Apple's Grand Vision

Apple's product strategy has been receiving more attention lately as voice-first and AI-first become buzzwords in Silicon Valley. Questions regarding whether Apple even has a coherent product vision are on the rise. While Apple is no stranger to receiving skepticism and cynicism, the degree to which people are discounting Apple's product strategy is noteworthy. There is mounting evidence that Apple's industrial designers are following a product vision based on using design to make technology more personal. It is becoming clear that such a vision extends well beyond just selling personal gadgets. 

Product Strategy

Apple's financials paint a picture of a company following an iPhone as Hub product strategy in which iPhone is the sun and every other product revolves around iPhone. Apple generated $140B of revenue and approximately $60B of gross profit from iPhone over the past year. These totals amounted to 60% and 70% of Apple's overall revenue and gross profit, respectively. As seen in Exhibit 1, over the past year, Apple sold 2.5x more iPhones than iPads, Macs, Apple Watches, Apple TVs, and AirPods combined. 

Exhibit 1: Apple Product Unit Sales

Upon closer examination, Apple is not following an iPhone as Hub strategy. In fact, the company has never followed such a product strategy. Apple is instead following a strategy based on selling a range of tools containing varying levels of personal technology. Management is placing big bets on four product categories: Mac, iPad, iPhone, and Apple Watch. 

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Apple leaves it up to the consumer to determine the amount of personal technology that fits best in his or her life. For hundreds of millions of people, iPhone is the device that has just the right mix of power and functionality in a convenient form factor. This plays a major role in explaining the iPhone's oversized impact on Apple's financials. When looking at the number of new users entering each product category, it becomes clear that iPhone is Apple's best tool for gaining new customers. (The math behind Exhibit 2 is available for Above Avalon members here, here, and here.)

Exhibit 2: Growth in Installed Base

In addition to the four primary product categories, Apple also sells a line of accessories. HomePod, AirPods, Beats, and Apple TV are positioned to add value to Apple's primary computing platforms. The bulk of these accessories are designed to control sound. AirPods and Beats handle sound on the go while HomePod is tasked with controlling sound in the home. Apple TV is unique because it is given the job of controlling both sound and video on the largest piece of glass in the home. This uniqueness is also evident with Apple launching the tvOS platform for third-party developers. 

 
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The Grand Unified Theory of Apple Products

While Apple's four primary product categories share a few obvious attributes such as possessing screens, there is a more important connection. Each is designed to be an alternative to the next most powerful device as detailed in The Grand Unified Theory of Apple Products (shown below).

 
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Apple's quest to make technology more personal involves using design to remove barriers preventing people from getting the most out of technology. Instead of positioning new products as replacements for older ones, Apple is focused on coming up with alternatives. One way to accomplish this goal is to take complicated tasks and break them down into more granular tasks, which can then be handled by smaller and simpler devices. 

  • iPad is given the job of being powerful and capable enough to serve as a Mac alternative. 
  • iPhone is given the job of handling tasks that may have otherwise gone to iPad.
  • Apple Watch is tasked with doing enough things on the wrist that it can serve as an iPhone alternative.  

Multitouch computing represented a giant leap in Apple's quest to make technology more personal. Based on unit sales, it's fair to say hundreds of millions of people think iPhone and iPad are adequate Mac alternatives. In a similar vein, Apple Watch isn't designed to replace iPhone. Instead, Apple Watch is given the job at handling some of the tasks given to iPhone. The ability to put digital voice assistants on the wrist represents Apple's latest personal technology breakthrough.

Evolving Product Priorities

While Apple designers and engineers have shown the willingness to push Apple's four primary product categories forward, change is in the air. Apple Watch and the broader wearables category represent Apple's best chance to make technology more personal. One of the highlights from Apple's inaugural event last month at Steve Jobs Theater was a cellular Apple Watch. In fact, the Apple Watch portion of the event was the strongest part of Apple's presentation. After spending the past two years refining its Apple Watch messaging, Apple now has a more appealing and convincing Watch sales pitch for consumers.

It's becoming clear that Apple's product priorities are shifting. 

  1. Release an Apple Watch that is fully independent of iPhone.
  2. Position Apple Watch to handle more tasks currently given to iPhone. 
  3. Release accessories that complement Apple's expanding wearables strategy.
  4. Position iPhone as an AR navigation device. 
  5. Position iPad as a genuine Mac alternative.
  6. Position Mac as a VR/AR content creation machine.

Combining the six preceding priorities into one cohesive product strategy leads to the following diagram.  

Resources and attention are flowing to the devices at the right end of the spectrum, the products most capable of making technology more personal. A cellular Apple Watch Series 3 is the latest step in Apple's journey to an Apple Watch that is completely independent from iPhone. Such a product will represent a watershed moment for Apple Watch as it would more than triple the product's addressable market. When it comes to Apple Watch serving as a genuine iPhone alternative, the addition of a selfie camera one day and an increased role played by Siri intelligence will go a long way in allowing Apple Watch to handle additional tasks formerly given to iPhone. 

Grand Vision

There is a grand vision behind Apple's product strategy of selling a range of personal devices. Apple believes design is the ingredient that allows people to get the most out of technology. Even though Apple's industrial designers oversee this vision, the entire company ranging from engineers and product designers, to Apple retail specalists believe in focusing on the user experience. Apple views core technologies not as products in of themselves, but as ingredients for something else. Instead of copying other companies and chasing after technology's raw capability, Apple is more interested in technology's functionality as it relates to the user experience. 

It is easy to look at Apple's current product line of personal devices and wonder where the company will turn next. Additional wearable devices like AR glasses are inevitable and fit within a product line of personal gadgets. On the other hand, Apple's growing interest in transportation has been a head scratcher for many observers as a car doesn't seem to fit within Apple's product strategy. This has led some to wonder if Apple is getting away from its mission or vision in an attempt to chase revenue or users. 

Instead of assuming a self-driving car would be tacked onto the end of Apple's product line next to Apple Watch, the much more likely scenario is that transportation would represent a brand new product paradigm for Apple. The same idea applies to Apple's growing interest in architecture and construction.

As shown below, Apple would have multiple product paradigms, each comprised of a range of products. This is the primary reason why Project Titan shouldn't be thought of as just a self-driving car initiative, but rather Apple building a foundation for its transportation ambition. 

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In essence, Apple's transportation strategy would begin with a self-driving car but then eventually lead to the company developing more personal modes of transportation based on new user interfaces, fewer wheels, and different seating arrangements. This process would be equivalent to Apple starting with Mac and then using new user interfaces, technology, design, and manufacturing techniques to create products capable of making technology more personal. Apple would take a self-driving car and strip away capabilities in order to improve functionality. The same goal can occur with architecture and the broader concept of smart homes. It's difficult to see homes becoming truly smart until Silicon Valley begins building housing. The major takeaway is that Apple's quest to make technology more personal doesn't just apply to personal devices. Instead, there is a role for design to play in entirely new industries such as transportation and construction. 

