apple,

Wearable Device Now, iWatch Later

John Paczkowski over at Recode is reporting Apple will announce a wearable device in two weeks. Tim Bradshaw over at FT is saying Apple’s new wearable won’t be called iWatch. While things can obviously change, and Apple product naming is notorious for being kept close to one’s chest, both journalists have solid track records.

I have three observations. 

1) No Leaks Suggest Delayed Launch. We have seen no leaks of a new Apple wearable device. While it certainly is possible that Apple doubled down on secrecy, I highly doubt that we would have no leaks of any kind for a brand new product that had entered mass production (2-4 million+ units) weeks ago.  I suspect this new Apple wearable device, if announced in less than two weeks, will not go on sale anytime soon. I still would expect demos to be available at the event as Apple is fully capable of producing a few hundred devices internally. While the new Arizona sapphire plant certainly is intriguing and may play a role with wearables, there would be too many other partners involved in a wearable device for there not to be any leaks.  While I still wrestle with the exact timing of shipping (I fully expect Apple to announce the ship date or at least a somewhat narrow timeframe), I think there is a low probability of an immediate launch.  

2) Sharing the Stage. If Apple introduces a wearable alongside iPhones, I think the “wearable as an iPhone accessory” mantra makes a lot more sense that having a huge iWatch-only event, similar to the first iPad, where a wearable device can stand alone on its own merit and not require another iOS device. If a wearable device requires an iPhone to function, it makes more sense to announce alongside new iPhones.  Over time, I expect wearables to become fully capable of moving beyond accessories, but we are only talking about the first version of a still unannounced product.  

3) iWatch vs. Wearables Category. Apple may view the wearables category as requiring training wheels as consumers may not understand or connect with a full blown “iWatch” right out of the gate, so an in-between wearable device would be required to make the learning curve more manageable.  For example, an iPad introduced in 2005 probably would not have done as well since people wouldn’t have been familiar with a touch interface - not to mention the lack of an app ecosystem.  It is possible Apple will initially sell a wearable device similar to a fitness band, but focused on the much broader and mainstream subject of health, only to expand the lineup in subsequent years with various editions, price points, and styles.  I have a growing suspicion that Apple’s wearables category will not be comprised of just one or two models but an array of devices as wearables will usher the era of fashion into personal technology. Apple’s recent retail hires support my thesis that a new way of thinking is required to sell a range (maybe up to dozens?) of wrist devices.

At this point I expect a “wearable” device to be introduced in two weeks, with the goal of getting users acquainted with this new wearables product category, while the more powerful and much more important “iWatch” is kept for 2015 or later.

Current Tech Musings and 2014 Predictions

Let’s take a step back and see how things look around the world.

Apple is Fine.

Similar to 2012, Tim Cook back-loaded Apple’s 2013. Apple went so far as to release the retina iPad mini pretty much as late as it could and still guarantee that supply would be adequate before the key holiday shopping season.  From all indications, the new hardware is selling well - as one would expect - although many Apple bloggers whiffed when judging 5c popularity.  While the sales gap between the 5s and 5c may shrink going forward, I would be quite surprised if the 5c becomes “the real iPhone” as many predicted. The sheer uproar over 5c pricing appears to have quieted down as well.  Apple’s redesigned iOS 7 doesn’t seem to have created any new “–gate” controversies, with the only complaints coming from design snobs (I say that with genuine respect).  Apple accomplished a lot in 2013, and 2014 looks to be just as jam-packed with what I would expect to be iPhone bifurcation (two distinct iPhone form factors with simultaneous development – a really big deal). An iPad pro (think larger iPad Air with possible dedicated accessories for professionals) would also seem to fit very well in Apple’s 2014 resource timeline.

Tech Industry Hardware Becoming a Snooze.

Take a look around and there really isn’t much in the way of exciting and flashy hardware innovations geared for the masses. Yes, the 5s is forward-thinking, and has the internal composition that will rival next year’s iPhone 6, but it’s hardly something to get people talking at the holiday party.  The iPhone 5s fingerprint scanner is nice (continues to work well for me), but I’m not finding it nearly as much of a salesperson as Siri (those initial demos were unbeatable).  On the tablet front, it has become an even bigger bore.  I use an iPad 2 and have absolutely no desire to upgrade to a newer iPad anytime soon.  Outside of Apple, Google is busy publicly beta testing hardware products with the ultimate intent of controlling our data and attention.  Amazon is busy spending money left and right in an attempt to sell Amazon Prime subscriptions, and Samsung is twiddling its thumbs waiting for Apple to release new products. 

Smartwatches Selling Like Cold Cakes.

