Strategy Behind Retailers Discounting Apple Watch and iPad

One noticeable trend evolving over the past few weeks in the U.S. has been significant sales on Apple products at some of the country's largest brick and mortar retailers. Best Buy and Target have offered sales on Apple products in the past, but this year feels different. While some have looked at these promotions as signs of waning Apple product demand and a directive by Apple to push excess supply through the distribution channel, the reality is much different. Retailers are positioning Apple Watch and iPad as the top gifts of the year, betting discounts for those two products will drive foot traffic into stores and page views to online stores. The end goal for retailers offering Apple Watch and iPad discounts is to generate the needed buzz and revenue to better compete with one of the best performing retailers: Amazon.

Retailers Are Having a Difficult Year

Traditional brick and mortar retailers have now been embroiled in a tough fight against online retailers for years. The sheer competitiveness found throughout the retail segment is now turning traditional retailers against each other. The single-most important development for the retail landscape has been the smartphone and the exploding phenomenon of "showrooming." Consumers, armed with their smartphones, and in some cases tablets, head out to malls and shopping centers with the goal of trying on or testing products only to then use their smartphones to compare prices across various stores. This process often occurs right in the store and has become quite noticeable in data trends released by mobile app analytics companies. Showrooming is especially common for electronics and other big-ticket items available at a number of different retailers.

To make this year especially difficult for many U.S. retailers, weather patterns have led to unseasonably warm conditions through mid-December, especially in the U.S. Northeast. As a result, apparel sales, traditionally a key component of fourth quarter sales, have been hit hard. When looking at year-to-date sales trends, it quickly becomes clear that 2015 has been a difficult year for most traditional retailers. When comparing their revenue growth trends to those of Amazon, the mediocre results quickly stand out. 

U.S. Retailer Revenue Growth (year-to-date) 

Note: Reflects only U.S./North American revenues where applicable.

New Retail Strategies and Tactics

Traditional retailers have begun to adapt to the new normal. Best Buy has embraced a number of new strategies to compete against Amazon and other e-commerce retailers. Phrases like "price matching" have become engrained in many consumers' minds. Instead of fighting against showrooming, price matching is all about brick and mortar retailers placing foot traffic and online page views above increased margins and profits. Instead of losing a sale to a different retailer online, retailers are willing to lose a bit of profit in order to keep that customer. 

The best retailers have gone even further and begun to turn their physical stores into something more than just a location for showrooming. Best Buy has doubled down on the concept of stores within stores, including 500 mini Apple stores. In addition, customer service, like the Geek Squad, has been positioned as a much bigger reason to venture to a Best Buy store. The long-term strategy behind such a plan would be to make up lost margin related to price matching with high margin service items such as extended warranties and repair jobs.

Niche retailers, like outdoor lifestyle retailers Cabela's and Pro Bass Shop, have been able to turn brick and mortar stores into a type of attraction or amusement where families can literally spend the day. Despite all of these various strategies, all retailers share the same goal: occupying customers' attention and dollars. This is where doorbuster sales and various other high-profile sales on Apple products enter the conversation as such sales are meant to grab buzz and interest. 

December Retail Observations

A few trends become apparent when looking at these recent Apple product sales at brick and mortar retailers. 

Apple Watch is positioned as tech gift of the year. Looking at the tech landscape and the best- selling new devices in recent months, 2015 has been the year of the wrist wearables. Accordingly, Fitbit and Apple are the two leaders of the very young market, taking a 82% adjusted market share. However, for retailers craving buzz, store traffic, and a revenue boost, Fitbit just does not compare with Apple Watch. Not only were Fitbit wearables available in 2014, but they cost approximately a third to a fourth the price of an Apple Watch. In addition, Fitbit does not offer much exclusivity as the devices are available in many retail locations. Meanwhile, this is the first holiday gifting season for Apple Watch, with the product remaining quite exclusive in terms of retailer availability (Best Buy, Target, Walmart, and mobile carriers). The end result is retailers positioning Apple Watch as tech gift of the year. 

Best Buy's Apple Watch sale includes $100 off all models, including both Sport and Watch collections. Meanwhile, Target's Apple Watch Sale includes $100 Target gift cards with the purchase of any Apple Watch.

While Apple Watch remains polarizing within tech circles, the general population has shown to be much more receptive to the product, preferring its simplicity and ability to perform a few tasks, including receiving notifications. If going strictly by Apple Watch reviews on Best Buy's website, shown below, people think very highly of Apple's newest product category. 

iPad is still one of the top tech sellers.  Even though the iPad has suffered from slowing sales momentum in recent years, the device is still a very good seller in absolute terms, especially during the holiday season. In addition, the distribution dynamic seen with the product ends up giving brick and mortar retailers an outsized share of sales compared to products like the iPhone sold at mobile carriers. The end result is the iPad makes one of the most popular gifts, especially for children and teens. It is in retailers best interest to have sales on iPads to appeal to customers and drive traffic into stores. 

Best Buy's iPad sale includes $100 or $125 off all models, except for iPad Pro. Meanwhile, Target's iPad sale includes $50 or $80 Target gift cards with the purchase of select iPad models.

No sales uniformity. Even though more than one retailer is having sizable discounts on Apple Watch and iPad, each retailer has slightly different promotions. Other retailers, like Walmart, don't have any Apple product sales. This tells me that these promotions are not necessarily directed by a third-party, but rather settled upon by each individual retailer.  

What about other tech products? Other than Apple Watch and iPad, there are very few tech products that will sell in the same ballpark in terms of quantity and revenue. The only exception would be Fitbit, which unveiled a very extensive marketing campaign for its range of wearables with the company expecting to sell upwards of eight millions device this current quarter. While Microsoft was able to generate some much needed buzz with the Surface line of tablets, sales are still quite a bit lower than iPad-like revenues. Meanwhile, Amazon Kindles lack the growth and excitment of previous years.   

The Strategy Behind Big Apple Sales

Best Buy and Target are discounting Apple Watches and iPads because they are confident those two products will be able to garner interest and buzz to generate increased foot traffic and page views. Only 2% of Target's sales originate from its website, with Best Buy seeing a bit larger percentage (10%). Accordingly, It is conceivable that these Apple product sales will drive traffic to stores. Given the competitive trends, being able to get a consumer to a store is becoming more difficult and expensive. Once in a store, Target can then do its job and sell additional product. It is a version of the milk and bread strategy where grocers place the milk and bread in the back corner of the store in order to get you to walk through all of the other aisles and items.  