Issues

Apple has run into its fair share of issues and roadblocks following its grand vision. As resources and attention flow to devices most capable of making technology more personal, Apple has made some questionable design decisions. The Mac Pro and Apple's overall approach to pro Mac users has not fared well in recent years. This serves as the basis for my "The Mac is Turning into Apple's Achilles' Heel" article earlier this year. Management was forced to back track in order to stem growing backlash within the pro Mac community. Even today, the amount of criticism pointed at the Mac, some of which is genuine, is trending at multi-year highs. 

The Mac debacle also ends up revealing some of the downsides associated with Apple's functional organizational structure. The company practices a focus mantra when it comes to product development, which may result in certain products getting left behind or not getting as much attention as they may need. This may make the jump into new product paradigms like transportation that much harder for Apple. 

While Apple's product line is still incredibly focused for a $825B company, there is no denying that additional models and SKUs have led to an expanding product line over the years. Apple's entire product line is shown below. Apple relies on a consumer segmentation strategy to target as broad of a market as possible for each of its four primary product categories. Apple has learned a lesson or two from the dark days in the 1990s. A byproduct of this strategy has been complexity being added to the product mix in recent years.

 
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Inevitable Path

Apple puts much effort, care, and deliberation into marketing. This makes one of the animated videos found on Apple's website so intriguing. As shown in the screenshots below, the animated video is meant to highlight HomePod's spatial awareness capability. The only two Apple products shown in the room are HomePod on a table and the two individuals wearing Apple Watches. There is no iPhone, iPad, or Mac in sight. For some companies, this can be brushed off as a simple oversight, but not for Apple. It's intentional. 

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Apple looks at Apple Watch as the natural evolution of personal computing. Having Siri intelligence on the wrist throughout the day, in addition to receiving and consuming information via a screen, is powerful. Meanwhile, HomePod is positioned as an Apple Watch accessory capable of delivering sound in a way that just isn't feasible for a device worn on the wrist. While some companies are advocating new product strategies such as voice-first or AI-first, Apple is taking a different path with a product strategy evolving into one based on wearables. Voice and AI are then positioned as core technologies powering these wearable devices. To a certain degree, this is the inevitable path Apple has been on for the past 40 years. Going forward, the largest opportunity for Apple will be found in using its product vision to create personal technology paths in new industries.  

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iPhone Courage

iPhone pricing has garnered more attention in recent months than any other Apple topic. However, pricing is not the most important variable impacting the iPhone business. With iPhone X, Apple is taking what previously worked with iPhone and throwing it away in an effort to create a better user experience. For Apple to take this much risk with the product responsible for the vast majority of its cash generation and new user growth is noteworthy. 

iPhone X

During its inaugural event at Steve Jobs Theater last month, Apple unveiled three flagship iPhones. Management dedicated 20 minutes of stage time to iPhone 8 and 8 Plus, models clearly positioned within the existing iPhone paradigm. Attention then turned to iPhone X, which garnered nearly twice as much stage time. While the "X" stands for ten, it could have very well stood for extreme. iPhone X will be the most radical iPhone Apple has sold to date. The home button has been removed to fit a larger screen in a smaller form factor. This change, which was years in the making, ushers in a completely new iPhone experience. Users will have to retrain their finger reflex to not press the bottom of the screen and instead, get used to swipes. In addition, the removal of fingerprint recognition in favor of facial recognition represents a very big change in how we will use iPhone. A strong argument can be made that removing the home button is the single-biggest change Apple has made to iPhone. The sheer amount of risk found in the move is being grossly underestimated. 

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iPhone Strategy

Apple is launching iPhone X at a critical juncture for the iPhone business. A slowing upgrade rate among existing iPhone users has led to overall unit sales plateauing, as highlighted in Exhibit 1. 

Exhibit 1: iPhone Unit Sales (Trailing Twelve Months)

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Despite weakening sales growth trends, Apple is still selling more than 200M iPhones per year, bringing in $140B of revenue and $60B of gross profit. In addition, the iPhone installed base grew by approximately 110 million users in 2017. iPhone remains Apple's most effective tool for grabbing new users. 

Apple's iPhone strategy can be broken into three parts:

  1. Pricing
  2. Product marketing
  3. Design

While much of the attention has been focused on Apple's move at the high-end of the iPhone pricing spectrum, the company is making just as interesting of a change at the low-end. Apple is following a consumer segmentation strategy. Management is cutting iPhone pricing at the low-end to improve accessibility. The $399 iPhone price floor that had been in existence for years was shattered last month. A $350 iPhone SE is the lowest-priced "new" iPhone Apple has sold to date. Management's decision to continue selling iPhone 6s and 6s Plus, and even iPhone 6 in select markets, positions additional SKUs for customers focused on value and price. Meanwhile, at the other end of the pricing spectrum, Apple is running with higher-priced models targeting consumers who value the latest and greatest technology. 

Underlying this pricing dynamic is a product marketing strategy focused on positioning the iPhone as the best camera people have ever owned. The dual-camera system found in iPhone 7 Plus is one of the more noteworthy iPhone features in years. With iPhone 8 Plus and iPhone X, Apple introduced Portrait Lighting, which adds a new element to Portrait mode. Apple then went further to include Portrait mode and Portrait Lighting on the iPhone X front-facing camera.

Apple saw how cameras are becoming much more than memory capture tools. Cameras are turning into smart eyes powering the dawn of the augmented reality era. Apple spent years dedicating resources to the effort and is now at the point where iPhone cameras are being powered by Apple silicon. This provides Apple's cameras additional differentiation and the ability to stand out from peers. 

Apple has seen quite a bit of success with its iPhone pricing and product marketing strategy over the years. However, these two variables are not the most important items impacting iPhone's evolution. Design, or the way consumers use the product, has a much larger impact on iPhone's future, and Apple is making big changes to how we will use iPhone going forward. 

The Headphone Jack

iPhone X demonstrates how Apple is willing to move beyond legacy design constraints and thinking. The home button has come to represent safety for hundreds of millions of people. In just a few years, Touch ID and fingerprint recognition became universally accepted because of their connection with the convenient iPhone home button. Apple is taking this familiar design and throwing it out the window in an attempt to push the iPhone experience forward. Although Apple is confident consumers will embrace the changes, the confidence sure isn't a result of consumers demanding or wishing for these changes. Instead, Apple designers and engineers are throwing away legacy thinking in order come up with something new. Upon closer examination, Apple has previously demonstrated this willingness to let go of legacy design. 