The smartwatch appears to have finally hit mainstream in 2013 as Best Buy is now carving out more square footage to the concept.  Sales are, and will probably remain, “okay” for early adopters where massive sales are certainly not on the radar, but mass adoption remains out of reach.  The idea of a smartwatch makes perfect sense as the phone form factor contains numerous inefficiencies, but the smartwatch industry lacks the needed design and fashion acumen to really get things moving.  The technology does appear to be available though. Interestingly, one company has been beefing up their design and fashion human capital resume. 

Mobile Messaging App Fever. Yawn.

I’ll be honest, I get bored with the never-ending updates on how many users certain mobile messaging apps have.  In the U.S., this fascination with mobile messaging apps remains subdued as Facebook, Twitter, iMessage, (and I suppose you can include Snapchat), pretty much represent the bulk of how people communicate with each other – oh and the phone feature on the iPhone as well.  Maybe I’m just naïve (and only friends with Apple users), but I really have no desire to follow which mobile messaging app is selling “stickers” or making a play for the Indonesian mobile app market.  I never have used Whatsapp and don’t know anyone who has either. The mobile space is fast moving and people love stories of how start-ups will displace incumbents, but from my vantage point in the U.S. – Facebook and Twitter will remain important communication channels, while iMessage continues to be the sleeper hit. I still think mobile carriers are the big winner as my monthly bills will continue to rise regardless of which start-up does well. Of course critics will say the U.S. doesn’t matter, or is behind the times (and that I am clueless), to which I respond as long as the Valley remains the focal point of technology and entrepreneurship in the world, the U.S. matters.

Changing of the Tech Review Guard.

Yesterday, The Wall Street Journal announced Walt Mossberg’s replacements – relatively new names that probably will get paid a fraction of Mossberg’s current salary. I actually don’t think the WSJ will miss a beat with such a strategy, which may say more about Mossberg’s inflated salary than anything else.  Nevertheless, WSJ tech reviews still matter and companies will continue to treat them accordingly. The overall tech product review industry continues to morph and traditional sources for the “yea or nay” for a new product are now shifting to bloggers turned journalists where personal trust outshines all else.   As seen with Apple’s latest products, tech specs don’t matter as much these days and this trend will only intensify as fashion bleeds into personal technology.

Other Random Musings.  

  1. It is now easier than ever to grab a few of your journalist friends and start a new company focused on delivering news.  Oh, and charge people a lot of money to read what you have to say.  I imagine this trend will only intensify as it is becoming clear that 1-5 person shops are finding a particular niche in online journalism. Some personal bloggers are pulling in more than $500,000 a year, which traditional media companies will have a hard time matching (or even justifying), while start-ups with minimal expenses require only a modest subscription base to break-even. Of course, aggregators will continue to do well in this world as well where expense growth via headcount is one differentiator versus the small shops.  Slideshows put food on the table. One has to start worrying about information overload though, right?  Hopefully?  Yeah, I know, wishful thinking.
  2. A wildcard for 2014 includes Apple’s new retail chief, Angela Ahrendts, which some have already labeled as Apple’s next CEO.  My response would be let’s wait to see how she fits within the Apple culture, then we can start talking. Regardless, Apple retail needs some urgent help, so Angela will be busy.
  3. The tech IPO window is wide open and many signs point to 2014 being another good year.  Housing continues to stabilize and contrary to the perma-bears, I think the housing industry will be fine from here on out.  The theme of rising interest rates (due to a stronger economy) makes sense to me as well.  While I won’t comment on which companies will see an IPO in the coming quarters, I would focus on the quality of these IPOs as one would assume quality will decline as we move past the economic recovery years of 2010-2013.
  4. Angry Birds (and paid iOS app?) fever is over. It was fun while it lasted. I would be interested to see if Rovio can find another “Angry Birds”, although I remain skeptical. In addition, the overall paid app boom appears to be dead (was there ever a boom?). While there will still be winners going forward, companies solely focused on selling apps for money face dwindling prospects of success. App development, as part of a bigger strategy, seems to have a much brighter future. 

Predictions for 2014.

  • Pundits will say Apple made numerous mistakes, either in terms of product pricing, marketing, or strategy.  The new iPhone will also be classified as marking the end of Apple’s popularity.
  • VCs will continue to pass off personal marketing blogs as independent sources of knowledge and wisdom.
  • Pundits will say Facebook is dead.
  • Mobile messaging app fever will continue.
  • Humans will continue to be inundated with useless information and inconsequential data points. 

Here's My Platform. Vote for Me.

The first half of 2013 felt weird.  Even though plenty of phones and tablets were sold, as well as several laptops, the excitement level seemed less inflated compared to last year.  Consumers are content with their gadgets and remain busy uploading personal information to a dozen or so social and messaging networks.  Nevertheless, there were some stories in the first half of 2013 primed for riveting Twitter debates. To sum up my stance on these issues, I came up with an easy to remember platform, akin to a politician. I am pro-iWatch, pro-expensive cheap iPhone, anti-Glass, and pro-Schiller.