Retailers have long relied on this strategy to boost revenues, but it has taken on greater importance in recent years as competition intensifies. Electronics retailing in the hundreds of dollars represent the keystone of this strategy, especially in the November and December timeframe as people are willing to spend hundreds of dollars buying gifts for loved ones in addition to splurging on gifts for themselves. 

Apple's Involvement with Sales

Similar to any consumer goods company, Apple has working relationships with its third-party retail partners. Unfortunately, when it comes to analysis, these relationships are cast in mystery as the details surrounding contracts are confidential. In addition, the information found in these contracts is often not known by many people and is rather bland, limiting the odds of leaks reaching the press since there is little interest in such details. Traditionally, companies compensate third-party retailers for selling their product by offering lower wholesale prices with a varying degree of built-in margin available to the retailer. This margin is dependent on a number of factors, including the amount of power each party holds in the relationship. Walmart, for example, is well known for its ruthlessness when it comes to its suppliers, demanding low prices in return for significant purchase orders. There are also stipulations where companies can dictate how low a retailer can sell a product for with various incentives in place to have retailers follow such clauses. 

When it comes to Apple's direct involvement with these Apple Watch and iPad sales at Best Buy and Target, the most likely scenario is that Apple is aware of and has signed off on such sales although much of the financial impact is carried by the third-party retailer. Why does Apple allow massive discounts on its products? Temporary discounts during peak shopping seasons of the year have little to no long-term negative consequences on branding. In fact, by embracing third-party sales while maintaining its own "no discount" policy at Apple Retail, Apple is further able to maintain its brand image. If Apple was providing significant kickbacks or compensation to these third-party retailers, such trends would appear in financial trends through the average selling price (ASP). This explains why Fitbit's ASP is well below the actual retail sales prices of its products. Fitbit provides retailers much better margins than compared to Apple. 

Financial Implications

From Apple's perspective, what may end up being the most valuable long-term financial takeaway from these Apple product sales is increased brand relevance for Apple Watch. Apple has sold seven million Apple Watches to date, and I currently estimate Apple will sell another five million Apple Watches during the current quarter. This would suggest that Target and Best Buy have the potential to move upwards of one million Apple Watches this quarter, or $400-$500 million of Apple Watch revenue. This is not a trivial amount for Target and Best Buy and would certainly help offset weakness in other areas such as winter apparel. A very successful holiday quarter will help cap off a successful launch calendar year for Apple Watch with unit sales nearing 11 million. The product category would be well positioned for Apple Watch 2 in the first half of 2016.

For iPad, the iPad mini experiences strong sales each fourth quarter followed by a steady and dramatic drop-off in sales in subsequent quarters. I estimate Apple selling 17 million iPads during the current quarter which means Target and Best Buy could sell up to three or four million iPads, or another $1.3 to $1.7 billion dollars. Combining Apple Watch and iPad sales, these Best Buy and Target sales are likely worth at least $1.5 billion of revenue. When considering the additional product sales resulting from customers visiting stores in search of these Apple products, Best Buy and Target will likely bring in more than $2 billion of revenue this quarter related to Apple promotions. In the competitive retail landscape, discounting Apple products ends up being a worthwhile bet. 

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The Grand Unified Theory of Apple Products

There is much debate and intrigue regarding how Apple's expanding product line fits together. The addition of an entirely new product category with Apple Watch and new models such as iPad Pro have led some to wonder if Apple is losing focus or is unsure as to where the technology puck is headed. However, in a somewhat unpublicized interview for the new iMacs this past October, Phil Schiller, Apple SVP of Marketing, described a new theory for Apple's product line, which I am calling "The Grand Unified Theory of Apple Products."  This theory provides a glimpse into how Apple looks at the world and more importantly, some clues as to where Apple product categories are likely headed over the next few years. 

Product Line Expansion

One theme that has come to represent the Tim Cook era is product line expansion. Over the past four years, Apple has doubled its product lineup from 12 distinct models to more than 24, including a new product category. On a SKU basis, the growth is even more noticeable when taking into account additional finish options and various iPhone models geared toward specific mobile carriers. The ability to not just ship hundreds of millions of iOS devices each year, but to do so while offering so many SKUs, says a lot about Apple's supply chain prowess.

Much of this product expansion has come in the form of additional models reaching lower price ranges. Apple followed a similar method with the iPod in the early and mid-2000s. The difference now is we are seeing this occur with multiple product categories at the same time. Apple's expanded product line has contributed to total revenues more than doubling to $234 billion in FY2015 from $108 billion in FY2011.

Explaining Apple's Product Line

One question that has been raised by Apple's continued product expansion is how do all of these products fit together to produce one cohesive platform and encourage a broader ecosystem? The lines between product categories have become somewhat blurry. Upon closer examination, Apple's methodology of explaining its product line has matured over the years from talking about the iPad and a product's unique role to including the Apple Watch on a single product spectrum where personal choice is required to decide which products to buy. 

Unique Roles. When Apple announced the iPad in 2010, there was much attention and resources dedicated to explaining why a multi-touch tablet with a 9.7-inch screen should exist in a world with 3.5-inch screen iPhones and 13-inch MacBooks. The implied message was that the iPad would fit in most consumers' lives as it was a device that could do a list of things better than both an iPhone and a Mac. The iPad was given a very specific role to play. The now infamous slide Steve Jobs used to introduce the iPad (included below) is considered one of Apple's best marketing slides. It includes iPhone on one side, Mac on the other, and space in the middle with a list of various activities that can be done better by a new type of device.

The intriguing aspect of the slide was that it was geared toward consumers more so than analysts and technology pundits. Apple made it very clear as to why someone should buy an iPad. Judging from the early sales success, Apple's clear messaging worked. However, the broader implication from this marketing was that each Apple product had a particular role to play in our lives. Since Apple sold a handful of products, it wasn't much of a stretch for a consumer to buy every product category as each had its own unique role. Fast forward five years, and the product dynamic has changed to such a degree that the iPad seems like a redundant device to many people. The space between an iPhone and Mac continues to shrink, and iPad sales are declining. Apple's previous strategy of selling the idea that there was room in our lives for every Apple product category was beginning to come undone. Apple needed a new way of explaining its product line. 