In September 2016, Apple unveiled iPhone 7 and 7 Plus. The two flagship models contained the typical assortment of new features and upgrades. However, one change stood out from the others. Apple removed the dedicated headphone jack despite no one having asked for such a move. Instead of including the traditional pair of EarPods in the box, Apple unveiled a new pair of EarPods that used the Lightning connector. In addition, Apple included a small adapter so that older headphones would connect with Lightning. 

When explaining Apple's decision, Phil Schiller, Apple SVP worldwide marketing, said "it really comes down to one word: courage. The courage to move on, do something new that betters all of us."

To say that removing the headphone jack was a controversial decision would be an understatement. The mere thought of removing the dedicated headphone jack from smartphones drove the tech community up a wall with some declaring the move as "user hostile" and "stupid." Schiller's explanation for the removal did not sit well with many. Some referred to it as tone-deaf, and others used arrogance and greed to describe the situation. There were then some who thought Schiller should have said "courage of convictions" in order to better encapsulate his meaning. 

In reality, Schiller was right in calling Apple's decision to remove the dedicated headphone jack courage. As it turns out, Apple displayed additional courage last month by removing the home button from iPhone X.

Courageous

The reason these iPhone design choices can be called courageous is that Apple is not afraid to risk sales in order to make technology more personal. It is not easy to take a product that is bringing in more than $140B of revenue per year and change the way people fundamentally use the device. While this situation may seem too self-centered to deserve being called courageous, iPhone is used by 800 million people. (The math behind my iPhone user base estimate is available for Above Avalon members here.) A design decision capable of improving or advancing the iPhone experience will have a tangible impact on many lives. It's not an exaggeration to say that society as a whole can benefit from these iPhone design choices. We are empowered by having a mobile computer in our pockets, and additional power will flow to users as smartphones evolve into augmented reality devices.

The headphone jack is one of a handful of examples of Apple displaying courage by taking what seemed to be working fine and throwing it away to improve the iPhone user experience.

  • 30-pin dock connector removal
  • Headphone jack removal
  • Home button removal

These design choices share a few common traits: 

  1. Deliberate. Apple doesn't make changes for the sake of making changes. Instead, the company is deliberate with its choices. A headphone jack is not removed in order to merely have iPhone 7 stand out from iPhone 6s. Instead, the move is an early step in Apple's long-term mission to remove wires from our lives. Schiller's inability to discuss the long-term goal found in removing the dedicated headphone jack is one reason his courageous comments came off as tone-deaf. A number of years and iPhone versions often have to pass before the motivation behind some of Apple's design decisions becomes clear. 
  2. Decisive. Apple doesn't sit on the fence when it comes to design. One should not bet on a dedicated headphone jack returning to iPhone. In what is still a raw and polarizing topic for some, dedicated home buttons with fingerprint readers are on their way out over the coming years. Dedicated home buttons don't have a future at Apple. 
  3. Design. All of these significant iPhone changes are made with design in mind. By removing the dedicated headphone jack and home button, Apple is changing the way we interact with iPhone. While some of these changes occur through a new user interface, other changes involve how we use iPhone in relation to other products. While the user experience change is less clear with some changes, such as Apple swapping the 30-pin dock connector with Lightning, other examples, like the home button removal, are much more apparent. 

It's All About Design

Avoiding change out of fear of angering users or customers can cripple an otherwise successful product and company. Fear of throwing away design artifacts and legacy tendencies represents one of the biggest risks facing iPhone today. This is why design, and not pricing or product marketing, is the most important variable when thinking about iPhone's future. 

Fear of embracing change would make it impossible for Apple to accomplish its long-term goal of making technology more personal. When it comes to iPhone, this goal manifests itself in a design that blends hardware and software. Apple's willingness to take big design bets allows iPhone to evolve over time. As buttons and ports are removed to make room for the latest camera, battery, and screen technology, iPhone morphs from a multi-touch computer into an augmented reality navigator controlled by glances and looks. 

This behavior of killing off features, components, ports, and technology in an effort to push the user experience forward is a carryover of Apple's approach with the Mac. The difference this time around is that Apple is making these changes to a product that is used by 8x more users. 

Samsung vs. Apple

Apple is not alone in pushing smartphone changes like removing a front-facing home button or dedicated headphone jack. In fact, making changes for the sake of change is relatively easy in the smartphone industry. The difficult part is leveraging these changes to push the user experience forward.

Samsung was able to beat Apple to market with an OLED smartphone lacking a front-facing home button. However, the difference in how Samsung and Apple leveraged these design changes is noteworthy. By removing the home button, both companies had to come up with an alternative to having a fingerprint reader positioned in a convenient location. Samsung chose to place the reader in a much more awkward location on the back of the device. Meanwhile, the company's facial recognition alternative ended up being a bust as it quickly became apparent it just wasn't as good as fingerprint recognition. It is tough to argue that the Samsung Galaxy user experience was improved with such changes. Instead, Samsung serves as an example of making changes for the sake of change

Meanwhile, Apple is positioning Face ID as the alternative to having Touch ID and the home button. If done correctly, Apple will be the company to bring facial recognition as a form of biometric authentication to the masses. Based on the company's success with Touch ID, Apple deserves the benefit of the doubt that Face ID can follow suit and see massive customer acceptance. In fact, Apple's removal of the home button and embrace of Face ID will likely kick off a new era at the company involving facial recognition. It is only a matter of time before every Apple product with a camera has the TrueDepth camera system. Such a development may seem trivial, but it will lead to a new era of health monitoring to which we haven't even contemplated the implications yet.

TrueDepth camera system in iPhone X.

TrueDepth camera system in iPhone X.

The other implication found with Apple taking design risks is that unlike every other smartphone manufacturer, Apple sells very few smartphone models. The company does not have the benefit of taking risks with a much less popular model and only then bringing new features to the mass market once market adoption has been proven. Instead, Apple spends years and multiple iPhone versions systemically preparing for a major design change included in a flagship model.

Putting Fear Aside

The amount of risk Apple is taking with iPhone X should not be underestimated. There is a reason why management is positioning iPhone X as a glimpse of the next 10 years of iPhone. The model is dramatically different to iPhone 8 and 8 Plus. While Apple is confident that consumers will embrace these changes, it sure isn't due to consumers demanding or wishing for these changes. Instead, Apple designers, engineers, and marketers are showing a willingness to break down legacy thinking in order to come up with something new. By not letting fear of change and customer rejection dictate iPhone design decisions, Apple is displaying courage. While Apple stands to benefit financially from these design changes, iPhone users also stand to benefit. iPhone is empowering hundreds of millions of people in ways that were never before imagined. Courage is putting fear aside and taking bold risks in order to empower others.

