The End to Apple’s Cash Dilemma

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

Current Cash Strategy

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

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

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

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

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

Exhibit 2: Apple's Net Cash

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

Changes Are Coming

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

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

Spending Excess Cash

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

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

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

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

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

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

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

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

Modified Dutch Auction Tender Offer

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

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

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

Light at the End of the Tunnel

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

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A Stationary Smart Speaker Mirage

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

Amazon Echo

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

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

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

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

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

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

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

Sales

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

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

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

A Mirage

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

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

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

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

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

Mobile Trouble

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

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

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

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

Crossroads

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

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

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

 
 

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

Future

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

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

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

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

Wearables

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

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

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

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

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

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It's Time for Apple to Disclose Apple Watch Sales

Apple Watch is a resounding success, and it's time for Apple to make it official by providing quarterly sales data. The question of whether Apple should disclose Apple Watch sales has never had a simple "yes" or "no" answer. Instead, the positives and negatives found with disclosure have to be weighed against each other. There is now more upside found in Apple disclosing quarterly Apple Watch sales than in keeping them private and just providing sales clues.

The Initial Decision

In late 2014, six months before Apple Watch went on sale, Apple announced that it would not be disclosing quarterly Apple Watch revenue and unit sales. The company would include Apple Watch in a new financial line item. The category, called "Other Products," would serve as a catch basin for a variety of products including iPod, Beats, Apple TV, other Apple accessories, and a range of third-party accessories sold through Apple Retail. 

Apple's decision to withhold Apple Watch sales was a controversial one. Apple Watch represented Apple's first genuine new product category in the Tim Cook / Jony Ive era. Expectations were high as observers positioned Apple Watch as a litmus test for Apple's ability to innovate following iPhone and iPad. The lack of disclosure meant analysts would have to back into Apple Watch sales estimates using their own earnings models. This process guaranteed there would be a discrepancy when it came to Apple Watch estimates. 

A number of theories were put forth regarding why Apple made the initial decision to lump Apple Watch in with Other Products. The official reasoning according to Apple management was that given how Apple Watch was a new product with no revenue, it made sense to lump the product with other products. In addition, the lack of disclosure was said to make it difficult for competitors to assess Apple Watch demand and market trends. The much simpler explanation was that Apple just didn't stand to benefit from disclosing Apple Watch sales out of the gate. Apple faced a number of benefits associated with keeping Apple Watch sales hidden, such as:

  • Keeping competitors in the dark.
  • Avoiding negative press coverage focused on the wide discrepancy between Apple Watch and iPhone sales.
  • Avoiding investor and analyst disappointment if Apple Watch sales missed very high expectations.
  • Moving the Apple narrative on Wall Street beyond unit sales growth. 

Meanwhile, the downsides associated with keeping Apple Watch sales hidden included:

  • Portraying a lack of confidence in Apple Watch.
  • Being unable to control the Apple Watch narrative in the press.

In early 2015, there was very little upside for Apple found with disclosing Apple Watch sales. While management was confident that Apple Watch would become a hit product, there was no reliable way of converting that optimism into multi-year sales projections. The product had an unknown adoption curve, and Apple did not have a recent product to use as a proxy to estimate adoption. The iPad was released five years earlier, but the product had proven to be a sales outlier by riding the iPhone's coattails. In addition, management knew initial Apple Watch sales would pale in comparison to iPhone sales, potentially leading to negative stories in the press. Apple made the correct decision to keep initial Apple Watch sales hidden.

Sales Clues

On the surface, Apple's decision to withhold quarterly Apple Watch sales data would make it difficult to assess performance. As seen in Exhibit 1, Other Products revenue, which includes Apple Watch sales, doesn't provide many clues regarding Apple Watch demand. If anything, the most likely takeaway is that Apple Watch sales haven't been impressive. However, this assessment is grossly inaccurate.

