iPhone Evolution

The iPhone's most remarkable quality is the degree to which its role in our lives has changed. In 2007, the iPhone was a computer that fit in our pocket. The product evolved into the most valuable communications tool in our life thanks to advances in camera technology. We are now on the verge of the iPhone becoming a new kind of personal navigator as Apple embraces augmented reality. The iPhone's role in our life doesn't remain static, but rather it evolves. This fact has major implications when it comes to thinking about iPhone sales and pricing, screen size preference, upgrade trends, and even how other gadgets will fit into our lives. 

The iPhone 7 Plus

One takeaway from Apple's 2Q17 earnings was that the iPhone 7 Plus is selling surprisingly well. Management assumed the larger iPhone form factor would gain popularity, but iPhone 7 Plus demand has exceeded Apple's internal expectations. Not only has the iPhone 7 Plus sold well in the U.S. and Europe, but the model is seeing double-digit sales growth in China.

Relying on app usage trends provided by Fiksu, iPhone 7 Plus demand looks to be up at least 20% year-over-year compared to the iPhone 6s Plus. Given that overall iPhone sales are trending flat year-over-year, sales of the other iPhone models are not as robust as that of iPhone 7 Plus. In fact, management commented on how subdued interest in older iPhone models drove much of the sales weakness in China last quarter.

 
 

This raises an obvious question: Why has the iPhone 7 Plus seen such strong demand? The model looks very similar to an iPhone 6 Plus and iPhone 6s Plus. In addition, consumers have had the option to buy an iPhone with a 5.5-inch screen for three years. 

The most logical explanation is that the iPhone's role in our lives continues to change, and iPhone 7 Plus features have become more appealing than those of smaller iPhones. Bigger screens are gaining popularity because photos and videos are becoming a more crucial part of our daily communication. While large screen smartphones have been popular in Asia for years, momentum is only now building in Western markets. In addition, the dual-camera system in the iPhone 7 Plus has led to Apple's significant marketing campaign around Portrait Mode. The iPhone 7 Plus camera is actually one of the more marketable iPhone features in years, which speaks volumes about iPhone being the key communication device in our lives. 

 
 

Evolution

Up to now, iPhone evolution has meant the process of Apple gradually improving features and components each year. Rather than calling a new iPhone a revolutionary update, we look at year-to-year hardware and software changes as evolutionary. However, this doesn't do a great job of describing what is really taking place with the iPhone. The iPhone's role in our lives is the item actually evolving. The iPhone is not a static product providing a similar experience year in and year out, much like a laptop or desktop. Instead, the iPhone's definition changes over time thanks to software and hardware advancements.

2007. Next month marks the tenth anniversary of the iPhone's launch. In what is now widely referred to as the greatest product unveiling of all time, the iPhone introduction provides an easy way to see the iPhone's initial definition out of the gate. The iPhone was positioned as a widescreen iPod with touch controls, a revolutionary mobile phone, and a breakthrough internet communicator wrapped into one product. Judging by the audience's reaction and applause, the most anticipated feature was the revolutionary mobile phone, not the internet communicator. Said another way, the iPhone was initially viewed as a different kind of phone. 

 
Steve Jobs introduces the iPhone in January 2007.

Steve Jobs introduces the iPhone in January 2007.

 

2008. The App Store introduction in July 2008 set the iPhone on its current trajectory. It became clear that the iPhone wasn't just a phone, but rather a computer that fit in one's pocket. The potential found with iOS was not fully appreciated at launch. A smartphone was initially looked at as a device supplementing our PC usage while away from the desk or home. This is one reason why Blackberry was so popular among business users. For the first time, they had access to their email while away from the office.

2012. Facebook's acquisition of Instagram in 2012 was a turning point not for Facebook, but rather for the smartphone camera. Around this time, the iPhone's role in our lives was also changing. The device was no longer just about having email or webpage browsing in our pocket. The camera began to gain value. We started using cameras for more than just capturing memories. Social networks based entirely on pictures started to take off. Other companies, including Snapchat, soon followed in terms of fostering new forms of communication based on new visual mediums. If the camera renaissance began in 2012, then the video renaissance started a few years later. Everyone is now battling for live streaming prominence. The latest trend with video filters begins to reveal where things are headed: augmented reality.  

AR Navigator

There are signs that the iPhone's role in our lives is about to change once again. We are on the verge of the augmented reality (AR) era. Apple has been investing heavily in AR for years with a number of notable acquisitions including Metaio, Emotient, Polar Rose, Faceshift, PrimeSense, Flyby Media, and Perceptio. AR is going to turn the iPhone into a smart pair of eyes. These eyes will transform the iPhone's functionality. Much of what has been written and said about AR positions the technology as merely an interlacing of objects with a real-world layer. Snapchat filters come to mind. However, the much more interesting and valuable attribute found with AR is having a device extract data from our surroundings and then offer additional value and context to the user. The dual-camera system found in the iPhone 7 Plus is able to extract more data than any other iPhone camera. 

Near-Term Implications

Higher Pricing. As the iPhone's role in our live continues to evolve, the device has been able to capture an increasing amount of value. When phones were just phones, we were willing to spend a certain amount on the device and corresponding service (voice minutes and text messages). Once the iPhone kicked off the era of smartphones turning into computers, we valued "phones" differently. We were willing to pay much higher prices because the devices provided additional value. Once an iPhone becomes an AR device, we are going to place even more value on the device. This will manifest itself in higher iPhone pricing. There is a reason why there has been an increasing number of reports and rumors about future iPhone pricing exceeding $1,000: It makes plenty of sense. 

Higher Costs. Simply put, it is costing Apple more to build iPhones. Apple is passing these higher component costs on to consumers. Apple increased iPhone pricing by $100 in 2014 for the 5.5-inch screen found with the iPhone 6 Plus. Pricing was raised by another $20 last year to account for the dual-camera system found in the iPhone 7 Plus. An iPhone model exceeding $1,000 is inevitable due to the simple fact that screen and camera technology costs are increasing. This may seem to be a recipe for disaster when it comes to iPhone demand. However, iPhone 7 Plus shows there has been a certain level of inelasticity found with iPhone demand. It all comes back to iPhone evolution and the iPhone's role in our lives changing to support higher pricing. 

Screen Size Preference. The 4-inch iPhone SE served Apple well over the past year. According to my estimates, Apple sold 30M iPhone SE units to date. However, the iPhone's evolution will likely impact screen size preference going forward. The desire for one-handed iPhone use is being surpassed by the desire to consume photos and videos on larger screens. It is becoming difficult to see 4-inch iPhone screens remaining in Apple's product line. Instead, the product will likely be cannibalized by iPhones with larger screen to bezel ratios. Apple will be able to fit larger screens in a similar form factor, thereby solving the dilemma experienced by those wanting not only one-handed iPhone use, but also larger screens.