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The Significance Behind Steve Jobs Theater

On paper, Steve Jobs Theater doesn’t make complete sense. The price tag would lead many to question the rationale in building a massive underground theater for unveiling products. It’s difficult to envision any other company wanting to undertake such a project. However, after I attended Apple’s inaugural event at Steve Jobs Theater, Apple’s motivation behind the building became crystal clear. Steve Jobs Theater is an Apple product, and a closer look at the building uncovers a side to Apple that few have seen before.

Initial Visit

Steve Jobs Theater is located in Cupertino and positioned in the southeast corner of Apple's new $5 billion Apple Park headquarters. The 167,000-square-foot building consists of a 921-seat underground theater and accompanying product demo room. Apple plans on utilizing Steve Jobs Theater for product unveilings and the periodic corporate event. Apple hired Norman Foster and his firm Foster + Partners as the project's architect although Apple Chief Design Officer Jony Ive and other Apple designers played a pivotal role.  

Steve Jobs Theater. Photo credit: Apple

Steve Jobs Theater. Photo credit: Apple

Most visitors arriving at Steve Jobs Theater for the first time will be impressed by its seclusion and allure. Unlike the 2.8-million-square-foot ring building, Steve Jobs Theater cannot be seen from nearby streets surrounding Apple Park. Instead, visitors must walk along a path that winds its way through a series of carefully landscaped hills. It soon becomes clear that this short walk is actually part of the broader experience Apple was trying to achieve.

The path empties out into a basin containing Steve Jobs Theater’s lobby. The 22-foot curved panes of glass create a strong first impression. To the right is an unobstructed view of the giant, circular ring building. The entire experience is reminiscent of Disney World as it becomes clear that someone has created this specific experience to be consumed at this particular location. The lobby, the only part of Steve Jobs Theater that is above ground, is massive, intriguing, and even magical. It doesn’t take long to notice the lack of walls or support structure. This leads to the inevitable question of how the 155-foot roof is being held up. (Spoiler: the glass supports the carbon fiber roof.) Additional questions are raised regarding how plumbing for the water sprinklers and electricity for the lights and speakers are piped to the roof. As it turns out, a little magic is indeed at work. As reported by Lance Ulanoff over at Mashable, all of the necessary plumbing and wiring is found in 20 of the narrow gaps between the large panes of glass. 

 
Steve Jobs Theater floor plans.

Steve Jobs Theater floor plans.

 

The other item that stood out about Steve Jobs Theater was the two sets of stairs on either side of the lobby that are used by visitors to walk down to the theater. The intriguing use of Castagna stone and handrails hand-carved into the stone walls reminded me of a mix between an Egyptian structure and something from space. Photos and videos don't do them justice. 

(My complete review of Apple's inaugural event at Steve Jobs Theater is available for Above Avalon members here.)

Not Perfect

Steve Jobs Theater is far from perfect. A strong argument can be made that Apple outgrew the theater before it even opened. Apple's prior two iPhone launches took place in a venue that fit 50% more people, which allowed Apple to invite many more Apple employees than they did to the inaugural event at Steve Jobs Theater.

Despite the building's large footprint, the exhibit space felt incredibly cramped. While Apple may like the visual of hundreds of people bumping into each other to get their hands on the latest products, it's not exactly the best experience to go through. My suspicion is that the exhibit space needs a few modifications to reflect the new era of reporters wanting to live stream. 

 
The Steve Jobs Theater exhibit space was still packed after an hour of hands-on time. 

The Steve Jobs Theater exhibit space was still packed after an hour of hands-on time. 

 

In addition, there were a number of odd design decisions found at Steve Jobs Theater. These range from the awkward paper towel dispensers in the restroom to uneven temperature control in the lobby and doors that are unusually difficult to open. There was also a decent probability of getting a little wet from water dripping off the carbon fiber roof in the morning. However, the building's accomplishments end up vastly outweighing these minor oddities.

Observations

Much of the discussion regarding Steve Jobs Theater up to now has been superficial. Most people agree that the building is impressive and fits within Apple's broader design focus. However, upon closer examination, Steve Jobs Theater provides a fascinating look at today's Apple. A number of items stood out to me. 

An Apple Product. Apple is no longer a company that just ships consumer hardware powered by differentiated software. The unveiling of Steve Jobs Theater is the latest sign of this reality. The theater is an Apple product, in the same vein as Apple's redesigned Retail stores. Apple approached Steve Jobs Theater and the broader Apple Park headquarters in the same way that it would any other product. Significant time and resources were spent on modeling and prototyping before construction. An identical process occurs for Apple products that eventually end up on our desks, in our pockets, and on our wrists. 

One of the most significant takeaways from Steve Jobs Theater is that Apple is no longer a company content in just focusing on making well-designed electronics. Apple is moving into bigger and bolder initiatives. Jony Ive has hinted in various interviews about his never-ending drive to make technology more personal and create tools for people. While this goal will inevitably lead Apple further into wearables, including glasses, there is a very high likelihood that Apple will focus on bigger tools like self-driving cars. These bigger tools will require Apple to move much further into construction and architecture. Apple reportedly owns and leases a collection of heavy manufacturing facilities close to Apple Park that includes some of the last remaining open space in the San Jose vicinity. (A listing and map of these Apple buildings are available for Above Avalon members here). The day when Apple designers build their very own state-of-the-art transportation R&D center minutes away from Apple Park is no longer a fantasy. All of this puts the PR photos with Tim Cook and Jony wearing Apple hardhats into a new light. 

 
Tim Cook and Jony Ive at Apple Park. Photo credit: The Telegraph

Tim Cook and Jony Ive at Apple Park. Photo credit: The Telegraph

 

We have arrived at a weird point in time. Silicon Valley giants are gaining unfathomable amounts of power yet remaining remarkable aloof when it comes to manufacturing and construction. Apple is the notable exception. Apple is the company most eager to step outside its comfort zone and experiment in construction and architecture realms. Apple sees the gap between architecture and design starting to shrink. According to Jony, architecture is "a sort of product design; you can talk about it in terms of scale and function and materials, material types. I think the delineation is a much, much softer set of boundaries that mark our expertise."

Experience. There's a reason why Steve Jobs Theater and the overall Apple Park campus is reminiscent of Disney World. Both locations provide an unmatched experience to the visitor. When walking around the grounds surrounding Steve Jobs Theater, it truly felt as if the building is meant to represent Earth while the large circular ring building off in the distance is the Sun. 