Exhibit 1: Apple "Other Products" Revenue

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In what came as a surprise, soon after Apple Watch launched, Apple management began to provide clues regarding Apple Watch sales. The sales clues have now become so helpful at reaching Apple Watch sales estimates, management appears to be systematically undermining its initial decision to withhold sales data. Some of the more noteworthy sales clues over the past two-and-a-half years include: 

  1. Apple Watch revenue accounted for "well over 100% of the growth" in Other Products in 3Q15 (two months of sales). In addition, Apple Watch sell-through was higher in 3Q15 than in the comparable launch periods for iPhone and iPad.
  2. Apple Watch unit sales were up sequentially in 4Q15 and once again in 1Q16. 
  3. Apple Watch unit sales exceeded sales of iPhone during its first year. Apple Watch was the second best-selling watch brand in CY2015 (revenue).
  4. Apple Watch experienced a unit sales and revenue record in FY1Q17. Apple Watch sales "nearly doubled year over year" in 2Q17 and have been up "over 50%" in 3Q17 and 4Q17.
  5. Apple Watch was the best-selling watch brand over the twelve months ending in June 2017 (revenue).

Taking the preceding clues into consideration and adding them to my Apple financial model leads to the Apple Watch unit sales estimates found in Exhibit 2. Apple has sold 30M Apple Watches to date. More detail on the size of the Apple Watch installed base and user base is available for Above Avalon members here

Exhibit 2: Apple Watch Unit Sales (Above Avalon Estimates)

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In order to remove the seasonality found with Apple Watch (sales are concentrated in the holiday quarters - 1Q16 and 1Q17), Exhibit 3 shows Apple Watch sales on a trailing twelve month basis. Apple Watch momentum becomes much easier to observe. Apple Watch unit sales have been steadily increasing over the past year with unit sales up nearly 50% year-over-year on a trailing twelve month basis. 

Exhibit 3: Apple Watch Unit Sales - TTM (Above Avalon Estimates)

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    Time for Change

    Four major changes have swung the disclosure debate in favor of Apple providing Apple Watch data on a quarterly basis.

    1. There is no smartwatch market. After more than two-and-a-half years of competition, it is clear that Apple Watch doesn't have much genuine competition. Instead of there being a smartwatch market, there is just an Apple Watch market. In the beginning, some thought low-cost, dedicated health and fitness trackers would pose a major long-term sales risk to higher-priced, multipurpose wearable devices like Apple Watch. This has proven to be incorrect. Apple Watch is seeing growing sales momentum while dedicated fitness trackers are quickly fading in the marketplace. Samsung, Garmin, Fossil are the only companies selling at least 100,000 smartwatches per quarter on a regular basis. The rationale for withholding Apple Watch sales data "due to competitive reasons" is getting weaker as time goes on. In addition, competitors already have a very good idea of how Apple Watch is performing in the marketplace thanks to the sales clues provided by Apple. (In addition, I have been providing Apple Watch sales estimates to Above Avalon members for years.)
    2. Additional Apple Watch sales data. Apple has a much better handle on Apple Watch demand trends given 10 quarters of Apple Watch sales data. Management is well aware of the seasonality found with Apple Watch sales. In addition, much of the unknown found with the quarterly swings in Apple Watch sales has been removed. Year-over-year growth projections for Apple Watch now serve as a more reliable way of forecasting sales. 
    3. Low Apple Watch expectations. Wall Street no longer has high expectations for Apple Watch sales. Accordingly, Apple is no longer facing the same level of risk of missing Apple Watch sales expectations.
    4. New Wall Street focus. There is evidence of Wall Street focusing much less on Apple's unit sales growth. Instead, Wall Street is increasingly focused on Apple's balance sheet. The result is an environment in which Apple doesn't have to worry as much about slowing Apple Watch unit sales posing a threat on Wall Street. 

    Apple has been trying to play both sides of the Apple Watch disclosure debate. On one hand, the company still doesn't want to face the pressure and scrutiny found with disclosing Apple Watch revenue on a quarterly basis. However, management is providing increasingly detailed sales clues in an effort to tell the world that Apple Watch is selling well and gaining momentum.

    Apple now stands to benefit more from disclosing Apple Watch sales than keeping them hidden. What were once incentives for not disclosing Watch sales have reversed and now represent reasons to provide sales data.

    • Apple is missing positive press coverage associated with strong Apple Watch sales figures.
    • Apple can improve its Wall Street narrative by talking up Apple Watch as a primary computing platform. Sales data will help Apple in such efforts.

    The recurring theme found with Apple's disclosure philosophy is providing numbers when doing so benefits the company. A few recent examples include Apple beginning to disclose the number of paid subscriptions across the various App Stores and more detailed numbers related to Apple Retail traffic. The paid subscriptions disclosure goes a long way in painting Apple as having the best ecosystem for paid third-party services. Meanwhile, the Apple Retail and online store traffic disclosure paints a picture of an expanding Apple ecosystem in China and emerging markets.