A Spectrum. At the Apple Watch introduction keynote, Apple changed its tune when explaining its product line. Instead of positioning product categories in such a way that each product played a specific role in our lives, Apple began moving down the path of consumers picking and choosing the devices that made the most sense for them. The now classic, "product profile" slide made its debut (pictured below).  All of Apple's primary products fit on one spectrum. 

The message behind the slide was simple: each distinct product category possesses a different ratio of personal technology and power. The smaller the device, the more personal the technology. Meanwhile, the large iMac is positioned as the ultimate computing machine. The best choice as to what to buy or use is dependent on the individual. All of a sudden, Apple had a way to explain iPad's declining sales momentum (cannibalization by other Apple products), while also planting the seed that not every one will want an Apple Watch in the near-term. Instead, it's all about personal preference. It seemed that Apple under Tim Cook was moving towards a company tasked with selling a range of computing devices to allow the average consumer to choose what makes the most sense for him or her. 

While this message may seem to answer most lingering questions regarding Apple's product strategy, it still contains a number of drawbacks and questions. From a customer viewpoint, there is still confusion as to how all of these products come together. Look no further than the tricky iPad versus Mac debate. In addition, the descriptions used for each device concerning powerful technology on our wrist, in our pocket, or in hand are still somewhat vague and open to interpretation. From an analyst viewpoint, Apple's desire to look at its products on a spectrum has resulted in a rather wide range of opinions, including many pessimistic views on Apple's broader product strategy.

The Grand Unified Theory of Apple Products

This past October, Phil Schiller, in a rare interview with Steven Levy, talked about the new iMac. He took the opportunity to discuss a new way of thinking about the Apple product line, and I found it to be most revealing from a strategic perspective. Instead of describing how each product has a new unique role in our lives or simply placing Apple's entire product category on the same spectrum with an Apple Watch on one end and an iMac on the other, Schiller gave each product a job: make consumers feel like they don't need a larger, more powerful, Apple device in their lives. 

Schiller's theory is best viewed by taking his comments to Steven Levy and breaking them out by product category.

• Apple Watch: "The job of the watch is to do more and more things on your wrist so that you don't need to pick up your phone as often." 
• iPhone: "The job of the phone is to do more and more things such that maybe you don't need your iPad, and it should be always trying and striving to do that."
• iPad: "The job of the iPad should be to be so powerful and capable that you never need a notebook. Like, Why do I need a notebook? I can add a keyboard! I can do all these things!"
• MacBook: "The job of the notebook is to make it so you never need a desktop, right? It's been doing this for a decade. So that leaves the poor desktop at the end of the line, What's its job?..."
• iMac: "It's job is to challenge what we think a computer can do and do things that no computer has ever done before, be more and more powerful and capable so that we need a desktop because of its capabilities. Because if all it's doing is competing with the notebook and being thinner and lighter, then it doesn't need to be."

The first thing to notice about Schiller's new product theory is that it is actually a series of goals that also serve a dual purpose: help describe the product. What is the Apple Watch? It is a device that is supposed to handle a growing number of tasks once given to your iPhone. What is the iPhone? It is a device that is supposed to handle a growing number of tasks once given to your iPad. The argument can be made that all of this is just theory and that reality is not exactly keeping up with this vision, but that is exactly why it is called "The Grand Unified Theory of Apple Products." Upon closer examination, there is quite a bit of evidence to suggest that this theory actually does a good job of describing Apple's product line. In fact, Schiller's message provides the clearest clue yet as to how Apple management views its product lineup, even more so than the previous product theories put forth with the iPad and Apple Watch introductions. 

There are three major takeaways from Schiller's new product theory:  

1) The Apple Watch is a classic Apple bet. The very fundamental underpinning to Schiller's new product theory is that Apple Watch holds the most potential for making technology more personal. When looking at Apple's strategy over the years, the one overarching theme that transcends everything is the desire to make technology more personal, removing the barriers and allowing consumers to develop new and engaging relationships with technology. I continue to think the Apple Watch is being underestimated as elevated expectations for the product were reset over the past few months. The mistake many people continue to make when thinking of Apple Watch is looking at it as an inadequate iPhone replacement. Instead, Schiller's comments about Apple Watch denote a subtle distinction - the Apple Watch's role is to handle a growing number of tasks formerly given to the iPhone. For now, those tasks may be just simple notifications and things like checking time, but similar to how Apple handles product development, the Watch will soon handle more in the way of finance, health, identity, and communication. In many ways, the Apple Watch is setting up a classic Apple bet that a simpler device will eventually be able to handle many of the tasks currently given to larger and more powerful devices.

2) Greater iPhone differentiation is coming. While the recent debate has been stuck on whether the iPad can replace PCs, the real discussion that we should be having is how iPhones are replacing PCs. The iPhone is nothing more a smaller iPad. Of course, that subtle distinction ends up being the difference between a product selling 50 million units a year and 250 million units a year. The iPhone's form factor gives it the secret to success: mobility. Similar to how computing needs vary with the Mac and iPad, this same variability will come to the device being positioned to replace them. The writing is on the wall: expect the iPhone line to see greater diversification with a Plus model standing out from other models. So far, that diversification has primarily taken the form of screen size, but over time I would expect new ways for the Plus model to stand out from its iPhone siblings. 

3) Don't expect an iPad/Mac hybrid. Apple will not follow Microsoft down the iPad/Mac hybrid path. While it is easy to focus on the iPhone and Apple Watch as the future, it is crucial to note the role the Mac plays in Schiller's product theory. The Mac is the device that pushes everything forward. It may sound extreme, but Apple looks at a future Apple Watch as one day being just as useful as a current iMac. However, that goal is only possible if the iMac continues to receive the attention and resources to see what is possible at the upper limits of personal computing. A iPad/Mac hybrid would run against this trend as such a device is an explicit acknowledgement that the Mac is flawed as a product category. Instead, there is still much that can be done to push the Mac forward. 