Steve Jobs Theater symbolizes how Apple is doubling down on extending the Apple experience beyond just iPhones in our pockets and Apple Watches on our wrists. As Apple's Retail store strategy shows, the idea of using architecture and physical spaces to explain the Apple story isn't new. However, Apple has taken the idea further to include its headquarters and even the theater at which it plans to unveil many of its future products.  

Focus. It's easy to look at Steve Jobs Theater and forget the amount of work and resources that went into the building. Jony and Apple's Industrial Design team reportedly worked alongside Foster + Partners on nearly every aspect of the theater and the entire Apple Park campus. Apple management likes to use every opportunity to reiterate its goal of remaining focused and saying no to a lot of great ideas. The company's product line demonstrates such focus. Accordingly, there is logic in considering how much attention went into Apple Park over the past few years and where that attention is now being placed. This brings us to the most crucial takeaway regarding Steve Jobs Theater: Jony Ive.

Jony Ive

In May 2015, Jony was promoted to Chief Design Officer. The transition kicked off a debate regarding the underlying motivation behind the move. Many argued that the promotion marked the beginning of the end for Jony's time at Apple. Some observers argued Apple is setting the stage for Jony's eventual retirement by shifting day-to-day responsibilities to Richard Howarth and Alan Dye. The degree to which Jony then took a less visible presence in subsequent months (which was clearly telegraphed by Apple in announcing his promotion) added oxygen to the fire.

Others said Jony's Chief Design Officer title is mostly ceremonial with little-to-no responsibility and compared it to Steve Jobs giving the Chief Software Technology Officer title to Avie Tevanian in 2003. Tevanian ended up leaving Apple a few years later. In reality, such a comparison is so off base it could classify as intellectual dishonestly. 

I've held a completely different view of Jony's promotion. The day after Jony's promotion was announced (via a Stephen Fry article), I wrote

"With Howarth and Dye serving as Jony's two lieutenants in terms of managing day-to-day aspects of Apple design, what would such a dynamic look like and where would Jony fit into the picture? I consider Jony's new role to be much more about leadership while Howarth and Dye handle the more corporate side of things - the actual management of teams. The amount of additional time and attention that Jony can spend on entirely new projects, while leaning on his two right hands to make sure that schedules are being met and projects are receiving all of the resources they need, goes a long way in describing Apple's strategy over the next few years.

I see an environment in which Jony's potential can be unleashed even more now than the world has already seen. Similar to how Steve Jobs was known to head down to Jony's design lab to hang out, I suspect in some ways, Jony wants to do the same - check out of the day-to-day executive grind and lose himself in research and design elements on whatever topic or subject he choses. By being positioned in more of a leadership role than a managerial role, Jony could maybe be more like Jony."  

Two years later, and with Steve Jobs Theater officially open, it is clear Jony holds the role closest to the one held by Steve Jobs. The promotion to Chief Design Officer represented sustainability for Jony. It has been reported that Apple Watch development, in addition to overtaking leadership of human interface, took its toll on Jony. The entire Apple Park project represents much of Jony's focus in recent years. Jony reportedly was the one who carried Apple Park on his shoulders. Its completion now gives Jony the freedom to focus on new initiatives and projects at Apple. 

A Design Company

"[O]ne of the ways that I believe people express their appreciation to the rest of humanity is to make something wonderful and put it out there." - Steve Jobs

It's difficult to envision any other company building something like Steve Jobs Theater. Based on the reported $14 million price of the theater seating, my estimate for the overall cost of the building exceeds $100 million. Most management teams will struggle to find how such an initiative would ever come back to boost sales or benefit the company. The fact is that Apple is unlike any other Silicon Valley firm. Steve Jobs Theater symbolizes how Apple isn't a tech company but rather a design company. Apple believes that how we experience and interact with a product is more important than a single focus on the technology powering that product. Apple is now bringing that philosophy to the way we experience architecture. As for the why behind it all, Apple's answer would probably be to make something wonderful. 

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Major Tech Trends Ahead of Apple's Big Event

With Apple about to host its largest product event in years, much of the attention continues to be focused on the details. Plenty of questions remain regarding the various changes Apple will announce across its iPhone, Apple Watch, and Apple TV lines. A closer look at the broader trends taking place in these product segments go a long way in adding much-needed context to Apple’s inaugural event at Steve Jobs Theater.

Smartphones

On the surface, the smartphone battle seems to be largely settled. Predictions calling for iPhone’s demise at the hands of Google and Android have subsided although some are now eager to replace Google with WeChat as Apple’s arch nemesis.

Behind this facade of relative calm, the smartphone market continues to evolve at a rapid pace. Three major trends are unfolding regarding how consumers view smartphones:

  1. Larger screens continue to gain momentum.
  2. Form factor size is hitting a ceiling.
  3. The pricing gap is widening.

With an increasing amount of content consumed on smartphones, consumers and manufacturers alike continue to get behind larger screens. Once deemed excessive and niche, large smartphones with 5-inch to 6-inch screens are seeing growing sales momentum. This large screen smartphone trend has materialized across the industry, indiscriminate of geography and even price.

While there is still evidence that a portion of the market is OK with smaller screens as seen by continued 4-inch iPhone SE sales, this segment is more likely to contract than expand over time. 

The newest and most intriguing development in the smartphone space is found with the relationship between screen size and form factor. Historically, smartphone screen size faced a ceiling in terms of its relationship to form factor. Mobility is greatly reduced if a smartphone is so large that it is unable to fit comfortably in pockets, purses, and pouches. The trend of removing front-facing bezel and dedicated home buttons is eliminating this form factor limitation. Smartphone manufacturers are able to ship larger screens without increasing form factors.

The OLED iPhone is rumored to include a 5.8-screen, which is larger than the 5.5-inch iPhone Plus screen, in roughly the same form factor as an iPhone 7. This will have a major impact on how consumers think about smartphone size preference. It is inevitable that all iPhones will eventually contain the same design language - no home buttons and little to no front bezel. Large swathes of the iPhone user base will likely want to upgrade to these new iPhone models over time. It is the type of multi-year upgrade cycle that PC makers hoped would occur in the laptop space but never materialized. 

As manufacturers increasingly bet on camera and screen innovation to stand out from the competition, smartphone pricing has been on the rise. While smartphone prices are increasing at the high-end, as seen with the $750 Samsung Galaxy S8 and $950 Galaxy Note 8, there continues to be a significant portion of the smartphone market desiring price accessibility. The key for smartphone manufacturers will be balancing higher-priced smartphone SKUs packed with the latest technology with increasingly lower-priced SKUs still offering a premium experience. 

Wearables

The wearables market has had a rocky start. Some of the initial wearables players have retreated out of the space while others have taken a more cautious view. Only a handful of companies are seeing wearables sales success. It is fair to say everyone, including Apple, has seen their fair share of strategy changes over the years. 