    Best of Both Worlds

    Since Apple won't be required to disclose Apple Watch sales in the near-term given their small percentage of overall revenue, there is a way for management to have the best of both worlds when it comes to Apple Watch disclosure. Management can begin disclosing quarterly Apple Watch unit sales while keeping revenue lumped in with "Other Products." By disclosing unit sales, Apple is able to receive all of the upside found with Apple Watch disclosure. However, by not disclosing revenue, management would be able to keep Apple Watch average selling price (ASP) data hidden for competitive reasons. While the world would know how many Apple Watches are sold every quarter, estimating would still be required to assess which Apple Watch models are selling well. Apple has done something similar in the past with Apple TV when the company periodically disclosed unit sales without breaking out revenue. 

    By providing just Apple Watch unit sales on a quarterly basis, Apple can beginning taking back the Apple Watch narrative. As of today, there is still a remarkable amount of skepticism pointed toward Apple Watch. Since there is no rational reason for such skepticism to exist given management's Apple Watch sales clues, the lack of official Apple Watch unit sales data is likely a contributing factor. Official Apple Watch unit sales would go a long way in positioning Apple Watch as a compelling computing platform. Some consumers may become interested in Apple Watch once knowing how many other people are buying and wearing the product. Compared to the lack of sales disclosure from companies like Amazon, Google, and Samsung, providing quarterly Apple Watch unit sales would garner much more positive press for Apple Watch.

    Meanwhile, there is a declining number of downsides and risks found in disclosing Apple Watch unit sales. Apple Watch has significant momentum in the marketplace, and Apple's engineering and design teams are running as fast as they can with the product category. Apple is leading the market with a cellular Apple Watch and being able to apply fashion/luxury attributes to design and technology. These items will very likely continue to fuel sales momentum for Apple Watch. No other company is close to Apple when it comes to selling multipurpose computers on the wrist at volume. 

    Financial Disclosure

    Apple will eventually have no choice but to disclose Apple Watch revenue. Once "Other Products" begins to account for 10% to 15% of Apple's overall revenue, pressure will build for management to break up the line item to make it easier for analysts to model. Other Products currently accounts for 6% of Apple's overall revenue. The iPad represented close to 15% of Apple's overall revenue immediately after going on sale. Apple likely had no choice but to break out iPad sales. Meanwhile, Apple stopped reporting iPod sales once it declined to 1% of overall sales. 

    The Other Products line item has been effective up to now since it represents a small fraction of overall Apple revenue. This was the primary motivation behind Apple creating the category in the first place - to serve as a catch basin for products bringing in a small percentage of overall revenue. If Apple Watch continues to see significant revenue growth, pressure will build for Apple to rearrange its financial disclosure in order to break out Apple Watch revenue. While this scenario won't happen in the near term, a few more years of strong Apple Watch sales growth will make it a very real possibility. 

    Holiday Quarter

    Apple's next earnings report marks a great opportunity for Apple to begin disclosing Apple Watch unit sales. Apple will likely sell more than 9M Apple Watches during the holiday quarter, which would represent a sales record and exceed Mac sales by a wide margin. Looking ahead, Apple Watch is on track to reach a 25M unit sales per year pace in 2018. It's time for Apple to begin disclosing Apple Watch unit sales data and become much more vocal in telling the Apple Watch story.

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    iPhone X

    After 10 years, the iPhone business is displaying signs of maturity. The days of significant sales growth are in the rearview mirror. The upgrade cycle is getting longer as it becomes that much harder to get people to upgrade their iPhones.

    Apple was faced with a choice: Stick with the familiar and milk the iPhone business for all it’s worth, or throw familiarity out the window to pave a new iPhone journey for the next 10 years. Apple chose the latter, and iPhone X is the byproduct.

    I’ve been using an iPhone X since Monday. Accordingly, this is not a comprehensive review. Instead, the focus is on my initial impressions and thoughts from using the device. My expectation is for additional iPhone X observations to materialize over the coming days and weeks.

    iPhone X is without question an inflection point for the iPhone business. This new iPhone era won’t necessarily materialize in the form of stronger iPhone sales growth. Instead, the iPhone user experience is now on a different trajectory. In some ways, iPhone X places iPhone firmly in the direction of the original vision Jony Ive and Apple’s industrial designers had for iPhone when it was still an R&D project 12 years ago. Apple wants iPhone hardware to melt away, leaving just the user interacting with software.