Long-Term Implications

iPad Demand. As larger iPhone screens become the norm, small iPad screen demand will continue to decline. As discussed in my "Peak iPad Mini" article published in November 2015, there is no room for the iPad mini in Apple's evolving product line. Going forward, the iPhone will continue to represent the iPad's biggest headache. Larger iPhone screens handle many of the core items that were initially positioned as key iPad selling points. This will force Apple to position the iPad as a high-end device focused on larger screens and tasks such as writing, drawing, and sketching.

Wearables Demand. The iPhone may be great at capturing the world around us, but it comes up short in terms of capturing a crucial part of our lives: biometrics data. Health monitoring will represent a key use case for wearables (not just for Apple Watch). It may seem counterintuitive, but the more crucial of a device the iPhone becomes in our life, the more room there may be for a new breed of device. 

Upgrade Trends. While the iPhone upgrade cycle will continue to elongate, a ceiling may begin to appear preventing the iPhone upgrade cycle from approaching that of a PC or Mac. The iPhone's evolving role in our lives makes the product much more dynamic than a laptop or tablet. The amount of change seen over the course of four to five iPhone versions will likely keep the average upgrade cycle from extending beyond five years. The wild card is the degree to which consumers embrace annual upgrade plans that take much of the decision-making out of the process and make iPhones that much more accessible to the mass market. 

It's All About the Camera

Critics have been wrong about iPhone over the past 10 years because they failed to predict iPhone evolution. When the iPhone was just a computer in our pocket, the device was said to eventually lose to lower-priced computers. Instead, the iPhone became the most valued communication tool in our lives. Some now think the iPhone will lose to the most powerful communication services currently running on the iOS platform. However, the iPhone won't just remain a communication tool. Instead, the iPhone is quickly becoming a personal navigator capable of capturing much more data around us. 

My theory as to why the iPhone has evolved while larger screens like tablets, PCs, and TVs have seen much less change is that the iPhone contains the most valuable camera in our lives. As the iPhone's role in our lives has changed, camera usage has increased. We are giving much more value to the most mobile camera in our lives. The fact that we have our iPhones on us throughout the day breeds this evolutionary process. It also helps having an industry the size of the smartphone industry work on advancing certain core technologies found with the camera (hardware and software). The camera's importance to iPhone evolution raises an intriguing idea. The iPhone's future may be found by forecasting how we will use and value cameras in our lives.

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Apple Wearables Sales Outpacing iPhone out of the Gate

Apple's wearables platform is gaining momentum. According to Apple's most recent earnings and management commentary, the company sold more than five million wearable devices last quarter. When combined, Apple Watch, AirPods, and W1 chip-enabled Beats headphones are now outselling Mac in terms of unit sales. More impressively, Apple wearables are tracking ahead of iPhone in terms of unit sales out of the gate. As competitors continue to approach wearables with caution, Apple is doubling down. 

Apple's Wearables Platform

Apple's wearables platform consists of three product categories:

  • Apple Watch. Launched in April 2015, Apple Watch is Apple's first wearables device. After reconfiguring the Apple Watch line this past September, Apple now sells five Watch models ranging from a $269 Apple Watch Series 1 to a $1,499 Apple Watch Hermès. To date, Apple has sold 25M Apple Watches (my estimate). 
  • AirPods. AirPods are much more than just a pair of wireless headphones. The inclusion of Apple's new W1 chip, along with a series of sensors and voice accelerometers, position AirPods as Apple's second major wearables product. Despite launching with very limited supply in December 2016, Apple has managed to ship at least three million AirPods (my estimate) in a little more than three months on the market. This amounts to $475 million of revenue in just the first 14 weeks on the market. 
  • Beats headphones. The inclusion of Apple's new W1 chip means three Beats headphone models (BeatsX, Solo3, and Powerbeats3) should be classified as Apple wearables. The expectation is that these headphones will gain additional features in subsequent versions. 

Apple launched a wearables platform with Apple Watch two years ago in April 2015. Apple has since expanded the platform to include devices for the ears (AirPods and Beats headphones). As Apple unveils new wearable devices and form factors, those products will expand the company's wearables platform.

Sales Trends

There has been an intense debate involving wearables and how to define sales success. The best way to begin addressing the issue is to go over the sales numbers. As seen in Exhibit 1, Apple Watch and iPhone have been trending similarly when we look at sales out of the gate. When looking at the first two years each product was available in the market, we see that both Apple Watch and iPhone are outpacing early iPod sales by a wide margin.

Exhibit 1: Early Sales Trends (Two Years Following Launch)

Rearranging the data from Exhibit 1 into cumulative unit sales removes the seasonal impact. It becomes easier to see how Apple Watch and iPhone are running neck-and-neck for second best-selling Apple product category across the first eight quarters following launch. The fact that Apple has sold nearly the same number of Apple Watches as iPhones during the first two years on the market will surprise many people. The narrative surrounding Apple Watch does not match that of a product very close to being the second best-selling product out of the gate in Apple's history.

 
 

This past quarter marked the eighth quarter that Apple has been selling a wearable device. When AirPods and Beats headphones unit sales are added to Apple Watch sales, the true extent of Apple's wearables platform becomes apparent. Apple's total wearables sales are outpacing iPhone sales out of the gate. As seen in Exhibit 2, AirPods and Beats headphones sales boosted Apple wearables sales in the seventh and eight quarters following Apple's wearables platform launch.

Exhibit 2: Early Sales Trends (Two Years Following Launch)

Screen Shot 2017-05-11 at 2.56.31 PM.png

On a cumulative unit sales basis, Apple wearables sales are exceeding iPhone sales by two million units after the first eight quarters on the market. Wearables are Apple's second best-selling product category out of the gate.

 
Screen Shot 2017-05-10 at 5.34.44 PM.png
 

Key Considerations

Whenever sales comparisons are made between Apple wearables and iPhone and iPad, there are a number of key differences between the product categories that need to be discussed.

iPhone. In 2007, Apple launched the iPhone with very limited distribution. For the first four months, iPhone was only available at AT&T in the U.S. By time the iPhone 3GS launched in 2009, the iPhone was available in 80 countries. The iPhone's limited distribution masked the product's underlying adoption trends. During those first two years on the market, consumers began to see value in a hand-held computer. This makes it impossible to know how well the first iPhone would have sold if it was given a much wider launch. It took a few years for the mass market to become interested in iPhone. 

iPad. The iPad launch was timed perfectly and enabled the iPad to ride the iPhones' coattails. The iPhone app bonanza certainly contributed to iPad sales in addition to the fascination found with much larger multi-touch screens running iOS. While the iPad saw a limited rollout at launch, distribution was much wider than it was with the iPhone launch a few years earlier. 

