Week in Review; Most Popular Daily Email Links

I look back at the most popular links found in the AAPL Orchard daily email this past week. To receive this daily email containing Apple-related links and analysis, please subscribe here.

Most Popular Links of the Week:

1) Apple SVP of Design Jony Ive's talk at Design Museum in London. The talk focused on the issues with the way designers are educated and the lack of focus on making physical products. I thought Jony's comment on “careless” products from other companies and designers was pretty interesting: "If you expect me to buy something where all I can sense is carelessness, actually I think that is personally offensive...It's offensive culturally, because it shows a disregard for our fellow human."  Jony spoke for an hour and covered a range of topics. Dezeen took splendid notes. If you are interested in Apple or design, I recommend finding 10 minutes today and taking a read. - Dezeen

2) Apple Has a New Product: $300 Wireless Beats Headphones. They actually look pretty nice. It makes it even more amazing how Apple was able to turn generic white EarPods that came free with iPods and iPhones (and cost a few bucks to make) into such a powerful marketing tool up until a few years ago. - MacRumors

In a follow-up post, it seems like initial reviews are positive. - MacRumors  

Related: My four main takeaways from Beats' new $300 headphones. - Above Avalon

3) Apple's $3 Billion Bet on Reinventing the Music Industry. I had been mulling Apple and music for a number of weeks and over the past few days the increasing number of music-related news items actually makes my piece quite timely. There’s a lot to think about in the post, and I add more perspective and color on the subject in the upcoming Above Avalon podcast which will be published in the coming days. I think all music will eventually be free, but the music industry first needs its own “App Store” moment where a software platform can reset how the music industry makes money and Beats can be that platform. Similar to software post-App Store launch, music creation, distribution, and monetization can be revolutionized by a new platform where there are minimal barriers between fans and content creators. - Above Avalon

Reminders:

Podcast. The first episode of the Above Avalon podcast was published earlier this week containing introductions and comments about Apple Pay. Each week I will focus on one Apple-related topic. Listen and subscribe (for iTunes and Overcast) here. A new episode will be published in the coming days. 

Four Interesting Things About Apple's New $300 Beats Headphones

Event: Beats announces new $299 Solo2 Wireless on-ear headphones. 

1) These headphones are the same price as an iPad mini 2.  Higher-end Beats headphones go for $399; the price of iPad mini 3. The iPad mini will likely go down as having the lowest margins out of any mainstream Apple product in recent years (closer to 25-30% vs. iPhone's 55-60%). I would venture a guess that these Beats headphones probably have margins closer to iPhone (if not exceeding) and that is before taking into account any savings from Apple buying the company. 

2) Beats is using color as a price differentiator. Red, black, white, and blue costs $299, while Stone Grey, Hunter Green, Imperial Violet, Blush Rose, and Sapphire Blue costs $199. Reminds me a little bit of iPhone 5c.  Interestingly, the red is only available at Verizon (I assume some prior business partnership?) Edit: Looks like the five additional colors is actually for the wired Solo2. Color still being used as differentiator but for different models. 

3) I estimate Apple will sell around 2-3M Beats headphones in 2015. A high estimate would be around 4M. With an average selling price of around $285, Apple may bring in $600-800M of annual revenue, or 10% of Apple's old "accessory" revenue which is not a big line item when compared to overall revenue. These headphones will not move any financial needle for Apple. Instead these devices are all about brand positioning and mindshare (getting people to see them and talking about them). 

4) Looking at $299 headphones makes it that much more amazing to think how Apple was able to turn generic white EarPods that came free with iPods and iPhones into such a powerful marketing tool up to a few years ago. 

Bonus: I expect to see more interesting things come from the wireless on-ear/in-ear headphone space. 

Yale Researcher Inadvertently Helps Market the Apple Watch

Event: A Yale grad student thinks he is the first to prove causality between iPhone usage and an increase in injuries to young children due to distracted parenting.  