    Not Your Typical Update

    The first thing that becomes apparent after using iPhone X is that this isn’t just any iPhone update. (Most people will probably call it iPhone “ex” instead of “ten” – I doubt Apple cares too much since people are going to buy this device in droves).

    Historically, Apple has strived to have two or three marque features for each iPhone release. These features have to be substantial enough to frame a marketing campaign around. Some of these features, such as larger screens and fingerprint readers, have been hardware-related while other features, such as Portrait Mode and the dual camera system, have been a combination of software and hardware. In addition, new case colors have become a reliable way of enticing some iPhone users to upgrade. A few of the more noteworthy updates over the years include:

    • iPhone 5: Larger 4-inch screen
    • iPhone 5s: Touch ID / Gold finish
    • iPhone 6 / 6 Plus: Larger 4.7-inch and 5.5-inch screens / Apple Pay
    • iPhone 6s / 6s Plus: 3D Touch / Live Photos / Rose Gold finish
    • iPhone 7 / 7 Plus: Dual camera system (Portrait Mode) / Jet Black finish
    • iPhone 8 / 8 Plus: Glass back / Gold finish

    When looking at the preceding list, no one feature jumps out as single-handily changing the way we use iPhone. Instead, each feature played a supporting role in a much bigger production. Apple’s broader goal has been to improve the iPhone experience ever so slightly with each new iPhone. Management has seen more success in reaching that goal in some years than in other years.

    With iPhone X, two design changes stand out: the removal of the front-facing home button and Face ID replacing Touch ID. The changes amount to nothing short of an entirely new iPhone experience. The best way to describe the feeling found when using iPhone X is that it’s the closest thing to using an iPhone from an alternative universe. There is this fresh, or reinvigorating, feeling to it – as if the home button was holding the iPhone experience back, representing a barrier to interacting with software. No other iPhone update has been able to elicit such a strong feeling. It is also easy to see where Apple wants to take iPhone over the next ten years (more on this shortly).

    Learning Curve

    Much to my surprise, there really isn’t much of a learning curve with iPhone X. While it will take a few minutes to get used to not having a home button, the memory reflex adjusts incredibly quickly. I was expecting to keep pressing the bottom of the screen as if there was still a dedicated home button, but it just never occurred.

    The remarkable thing about this is that considering how engrained the home button has been in our lives, to just move on after a few minutes says something about the intuitive user interface found with iPhone X. The home button wasn’t just a way to unlock our iPhone the dozens of times throughout the day or to get back to the home screen. Instead, the home button represented familiarity and safety. In case of trouble, a quick tap would drop us back into the comfort found with the home screen. In case of an extra sticky situation, a quick double tap would bring up the multitasking window as a form of escape.

    With iPhone X, the swiping gesture has replaced home button pressing, and it feels more natural than a home button ever felt. A swipe up from the bottom of the screen in both a horizontal and vertical position brings you back to the home screen. Control panel is a swipe from the upper right corner.

    Why No Home Button?

    There is a rather straightforward question to ask about iPhone X: Why did Apple remove the iPhone home button in the first place? It’s all about coming up with a different way to interact with technology – removing extra bezel to just leave you and the screen. A byproduct of this is that Apple is able to fit more screen in the same form factor. iPhone X has a little bit less screen real estate (in terms of area) than iPhone Plus. The 5.8-inch screen has a more vertical element than its iPhone Plus sibling.

    While the iPhone Plus has been gaining sales momentum in recent years, culminating with iPhone 8 Plus outselling its smaller iPhone 8 sibling, the form factor is a bit large for a certain portion of the iPhone user base. Apple went with the iPhone X’s particular form factor because it felt the best in hand. Of course, Apple will likely sell different iPhone X sizes over time, but the company had specific reasons for going with the current iPhone X form factor. 

    Face ID

    Touch ID is a thing of the past. If it wasn’t for needing to use Touch ID on my iPad Pro, I doubt I will give the fingerprint recognition technology much thought going forward.