Apple Watch. Despite Apple Watch seeing a much wider rollout at launch, the product has faced a different kind of constraint. Apple Watch requires an iPhone. This has the effect of more than doubling the entry-level price of Apple Watch for non-iPhone owners. Even though the Apple Watch was available in nine countries, including China, at launch, the product's target market was closer to 500M people. 

AirPods. AirPods launched this past December in more than 100 countries. Exhibit 2 adds AirPods sales to Apple Watch and Beats headphones sales beginning in the sixth quarter following Apple's platform launch. This ends up adding quite a bit of conservatism to Apple wearables sales as AirPods will likely be on an annual sales pace measured in the tens of millions per year by time they have been available in market for eight quarters. As long as supply improves, AirPods will likely give the iPad a run for its money in terms of it being the best-selling Apple product out of the gate over the first two years. (The methodology and math behind my AirPods sales estimates are available for members here.)

Context

One takeaway from all of these launch and distribution differences is that each product has faced its own set of unique situations and challenges. However, there is value found in comparing sales of wearables to those of early iPhone and iPad because such comparisons provide context for wearables sales.

Many people have been grading Apple wearables on a curve, looking at the devices through an iPhone lens. Since unit sales pale in comparison to current iPhone unit sales (220M a year), wearables are being cast off as either disappointing or irrelevant. This ignores what is growing momentum for Apple's wearables platform.

To have Apple wearables sales outpace iPhone sales out of the gate when looking at the first two years of availability demonstrates that wearables are a thing. Apple has built and sold more wearables than iPhones after the first two years in the market. That fact goes a long way in helping to define just how significant Apple wearables sales have been. It is irrelevant if Apple could have shipped additional iPhones by launching with wider distribution back in the late 2000s. An argument can be made that Apple would have sold many more wearables this past quarter if it wasn't for severely constrained AirPods supply.  

Redefining Wearables

Too much attention is being placed on Apple Watch as holder of the wearables torch. Instead, the focus needs to be placed on both Apple Watch and AirPods, with W1 chip-equipped Beats headphones representing Apple's third wearables product category. Instead of looking at these wearable devices as standalone products with few similarities or overlap, we should view them as coming together to create a platform, as shown below. AirPods usage increases the value found with Apple Watch ownership. The reverse applies as well. Apple Watch usage increases the value found in AirPods ownership. This interdependency is only going to intensify and likely boost overall Apple wearables sales.

 
 

Looking Ahead

According to my estimates, Apple is on track to sell more than 30M wearable devices in 2017. This is an astounding figure considering that it would represent approximately 15% of the number of iPhones Apple is expected to sell in 2017. As seen in Exhibit 3, there is a strong probability that Apple wearables sales will continue to outpace iPhone sales when looking at the first three years of availability following launch.

Exhibit 3: Early Sales Trends (Three Years Following Launch)

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Looking out a bit further to the first five years of availability following launch, things become even more interesting. The iPhone began to outsell the iPad three years following launch, and the sales gap has increased ever since. Similarly, Apple's wearables platform is positioned to outsell iPad in roughly the same amount of time following launch. It is not out of question that Apple wearables will continue outpacing iPhone as we move to four years of availability following launch. While this is no small task as Apple would likely need to double the number of wearables it is currently selling, AirPods would play a key role. 

Exhibit 4: Early Sales Trends (Five Years Following Launch)

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Momentum Building

This past holiday season, Apple passed Fitbit to grab the title of largest wearables company. This past quarter, for the first time, more Apple Watches than Fitbit devices were sold. The number of people wearing an Apple wearable device has likely surpassed 20M. Apple is laying the foundation for a wearables platform that will eventually grow to annual unit sales in the hundreds of millions of devices. 

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Apple Isn't a Tech Company

Apple continues to be misunderstood. With the company's cash cows showing signs of maturity, Apple's interest in new industries is growing. Questions are swirling as to where Apple may be headed next. The answer is found by assessing how Apple views itself and the role it has to play in the world. Apple isn't a tech company, but rather it's a design company betting that consumers want something more than just technology in their lives. 

Defining Apple

Over the years, Apple has been given a number of labels: 

  • Computer company
  • Technology company
  • Product company
  • Consumer electronics provider
  • Mac company
  • iPod company
  • iPhone company
  • Luxury retailer
  • Consumer discretionary company
  • Consumer staples company

Some of these labels were more valid than others. In some cases, the label was meant to represent Apple's relationship with customers. Other labels went a bit further in an attempt to describe some aspect of Apple's culture or product philosophy.

Even Apple contributed to a few labels. In January 2007, Steve Jobs announced that Apple would drop the "Computer" from its name and become just "Apple Inc." to reflect the changing product line. The name change led some to believe that Apple now viewed itself as a consumer electronics company or even an iPhone company. However, a corporate name change doesn't tell us much about how best to define a company.

A more interesting clue about how Apple views itself came three years later, at the end of the iPad unveiling keynote, when Jobs talked about how Apple was able to make a device like the iPad. Here's Jobs: 

"The reason that Apple is able to create products like the iPad is because we've always tried to be at the intersection of technology and liberal arts. To be able to get the best of both. To make extremely advanced products from a technology point of view but also have them be intuitive, easy to use, fun to use, so that they really fit the users and users don't have to come to them, they come to the user. And it's the combination of these two things that I think let us make the kind of creative products like the iPad."

 
 

Clues

This location at the intersection of technology and liberal arts explained why competitors had such a difficult time competing against iPad (as they still do today). There was something more to the iPad than just technology. However, this still doesn't tell us how best to define Apple going forward. Instead, a closer examination of Apple's business provides more valuable clues. 

Power Structure. In the late 1990s, Steve Jobs shifted the power structure within Apple so that designers had control and influence over engineers. The logic in turning Apple into a design-led company was that design is the item that leads to great products. The iMac was the first product to be born out of this new power structure. 

Since becoming CEO in 2011, Tim Cook has made a number of leadership and managerial changes that amount to giving even more power to Apple designers. My theory is that these changes have reinforced a structure that splits Apple leadership into two groups:

  • Operations and corporate strategy
  • Product

An inner circle comprised of Tim Cook, Eddy Cue, Phil Schiller, and Jeff Williams oversees Apple's day-to-day operations and broader corporate strategy. This inner circle is supported by a number of SVPs and VPs. In addition, Cook increased the number of direct reports to the CEO while expanding the managerial reach of those making up the inner circle.

