The Elephant in the Smartwatch Room

Apple is consolidating power within the smartwatch industry at an alarming rate. A growing number of competitors are exiting the space as the anticipation and promise found with wrist computing has materialized for only a select few. For the rest, smartwatches have been nothing but frustration and despair. The writing is on the wall. There isn't a smartwatch industry. Instead, there's only an Apple Watch industry.

The Beginning

Even though it feels like the smartwatch is a relatively new phenomenon, the idea of redefining utility on the wrist is more than five years old. Apple began to investigate a device for the wrist in 2011, just four years after launching the iPhone. The idea was simple: Create a device that pairs with a smartphone. This device would allow the user to spend more time enjoying his or her surroundings while staying informed of need to know data throughout the day.

As the project progressed within Apple, there were ongoing questions as to which parts of the smartphone experience would best qualify to be brought to the wrist. In some ways, this experiment is still ongoing five years later. Some of the earliest smartwatches tried to recreate the entire smartphone experience on the wrist, all the way down to recreating a screen of third-party apps. Others bet that smartwatches with more in the way of dedicated (i.e. limited) functionality would do better. In both cases, smartwatches were looked as a much needed growth opportunity that would partially offset the inevitable slowdown in smartphone sales. 

Industry Sales

When compared to smartphone and tablet sales, smartwatch sales are still having a difficult time showing up on a chart. Since the start of 2015, there have been approximately 35M smartwatches shipped, compared to 385M tablets and 2.9B smartphones. In 2015, for every smartwatch shipped, there were 12 tablets and 80 smartphones sold. In 2016, these ratios are expected to improve slightly. For every smartwatch shipped, 10 tablets and 78 smartphones will have been sold. People are buying smartwatches. The problem for the industry is that not many non-Apple Watch smartwatches are being sold. 

Exhibit 1: Smartwatch, Tablet, and Smartphone Unit Sales (2016E)

The Players

There have been only three legitimate players in the smartwatch industry.

1. Apple
2. Garmin 
3. Samsung

Combined, these three companies have represented 78 percent of smartwatch shipments over the past two years. Even more remarkable, no other company has come close to these three in terms of unit sales. Since the beginning of 2015, only seven companies have shipped more than 200,000 smartwatches in any given quarter. Out of those seven, one will soon be broken up in a fire sale (Pebble), another just announced it was getting out of smartwatches (Motorola), and two have shown little interest in releasing new smartwatches (Huawei and LG). This leaves Apple, Garmin, and Samsung. 

Even more astounding, the "Other" category, the usual industry catch basin for dozens of other companies, is on track to account for just 11 percent of smartwatch shipments in 2016. One group of companies found in the "Other" category are the original sellers of utility on the wrist - watchmakers. The Swiss watch industry continues to dabble with connected watches. However, one would be correct in questioning the motivation guiding some of these companies. TAG Heuer, apparently in an attempt to claim its position as one of the more successful Swiss watchmakers when it comes to smartwatches, announced it will sell just 75,000 connected watches in 2016. Those kinds of sales make the Swiss watch industry completely irrelevant in terms of the broader smartwatch market. 

Consolidating Power

As seen in Exhibit 2, Apple Watch has represented between 45 percent and 65 percent of quarterly smartwatch shipments since launching in 2Q15. Given Tim Cook's recent comments about Apple expecting record Apple Watch sales during 4Q16, Apple Watch is poised to capture an even greater share of industry sales. When considering that the iPod had around 70 percent marketshare in the MP3 market at its height, the Apple Watch is approaching iPod-like sales share within the smartwatch industry. It's clear: Apple Watch has consolidated power after just a few quarters of sales. 

Exhibit 2: Smartwatch Unit Sales Share

The primary question facing the smartwatch industry isn't why most companies have been unable to find sales success. The answer is simple: Most smartwatches haven't been appealing to consumers. Instead, the more intriguing question is found with Apple Watch's success. How has Apple been able to sell close to 20M Apple Watches to date? I suspect there are four reasons: 

1) Design. The Apple Watch is popular because people want to wear one on their wrist. Jony Ive and Marc Newson are on to something with Apple Watch design. In what isn't a coincidence, the best-selling smartwatch is a device that looks the least like a traditional watch. 