    The Apple rumor cottage industry had a wild 2017 when it came to Touch ID and iPhone X. Many Apple rumor finders and reporters were extremely confident that Apple actually wanted to put Touch ID under the screen and due to technological roadblocks had to settle for Face ID. While it would not be surprising for Apple to investigate trying to put fingerprint recognition under a screen (why wouldn’t they kick the tires?), Apple is no way settling with Face ID. In addition, the claim that Face ID is in some way a stop gap is just wrong. Instead, Face ID represents the next reiteration of Apple’s quest to push biometric authentication forward.

    Face ID set-up is ridiculously smooth, easy, and quick. We can probably throw the word magical into the mix as well – it would qualify. While Touch ID signup has improved over the years, Face ID blows it out of the window in terms of simplicity and intuitiveness. 

    There are a few notable drawbacks to Face ID – which do seem like low-hanging fruit for Apple to address down the road. (These drawbacks were discussed in my accompanying iPhone X initial impressions video.)

    1. You need to look at the iPhone X TrueDepth camera system basically directly on for Face ID to work. The days of laying your iPhone on the desk and just reaching over and pressing the home button are over (for now). Instead, you will either need to shift so that your face is directly over the TrueDepth camera system, or you have to lift up the iPhone from the flat surface. You can just tap the screen to see notifications.
    2. Face ID requires access to your eyes, nose, and mouth. For some people, this will limit Face ID availability. It is important to point out that Touch ID has its fair share of issues as well including wet fingers.
    3. In my initial tests, Face ID on iPhone X was slower than Touch ID on an iPhone 8 Plus when used to get to the home screen. 

    All in all, Face ID is impressive. It’s not a perfect replacement for Touch ID but it’s more than adequate. iPhone X will place Face ID as the first genuine technology that will make facial recognition go mainstream in a smartphone. 

    The Screen

    A few hours with the screen is all you need to begin understanding why Apple chose to remove as much bezel as possible. The way Apple wraps the iPhone X screen around the TrueDepth camera system (a.k.a the notch) has been a polarizing topic in the run up to this week’s launch. Some people think the notch is bad design. This camp argues Apple shouldn’t have included a visual gap in the screen. Renderings showing various iPhone X apps in portrait mode, which clearly look odd at first, have given this camp a decent number of supporters.

    However, in what likely isn’t a coincidence, the “notch is bad design” camp has been quiet when it comes to offering or suggesting better alternatives. Including extra bezel to the left and right of the TrueDepth camera system, like every other smartphone manufacturer currently does with their front-facing camera, isn’t a better solution. One wouldn’t be able to use that space to display information such the date, time, battery indicator, carrier signal, etc. In addition, the whole point of iPhone X is to get rid of as much bezel as possible.

    Much like the home button, the “notch” will be quickly forgotten. It just melts away after a few hours of use. Let’s not beat around the bush – an iPhone X without any notch would obviously be the closest representation to Apple’s vision of hardware melting away to just leave the user interacting with software. However, the technology for such a feat just isn’t available today (although Apple R&D suggests the company is working at it). But Apple sure comes close to that perfection, even when taking into account the notch.

    I don’t think it’s fair to say that the way Apple wraps the screen around the TrueDepth camera system was some kind of major compromise. Instead of Apple redesigning iPhone to remove the notch next year or the following year, there is a much higher likelihood of Samsung and other smartphone manufacturers embracing some version of the notch as the extra bezel found on Galaxy S8 or Pixel 2 XL really does stand out in a negative way when positioned next to iPhone X.

    The debate over the notch is not about whether Apple should have included a notch or not with iPhone X. Instead, the debate comes down to screen real estate. Along those lines, the notch comes out ahead. Regardless of the pros and cons found with the notch, Apple is fully embracing it. In fact, the notch replaces the home button as a defining characteristic of the device – a way for the phone to stand out from competitors. The notch ends up being iPhone X branding.

    Thoughts on Sales

    Beginning Friday, Apple will be selling three new iPhones simultaneously for the first time (iPhone X, iPhone 8, and iPhone 8 Plus). After using both an iPhone 8 Plus and iPhone X, I don’t think it’s completely right to label each as Apple’s flagship iPhone. Instead, iPhone X has the exclusive rights to that title.

    While iPhone X shares some similarities with iPhone 8 and 8 Plus, the differences are just too much to place the three phones on the same plane. However, it would be a mistake to cast iPhone 8 and 8 Plus as the forgotten iPhones.