Meanwhile, the Apple Industrial Design group is positioned as the overseer of Apple's product direction. Christopher Stringer is a veteran Apple industrial designer who recently was reported to be leaving Apple. A few years ago, during Apple's Samsung trial, he explained that the job of an Apple industrial designer is "to imagine objects that don’t exist and to guide the process that brings them to life."

As seen in the following diagram, which was published in my "Grading Tim Cook" article, Apple leadership is split into two groups: operations/corporate strategy and product. This structure doesn't resemble that of a technology company. The Industrial Designers have continued to consolidate power during the Tim Cook era. 

Organizational Structure. It is logical to assume that the significant amount of change in power structure has resulted in cracks forming elsewhere within Apple. While some of this has manifested itself in certain groups losing influence or sway with management, the broader culture at Apple doesn't appear to have been jeopardized. The company's functional organizational structure has played a significant role in keeping corporate politics somewhat at bay. The focus, by design, remains on the product. 

In managing the Industrial Design group, Howarth isn't simply overseeing a team of 17 industrial designers. Instead, he is managing Apple's in-house design studio. Even after including the Human Interface team, Apple's core group of designers is remarkably small. This creates a contrast with tech companies employing hundreds of designers or utilizing various outside design consultants. Today, Apple handles all of its design internally.  

By rearranging the Apple leadership structure diagram shown above, we obtain a different look at Apple. The company is comprised of a nimble design studio supported by one of the largest technology arms in the world. It would be incorrect to classify Apple as just a design studio. The technology arm allows Apple to develop the technologies powering products created by the Industrial Design group. This dynamic is made possible by close collaboration between the designers and Apple's significant engineering resources. 

 
 

Storytelling. The next big clue as to how best to define Apple comes from observing how management has tried to tell the Apple story through the press. Consider some of the recent articles and interviews published in cooperation with Apple executives.

  • Jony Ive profile in The New Yorker (February 2015). The 16,000-word profile had Apple's full support and was one of the defining pieces written about the company this decade. Ian Parker used the Apple Watch as a prism to show how today's Apple is Jony's Apple. The messaging was clear: Apple's product strategy was now led by an industrial designer. Jony now had the role formerly held by Steve Jobs. 
  • Charlie Rose's exclusive look inside Apple (December 2015). Rose was given unprecedented excess inside Apple for a 60 Minutes report. The tour included the world's first genuine look inside Apple's Industrial Design studio. While a few photos of the studio were released in the past, Rose's access was unprecedented. In one scene, Rose and Jony talk about how few people get to be in the lab. Jony laughed and said "We don't like people in this room, period," in an obvious recognition of how unusual it was to have Rose and his entire entourage sitting in the studio. This raised the question of why Apple gave Rose such access in the first place. Apple felt that a look inside the design studio would help explain itself to the world.
  • Charlie Rose interview with Jony Ive (March 2016). The 72-minute interview aired in March 2016 and was aimed at figuring out what drives Apple. The interview went into detail as to how products are developed at Apple. It also addressed various topics pertaining to Jony and his design philosophies. 

In each of the preceding examples, Apple had one goal in mind: Shape its public image. Apple wanted to be known as more than just a technology company. Instead, Apple viewed itself as a company that puts the product above everything else. 

Products. Given that the product plays such a prominent role at Apple, the clue that best helps us define Apple is found in its products. Last month, Apple unveiled a number of new products through a series of press releases. (My complete review of Apple's new products is available for members here.) The new Apple products that contained the most intrigue were Apple Watch bands. There were a number of new Woven Nylon bands as well as Classic Buckle, Sport Band, and Hermès band options. The changes amounted to Apple unveiling its spring 2017 Watch band collection.

While Apple Watch bands remain a source of mockery within some Apple user circles, the product is incredibly important for Apple. Watch bands are the primary reason Apple has been able to sell close to 25M Apple Watches to date and become the wearables leader in the process. While there is value and convenience found with having a small screen positioned on the top of one's wrist, the only reason people are willing to wear that screen in the first place is because of Watch bands. It is not a coincidence that Apple Watch bands are the most frequently updated product at Apple.

With Watch bands, Apple is shipping a product that isn't powered by any software or technology. Instead, Watch bands are judged by tangibles and intangibles more likely to be found in the fashion world than in Silicon Valley. Watch bands end up serving as a big clue for the kind of company Apple is striving to be. It's certainly not to be just a tech company. 

The Mac provides another clue as to how best to define Apple. While we can point to a number of red flags appearing in the Mac business, the major trend taking place with the Mac is that the product is changing in an iOS world. What was once geared toward the liberal arts mindset is now finding itself more appealing to those in fields such as engineering. This transition coincides with the Mac becoming a bigger headache for management. The company knows how to make technology more personal, as with the iPad. However, when the same goal is attempted with the Mac, Apple receives pushback from a small but influential segment of the Mac user base. The struggles Apple is having with Mac end up showing that Apple isn't just a tech company. There is something else at play. 

Not Tech, but Design

All of the preceding clues for how best to define Apple contain a similarity: They revolve around some element of design.

  1. Apple is a company in which designers hold the most power and influence.
  2. Apple is structured to position the product above anything else.
  3. Apple management is eager to use design to tell its story.
  4. Apple's product line embodies the principle of technology not being enough.

At every turn, Apple is quick to discuss how something more than technology is needed. Even Apple's WWDC 2017 announcement reiterates this point, saying "Technology alone is not enough." That is a powerful statement to define what is arguably Apple's most tech-focused event of the year. 

 
 

Apple isn't a tech company, but rather it's a design company. 

By being defined as a design company, Apple is positioning the user experience  - how consumers interact with technology - as more important than focusing on the sheer power found with technology. This goal permeates throughout Apple. The company isn't just a design studio with a technology arm. Instead, every group at Apple is in one way or another focused on design. Apple is betting that design is the ingredient that will continue to put the product above anything else. 

Design vs. Technology

There is a way to differentiate a design company from a tech company: Observe how the company approaches technology. In every case, Apple views core technologies not as products themselves, but as ingredients for something else. Instead of wanting to chase after technology's raw capability, Apple is more interested in technology's functionality as it relates to the user experience. This brings up Jobs' reference to Apple being at the intersection of technology and liberal arts. By looking at the world through this lens, we receive a clearer roadmap as to where Apple is headed in terms of product strategy. 