Even though the themes of fashion and luxury are no longer discussed as frequently with smartwatches, they remain critical ingredients for Apple Watch's sales success. Apple has positioned interchangeable watch bands as key fashion items for the Watch. In addition, Apple is redefining luxury with Hermès and Edition Watch pricing. 

2) Fun. The Apple Watch doesn't have one "killer" app. Instead, the device is a health and fitness tracker for some and a notification and messaging device for others. In both cases, consumers view the Watch as a fun iPhone accessory. The changes found in watchOS 3, including the greater focus on Watch faces, emphasizes the "fun" theme found with the Watch. 

3) iPhone. With more than 700M iPhone users out in the wild, the Apple Watch has benefited from being positioned as an iPhone accessory. This type of halo around the iPhone is not found with competing devices. Garmin's success has been limited to certain fitness circles. Meanwhile, Samsung has seen some smartwatch sales success by bundling watches with smartphone purchases. Outside of bundling, there is no evidence to suggest the same kind of halo around Galaxy smartphones exists. 

4) Price. In just 17 months, Apple cut Apple Watch's starting price from $349 to $269, a 23 percent reduction. When considering that the cost of a Watch Sport Band has remained steady, the starting price for an Apple Watch case has seen a 27 percent price reduction. In addition, retailers have run with steep discounts for Apple Watch during the holidays. This led to Apple Watch Series 1 going for $199 on Black Friday last month. In what shouldn't come as a surprise, Apple Watch sales have increased as prices have fallen. In addition, these price reductions have left little room for competing devices to breathe. In many cases, Apple Watch pricing is less than that of other smartwatches. 

New Developments

We are getting our first good look at the current state of the smartwatch market. There isn't much to see outside of Apple Watch land. This dynamic will likely lead to a few new developments in the wrist wearables space in the coming quarters.

1. The sales gap between smartwatches and fitness & health trackers will shrink.
2. Competition begins to emulate Apple Watch much more closely.

This past November, Fitbit released an alarming earnings report. The company hit a brick wall in terms of sales growth. Fitbit's issues provide a big clue that the market for dedicated health and fitness trackers will have trouble reaching mass market. The fact that Fitbit has already hit a wall in terms of sales growth, despite only selling 55M cumulative devices, suggests the wrist wearables future is much brighter for multi-purpose devices with a screen. This will pressure Fitbit to continue expanding its line and truly enter the smartwatch space. 

The company has been busy acquiring assets, including pools of talent such as Pebble's software engineer team, in an effort to fill obvious resource holes. However, it will be tough for Fitbit. To make matters worse, Apple's reconfigured marketing pitch for Apple Watch Series 2 is targeted squarely at Fitbit. Apple management saw how Fitbit was outselling Apple Watch, although at a much lower ASP, and wanted in on the action. 

As seen in Exhibit 3, the Apple Watch versus Fitbit battle may be nearing a new chapter. In 4Q15, Fitbit outsold Apple Watch by 3.5M units. Over the subsequent three quarters, Fitbit grew its lead. It appeared Fitbit was gaining momentum (discussed in greater detail in the article, "Apple Is Going After Fitbit."). However, taking Cook's recent comments about Apple Watch sales, and Fitbit's guidance, it appears that Apple Watch will cut into Fitbit's sales lead by 25 percent this holiday quarter. Fitbit is on track to outsell Apple Watch by only 2.6M units in 4Q16. 

Exhibit 3: Fitbit and Apple Watch Unit Sales

Meanwhile, on the smartwatch side of the equation, the more successful Apple Watch becomes, the higher the probability that competitors will begin to emulate Apple Watch. We should expect to see competing devices that look much more like Apple Watch in looks and functionality. The design language will increasingly move away from traditional timepieces and instead towards Apple Watch. The design language found with Apple Watch will eventually extend even to luxury watchmakers. 