A Roadmap, Not Destination

Schiller's grand product theory serves as a roadmap for where Apple wants to bring its current product line over the next few years, but it is important to not think of it as a destination. In a few years, the work from Apple's Project Titan will represent a new direction for Apple. While an electric car may not seem to fit in with a portfolio of watches, smartphones, tablets, laptops, and desktops, it is important to not get caught up by form factors but instead to look at what all of these products have in common: creating a experience. The simple fact that a device is used on a desk, held in hand, worn on the wrist, or sat in, doesn't change Apple's fundamental goal: make technology more personal.

For us to even be in a position to say that a 5-inch piece of glass held in our hand can replace a MacBook or iMac should help show that personal technology is about taking complicated tasks and breaking them down into more granular tasks, which are then able to be accomplished by smaller and simpler devices. This process will continue until we find ourselves in a position to begin looking up from our Apple Watches and iPhone screens but still feel connected to the world. The connected room era will have officially begun and Apple thinks those connected rooms will have four wheels. 

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Listen to this week's Above Avalon podcast episode (Episode 44: The Grand Unified Theory of Apple Products) for more information on this topic: Above Avalon, Overcast, iTunes.

Peak iPad Mini

The iPad mini's best days are behind it. Using app analytics data from Fiksu and Mixpanel, along with my own iOS device sales estimates and projections, I was able to derive iPad mini sales since launch. Over the past two years, iPad mini sales trends have deteriorated much faster than most people think. When taking into account the move to larger iPhones and iPads, the iPad mini's value proposition has likely been weakened to such a degree that the decline in sales is permanent. We have experienced "Peak iPad mini." More importantly, by analyzing the iPad mini's sales trends, we have better insight as to where the iPhone and iPad product lines are headed and the iOS platform's overall direction when it comes to form factors. 

iPad Mini Has Fallen Out of Favor

Conventional wisdom would suggest that the iPad mini has been the better performing iPad line due to its low price and feature set. In reality, the iPad mini has seen much weaker sales trends compared to its larger 9.7-inch screen sibling. As shown in Exhibit 1, when looking at iPad mini sales on a trailing twelve month (TTM) basis, the device's multi-year sales decline becomes quite obvious. Apple would need to sell close to double the number of iPad minis sold over the last 12 months to set a new sales record, a feat that is looking very unlikely. 

Exhibit 1: iPad Mini Unit Sales (TTM)

While everyone is aware of the iPad's sales troubles, one surprising observation is that most of the iPad's sales decline can be attributed to the iPad mini line. As seen in Exhibit 2, the 7.9-inch screen form factor has seen a dramatic 50% drop in sales on a TTM basis over the past two years while the 9.7-inch iPad line has seen much more resilient sales. This trend seems counterintuitive but provides a very strong clue as to how consumers are thinking about the iPad. When taking into account this granular iPad sales data, Apple management likely had a much easier time deciding to launch the larger iPad Pro. The trend towards larger iPads has already been years in the making.  

Exhibit 2: iPad Unit Sales by Screen Size (TTM)

What Happened?

There has been a polarizing debate as to what happened to iPad sales. Some have blamed slowing sales on longer life cycles while others have pointed to iPhone cannibalization or a combination of the two. The latest theory is that iPad software issues and a flawed App Store are to blame. When considering that the smaller iPad mini is becoming less popular than the larger models, many of those reasons fall by the wayside.

In reality, the iPad was a victim of its own success. The combination of a very popular iPad 2 (decent weight, okay screen, and good battery) and the launch of a smaller iPad mini (with a low price) led to a boom in sales that resulted in iPad sales growth peaking only three months after the iPad mini went on sale.

In retrospect, the iPad mini served as a great precursor to the phenomenon known as larger screen iPhones. There was likely significant demand for an iOS device larger than the current iPhone at the time (iPhone 5's 4-inch screen) but a bit less bulky than the 9.7-inch screen iPad. Soon, all of these reasons began to be wiped away with new, larger iPhones and thinner iPads. While the iPad mini's low price meant the device was the more popular iPad for gifting around the holidays, which is likely still true today, the need for an iPad mini was increasingly being met by the iPhone and larger iPads. 

iPad Mini's Declining Value Proposition

A slowdown in iPad mini sales is not enough to lead to the conclusion that the product line will see a permanent reduction in sales. The Mac serves as great example of this as the product seemed to have seen peak sales, only to come roaring back in subsequent quarters. Instead, the Peak iPad mini theory is predicated on the idea that the device's position in the market has fundamentally changed, leading to a weaker value proposition and corresponding cut in sales. One example of this type of value destruction is found with iPod and how the smartphone led to less demand for dedicated music players. Peak iPod occurred in 2008, a year after the iPhone was released. 

The very significant move towards larger screen iPhones has altered the iPad mini's ultimate sales trajectory. As shown in Exhibit 3, when the iPad mini was first introduced in 2012, the world was predominately using 3.5-inch screen iPhones. Meanwhile, the Android phablet movement was only just beginning to take off.  Over the course of the next two years, iPhone sales trended towards bigger screens. Today, a vast majority of iPhones sold include a 4.7-inch or 5.5-inch screen. These larger devices are increasingly serving as better consumption devices, taking away a key value proposition previously held by the iPad mini. 

Exhibit 3: iPhone Sales Breakdown by Screen Size

Meanwhile, on the other end of the spectrum, the iPad Air's resilient sales (as shown in Exhibit 2) suggest that an increasing number of consumers are looking to use an iPad as a laptop and desktop replacement. Accordingly, the iPad mini's smaller screen is not preferred as the reduction in screen real estate leads to a less useful product for media consumption, web surfing, and other basic computing tasks. 

Some have said that the iPad is being squeezed between the iPhone and Mac. In reality, the iPad mini is being squeezed between larger iPhones and the iPad Air and iPad Pro. 

iPad Mini's Price Advantage is Overrated

The iPad mini was launched in 2012 as a defense against Android OEM competitors potentially underpricing the iPad and risking a repeat of the Windows vs. Mac battle. In reality, the iPad mini is still too expensive to compete with pure media consumption devices running Android, but there is no evidence such devices pose a threat to iOS. Many now point to price as the iPad mini's secret weapon that should not be underestimated. In reality, this strength is likely overrated. At $399, a new iPad mini is only $100 less than a new iPad Air and the same price as a year-old iPad Air. This pricing dynamic likely explains why the iPad mini sales have declined more than sales of the more expensive iPad Air models. 