Augmented Reality (AR). Apple has been investing significantly in AR for the past few years. Instead of acting like a tech company and positioning AR as a standalone product, Apple's primary focus is to incorporate the technology into products we already use (smartphones, tablets) and products we will begin to use in the future (entirely new wearable form factors). Apple views AR as a core technology that will transform products into a new breed of navigation tools. This will add a new dimension to the technology. The way we will interact with AR is often the part of the equation not discussed much by tech companies. Apple will attempt to figure it out. 

Autonomous Driving. Contrary to reports, Apple still wants to design its own car. Apple recently was granted a permit to begin testing autonomous driving technology on California public roads. Apple is researching autonomous driving technology because it will be a core ingredient powering a range of Apple products in the transportation space. Instead of partnering with legacy auto companies, Apple will look to do everything on its own. The motivation and ambition in such a move is born from Apple's adherence to design and the quest to control the entire user experience. 

Health Monitoring. There is a reason why Apple Watch bands are the most frequently updated product in Apple's line. The best way to get people to wear health monitoring technology is to have people want to wear health monitoring technology. Today, health monitoring primarily describes simple fitness and health tracking. Apple is actively researching different technologies, including those for possible blood sugar monitoring. If successful, the technology will play a vital role in Apple's wearables products. 

Voice. A tech company positions a voice assistant as the product. Cheap standalone speakers would be positioned as a way to get people to use the voice assistant as much as possible. Apple sees voice playing a different role in computing. Voice assistants can add value to products we already use and wear throughout the day. Instead of making the voice assistant the focus, Apple is interested in how we can use our voice to make technology more manageable. 

TV. Apple's decision to not ship a television set provides an example of not enough core technology resulting in a product receiving a "no" from the company. According to reports, Apple was not able to figure out a way to differentiate itself from the competition. This is another way of saying there was little found with a television set that could lead to an entirely new user experience. Television sets are stationary, large pieces of glasses positioned a few feet in front of us. While new technology in the form of a few front-facing cameras and sensors may add a few new twists to the equation, Apple didn't think the final offering would be compelling enough. Instead, Apple focused on the piece of the television experience we do interact with - the remote control and tvOS user interface. As it turned out, Apple ended up selling more than 255M "television sets" in 2016 anyway. They are called iPhones and iPads. 

Criticism

Much of the criticism directed at Apple can be traced back to how the company is defined. Because it is not a tech company, some have questioned Apple's ability to grasp future technology waves. These critics don't give Apple enough credit for the large technology arm connected to its design studio. Suggestions that Apple's services will remain inferior to those of its peers are becoming common occurrences. However, the progress Apple has made with Apple Maps suggests this is not the case. Apple's ability to excel at machine learning is routinely questioned. The criticism boils down to Apple focusing too much on functionality (how we use the technology) and not enough on capability (what the technology can do). 

At the same time, Apple receives pushback from being a design company. The significant backlash Apple is receiving from a portion of its pro Mac user base boils down to a broader dissatisfaction with the company betting too much on design. There are some Apple users who don't want the version of technology Apple is selling. In addition, there is no sign of this dissatisfaction going away.

In reality, Apple's largest risk isn't found in being a design company or not being a technology company. Instead, it's in becoming a tech company. If Apple finds itself moving away from being design-led, the product will be put into jeopardy. This is likely one reason why Cook continues to bet so heavily on design. 

The Apple Design Book

AirPods wasn't the surprise product of 2016. Rather, Apple's $199 design book came as a shock to the Apple community.

 
 

While many looked the book as Apple designers getting intoxicated by nostalgia, the book ends up being the clearest expression of what makes Apple a design company. Apple is focused on creating products that can change the world. The secret to accomplishing this goal is to place a bet that technology alone is not enough. 

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The Mac Is Turning into Apple's Achilles' Heel

Apple's decision to change course and develop a new Mac Pro has received near-universal praise from the company's pro community. While developing a new Mac Pro is the right decision for Apple to make given the current situation, it has become clear that the Mac is a major vulnerability in Apple's broader product strategy. The product that helped save Apple from bankruptcy 20 years ago is now turning into a barrier that is preventing Apple from focusing on what comes next. 

Apple's Mac Meeting

There were three takeaways from Apple's recent on-the-record meeting with five journalists in Cupertino to discuss the Mac.

  1. Apple is sorry about the lack of Mac updates targeting pro users.
  2. The current Mac Pro suffers from a fatal design decision (although the device will continue to be sold).
  3. Management debated the Mac Pro's future and decided to change strategy and begin work on an entirely new Mac Pro. The company will also work on an Apple-branded pro display to go along with a new Mac Pro. 

(My complete review of Apple's emergency Mac meeting is available for members here.)

It is easy to look at this highly unusual meeting as being just about the Mac Pro and Apple trying to prevent influential content creators from jumping to a competing platform. However, read between the lines, and it becomes clear that Apple has a much bigger problem on its hands than simply an outdated Mac Pro.

The Mac has become a major headache for Apple, and management is on the verge on going down the Mac rabbit hole, funneling an increasing amount of resources and attention into a product category that doesn't represent the future of personal computing. The risk is that Apple will be stuck with a $25B legacy business and corresponding user base that will threaten the company's increasingly ambitious product strategy.

Tale of Two Apples

Apple is like a novel where two characters are battling each other in the post-PC era. When it comes to mobile, Apple's success is unmatched. The company is connecting with the mass market like never before. The iPhone is bringing more than 100M new people into the Apple ecosystem each year. Apple Watch momentum is building with a user base surpassing 20M people. Early AirPods sales trends look even more promising. More importantly, Apple executives have been on the same page with each other when it comes to strategy. 

This cohesion in strategy extends to how Apple continues to place big bets in an effort to control its own destiny in mobile. Recent news of Apple developing its own GPU solution is the latest step in the company's quest to ship a single system-on-the-chip (SOC) powering a range of mobile and wearable devices. This will give Apple a competitive advantage measured in decades. The company is also placing big bets on mobile services such as mapping and payments, items that will serve to create a competitive advantage in the changing tech landscape. 

In stark contrast, Apple's Mac strategy looks like a slow-motion train wreck. While Apple has made some progress with bringing elements of mobile such as Touch ID, multi-touch displays, and ARM processors, to the Mac, years of sporadic updates have overshadowed the positives. Apple's relationship with its pro Mac user community has deteriorated and can now be described as toxic. To make matters worse, there appears to be a growing rift among Apple executives concerning Mac strategy. 