    Conventional wisdom positions iPhone X as targeting iPhone users focused on the latest and greatest technology. Meanwhile, everyone else is thought to be interested in the lower-cost iPhone 6s, 7, or 8. After using iPhone X and taking into consideration how most consumers buy iPhones, I’m not sure such a generalization is correct.

    The question of how an iPhone user will choose between an iPhone X and a different kind of iPhone (most existing iPhone users will stick with iPhone for their next smartphone) won’t come down to one’s desire for the latest and greatest technology. Instead, it will likely come down to one’s comfort level with change and the desire for familiarity.

    For a portion of the 800M iPhone users in the wild, iPhone X will represent change that isn’t essential at this time. This isn’t to say anything about iPhone X not appealing to the mass market or the device not being intuitive enough. Instead, the iPhone user base is increasingly heterogeneous when it comes to views and thoughts regarding technology and iPhone. For many people, iPhone 8 and 8 Plus are worthy upgrades to their existing iPhones. A very strong case can be made that iPhone 8 and 8 Plus will sell just fine next to iPhone X. In subsequent years, these users will eventually be in a better position to embrace the design changes found with iPhone X as Apple extends that design language to different screen sizes.

    Approximately 80% of iPhone sales in the U.S. occur through mobile carriers. This means that for many iPhone users, the purchase decision between iPhone 8 and iPhone X may come down to how each iPhone looks next to each other in a Verizon or AT&T store. The iPhone X would probably win if it were a beauty contest – the screen just can’t be beat. However, the home button may give iPhone 8 and 8 Plus some points with a portion of consumers. At the end of the day, sales may end up a draw, which would be a big win for iPhone X considering its higher price.

    Speaking of iPhone X pricing - which will likely go down as the most talked about Apple topic of the year – concerns of iPhone X pricing being too high are misplaced. This phone is going to sell well in U.S. and China. In fact, iPhone X will sell well in all of Apple’s established markets. Emerging markets will likely be a different story, which explains Apple’s consumer segmentation strategy for iPhone pricing. The iPhone SE, 6, and 6s are clearly targeting emerging markets where pricing is a much bigger sticking point.

    Apple’s Goal

    In many ways, iPhone X is the kind of product you would expect from Apple. Instead of settling with the existing iPhone paradigm and watching iPhone sales and profit gradually decline over time, Apple is determined to move on to the next thing. iPhone X is that the next thing. We are seeing the foundation for the next ten years of iPhone. All iPhones will eventually look and feel like iPhone X.

    There are a few rough items around the edges. Face ID has some drawbacks when compared to Touch ID, although these are pretty much offset by its positives. In addition, some iPhone Plus users may be left a bit unsatisfied with iPhone X screen real estate (I would be interested in trying an iPhone X in the size of an iPhone Plus).

    Apple is laying the foundation for a new user interface paradigm in which we rely much less on multi-touch to control our iPhones. Instead, we will rely on glances and looks. With wearables increasingly positioned as Apple’s product priority, an iPhone that serves as an augmented reality navigator controlled by glances is the future. The technology underpinning such a product can then one day be applied to other wearables controlled by glances and looks: Apple glasses.

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    Apple Is Facing a Double Standard

    Apple is a Silicon Valley and Wall Street leader. The company has the most profitable and best-selling smartphone, tablet, smartwatch, and wireless pair of headphones in the market. Apple has grown its user base by 10x over the past 10 years and is bringing in nearly more revenue than Amazon, Alphabet, and Facebook combined. This level of success places a bull's-eye on Apple’s back and rightly so. Leaders should be held to a higher standard. 

    However, a trend has developed where a number of tech companies are said to be outperforming Apple. Despite being cast as leaders, these companies aren't judged by the same high standards as Apple. Microsoft, Samsung, and Google are said to be one-upping Apple in core competencies like hardware and design. Yet, these companies don't face anywhere near the amount of criticism thrown at Apple. 

    Even when looking at companies that deserve to be put on a pedestal, such as Amazon, Tesla, and Tencent (WeChat), a double standard becomes apparent. While these companies are doing great things in terms of building promising customer relationships, none are exposed to the level of cynicism facing Apple. A company that is heralded in the press as surpassing Apple as a leader should face the same high standards used to judge Apple. Unfortunately, this never happens. The bull's-eye is never removed from Apple's back and given to another company. 