Three major trends are unfolding in the wearables space: 

  1. Sales momentum is flowing to smartwatches.
  2. Fashion and luxury continue to gain importance.
  3. The wearables battle is slowly expanding beyond the wrist.

Dedicated fitness trackers have lost momentum while Apple Watch continues to outperform sales expectations. Fitness and health tracking is moving from being a product to a feature. Nowhere is this seen more than in a comparison of Fitbit and Apple Watch sales over the past year. 

Exhibit 1: Fitbit vs. Apple Watch Unit Sales

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Meanwhile, Fitbit’s new Ionic smartwatch is a "bet the company" type of move in an attempt to capitalize on this new wearables landscape. Garmin has seen similar trends with sales momentum flowing from dedicated fitness and health trackers to its smartwatch offerings. We are only seeing the initial fallout from this development.

One of the items Apple got correct out of the gate with Apple Watch was interchangeable watch bands. This dynamic is now viewed as natural and almost inevitable when discussing smartwatches. Going forward, technology companies will continue to face pressure in the wearables space given how consumers are demanding luxury and fashion options.

As the battle for the wrist evolves, the ear is shaping up to be the second major wearables battleground. Apple, Samsung, Fitbit, and a slew of smaller hardware companies and start-ups will have wireless or cordless headphone offerings in the market for the upcoming holiday season. Apple is the clear leader in the space with its W1 chip-equipped AirPods and Beats. More importantly, given the company's sales success with Apple Watch, Apple has the most formidable wearables platform. We are moving to a point at which the wearables narrative will evolve. No longer will it only be about wrist devices. Rather, it will also include platforms consisting of hardware and software solutions for different parts of the body. 

Television

After years of unknown, we are starting to get a glimpse of TV's future. The large cable bundle's days are numbered. Netflix, Amazon, Facebook, Google (YouTube), and Apple are the new power brokers in the TV space. There is a long list of others including Disney (ESPN), HBO, and Hulu that would like to join that coveted list of influencers. Netflix and Amazon are the newest TV networks with massive budgets for funding scripted video content. YouTube and Facebook continue to reign supreme when it comes to offering ad-supported video content. Apple owns the most lucrative platform that involves consumers accessing paid video subscriptions. 

Major themes unfolding in the space include: 

  1. Price is playing a major role in the streaming set top box market.
  2. Momentum is found with smaller screens.
  3. New content players are holding optionality.

Roku is the current streaming video box leader with approximately 40% market share in the U.S. Amazon, Google, and Apple hold second, third, and fourth place, respectively. The market is unfolding largely based on price. Roku has been able to position itself as the cheapest way for people to access Netflix and YouTube on a large television screen. The company is going so far as to give away its Roku OS to TV manufacturers for free. Meanwhile, with Apple TV priced nearly five times higher than Roku, Apple's streaming TV box is bringing in nearly 6x more gross profit than Roku earns from its players.

While much attention continues to be placed on large screen televisions, such focus ends up being grossly misleading. Apple is actually selling more than 250M "TVs" per year called iPhones and iPads. These smaller screens are responsible for delivering an increasing amount of video content to consumers. 

In a battle for our time and attention, content creators with formidable content budgets are winning. There is a brain drain underway in Hollywood as talent in front and behind the camera is moving to the new players in town. There are still genuine questions as to just how sustainable some of these streaming video business models are as independent entities. However, there is no question that a company like Netflix has earned itself optionality from providing a superior entertainment experience to more than 100M people. 

Home

The smart home ended up being the surprise tech topic of 2016. Much of this was due to sheer fascination in Amazon's Alexa digital voice assistant and accompanying Echo speakers. The narrative has shifted in 2017 as mindshare is now splintered due to additional companies entering the scene. Apple is expected to discuss HomePod in detail at its upcoming product event. Major themes in the smart home space include: 

  1. Voice is being positioned as an early user interface.
  2. Companies are basing their home strategy around core competencies. 
  3. It is still early to declare definitive leaders and laggards.

As the number of smart items for the home available for sale increases, questions have swirled as to the best way to control these devices. Voice continues to grab much of the attention although the automation capabilities found in Apple's HomeKit hold much intrigue. At the same time, we are seeing pretty dramatic differences in strategy for the home based on a company's core competency. While Google and Facebook will look to monetize the data obtained via microphones and cameras through advertising, Amazon is looking for Alexa to serve as a better shopping assistant in order to drive Prime memberships. The preceding strategies include giving away hardware at or below cost. Meanwhile, Apple's strategy to sell the best-sounding speaker people have ever owned gives the company a good shot at becoming the most profitable device in the smart home space.  

Even though Amazon has garnered much good press in the space, it is simply too early to declare winners and losers in the smart home. The way that Apple and pretty much every large consumer-facing technology company are running forward with stationary speakers and screens for the home brings back flashbacks to the early wearables rush. Many companies will end up being disappointed. At the same time, the attention given to stationary devices has taken the spotlight off the importance of mobile devices in our home. The smartphone remains the most valuable computer in our home and we should not underestimate it when contemplating the smart home's future. Of course, a home won't likely truly be a smart home until Silicon Valley firms begin building their own housing, but that topic is for another day. 

Apple's Big Event

Apple's upcoming event at Steve Jobs Theater has the ingredients to be the largest Apple product event since the Apple Watch unveiling at the Flint Center in 2014. Apple will unveil at least three new iPhones in addition to new Apple Watches and a refreshed Apple TV. In some areas, Apple's goal will be to improve upon existing themes unfolding in the smartphone and streaming video arenas. In other areas such as smartwatches, Apple will likely take a true leadership role in pushing the market forward. 

I will be attending Apple's inaugural event at Steve Jobs Theater. My full thoughts and observations on the event will be sent exclusively to Above Avalon members. To receive this analysis and perspective, visit the membership page. Members also receive my analysis and perspective on Apple throughout the week via exclusive daily emails (2-3 stories a day, 10-12 stories a week). 

Apple in China

The narrative of Apple's China problem boiling down to a brutal battle with Tencent (WeChat) or local smartphone manufacturers is inaccurate. Apple's business in China is not imploding. Rather, it is experiencing growing pains. After more than a year of sales declines, positive signs are beginning to reappear in Apple's China business. China continues to represent more of an opportunity than a risk for Apple. 

The Numbers

Greater China is Apple's third-largest operating segment and consists of Mainland China, Hong Kong, and Taiwan. As shown in Exhibit 1, the segment saw significant revenue growth in 2015 followed by a surprising decline in 2016. With Apple on track to report nearly $45B of Greater China revenue in FY2017, the segment will report its second consecutive annual decline.