As for why Apple's problematic Mac strategy hasn't caused too many issues for the company up the now, the business has become niche. As seen in Exhibit 1, Apple is selling more than 250M iOS devices per year.  In comparison, they are selling fewer than 20M Macs. The Mac accounts for just 11% of Apple's overall revenue. More importantly, the Mac is no longer the primary way new users enter the Apple ecosystem. In addition, one can also argue that pro Mac users haven't had much in the way of alternative platforms up until recently, although this is still being debated. 

Exhibit 1: The Post-PC Era at Apple

The Achilles' Heel

Apple's Achilles' heel is becoming visible. As Apple gets better at making technology more personal for the mass market, the company is losing touch with its legacy pro users. The situation came to a head last week with Apple announcing that it began work on a new Mac Pro. While one can chalk up a new Mac Pro as a one-off cost for keeping iOS app developers engaged in the platform, Apple's vulnerability extends much deeper than one Mac model.

There appears to be a growing rift among Apple executives when it comes to Mac strategy. Apple Industrial Design and Apple management have spent the better part of the past 10 years focused on devices designed to move hundreds of millions of people beyond the Mac. However, this strategy did not address 30M Apple users dependent on pro Mac hardware and software. While this segment only accounts for 4% of Apple's user base, it is responsible for creating content consumed by the other 96% of Apple users. These content creators have played a major role in Apple's mobile success. 

Apple's Achilles' heel is found with the niche devices at the tail end of the business. As seen in Exhibit 2, when compared to smaller screen unit sales, devices targeting pro users barely register. Apple has come to the realization that these niche devices, instead of being cast off or ignored, need ongoing attention and resources. 

Exhibit 2: Apple Device Sales Mix (Screen Size)

Path to Today

It is fair to ask how Apple got into this predicament.  

The Mac isn't like the iPod, a device cleanly and quickly cannibalized by a newer Apple product. iOS and multi-touch are not able to handle all of the tasks given to Mac. This is one reason why Apple has been extremely vocal about continuing to invest in the Mac despite running forward with iPhone and iPad. The debate was never about whether or not Apple will continue to sell Macs, but rather about how best to bring the Mac into the future. 

One path forward was for Apple to consolidate resources and place a bet that higher-end MacBook Pros and iMacs would be able to handle the needs of most Mac Pro users. Apple ended up being partly right. A majority of pro Mac users have transitioned their workflows to MacBooks and iMacs without incident. 

Apple ran into an issue when it came to addressing the niche of the niche. Millions of pro users could not make the jump from Mac Pros or other high-end PCs to a MacBook Pro or iMac. Apple needed to support these users for no other reason than they create the content consumed by the rest of the user base. 

Issues

Apple's decision to work on a new Mac Pro raises a number of red flags. 

Resource strain. Even though Apple has $246B of cash and cash equivalents, the company is resource-constrained when it comes to time and attention. Apple's functional organizational structure produces a constant battle among products and teams to grab that finite amount of management's attention. For management to dedicate attention to new pro Mac hardware, the company may need to take its foot off the accelerator with other products. This may seem like a major flaw, and judging from the amount of criticism directed towards Apple's organizational structure, such an opinion is widely held. However, Apple's structure is put in place in order for the product to be put ahead of everything else. It is not a disadvantage or weakness, but rather one of Apple's secrets to success. There is value found in having Apple's Industrial Design team, along with Tim Cook and his inner circle, move from product to product throughout the year in order to place a select few big bets.

Broader cultural differences. Some may argue that Apple is capable enough to develop mobile and wearable devices while selling pro Macs at the same time. This ignores the much more complicated aspect of Apple satisfying vastly different user needs with pro Macs. Apple would not only be developing a new Mac Pro or standalone display, but also sustaining a small but influential base of pro users dependent on macOS. Similar to how the iPhone user base is changing, Apple's overall user base has become quite heterogeneous in terms of technology wants and needs. It may be nearly impossible for Apple to satisfy all of its users. 

Product strategy hole. According to consensus, the biggest challenge Apple is facing is finding a business as profitable and influential as the iPhone. This extends to Apple not being able to expand its developer and app success to newer product platforms. It has become clear that Apple's inability to move beyond the Mac poses a much bigger long-term risk. 

There may be a hole developing in The Grand Unified Theory of Apple Products (shown below). The idea behind the theory is that Mac portables and desktops are positioned as the most powerful machines in Apple's product line. These machines will then serve to push the rest of Apple's product line forward. However, there isn't much evidence of this actually taking place. Instead, iPhones and iPads are being used to decide where to bring MacBooks and iMacs. There is also the awkward situation of iPad Pro beginning to give Mac a run for its money in terms of performance. 

 
 

Meanwhile, there isn't much evidence of MacBook or iMac features serving as inspiration for Apple's smaller screens. This is a sign of value destruction occurring with larger screens found at Apple's tail end of the business. We are giving more of our time to the smaller screens in our lives. Where does this leave Macs within Apple's broader product strategy? It increasingly looks like an odd fit as the Mac becomes a legacy platform.

Additional Concerns

The need to have a highly unusual private, on-the-record briefing with five journalists to explain a complete reversal in Mac strategy signals a management team on defense. Apple is afraid of influential Mac content creators jumping ship. This is the exact opposite of the aggressiveness Apple has shown with mobile and wearables. The more one looks into the topic, the more worrying things appear.

In an attempt to explain Apple's new Mac strategy, Apple SVP Phil Schiller wiped the dust off the old quadrant product grid. At the same time, Schiller has been increasingly vocal about the Mac being around for the next quarter of a century. Here's Schiller in late 2016:

"The new MacBook Pro is a product that celebrates that it is a notebook, this shape that has been with us for the last 25 years is probably going to be with us for another 25 years because there’s something eternal about the basic notebook form factor. You have a surface that you type down on with your hands, with a screen facing you vertically. That basic orientation, that L shape makes perfect sense and won’t go away." 

Schiller is likely guided by the desire to calm pro Mac users' fears. Arguing that the Mac will be around for 25 years means that these users won't need to worry about transitioning away from the Mac during their careers. However, this stance places Apple in an awkward situation. Nowhere is this seen more clearly than in Apple's recent iPad Pro ad campaign. On one hand, Apple is saying it thinks the laptop form factor will be around for 25 years. However, Apple then launches a marketing campaign positioning the iPad Pro as a better computer than MacBook. 