Pro-iWatch.  Wearable gadgets interest me and I think there is something there.  Back in February, former Apple designer Bruce Tognazzini began what turned into a multi-month parade of chatter related to Apple developing its own smartwatch. I still think Bruce’s piece is the best words on the device and I have a feeling that a few years from now most of his post will have become reality. My conspiracy theory is that Bruce was frustrated with iWatch progress and released some of the work Apple had already done as a bribe to get Apple to finally decide to give the project the green light. In reality, Apple probably has been working on a gadget for the wrist for years (yes, that would make it a Steve project) and there was enough chatter floating around for Bruce to collect into a post. 

I suspect Apple did give the iWatch a green light as seen by numerous talent acquisitions and other signs including industry and management chatter. I think consensus is unsurprisingly naive, if not downright clueless, when it comes to thinking of how an iWatch would look and function. People need to stop picturing a classic watch when rethinking the watch.  I am not a fan of today’s smartwatch as the genre fails to answer many questions that the 21st century has placed on the classic watch; primarily purpose and functionality. The current smartwatch market isn’t seeing massive adoption and the industry lacks a cash-rich leader. Samsung and other giants are quickly rushing to market with their own smartwatch, but I am not optimistic that much will come from these early efforts. Instead, I would look more towards Nike’s Fuelband for signs of reinventing the watch. Add in device independency and fashion conscientiousness, and we start to peel the skin to iWatch’s core. 

Pro-Expensive Cheap iPhone. Apple continued to show healthy iPhone sales last quarter with 20% unit growth. Average selling price (ASP) fell as consumers continued to buy the discounted iPhone 4 and iPhone 4S. It seems fairly certain that Apple will release two new iPhone models next month; a “5S”, or the latest iteration to the iPhone 5, and a less expensive iPhone (think iPhone 5 only with a plastic casing and I suspect lacking the ability to support iOS 7 features exclusive to the iPhone 5S). Price points remain a controversial topic, boiling down to two schools of thought; the cheap iPhone will be priced closer to $200 in order to gain traction in emerging markets where phone subsidies don’t exist versus priced closer to $399-$499 as Apple continues to gradually move downmarket, attempting to create demand in the $399-$499 no-man’s land of new phone pricing.  Even though Apple may be able to manufacture a phone for $200 and still make an “ok” profit, I suspect Apple’s larger strategy is to make sure that all profit layers are captured as the iPhone moves downmarket. If the strategy backfires, Apple can discount the one-year old iPhone 5C for $299 next year and give it another try.

I also think a new $399-$499 iPhone fits well within a possible pro-forma iPhone lineup of iPhone 5S for $650, iPhone 5C in various colors for $450, and iPhone 4S for $350. Such a line-up could be sold across the world, including subsidy land. While a $450 “cheap” iPhone does not address the army of Android phones selling for $99, I wonder if that target is something Apple needs to even shoot for in the near-term. 

Anti-Glass. I summed up my Google Glass angst in a prior AAPL Orchard post, largely questioning the product on poor industrial design. Having a product on my face, during both usage and non-usage, strikes me as terribly inefficient and ineffective, not to mention obtrusive. Regardless of design, I also suspect the widespread popularity of contact lenses represent a strong case that glasses aren’t exactly a desirable body modifier. Sure, Google Glass represents something new, but new is not the same as good. Many pundits are hedging bets with assertions that Google Glass may find its niche audience. In retrospective, such a statement can be said about any new product as long as the company making that product remains committed to funding the project. Instead, I think Google Glass will largely be ignored once wrist devices flood the market.  

Pro-Schiller. This is the pro-freedom part of my platform, the idea that probably isn’t too controversial yet often goes unnoticed. I consider Apple SVP of Marketing, Phil Schiller, as the embodiment of Apple’s culture. Yes, Jony is Apple’s soul, but Schiller represents the hard work that occurs at Apple HQ, along with the fun, jokes, and general love for the journey taken. Any quick YouTube search would reveal plenty of clips showing wacky Schiller during Apple keynotes. Earlier this year, Schiller made headlines for pumping a bit of Apple PR before Samsung’s keynote unveiling the latest version of its flagship phone. In retrospective, Schiller didn’t need to say anything as Samsung relied on racist and sexist undertones to unveil a phone that didn’t live up to Apple-like expectations.  Looking ahead, Schiller’s input on product pricing placement and marketing will continue to take the spotlight. 

AAPL 1Q13 Preview; Near-Term Volatility Continuing

Revenue: $53.1 billion (AAPL guidance: $52.0 billion/Consensus: $54.5 billion) 

  • I expect Apple’s revenue to increase 23% year-over-year after adjusting for the 14 weeks in 1Q12.