    Grading on a Curve

    A massive curve is being used to grade companies not named Apple. The list of recent examples is extensive. 

    Samsung. Samsung released its Galaxy S8 flagship smartphone to near unanimous praise this past April. Tech media positioned the phone as a sign of Samsung taking the smartphone design baton from Apple. The phone was said to be an engineering marvel, standing apart from iPhone, and every other smartphone for that matter. YouTube vloggers, some with financial ties to Samsung, couldn’t say enough positive things about the phone. Samsung had beaten Apple to market with a smartphone lacking a dedicated home button and having reduced front bezels.

    Only a few days after launch, Galaxy S8 problems began to appear. In what has become a perennial occurrence with Samsung, smartphone features that were positioned as key attributes of the device were shown to be gimmicks. Samsung’s facial recognition software was easily spoofed with pictures. The company was forced to backtrack in terms of positioning facial scanning as a secure biometrical identification method. These problems should have led many to reassess claims that Samsung was the smartphone design leader. 

    Due to the home button being removed, Samsung decided to move the Galaxy S8 fingerprint reader to the back of the phone. It quickly became apparent that the decision was a questionable one. Instead of being labeled as a major design compromise, many reviewers brushed off the awkwardly positioned fingerprint reader as just a Samsung quirk. If the same scenario happened to Apple, leadership would be questioned and the company's strategy would be put into doubt. For Samsung, it was business as usual.

    Microsoft. Microsoft has enjoyed two years of unanimous media praise for its Surface products. The company is said to push the boundaries of personal computing forward with Surface. Unlike Apple, Microsoft is viewed as giving consumers something they want before they even know they want it. Microsoft’s Surface business is being graded on a curve. The product category is losing in the marketplace as consumers show little to no interest in tablet/laptop hybrids. Despite poor sales, there has been no discernible change to the Surface narrative in the press. The same kind of sales decline for iPad led many to question Apple's entire strategy and vision. The goal posts continue to move for Microsoft. Surface success is now said to be found with enterprise adoption despite Microsoft spending the better part of the past five years positioning Surface for consumers. 

    Amazon. No company is currently receiving more praise than Amazon. While some of this is justified, a strong case can be made that Amazon's product strategy is being graded on a curve. Stationary speakers powered by Alexa are positioned by many as the future of personal computing. The lack of retort or debate regarding this claim is astounding. The tech community has elevated Amazon Echo on one of the tallest product pedestals around. Boilerplate language referencing Echo's success and popularity are found in every smart home article despite Amazon providing very few clues as to how the devices are selling or being used. Newer Echo devices such as the Echo Show and Echo Look led some tech reviewers to bend over backwards in an attempt to avoid the appearance of not "getting it." This behavior stands out when compared to the sheer level of skepticism thrown at Apple's HomePod, a device that isn't even available for sale. 

    Google. The company is said to be getting better at hardware, and a few people are starting to declare Google the new design leader. Google Pixel is positioned by some as a sign of Google even beating Apple at hardware. In reality, there are a growing number of signs indicating Google continues to fumble forward when it comes to hardware. While Pixel's growing number of issues are well-covered in the press, the degree to which Google received the benefit of the doubt in the first place is something not afforded to Apple. 

    Tesla. While Tesla receives its fair share of criticism from Wall Street, the tech community rarely pushes back against the company. Tesla's growing manufacturing struggles and missed deadlines are written off as typical Elon Musk antics. Meanwhile, Apple's manufacturing struggles are viewed as a sign of bad decision-making.

    Snap. One word: Spectacles. The sunglasses with camera was looked at as a sign of Snap innovating faster than Apple. Long lines in front of a Spectacles vending machine were said to demonstrate how Snap was grabbing just as much buzz and interest as Apple during one of its global product launches. Not surprisingly, Spectacles flopped in the marketplace

    Apple Watch

    The stark difference in how Amazon Echo and Apple Watch have been portrayed in the press highlight the double standard facing Apple. Neither Amazon nor Apple officially disclose product sales for each respective product, although Apple provides many more helpful Apple Watch sales clues. This makes it interesting how Amazon Echo has been declared a resounding success while Apple Watch receives doubt and criticism. 