The Way Forward

My suspicion is that instead of trying to get around its Achilles' heel, Apple will try to be more cognizant of it. It is likely that a majority of Apple's senior executives, including Apple's Industrial Design group, still view the iPad and iOS as the more promising platform than Mac and macOS for the next 25 years of computing. Apple is pushing iPad like never before. New pro Mac hardware will not change this dynamic. However, it has become clear that Apple realizes its previous Mac strategy fell short as there was no viable path forward for tens of millions of pro Mac users.

Apple disclosed a few facts about its pro Mac users as measured by pro software usage. The data contains clues as to where Apple's product strategy may be headed. According to Apple, 70% of the Mac user base does not use pro software and would not classify as pro users. This is another way of saying that the iPad Pro could do quite well serving the needs of 70M Mac users. Meanwhile, the other 30% of the Mac user base wants and needs the power and flexibility that Apple has historically had trouble selling. 

Apple will likely position the Mac as a computing platform for legacy pro users while iOS will be targeted to everyone else. This will entail a few steps: 

1) Triple down on iPad. The writing is on the wall. Apple will not be able to address its Achilles' heel until iPad can be used for developing apps. This will involve Apple ramping investment and resources into iPad software, hardware, and accessories. While consensus assumes Apple should look to the Mac for iPad software inspiration, the more appropriate course of action is to look at the iPhone for inspiration. There is a reason that the iPhone is outselling the Mac by 10x. People enjoy iOS as a computing platform. After all, the iPad is just a bigger iPhone.

2) Continue to be aggressive with Mac design. Apple Industrial Design will continue to be aggressive in bringing the Mac experience forward. There have been some controversial Mac design decisions taken recently, including decisions about the Touch Bar and the insistence that multi-touch does not make sense on vertical Mac displays. Some may argue that Apple needs to look at a new Mac Pro as a hardware engineering problem and have the Industrial Design team take a back seat. This may be a recipe for disaster. It just goes to show how tricky of a proposition pro Mac hardware is for this management team. 

3) Running fast with new endeavors. The Mac does not represent Apple's future. Instead, the changing tech landscape will require Apple to play in new industries. The company needs to be extra aware of the long-term damage done by the Mac becoming a resource strain and jeopardizing other initiatives.  

Figuring Out What Comes Next

Apple still needs the Mac. Tens of millions of users aren't able to pack away their large displays and embrace iPhones and iPads. However, the Mac debate has never been about whether or not Apple will stop selling Macs. Instead, the question has been, how will management be able to retain the value of the laptop and desktop form factors in today's mobile world?

The most important thing for Apple to do when it comes to the Mac is to think about what comes next. Apple's broader mission is to use devices capable of making technology more personal to inspire a new generation of content creators. It is clear that iPhone and iPad are already inspiring tomorrow's content creators. Apple Watch and AirPods are not far behind in terms of being able to inspire.

When taking into consideration new technologies such as augmented reality, it is fair to wonder just how important large screens will even be in our lives in the future. Small screens are going to transition from being just tablets, smartphones, and smartwatches to being augmented reality navigators. In such a world, large screens will look like relics. The path forward for Mac looks bumpy.

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Apple Is Pushing iPad Like Never Before

Apple is pulling out all the stops when it comes to selling iPad. We are seeing the company take its most aggressive stance yet in getting existing iPad owners to upgrade. For the first time, Apple is also making a concerted effort to reach prospective iPad owners by targeting PC users. On the surface, these efforts seem like a last ditch effort to save iPad, which faces continued sales declines. However, Apple is guided by a different motive. There are signs of Apple pushing iPad like never before in order to solve its growing Mac dilemma.

Initial Look at iPad Sales

A quick look at overall iPad sales reveals an ominous trend. Sales have declined for 12 consecutive quarters. After topping out 74M units in 1Q14, the annualized iPad sales rate has declined by 42% to 43M units.

Exhibit 1: iPad Unit Sales (TTM)

When iPad is compared to iPhone and Mac, its sales weakness becomes even more pronounced. The sales gap between iPad and Mac continues to shrink. This has drawn into question Apple's vision for iPad and whether or not the device is the best representation of the future of personal computing. There are even people beginning to question some aspects of the post-PC era as steady Mac sales suggest consumers aren't moving away from laptops and desktops. 

Exhibit 2: iPhone, iPad, Mac Unit Sales (TTM)

For the past four years, we have seen various theories put forth to explain the significant drop in iPad sales. Longer upgrade cycles, larger iPhones, inferior software, lack of professional apps, and even poor Apple storytelling have been given as factors driving iPad sales weakness. 

iPad Strategy Changes

As sales have declined, Apple has implemented a number of significant changes in its iPad strategy. Many of these changes have occurred within the past year and a half. The latest changes were unveiled last week when Apple announced the new 9.7-inch iPad. (My complete review of Apple's new product announcements is available for members here.)

iPad Pro. The most obvious change relates to the iPad Pro line. The defining features of the iPad Pro are the Apple Pencil and Smart Keyboard support, which were introduced in 2015. One of the biggest criticisms facing the iPad over the past few years is that it is a consumption device used primarily for watching video. The iPad Pro seeks to change that narrative. The overall strategy with the iPad Pro is to release higher-priced SKUs offering additional functionality and capability.

Additional Simplicity. The iPad Air era is officially over at Apple. By positioning the new 9.7-inch iPad as the iPad Air 2 successor, the overall iPad line is much simpler. In fact, the iPad line contains the most simplicity in years. The "iPad Air" nomenclature had lost much of its meaning last year following the 9.7-inch iPad Pro unveiling as each device shared similar dimensions and identical weight. 

As seen below, Apple reduced the iPad line by 20% (five models down to four) and simplified the branding. 

 
 

By removing the iPad Air from the line, Apple made the iPad buying equation that much easier for consumers. This simplicity is a sign of Apple doubling down on the 9.7-inch iPad as the flagship iPad size. (The actual screen size may change slightly going forward depending on the screen to bezel ratio.) The choice is either between an iPad Pro or an iPad. Meanwhile, the iPad mini will become niche, available for consumers wanting an iPad with a smaller footprint.

Aggressive Pricing. Apple slashed the entry-level price for the 9.7-inch iPad to $329 from $399. Special $299 pricing for education institutions is also available. This is an aggressive pricing strategy considering that Apple was selling the 9.7-inch iPad Air 2 for $499 as recently as 12 months ago. The iPad mini had represented the entry-level iPad model when it came to pricing. Since the company is now positioning the smaller iPad as a niche device, the new distinction comes with a higher price.

Clearer Storytelling. Apple recently launched its largest iPad ad campaign to date. In what is called "Real Problems... answered," Apple showcases real tweets depicting computing problems and then demonstrates how the iPad Pro offers solutions. The ad campaign is a big deal for Apple and a sign of management directly reaching out to PC users as potential iPad purchasers. The company has been quite aggressive with its airing of the ads in recent weeks. 