Meanwhile, the year old iPad mini is still $70 more than the entry-level iPod touch, which is the lowest cost entry point for the iOS ecosystem. While some may look at the iPad mini as holding a better future than the iPod touch, that isn't exactly saying much considering the iPod touch's lackluster sales. 

iOS Sales Spectrum

The iPad mini's declining sales provides clues as to iOS form factor trends. Instead of looking at the iPhone and iPad as separate product categories, I like to think of them as existing on the same iOS spectrum but occupying different screen size segments. The fact that iPhone and iPad rely on the same mobile operating system makes this view reasonable. In Exhibit 4, iOS sales according to screen size are depicted for 2013 and 2015. 

Exhibit 4: iOS Sales Spectrum (2013 vs. 2015)

In the span of two years, screen size preferences have shifted to larger screens (reflected by the blue line in Exhibit 4 shifting to the right in 2015). Notice the iOS screen sizes that saw the largest sales declines between 2013 and 2015: 3.5-inch iPhone, 4-inch iPhone, and 7.9-inch iPad. A better way to see this trend is to picture the lines in Exhibit 4 as waves, depicted in Exhibit 5. Note two differences: The new sales peaks (in blue) are now found with 4.7-inch iPhones and 9.7-inch iPads while the amplitude of the wave at 4.7-inch iPhones is increasing. Over time, it is conceivable that the wave in blue continues to shift to the right with a higher iPhone crest. 

Exhibit 5:  iOS Sales Spectrum (2013 and 2015)

A few takeaways:

1) Consumers are increasingly allowing iPhones to play a greater role in their lives. Consequentially, purchasing habits are trending to larger screen iPhones. Apple will likely look to the 5.5-inch iPhone form factor as positioned well for potential sales growth, not to mention increased revenue and profit share. There is room for Apple to slim the device's bezels, making the device easier to hold in one hand while maintaining the 5.5-inch screen. 

2) The iPad Pro is positioned well to see an increasing share of iPad sales as consumers position the device as a laptop and desktop replacement. While this replacement transition is not possible for everyone at this time, the definition of work is changing and for many consumers typing is becoming one of the last barriers to switching completely to iPad. 

3) The 7.9-inch iPad from factor is caught in the middle.  It is too big to be put in a pocket or held in one hand but too small to replace a laptop or desktop. 

iPad Mini Is a Fading Star

Apple is still selling too many iPad minis for the product to be mothballed. However, the more likely path will be a slow yet steady slide into irrelevancy. The product will see more sporadic refreshes, which has already happened with the iPad line, while the value proposition continues to become less compelling. Holiday quarters will represent iPad mini's best sales times, and it will possibly even outsell the iPad Air during certain months, but the elephant in the room will keep a lid on iPad mini's upside. Ultimately, the iPhone is the single biggest threat to both the iPad mini and the broader iPad category as Apple pushes forward in differentiating the iPhone Plus line. Such a device holds the best chance of being the most popular and useful iOS form factor. From Apple's perspective, having the iPad mini be cannibalized by an iOS device with a higher profit margin may actually turn out to be a long-term positive from a financial and strategic perspective.   

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Making the Case Against an Apple Television Set

The Apple TV and iPhone were both formally introduced to the world on January 9th, 2007. One went on to sell over 700 million units and is now responsible for an active installed base of approximately 500 million users. The other was classified as a hobby and went on to sell "only" 20 million units. In 2014, Apple reportedly shelved the idea of selling its own television set. Given renewed focus around the launch of a new Apple TV platform, have the odds of Apple having second thoughts about selling its own branded television set gone up? No. Upon closer examination, there are very few reasons to justify an Apple-branded television set. In fact, a very strong case revolving around the television's ultimate value in a mobile world can be made demonstrating why an Apple television will not receive the green light to market.

The Long Journey to Today

The technology industry has struggled for the past decade in trying to define TV's future. Countless attempts to make TVs "smart" never caught on. The problem wasn't that companies weren't thinking outside the box, but rather that they were overthinking it. The future wasn't going to be found by turning our television into a desktop computer with an accompanying keyboard. Instead, TV's future became visible only after recognizing that a television is inherently a consumption device in need of content and an easy user interface. 

The new Apple TV is a product that has literally been years in the making, dating back to Apple's sneak preview of the "iTV" project in late 2006. Over the years, as the iPhone and iPad gained momentum and priority within Apple, Apple TV and the entire television category was negated to a long-term opportunity. While early Apple TVs were okay for consuming iTunes content, the value proposition to the average consumer just wasn't too appealing. We knew television was going to change and had a general framework as to what was needed to make that change happen, but we weren't sure when that change would unfold. All the while, speculation grew that Apple would unveil its own branded television set with a built-in Apple TV box.

Enter Netflix, Hulu and HBO Now. With a growing number of new content companies gaining strength and giving the consumer revamped content bundles that went up and beyond what we were used to with traditional broadcast and cable programming, the future started to come into focus. Meanwhile, instead of pushing forward with its own television, Apple reportedly canned the project to instead focus on taking lessons learned from iPhone and iPad in terms of how voice and touch could create a user interface that works with large screens positioned a few feet in front of us.  

The New Apple TV

There are two key elements to the new Apple TV that make the product stand out from previous reiterations: a new voice-based interface and an App Store.

New Voice-Based Interface. I had one "wow" moment while interacting with the new Apple TV for the first time: using Siri to navigate my television. Relying on Siri to search for movies or TV shows, and in the process being able to avoid the tedious task of using text to search, demonstrates that voice is an attractive way to navigate a large screen positioned a few feet away. I found voice so compelling that not being able to use Siri to search for videos within YouTube quickly led me to avoid using the YouTube app on Apple TV altogether. I simply had no desire to search by manually typing each letter one at a time using finger swiping on the Siri remote. While at first it sounded like a gimmick, using Siri to check the weather, stock prices, or sports scores was quite compelling even though I could have gotten the same information on my iPhone or Apple Watch. The ability to simply press a button and talk casually was riveting. I found the error rate with Siri on the new Apple TV to be low with the only hiccups resulting from asking questions that will likely be supported in future versions.