Craig Palsson looked at the way the iPhone 3G was launched exclusive to AT&T, tying the subsequent 3G roll-out in the U.S. to nearby hospital data. He found that injuries to children under five increased 10% from 2005 to 2012 while there was no discernible increase for older children.  The full report can be found here.  Palsson theorizes that parents are more distracted since they can do more work around the house on their iPhone resulting in lower parental supervision. 

I don't view the iPhone, or any smartphone for that matter, as the most efficient device for consuming information.  If I'm not actively interacting with the device, swiping left and right or tapping various buttons, then the device isn't providing much data and information. I am also forced to jump through hoops just to get the same small bits of information throughout the day such as a stock ticker, email, or location marker. 

Enter: Apple Watch. 

Apple Watch will excel at displaying cursory information on a display that is always in line-of-sight. How would you know when to briefly look down at your wrist? Taptic Engine (produces haptic feedback).  We can take it even further and the Taptic Engine may remove the need to actually look at the device. Your significant other can let you know they are on their way home by three quick taps. By streamlining the way we consume data using new sensory signals, the Apple Watch will not only usher in the era of personalized technology but also a new form of personal communication.

Less time focused on our gadgets and more time viewing the world around us. 

 

Apple's Mac Resilience in a Mobile World

A curious thing happened to Apple last quarter: Seven years after launching the iPhone and four years after launching the iPad, Apple reported the best sales quarter ever for Mac. The belief that Apple would never sell as many Macs as it did during the first quarter of 2012 (known as “Peak Mac”) was busted.  Tim Cook and Apple are as bullish as ever on Mac. I don’t think it’s a stretch to theorize that Mac’s resilience is born from the phones and tablets that many assumed would make the Mac irrelevant. As mobile devices continue to invade our culture, the Mac may find an attractive computing niche thanks to its special use cases and design.

Mac vs. Mobile Devices

Tim Cook spoke highly about the Mac a couple of weeks ago at WSJD, summing it up with “people love big screens”. It is that stark contrast to mobile devices that benefits the Mac as consumers have an easier time differentiating the uses cases between a Mac and mobile device.  After the iPad was launched, consensus quickly settled on the iPad cannibalizing the Mac.  Running with Apple’s stereotypical “cannibalization is good as long as one of our products is to blame” and a cursory glance at Apple’s 2013 quarterly results, which showed declining Mac sales, was enough for many to cast the Mac aside. 

I even thought the “iPad will cannibalize the Mac” argument made sense as I owned an older 2008 Macbook, which was giving me a lot of trouble, and my new iPad 2 was occupying all of my attention. But as smartphone penetration grew, and more importantly, mobile device capability expanded, the Mac started to stand for something that a phone or tablet would never be able to bring to the table: a nice big screen. Compared to a 4.7-inch iPhone or an iPad, an 11-inch and 13-inch Macbook Air are more enjoyable to do various tasks and work, such as researching a topic or writing a report. A 27-inch iMac? Even better.  

Fast forward a few years and I knew I needed a new computer so I bought a new iMac instead of an iPad Air because I had to do more writing and wanted a bigger screen for watching video. My Mac just cannibalized an iPad sale. I must not be alone as Mac unit sales have begun to stabilize and grew 21% year-over-year last quarter, aided by recent price cuts to MacBook Pro. Looking ahead, recent product updates should help continue year-over-year growth trends through 2015, highlighted by the grey bars in the following chart.

Mac is the Steady Ship to Mobile's Ebb and Flow

The Mac may also be benefitting from the continued ebb and flow of mobile devices. Consumers are still trying to decide what size of glass to carry in their pockets and soon on wrists. For some the trend is larger, embracing the 5.5-inch smartphone, for others the 4.7 and 4.0-inch form factor is best. Similarly with tablets, the iPad mini seemed to be the darling of the iPad line in 2013, but now looks increasingly likely to be discontinued with the iPad Air 2 as the best-selling iPad.  All the while, the Mac’s large gorgeous screens have remained largely unchanged as its discovery phase occurred last decade. Consumers know what it's like using a Mac/PC. It's that comfort that can drive consistent upgrades through the years while our mobile devices continue to morph in order to find that perfect combination.  

