stationary smart speakers that have to be connected to a wall outlet. In addition, the presence of a screen provides even more value as it has become very clear that voice-first or voice-only interfaces just aren't that efficient.

The writing is on the wall. The stationary speaker market is a stopgap measure taking advantage of relatively low wearables adoption. My estimate is that Apple Watch adoption stands at 3% of the iPhone user base (10% to 15% of iPhone users in the U.S.). As that percentage increases, my suspicion is we will start to see the stationary smart speaker market begin to experience usage and retention troubles. Just as every company seems to be moving into the smart speaker space today, pain and lackluster results will begin to spread, ultimately leading to most companies exiting the space.

There may still be a future for stationary smart speakers, but not as some kind of future computing paradigm. Instead, stationary smart speakers will become accessories to the very same wearables that they are competing against today. For example, when an Apple Watch wearer wants to listen to music, HomePod will be positioned as a way to provide a much better sound experience. In addition, the very same HomePod can be positioned in the home as a type of smart home hub for controlling devices while away. If voice interfaces evolve to the point of becoming more useful, wearables will be able to easily support an increased reliance on digital voice assistants. The current fascination with standalone smart speakers may end up being labeled as a stepping stone to mass-market wearables adoption. 

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