GM: 37.9% (AAPL guidance: 36.0%/Consensus: 38.4%)

  • Apple’s margin is expected to decline sequentially from 4Q12 primarily due to the wide range of updated products. Margin remains a key near-term unknown for AAPL. Management’s 36% margin guidance is 870 basis points less than the 44.7% margin reported in 1Q12, making EPS growth difficult to achieve. I still include expanding margins throughout 2013.  Further weakness, or a shallower rebound, may result in an additional EPS growth headwind.

EPS: $12.75 (AAPL guidance: $11.75/Consensus: $13.33) 

  • I expect Apple to report a 1% yoy EPS decline, when adjusting for 1Q12. While my $12.75 estimate is less than the Street’s $13.33 average, I attribute much of the variance to my lower gross margin expectation.

Product Unit Sales and Commentary

Macs: 5.2 million (flat yoy growth)

  • Mac growth continues to slow as tablets and smartphones satisfy many consumers’ computing needs. I expect 10% growth in portables driven by holiday shopping to be mostly offset by nearly a 30% decline in desktop sales due to the new iMac release schedule.

iPad: 22.4 million (56% yoy growth - when adjusted for 1Q12)

  • I expect Apple to report record iPad sales for 1Q13. My iPad estimate assumes approximately 8-10 million iPad minis and 12-13 million iPad 2 and fourth generation units. The iPad mini went on sale November 2 with an aggressive rollout, despite significant pent-up demand and limited supply. Apple was able to sell three million iPads in the three days following the iPad mini and fourth generation iPad launch. My estimate assumes approximately 25-35% cannibalization of the larger iPad models (1 out of 3 consumers willing to buy a larger iPad purchased an iPad mini instead). Going forward, I expect iPad mini sales to approach, if not exceed, those of the larger iPad models. 

iPod: 12.0 million (16% yoy decline)

iPhone: 47.8 million (39% yoy growth)

  • Apple made significant progress in reaching supply/demand balance for iPhone 5 in the U.S. and other launch countries. My quarterly estimate is largely based on AT&T’s recent comments on October and November smartphone sales (and additional extrapolation). Historical averages for AT&T’s share of global iPhones (and assuming a slighter higher mix of international sales) would imply 40-50 million iPhone sales, which I would consider the high probability estimate range.  I then assume channel fill of at least 1 million units, which positions my estimate in the narrower 46-48 million estimate range. 

Apple has missed Wall Street consensus EPS for the past two quarters, and unless estimates come down in the following weeks, a third miss isn’t out of the question. While it is hard to point to any one factor as driving a fundamental change in Apple’s operating performance, Apple’s prior two quarters have contained a few concerning metrics, including contracting margins and declining iPad and iPhone growth.  Did the weak global economy finally catch up to Apple? Were product release cycles continuing to wreck havoc with consumer demand? 

The bear argument would label Apple’s two-year stretch from 2010-2011 as an outlier, when two new products (iPhone and iPad) produced a perfect storm for EPS explosion.  Going forward, bears would argue margins will decline further, effectively limiting EPS growth. Future products would then lack the size to move the EPS needle. 

The bull argument would focus on iPhone and iPad as product leaders in its respective industries, while a temporary margin drop is indicative of product updates and not a fundamental change in the operating landscape. Apple’s future product plans would also occupy a spot in the conversation. 

Will 1Q13 represent an AAPL inflection point? I don’t think one quarter is capable of shedding enough light to figure out where Apple stands in its long, storied history. With iPhone now entering its 6th year (iPod recently celebrated its 11th birthday), the days of 100% revenue growth may be over for the product line, but should that statement even be considered controversial? There is also evidence suggesting Apple may be looking to smooth out demand cycles by updating products more frequently, a move that may bring long-term benefits, but at short-term costs.    

While much of the recent AAPL discussion has been focused on slowing growth and falling margins, it is easy to overlook fundamentals that would be considered very strong for any Apple competitor:

  • A smartphone pulling in $80 billion of revenue annually and growing at least 30%.
  • A tablet pulling in $30 billion of revenue annually and growing at least 45%.

A few AAPL loyalists have recently declared another “bad” Apple quarter (where bad is judged merely by EPS) will signal a new Apple, an Apple not deserving of their attention and instead lumped in with the rest of the tech crowd.  I disagree. One quarter, especially in the midst of an obvious change in business performance (product updates and management reshuffling), is not enough to conclude the long-term Apple story has changed. If an investor wanted to run away from Apple for near-term volatility, that decision could have been made a few months ago. Continued margin volatility may produce a scenario where EPS growth can accelerate throughout the year and 2014, even with slowing product sales growth. 

AAPL’s next 3-5 years will depend on management’s ability to introduce new product categories into an ecosystem that values a set of beliefs, including two that I tried to put into words following my first days with an iPad:

That technology is too powerful of a force to enjoy without acquired perception and natural intelligence.

That product design has the power to momentarily satisfy the never-ending search for order and reason.