 
 

One of the more interesting observations about the ads is how they end up making long-time MacBook users nervous. Apple is positioning iPad Pro as a better computer than laptops, and by extension, MacBooks.

Closer Look at iPad Sales

In order to properly assess all of the recent changes to iPad strategy, a closer look at sales is needed. While overall iPad sales have been in decline for years, reports of iPad's death have been greatly exaggerated. There is much more going on behind the scenes.

iPad sales have faced one major headwind in recent years. This item explains a significant portion of the sales decline. It's not inferior software, weak storytelling, or even a longer upgrade cycle. Instead, the iPad's problem has been the iPad mini.

People aren't buying as many iPad mini devices these days. Excluding 7.9-inch iPad mini sales from overall iPad sales results in a completely different sales picture. As seen in Exhibit 3, iPad mini unit sales have declined 70% after peaking in 4Q13 and 1Q14. The product's value proposition has been permanently reduced due to larger iPhones. Apple has clearly experienced Peak iPad Mini. It's not that the iPad mini form factor is going away, but rather that it will play a smaller role going forward. 

iPad mini sales weakness has masked stronger sales trends for larger iPads. In what will come as a surprise to many, the iPad Air 2 has been the best-selling iPad to date. In addition, more than half of people buying an iPad Air 2 were new to iPad. These are very promising signs for the iPad business. Not only are large screen (9.7-inch and 12.9-inch) iPad sales relatively unchanged over the past four years, but they actually have increased year-over-year this past holiday quarter. The iPad Pro line played a major role in this sales rebound. 

Exhibit 3: iPad Unit Sales by Screen Size (TTM)

Given iPad mini sales weakness, management is placing a big bet on larger iPad screens. By lowering the entry-level cost of the 9.7-inch model to $329, Apple is looking to make the most appealing iPad size more accessible. At the same time, the company is offsetting margin and ASP pressure by moving up market with more capable iPad Pro SKUs and accessories. The Apple Pencil accessory is one of the most underrated Apple products in years. 

Solving the Mac Dilemma

Since large screen iPads having shown much more resiliency over the past few years, Apple's recent iPad changes seem peculiar. Why double down on the iPad now?

Apple is pushing the iPad like never before in order to solve its Mac dilemma.

Ultimately, management has two options for the Mac:

  1. Double down. From a product perspective, there is a clear path forward for the laptop and desktop form factors at Apple. The company could continue bringing elements of mobile to the Mac. Apple can control more of the core technologies powering the Mac, and this would include bringing a version of iOS to the laptop and desktop form factors. The effort would take years to accomplish and utilize a significant amount of resources. 
  2. Move beyond the Mac. This option would begin with more sporadic updates to the Mac line and then eventually lead to Apple placing less and less attention on the category as other products gain priority and resources. While Apple would still sell Macs, it would become clear that the company's focus is on newer products designed to handle the tasks currently given to the Mac.

Management faces a difficult choice between the two options as the Mac is still selling very well. The product category is bringing in nearly $23B of revenue per year, $4B more than iPad thanks to a much higher ASP. Some companies are powered by Macs (although Apple executives seem to rely quite a bit on their iPads these days). Tens of millions of users rely on Macs to get work done every day. A portion of these users are adamant that a move away from Mac is nearly impossible given their current workflows.

My suspicion is that Apple is pushing larger screen iPads because management is determined to move beyond the Mac. Apple thinks now is the time to raise awareness that the iPad is a legitimate PC alternative for hundreds of millions of consumers. 

A move away from the Mac goes against much of the public commentary from Apple management. Tim Cook, Phil Schiller, and others have been quick to mention Apple's long-term commitment to the Mac with Phil Schiller even saying the laptop form factor will be around for another 25 years. However, management's recent actions speak louder:

  • Tim Cook calling the iPad the clearest expression of Apple's vision of the future of personal computing.
  • The new iPad Pro ad campaign elevating the iPad at the expense of Mac.
  • Aggressive iPad pricing highlighting Apple's desire to position the device for mass market consumption, while Mac pricing is more reflective of a niche product.

The iPad Strategy

As seen in Exhibit 4, the sales gap between large screen iPads and Mac peaked five years ago. The gap has since closed, with large screen iPad sales bouncing around 30M units annually and Mac sales seeing a slight improvement to 19M units. If Mac were to outsell iPad, this would certainly make Apple's goal in moving beyond the Mac that much more difficult. It would demonstrate how Apple has a serious problem on its hand as the iPad is not able to entice users away from Mac. Management is interested in avoiding that outcome.

Apple wants to push iPad sales now like never before in order to widen the sales gap between iPad and Mac. Large screen iPads have experienced some momentum in recent months. Management is building off that strength to unveil a broader campaign to boost iPad sales. If Apple is successful in increasing large screen iPad sales to a 40M unit sales annual pace (a 30% increase from current levels), iPad would be outselling Mac by 2x. This would certainly help change the iPad versus Mac narrative in the marketplace, giving Apple that much more motivation to dedicate attention and resources to other products. 

Exhibit 4: Mac, Large Screen iPad Unit Sales (TTM)

Apple is making its iPad sales pitch to two groups: existing iPad users and long-time PC users. According to my estimates, there are 100M users still using older iPads (iPad 1, iPad 2, iPad 3, iPad 4, iPad mini). A significant portion of these users are using devices that don't even support the latest iOS release. Management thinks simpler storytelling and an aggressively low $329 price will entice these users to upgrade to the new 9.7-inch iPad.

The fact that 100M people are still using older iPads demonstrates that the product provides value. Apple is also confident that users will see the significant improvement between the latest iPads and models from five to seven years ago. As for PC users, Apple thinks the iPad Pro line is capable of handling the vast majority of tasks currently given to laptops. Apple looks at the iPad Pro line, which includes Apple Pencil and Smart Keyboard, as a better solution for consumers than even the Mac. This is quite telling as to management's long-term motivation. 

While the iPhone has likely reduced the iPad's long-term sales trajectory, the iPad category is being underestimated. Apple thinks that now is the time to become much more aggressive in selling iPad. Fortunately, we will be able to judge Apple's progress by monitoring quarterly iPad sales. With a dramatic price cut, simpler sales pitch, reduced headwind from iPad mini sales, and a differentiated product line, Apple is confident the iPad will return to growth. A growing iPad business will then make it that much easier for Apple to move beyond the Mac and focus on creating a new breed of personal gadgets that make technology more personal. 

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