Exhibit 1: Apple Revenue from Greater China

In 2013, Tim Cook looked at China as being well-positioned to eventually become Apple's top market. At the time, Greater China was Apple's third-largest operating segment, representing approximately 15% of overall revenue. Over the subsequent two years, it looked like Cook's prognostication would be proven correct. After a very strong 2015, Greater China bypassed Europe to become Apple's second largest operating segment, responsible for 25% of overall revenue. Observers soon began to forecast when Greater China would overtake the Americas to become Apple's largest operating segment.

As seen in Exhibit 2, the situation changed dramatically in 2016. Weakness in Greater China led to the segment falling back below Europe in terms of revenue. Meanwhile, the Americas firmly remains Apple's largest operating system with revenue nearly double that of Greater China.

Exhibit 2: Apple Revenue by Operating Segment

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What Happened?

Apple's declining revenue in Greater China over the past six quarters can be attributed to a slowdown in iPhone sales. As seen in Exhibit 3, iPhone sales share in Mainland China saw a notable tick down beginning in early 2016. The data is courtesy of Kantar Worldpanel, an analytics firm relying on longitudinal surveys to track the same individuals and their smartphone habits over time. Kantar data provides a decent snapshot of how the iPhone is selling relative to other manufacturers (sales share). The sales share peaks experienced in early 2015 and early 2016 corresponded to new iPhone launches. The most recent iPhone launch (iPhone 7 and 7 Plus) clearly underperformed the two previous iPhone launches. This weakness undoubtedly led to much discussion at Apple HQ as it came as a surprise to management.

Exhibit 3: iPhone Sales Share (Mainland China)

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A number of theories have been put forth in an attempt to explain iPhone sales weakness in China. Ben Thompson over at Stratechery made the case that WeChat's prominence in China has reduced the value and lock-in found with iOS, reducing Apple to "simply another smartphone vendor." According to Thompson, this situation has led to declining loyalty and retention rates among iPhone users. WeChat also seems to have become the consensus pick among western media when it comes to pinpointing Apple's problem in China. 

Wired's Jeremy Hsu took a slightly different angle, saying Apple was "a victim of its own failure of imagination." The company's failure to adapt services such as Apple Music and Apple Pay to local culture has contributed to fading consumer interest in Apple hardware. Hsu argued Apple Music should have a free tier while Apple Pay's reliance on near-field communication technology isn't appealing in China.

While the preceding arguments contain solid points, they ultimately end up being dubious for explaining iPhone sales weakness. Both arguments position weak Apple services adoption, either due to a strengthening WeChat or Apple's own doing, as a sign of shifting customer perceptions facing Apple in China. Poor Apple services adoption is then said to lead to less brand loyalty and greater odds of switching away from iPhone. Such a claim ends up giving way too much credit to the influence Apple services play. It's as if Apple is a services company that just happens to sell hardware. This isn't the case. There is something more at play in China regarding weaker iPhone sales besides greater WeChat competition or lackluster Apple services. 

The Smartphone Market in China

A closer look at the smartphone market in China provides the context needed to assess Apple's performance. There are three major smartphone trends:

1) Anemic smartphone sales growth. There continues to be a misperception that Mainland China is seeing 20% to 30% smartphone unit sales growth year-over-year. This just isn't the case.  In reality, smartphone sales growth is much harder to find. According to IDC, the smartphone market in China grew 3% in 2015, 8% in 2016, and has been struggling to grow in 2017. Apple management likely contributed to the false perception of there being massive smartphone sales growth in the country by constantly talking up the opportunity tied to China's expanding middle class. While this shift is occurring, its impact on overall smartphone growth is less clear. 

2) Massive consolidation. Given such anemic sales growth, there has been intense competition and consolidation, especially at the low-end of the smartphone market. In 2014, the "Other" category consisting of Samsung, Lenovo, and a number of smaller smartphone manufacturers, represented 238M smartphone shipments. Two years later, "Other" sales declined by 60M units to 178M smartphones. The big smartphone loser in China hasn't been Apple, but rather Samsung and smaller smartphone manufacturers. 

Meanwhile, Oppo has experienced the strongest increase in smartphone sales on an absolute basis in China with Vivo and Huawei coming in second and third, respectively. On a combined basis, Oppo, Vivo, and Huawei saw an increase of 130M smartphone unit sales from 2014 to 2016. While it may be easy to look at Oppo, Vivo, and Huawei as winning at the hands of Apple, in reality, their sales gains have likely come from Samsung, Lenovo, and new customers entering the smartphone market at the low-end. Despite a very difficult 2016, Apple was still able to grow annual iPhone shipments by 8M between 2014 and 2016. This goes to show just how strong the iPhone performed in 2015.

 
 

3) ASP Divergence. The smartphone pricing gap in China is expanding. While Apple sits at the premium end of the market with an iPhone average selling price (ASP) exceeding $700, every other major smartphone manufacturer is reporting ASP that is a fraction of iPhone's. Pricing data would support the theory that Apple and those smartphone manufacturers with the strongest sales momentum are appealing to completely different customers. While overall smartphone growth remains subdued, whatever growth there is can be found at the low-end of the market.

Issues

Taking into account the unique trends found in the China smartphone market, my theory is that there are actually four distinct issues impacting Apple in China. 

1) Lack of New Users. It is becoming that much harder for Apple to find pockets of premium users in China ready to buy their first iPhone. Apple's smartphone sales share in China peaked in 2015 right after China Mobile began selling the iPhone 6 and 6 Plus. While China Mobile had officially begun selling iPhone a year earlier, it was the iPhone 6 and 6 Plus that represented the first big iPhone launch for the carrier. 

Apple experienced a big iPhone sales boost from the iPhone 6 and 6 Plus launching into an untapped reservoir of premium China Mobile users. Once these users purchased iPhones, there weren't similarly-sized pockets of new users elsewhere in China. Instead, Apple had to turn to Android switchers for new users. This is one reason why new users as a percent of overall iPhone sales has been on the decline. 

2) Longer iPhone Upgrade Cycle. Considering how Apple saw a significant number of new iPhone users in China in 2015, these users were not ready for an upgrade in 2016 or even early 2017 for that matter. Instead, iPhone users in China are likely holding onto their iPhones for a longer period of time before upgrading. This trend is not unique to China but rather has occurred in various geographies. 

3) Pricing Pressure. The significant smartphone pricing gap in China has placed a ceiling on Apple's iPhone target market. It looks like the number of Android users switching to iPhone is on the decline. According to Apple, switching outside of China was up year-over-year. The implication is that switching in China was down year-over-year.  A similar dynamic does not exist in the U.S. where iPhone is actually priced at or below the Android competition. A better comparison for measuring iPhone sales share performance in China would be countries where the iPhone is similarly priced at a premium. As seen in Exhibit 4, in what may come as a surprise, iPhones sales share in these countries end up even worse than that of China. 