    Amazon Echo and Apple Watch were likely selling at roughly the same pace during the first half of 2017. When considering Apple Watch sells at average selling price that is more than 5x that of Echo's, it's clear Apple Watch has been the revenue winner. In addition, given how some people have purchased four or five Echo devices, Apple Watch likely has wider user adoption.

    Why is Apple Watch momentum and sales success not reported while Amazon Echo is positioned as the next big computing platform? Amazon doesn't have the same kind of bull's-eye placed on its back compared to Apple. Amazon Echo doesn't receive any where near as much criticism or cynicism as Apple Watch does.  

    China

    Nowhere is the double standard Apple faces on display more than when China is discussed. Apple is the best-selling western brand in China. The company will bring in $45B of revenue this year in Greater China, selling upwards of 50M iPhones. According to 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 also up year-over-year. However, judging by the press, Apple is one step away from implosion in China. Whether it is competition from the low-end, which is not new or unique to China, or services companies like Tencent (WeChat) stealing Apple users, a narrative with lots of holes, Apple’s strategy in China is being severely questioned.

    While Apple has clearly experienced trouble in China, which likely played a role in Apple appointing Isabel Ge Mahe as VP of Greater China, the lack of criticism facing other companies regarding China is noteworthy. Amazon, Facebook, and Netflix, three companies considered to be among the most innovative entities today, have little to no presence in China. In some cases, it’s not a stretch to say these companies will never have a presence in the country. Yet, this reality is not viewed as a problem or hindrance for these companies. Instead, China is positioned as a wildcard opportunity containing just upside and little to no downside. For Apple, China is viewed in the exact opposite way, representing a lot risk with little to no upside opportunity.

    Theories

    Why is a double standard applied to Apple? Why are competitors being graded on a curve? I have a few theories:

    1) People like underdogs. It's not that people necessary want to see Apple fall, but rather people want to get behind the underdog. It makes for a good story. A recent example of this is found with Andy Rubin's Essential getting into the smartphone market. Despite Essential's smartphone being positioned right next to iPhone, there was a notable lack of skepticism and proper analysis facing both the company and smartphone. Essential should never have been positioned as a genuine iPhone threat. Microsoft Surface's battle against Mac and iPad represents another underdog story that some people just don't seem to get enough of. In reality, there isn't much of a battle when looking at sales. Similar underdog stories are found with Amazon's Alexa outpacing Siri, Samsung beating iPhone in terms of design, Google matching up with Apple hardware, and Tesla grabbing more buzz than Apple. 

    2) Founder bias. There is a tendency for people to give companies run by founders the benefit of the doubt, while companies like Apple have a much higher bar to jump over. Few have made much out of Mark Zuckerberg's growing list of bad product bets and lack of vision. Zuckerberg's fascination with VR is at worst merely laughed off. Larry Page's and Sergey Brin's lack of focus are widely known and mentioned, but rarely questioned in terms of Alphabet's grand vision. Jeff Bezos can do no wrong, despite plenty of examples of Amazon making mistakes. Tesla has become all about Elon Musk's vision with few discussing the company's strategic blunders and holes. Meanwhile, each step Tim Cook and Jony Ive take is questioned more than the previous step. The only difference between these companies: Facebook, Alphabet, Amazon, and Tesla are led by founders, while Apple isn't. 

    3) Apple is misunderstood. Apple lacks a strong narrative in Silicon Valley and Wall Street. While much of this is due to Apple's own doing, the situation leads to unknown regarding how to judge Apple's performance. Many still view and grade Apple as if it is a technology company. In reality, Apple is a design company. This likely contributes to an elevated amount of skepticism and cynicism being applied to Apple's actions. 

    Solutions

    The high standards applied to Apple should not be lowered in an effort to remove the double standard applied to the company. Leaders should receive an outsized amount of attention and criticism. Instead, the bar needs to be raised for companies not named Apple. If a company is said to be outpacing Apple, that company deserves to have a bull's-eye placed on its back. When it comes to the underdogs, stories should not romanticize David slaying Goliath, but detail the challenges and risks found in going up against Apple. Once problems and issue emerge, which they undoubtedly will, they should be covered as closely as the initial stories filled with optimism. 

    Apple is a polarizing company. This guarantees that the company will continue to face an outsized amount of skepticism and cynicism going forward. It's time that the same level of criticism be given to companies said to be giving Apple a run for its money as a Silicon Valley and Wall Street leader.

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