App Store. This past May at a conference in Germany, Netflix CEO Reed Hastings declared the future of TV would revolve around apps. A few months later, Apple threw its support beyond the app model as well. After using the new Apple TV for a few minutes, it's clear Netflix and Apple are correct in getting behind the app model. Apple TV's primary purpose is to consume content. Without third party apps like Netflix, HBO, or Hulu (and active subscriptions), Apple TV's value proposition would decline dramatically. 

An app's value is rather straightforward when it comes to consuming content on a television. Instead of one company pushing the same content to all viewers, an app makes it possible to have a very tailored and personal viewing experience, even within the same household. An app also makes it possible to search a wide variety of content depending on our current interests and mood. 

When Apple introduced Apple TV this past September in San Francisco, much of the press focused on the device's App Store and how gaming will be revolutionized. An App Store for Apple TV was craved by core Apple users ever since 2008 when Apple launched the iOS App Store. While apps are likely the future of television, I remain a bit more contained in my enthusiasm for many of the apps currently being paraded around. While there may be a loyal group of users that will be attracted to gaming on Apple TV, I am skeptical gaming will be able to move beyond its niche focus. Instead, apps that are focused on helping the user consume content in a more personal way have an incredible amount of potential. 

Saying No to an Apple-Branded Television

This past May, the WSJ reported that Apple had shelved its television plans in early 2014. While the exact details may forever be kept to a select few, Apple simply was not able to make the case for why an Apple-branded television deserved the green light. The WSJ article gave hope to long-time Apple television proponents by saying that the television project was never officially killed. Apple will have a hard time justifying selling its own television due to two reasons: TVs are impersonal devices meant purely for consumption, and the television's future in a mobile world is up in the air. 

An Impersonal Consumption Device. While some may look at the new Apple TV as a device capable of turning our television into an iPhone, in reality the device's features reinforce the fact that television is inherently used for consumption. Such a scenario makes it extremely difficult for Apple to position a television screen as being able to produce the kind of premium experience users have come to know from Apple. Everything from the new voice user interface to the App Store is built to make it easy to find and consume content while sitting a few feet away from a large piece of glass. While Apple has previously sold devices like the iPod for consumption, the iPod contained a certain level of personal connection to the user - through how it was meant to be carried, touched, and even worn. We see that these personal ingredients are needed to produce premium experiences with Apple Watch, iPhone, iPad, and the Mac. The end result is that consumers are willing to value and appreciate such premium experiences. A television's inherently impersonal and immobile nature gives Apple less opportunities to make an Apple-branded television stand out from alternatives. If Apple positioned a television to be used for more than just consumption by adding cameras or sensors, the problem would be that we don't live in a vacuum and will likely have even more capable devices in the form of smartphones and tablets nearby that could handle such tasks. 

Television's Questionable Future. Apple TV may very well represent television's future, but in an increasingly mobile world, the television screen will likely play a declining role, regardless of 4K or future technological trends. As a prime example of how a large television screen will likely remain a consumption screen with consumers, after using the new Apple TV with my television for a few minutes, I found myself increasingly looking down and interacting with my iPhone. I don't think this was by mistake. While I may be entertained for a few minutes by a few apps on Apple TV, its purpose is to display long-form content that I am not interested in viewing on my mobile devices. Over time, this dynamic may change as we rely even more on our iPhones and iPads to watch content. For a company that is willing to make very few big bets every few years, putting resources into a product like a television set with a future that is inherently opposite to themes found with mobile seems counterproductive for Apple. Meanwhile, content born out of mobile like short video clips found on Vine, Instagram, and YouTube feel off when viewed on a large TV screen. Instead, being able to consume such videos on our smartphones makes much more sense. Meanwhile, new products like the iPad Pro are designed with content consumption in mind with a superior speaker system and large screen. The end result is more people will consume video content on an iPad Pro as time goes on while momentum remains on the side of mobile.

Looking Beyond Dollars and Cents

Notice the lack of "revenue," "profit," or "margin" in the preceding paragraphs for why it doesn't make sense for Apple to sell its own branded television. This wasn't by accident, but rather those financial metrics are simply byproducts of Apple being able to sell a premium experience. Apple doesn't sell a product simply because it meets certain financial criteria. Instead, management evaluates if it can improve a product to the point where it possesses certain characteristics that lead to a premium experience. Metrics such as TV life cycles, low margins, or the fact that Apple would likely only be able to sell one unit to a household simply don't play a role in the fundamental case against an Apple television set. 

Apple TV's Role

Instead of simply controlling the large piece of glass in our living room, Apple TV's more valuable role is to further position Apple as a content distributor. When looking specifically at video content, Apple's interest in creating a slimmed down bundle of broadcast and cable programming can help the company provide a full assortment of video content to its users. This range of video content would then be able to be viewed on the hundreds of millions of personal Apple devices being sold each year including iPhones, iPads, and Macs. In a way, the Apple TV is Apple's trojan horse to gain power in the quest to become an improved content distributor. This characteristic is much more interesting from an experience-building perspective than compared to the idea of selling a large piece of Apple glass. Apple was right to shelve plans to build its own Apple television. 

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Decoding Apple's North San Jose Land Mystery

Apple has big plans for north San Jose. In the past few months, Apple has spent more than $300 million quietly purchasing or leasing land close to San Jose International Airport and only 11 miles away from Apple Campus 2. When adding up the possible square footage of office space that can be built on this land, Apple would be able to erect another "Apple Campus 2." At initial glance, there are three likely scenarios that can explain Apple's motivation buying land in north San Jose. However, after looking closer at Apple's employee and office space growth as well as the company's product development strategy and pipeline, the most likely scenario is that Apple is building an R&D center for Project Titan, specifically a prototyping and testing facility for a range of automobile products.  

The Property Transactions

After a few months of rumors within Silicon Valley commercial real estate circles, Apple's play for north San Jose began to take shape this past July when reports came out that the company signed a lease for a 290,000 square foot office building close to San Jose International Airport. Over the following four months, Apple has reportedly had three additional transactions resulting in the company owning or leasing nearly 90 acres.

July, 9, 2015. Apple reportedly leases a 290,000 square foot building from Ellis Partners at 2325 Orchard Parkway. The building is able to support 1,450 employees with 12 adjacent acres approved for 665,000 square feet of additional office space. The proximity of this building and open land to San Jose international airport (bottom left corner) can be seen below.