Exhibit 4: iPhone Sales Share (2017)

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4) Growing Pains. Although Apple has made much progress opening new Retail stores in China, the company still has an inadequate retail footprint in the country. There are only 40 Apple Retail stores in China, a country with 1.4 billion people. To put that number in context, Apple has seven retail stores in Connecticut, home to a little more than three million people.

Brick and mortar retail matters in China. According to Kantar, nearly 90% of Oppo smartphone sales took place through brick and mortar. Apple just doesn't have the retail penetration in Tier 1, 2, and 3 cities in China. For example, Apple has only three stores in Chongqing, one of the largest municipalities in China with a population of 30 million people.

While consumers have the option of buying Apple products through carriers or third-party retailers, there are drawbacks found with Apple relying on others to sell product. Despite selling the iPhone for years, iPhone sales share at Verizon remains lackluster compared to that at AT&T, Apple's initial partner in the country. Many have speculated that this lower sales share is due to the way smartphones are sold at Verizon where sales clerks have sway over consumer purchasing decisions.

Apple Retail stores represent one of the best ways for management to push the Apple experience. This is something not possible with third-party retailers. Considering it took management two years to open 20 stores in China, the lack of Apple Retail stores is an issue that will take Apple years to fix. 

WeChat

Apple's main issues in China are related to the underlying structure of the smartphone market, not greater WeChat competition. Why then is WeChat positioned as Apple's arch nemesis in China? If users spend all of their time and attention within the WeChat ecosystem, is Apple's ecosystem negatively impacted? Is WeChat cultivating a user base that views Apple as simply a premium-priced hardware provider, which will then result in less consistent hardware sales?

Unfortunately, quite a bit of the analysis regarding Apple and WeChat relies exclusively on anecdotal evidence. In an effort to move beyond this, we can use WeChat's most recent disclosures to gain a better perspective. The company disclosed that half of its 900M monthly active users spend 90 minutes a day on a WeChat property. That is a significant amount of time which likely makes Mark Zuckerberg and Evan Spiegel quite envious. WeChat is seeing success on a scale that simply isn't seen elsewhere by any other services company. However, we use our smartphones for more than 90 minutes a day. Current estimates peg average smartphone usage at five hours per day. This means the average WeChat user, while heavily invested in WeChat, is still relying on other services besides WeChat.

Meanwhile, App Annie recently pegged Chinese smartphone users as relying on ten apps on a daily basis. In terms of monthly usage, that number rises to 30 apps. Even if we assume these estimates are being generous, the narrative that WeChat users only use WeChat is exaggerated. 

The WeChat topic raises a broader question: What is Apple actually selling in China? iOS? Services? Hardware?

Apple is selling the same thing in China as it does in every other country. Apple is selling an experience. The simple act of buying an iPhone, even if it is used for WeChat, is part of that Apple experience. While Apple management would certainly like to see customers using Apple services, in reality, Apple service usage is not a requirement for Apple to succeed in a market. Instead, services are meant to add even more value to Apple hardware. At the same time, Apple service usage doesn't necessarily lead to increased loyalty and retention. Instead, the dynamic is much more complicated. For example, Apple loyalty is doing just fine in the U.S. even though Apple Pay usage remains surprisingly low.

Light at the End of the Tunnel

Signs of a bottoming process are appearing for Apple in Greater China.

  1. Revenue trends are stabilizing. During Apple's 3Q17 earnings conference call (my complete review of Apple's 3Q17 earnings is available for members here), management commented that although Hong Kong sales were still down, revenue trends in Mainland China were actually flat year-over-year. Revenue trends have now been improving for the past two quarters. While Apple is clearly not out of danger, the Greater China operating segment appears to have found some stabilization.
  2. iPhone sales share is improving. As seen in Exhibit 3, iPhone sales share has now seen two months of improvement in Mainland China. For this to occur in the period leading up to Apple's largest iPhone release in years is actually remarkable. There are two possible explanations for this improvement: the Product Red iPhone 7 and 7 Plus and a natural bottoming process in which existing iPhone users are ready for an upgrade. 
  3. Broader Apple ecosystem strength. Judging from Apple management commentary, Apple is seeing solid sales growth through its App Store in China. In addition, the iPad and Mac continue to sell well. Apple Retail store traffic and sales are up year-over-year as well. This sure doesn't look like a company seeing its opportunity in China slip away due to WeChat attacking the iOS ecosystem. 
  4. Apple made a notable leadership change. Apple recently promoted Isabel Ge Mahe to the newly created role of vice president and managing director of Greater China, reporting to Tim Cook and Jeff Williams. While the move was an acknowledgement of issues and trouble in Greater China, it is reasonable to expect greater operating efficiency, including additional effort to localize products. 

One question regarding Greater China is whether the operating segment still represents an opportunity for Apple or if it is more appropriate to look at the segment as a risk. Is the $45 billion of annual revenue from the region more likely to decline over time or can Apple be confident in looking at that total as a base for future growth? 

China still represents an opportunity for Apple although management will likely need to make additional strategy adjustments:

  1. Continue fine-tuning products to better fit local culture. There is pretty much no downside to spending additional resources on this effort. New iOS features targeting China (QR Code support, SMS fraud prevention, etc.) are a clear sign that management looks at this fine-tuning as crucial. 
  2. Embark on a massive Retail store expansion in Mainland China. A strong case can be made that Apple should have hundreds of retail stores located throughout China. 
  3. Continue strengthening relationships with key partners, including Foxconn and Tencent. With future China government regulations representing an unknown, Apple's best strategy for handling the geopolitical environment is to strengthen its relationship with local companies, including Foxconn. Contrary to popular belief, Tencent is more of a partner than enemy for Apple.
  4. Remain steadfast on taking a long-term view on China. Apple should focus not on turning around quarterly iPhone sales by releasing a cheap iPhone, but instead on forming a foundation for the Apple brand in the country. 

Apple ends up being graded on a curve in China. Apple is on track to report $45B of revenue in Greater China in 2017. Meanwhile, some of Apple's peers in the U.S. may never see much revenue at all from China. While Apple has its fair share of issues to overcome in China, fundamentals appear to be intact. Apple's ultimate goal in China is similar to its goal in every other country: Sell tools that are capable of improving people's lives. Apple is going to be just fine in China, even if customers use WeChat to enhance their Apple tools. 

Receive my analysis and perspective on Apple throughout the week via exclusive daily emails (2-3 stories a day, 10-12 stories a week). To sign up, visit the membership page.