Design and Innovation

Instead of winding down Mac R&D, Apple continues to give the lineup the required attention and resources needed for continued evolutionary and revolutionary updates. Apple’s 2014 Mac lineup speaks volumes with a new Mac Pro , Mac mini, and retina iMac, along with solid updates to the rest of the Mac lineup. Has the Mac line ever been stronger? 

Source: Apple

Source: Apple

Compared to other research budgets in Cupertino, the Mac simply doesn’t compare, but that’s not the point and instead a better comparison would be Mac’s R&D spend today to that from a few years ago. I would wager there hasn’t been much of a reduction.  In some ways, Mac’s design is the number one reason that people choose a Mac over PC. While a larger screen and dedicated keyboard may be what gets a customer interested in Mac, the design often is what leads to the purchase button being pressed. Competitors realize this and miraculously their designs have begun to mirror that of Mac. 

Mac’s Growing Niche and the Future

The Mac has found its niche. Apple will likely sell 200M+ iPhones, 60M+ iPads, and 20M Macs over the next four quarters. Twenty million units is not bad for a product that was supposed to be made irrelevant by mobile. Going forward, there are a few larger themes that will help when thinking about Mac.

  1. Apple will continue to work on lowering Mac prices, especially at the low-end of the lineup.
  2. The Mac’s differentiated software from iOS will be a selling point.
  3. Apple will continue to innovate with Mac where it matters (productivity and design).

I suspect there will be a few wildcards thrown into the mix, possibly as early as next year.  An iPad Pro, which I discussed in more detail a few weeks ago in my "Thoughts on iPad" post, may be unveiled (think iPad Air but with a 12.9-inch display and possibly new software features and accessories).  Such a device would represent Apple’s response to softening iPad sales in the face of larger smartphones and Mac's resiliency. Looking further out I wouldn’t be surprised if Apple tracks how a larger iPad sells in comparison to the Mac line and then uses that information to decide if it is time to rethink both the Mac and iPad lines and if there is some kind of new device that would take the best features of iPad and Mac while not adding new friction points. In addition, Chromebooks in education deserve to be mentioned but at this point I still see Chromebooks more as a threat to Windows machines than the Mac. Many school districts like Chromebooks because of their low costs, placing them in a different target market than the Mac.

As Steve Jobs said, “If you do something and it turns out pretty good, then you should go do something else wonderful, not dwell on it for too long. Just figure out what's next." For Apple, the Mac has been great and I’m sure they are busy on making it even better. 



U.S. and China Reach Trade Deal Reducing Tariffs on Tech Products

In an effort to boost cooperation and the global economy, it will be hard to find enough negatives in this announcement to outweigh the positives. The WSJ has a very detailed breakdown of possible implications. In terms of Apple, I wouldn't expect a $100 price reduction across the Mac lineup next year due to this agreement, although there may very well be a $100 price reduction across the Mac lineup due to other reasons (economies of scale, improved engineering). The WSJ mentions the tariff reduction agreement may actually help prevent software piracy, impacting the iTunes store. This whole story got me thinking about Apple's experiment with the Mac Pro being manufactured in the U.S. I wonder how that has been trending. Surely Apple has been learning a lot from the endeavor.  

Two days ago someone asked me out of the blue, "Why doesn't Apple assemble iPhones in the U.S.?" I listed my laundry list of reasons.  At the end, this person said, "Oh please, that's nothing. It's Apple." I didn't have a response.  As global trade (and automation) become more efficient, my laundry list of reasons for why Apple doesn't assemble more things in the U.S. will shrink.