Apple's initial land transaction in north San Jose.

August 3, 2015. Apple purchases 43-acres of open land for $138 million from Lowe Enterprises at 2347 North First St. The 2.8M square feet that is approved for the land could support up to 14,000 employees. As shown below, the 43-acre plot of land is touching land Apple had been leasing from Ellis Partners.

Apple's second land transaction in north San Jose. 

September 25, 2015. Apple buys a building previously leased from Ellis Partners, along with 12 adjacent acres of open land, for $166 million. Apple now owns enough land to support approximately 3.8 million square feet of potential office space. 

Apple's third land transaction in north San Jose. 

October 22, 2015. Apple leases a 202,000 square foot building at 2509 Orchard Parkway from Steelwave. The land is adjacent, as shown below, to previously purchased land from Ellis Partners and Lowe Enterprises. Apple now owns enough land to support approximately 4.3 million square feet of potential office space. 

Apple's fourth land transaction in north San Jose. 

Three Possible Explanations for Apple's Land Purchases

When contemplating Apple's plans with these land transactions, three scenarios seem to rise to the top: stockpiling land for eventual use in the future, building additional office buildings for a growing employee base, and building a research and development facility for Project Titan and Apple's growing automobile ambitions. 

Stockpiling Land for the Future. This theory is mostly based around the fact that land in Silicon Valley is a hot commodity. With little to no leased office space remaining in Cupertino and Sunnyvale (one estimate pegged Apple as representing 40% of Cupertino's office jobs), this theory positions that Apple management is looking to buy land in order to have room for future growth. While Apple may not have immediate plans for the land, the optionality provided by owning land in an up-and-coming geographic area somewhat close to Cupertino would give management enough reason to begin "stockpiling" land.

Upon closer examination, there are a number of holes in this stockpiling land theory that lead me to believe Apple is not just simply buying land to hold on to it for some undetermined future use down the road. The first is that Apple has never shown the desire to buy land indiscriminately without having a specific purpose or function for the land. Apple's focus mantra does not fit with a strategy of just buying large swaths of land with no clear agenda in mind. When looking at prior Apple land transactions, everything has had a purpose or reason. Apple purchased the land that is now home to Apple Campus 2 from HP years before construction began. Management has since gone on record to say the land had been purchased with a new headquarters in mind. Across the U.S. and the world, Apple's land transactions (both purchased and leased) have been conducted with specific growth plans in mind and include various locations in California, Austin, Texas, data centers in various states, Ireland, and recent sustainable forest transactions in North Carolina and Maine, as well as renewable energy initiatives in China.

One can also question the viability of a strategy where a company is spending close to $300 million dollars on land (much of it open land) simply out of fear of not having enough space to grow in the future. It just doesn't add up. Similar to how the Apple Campus 2 land became available due to rough times at HP, it is unreasonable to assume additional land wouldn't eventually become available around the Valley during an economic downturn or simple evolution of technology. It doesn't seem likely that Apple is stockpiling land in north San Jose just in case it may need it in the future. Recent reports seem to validate this stance as Apple is already working toward a development agreement with city officials. Apple has something specific in mind for this land.

Additional Office Buildings for Employees. The next plausible theory is that Apple needs additional office space for a growing employee base. This essentially represents the safe answer as to what Apple may be doing in north San Jose, and it is the one often paraded around in the press. Apple discloses its total employee count in 10-K filings each year. However, additional work is needed to break down this number into Retail Segment employees, temporary or part-time workers, and full-time non-Retail employees. Upon closer examination, I estimate Apple has approximately 60,000 full-time non-Retail employees across the world. As seen in the exhibit below, this employee count has grown significantly in the past five years and, assuming 10-15% growth each year over the next few years, it will not be long before Apple crosses 100,000 non-Retail full-time employees. It would then seem logical that Apple is looking to buy land to house all of these additional employees. 

However, a few things about this theory don't quite sit right with me. The first is that Apple is building a brand new headquarters (Apple Campus 2) with the stated goal of having most of its employees located in one large building in order to foster collaboration. Apple management has been very vocal with this reasoning, even taking journalists to tour the construction site to highlight the building's unique layout. Apple is taking pride in what they are building at Apple Campus 2. 

In order to gain perspective on how much land Apple now has in north San Jose, Apple Campus 2 will have 3.4 million square feet of office space compared to the 4.3 million square feet of potential office space in north San Jose.  I'm doubtful Apple is looking to build a sprawling campus that is larger than Apple Campus 2. The much bigger reason that I'm skeptical is that building an even bigger campus away from headquarters just doesn't fit with Apple's long-standing narrative as to how it views its functional organizational structure. 

Additional doubts that Apple is planning on building another large Apple Campus in north San Jose are raised when looking at some of the details around Apple's employee base. Apple Campus 2 will be able to house 14,200 employees. While large, the building is not large enough to house the roughly 20,000 Apple employees that work in the Cupertino/Sunnyvale area. Accordingly, Apple will continue to use its current headquarters at 1 Infinite Loop (home to 3,000 employees) and surrounding buildings. Run the math and once Apple Campus 2 is finished, Apple would actually be able to consolidate buildings. Why would management spend hundreds of millions of dollars to buy enough land in north San Jose to be able to build another Apple campus for nearly 20,000 employees when Apple Campus 2 has been the multi-year focus and cornerstone of the company's infrastructure development? I suspect the reason is that Apple isn't actually planning on building 4.3 million square feet of office buildings for 20,000 employees in north San Jose. Instead, Apple has a different type of structure in mind for the land. 

Research Facility for Project Titan. What if instead of building another large office building in north San Jose, Apple is looking to build a research facility?  What if this facility is actually a giant R&D complex in order to work on automobiles prototypes and conduct regulatory and safety testing? All of the evidence seems to point to such a thing. 

While we have no confirmation from Apple that they plan on building an electric car, there are enough clues to have a very high level of certainty that Apple is actively working on a self-driving electric car. Everything from a litany of recent automobile-related hires to Apple's interest in self-driving car testing facilities, a recent ramp in R&D spending, and overall automobile industry trends, not to mention accurate reporting from WSJ and at a handful of other publications, point to Apple planning something big with personal transport. 

Recent rumors peg Apple's Project Titan as being housed in leased office space in Sunnyvale, California, closer to Apple HQ. Apple has reportedly leased additional space in Sunnyvale to accommodate Project Titan employee growth. While this location might be a suitable place for employees to work, it is unlikely there is enough room to conduct a full range of electric car testing, including researching manufacturing techniques. 

Even though I suspect Apple is looking to build a Project Titan facility in north San Jose, I have doubts that this location will become the official Apple Car factory. As seen in the map below, there are currently two plots of land (shaded in red) that Apple has still not purchased or leased in north San Jose that are adjacent to Apple's recent land acquisitions. One is open space and the other has three buildings located on it. Even If Apple were to buy these two pieces of land, Apple's total ownership would measure approximately 140 acres. While this plot of land is indeed massive, it's quite small for it to be the location where an "Apple Car" would be manufactured at any level of scale. The lack of nearby rail also raises doubts that this location will become the primary location for manufacturing cars as rail is a cost effective way to transport finished product, not to mention receive raw material. Instead, this site's acreage would be more suitable for R&D purposes, a fact that even Apple has gone on record to discuss when questioned over these recent land purchases. 

Apple's previously acquired/leased land (green) and property currently not owned by Apple (red).

It is difficult to discuss electric automobile testing and assembly in Silicon Valley without mentioning Tesla's Fremont Factory (shown below), the former Toyota car factory located only 20 minutes away from north San Jose. Coming in at 340 acres (nearly four times the size of Apple's current north San Jose land holdings), the Fremont factory is overwhelming. Most of Tesla's assembly occurs on only roughly 120 acres of the site. However, it is important to remember that Tesla is only producing 50,000 vehicles a year, a far cry from the millions produced by the automobile industry's giants. One takeaway from the Fremont Factory is that building electric cars involves much more than just one big building. Instead, the ancillary buildings needed for handling incoming raw materials, producing components, assembly, and parking lots for finished product and transport infrastructure (like railroads), all point to these factories resembling cities rather than just factories. Looking at Apple's north San Jose land holdings, it's tough to see a similar operation like the Fremont Factory being built unless Apple plans on buying out dozens of additional buildings and hundreds of acres of land, something that doesn't seem too realistic or logical when looking at a map of the surrounding area. 

The Tesla Factory in Fremont, California 

Additional evidence suggesting Apple would need much more space to actually manufacture an Apple Car in north San Jose can be found with BMW. The company's i-series electric cars, along with other models, are produced in a factory that measures 23 million square feet. As a reminder, Apple's acquired land holdings in north San Jose amount to 4 million square feet of possible space. 

The clearest answer for what Apple has in mind for north San Jose likely rests with Apple's product philosophy and strategy. Apple will likely rely on the same manufacturing process undertaken with most of its products, including the iPhone. Instead of actually building its own car in its own factories, Apple would look to contract manufacturers to build components and conduct the actual assembly. The important point about this strategy is that Apple would still need to conduct vehicle prototyping and research in order to figure out what should or shouldn't be included in an Apple Car. Testing facilities for Apple Car would likely require a hundred acres by itself. The scale required for car development cannot be stressed.

Elon Musk is right when he said two months ago in an interview with a German newspaper that Apple can't just go to Foxconn and say, "build me a car." Look at how the iPhone became a reality. Apple didn't just go to Foxconn saying, "build us a phone." Instead, Apple needed to figure out how to put together an iPhone and come up with new machinery and processes along the way. Only after that R&D phase had been conducted, did Apple executives head to China and work with Foxconn on learning and replicating the process. As Tony Fadell recalled about iPhone development, building the first iPhone was the easy part. The much harder part was being able to produce millions of iPhones. While early stage iPhone prototyping was done at Apple HQ, in addition to testing (recall Apple's iPhone antenna labs), the actual assembly occurred in China.

When looking at north San Jose, Apple could turn its recently purchased land into an Apple Car R&D campus complete with a giant testing facility and several smaller office buildings supporting more clerical aspects of testing and more nuanced design R&D efforts. 

Future Clues in North San Jose

Apple is reportedly fast-tracking its north San Jose development plans, having submitted preliminary plans with San Jose officials. If Apple were looking to build an Apple Car R&D facility, I would expect pretty quick progress towards construction to be made in the coming months. The speed at which Apple acquired the land may be a sign of Apple's urgency. The WSJ had previously said Apple is targeting a 2019 "ship" date for an electric car. While the exact definition of a ship date is up for a debate, it's clear that Apple won't likely sit on this land for too long without much action if an Apple Car R&D facility is the ultimate goal.  

I would expect Apple to remain as tight-lipped and secretive as possible in regards to these land purchases and subsequent construction activities. While we will undoubtedly be able to track the project's physical development (via drone), Apple could end up building one large, relatively generic structure with most details hidden from the public. Management would also be able to conveniently use CarPlay or other generic R&D initiatives as reasons for the facility.

Main Takeaway: Apple Is Making Progress With Project Titan

When news first broke that Apple was thinking about designing its own electric car, many company observers were doubters. The thought of a company that had spent years building computers that can fit in a pocket all of a sudden building an automobile was just too much for many to believe. Apple would need to acquire such a significant amount of talent, in addition to constructing new R&D labs, all the while figuring out who would even build the product. However, over the past nine months, we are seeing Apple make progress toward addressing these exact concerns and doubts. Apple has been hiring the people needed for a car, and these land purchases in north San Jose would be the first tangible sign of Apple building the infrastructure for electric car testing and research. If we zoom out and look at the big picture, Apple is moving incredibly fast with its electric car plans. Apple has likely been able to work on much of the internal components of an Apple Car, including the passenger compartment. More granular work involving the battery, electric drive train, and autonomous driving software is also likely to be conducted in relatively traditional office space/commercial real estate. We are likely approaching the next stage requiring much more space and infrastructure. While 2019 seems like still a long time out, it is in fact a very aggressive timeline to develop an electric car considering that iPhone and Apple Watch were developed in 2-3 years.

Apple's $304 million of land purchases in north San Jose hint at something much larger than simple office buildings, yet not quite large enough for a sprawling electric car manufacturing facility. Instead, a R&D complex for prototyping and testing various personal transport initiatives is the leading candidate. 

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