Road Ahead

The smartwatch industry was born at an awkward time. A product designed to handle tasks given to smartphones launched when the average consumer was still only discovering the value found with smartphones. This has removed much of the oxygen from the smartwatch industry, and it appears that Apple is the only one with an oxygen mask. While Apple Watch sales confirm that wrist wearables are indeed a thing, there is still much unknown as to how far away from Apple this sales success will extend. It increasingly looks like Apple's game to lose. Apple is onto something with wearables, and the rest of Silicon Valley (and Wall Street) haven't yet come to terms with that reality. 

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Milking the iPhone

It feels like cracks are forming at Apple's edges. The company is straining to push out hardware updates. Supply issues are getting worse. Apple is reportedly moving away from selling beloved products like stand-alone displays and wireless routers. Meanwhile, Microsoft, Amazon, and Snap are gaining buzz with new niche hardware while Apple appears to be hanging back and resting on its laurels.

Something feels off with Apple, and the blame is increasingly pointed at Tim Cook. I suspect these feelings are a result of Cook betting now is the time to milk the iPhone. Apple is doubling down on the iPhone to build one of the world's most formidable tech ecosystems, and few are taking notice. 

The Strategy

One key mistake Apple made with the Mac during the early 1990s was to focus too much on profits and not market share. This led Apple to lose its connection with the consumer. Declining sales ensued, leading Apple to make a series of questionable decisions. Apple found itself with a complicated web of Mac models, each with different feature sets meant to chase a particular market niche.

Apple has been following a very different strategy with iPhone. The best way to see this strategy is to look at the changing iPhone line. In 2011, Apple was selling two premium-priced iPhone models, one of which was the previous year's flagship phone. Sales were approximately 70M units per year. Five years later, Apple has expanded the iPhone line to include five models, two of which are last year's flagship versions. Despite still having a very focused product line, iPhone sales have tripled to more than 210M units per year. 

Apple has been following a multi-year strategy of gradually lowering iPhone pricing in order to reach larger swaths of the smartphone user base. While such a strategy seems born out of a desire to boost sales and profits, management is motivated by something else. Apple has been working to make the iPhone accessible to more people. This is the exact opposite strategy that Apple used with the Mac in the early 1990s. New iPhone models, such as the iPhone SE, are not targeting market niches, but instead are meant to expand the iPhone's addressable market by hundreds of millions of users. 

One benefit of keeping the iPhone line lean has been consistently strong profit margins. While the $399 iPhone SE has a lower selling price than its larger siblings, the device's profit margin is similar to that of other iPhone models. By remaining focused on the product, as seen by the limited number of iPhone models, management has been able to maintain industry-leading profit margins. This has played a big part in allowing Apple to continue lowering prices to reach new customers. We are moving to the point when Apple will be able to sell a $299 iPhone, appeal to an entirely new part of the smartphone market, and still be able to maintain profit margins. 

Going After Users

As shown in Exhibit 2, Apple's strategy of focusing on the product has resulted in the iPhone installed base approaching 600M users at the end of September. This is a very different world than that of the Mac days of the early 1990s. When adding second-hand and used iPhones into the mix, there are more than 700M iPhones out in the wild. Much of this underlying iPhone strength has been masked by the preoccupation with slowing iPhone unit sales growth. The iPhone upgrade cycle has slowed, which is impacting the number of iPhones sold to existing iPhone users. However, sales to new users remain robust. 

Exhibit 2: iPhone Installed Base

In FY2015, more than 100M new customers entered the iPhone installed base. In FY2016, the number was even higher, marking a new record. There have been a few drivers for the steady rate of new users buying an iPhone in recent years. The gradual expansion of carrier agreements around the world has helped. In addition, lower-priced iPhones such as the $399 iPhone SE have made the iPhone more accessible.    

Building a Sandcastle

Milking the iPhone in order to build a formidable ecosystem has been one of Cook's defining moments as CEO. Unfortunately, consensus has not been grading Cook's performance as CEO along these terms. 

Instead, many have graded Cook as a product visionary. The problem with that is Cook is not Apple's product visionary. (That title unofficially belongs to Jony Ive). Cook's appointment as CEO was not predicated on his ability to one day become a product visionary. Accordingly, Cook should not be judged as such. In addition, some have compared Cook to former Microsoft CEO Steve Ballmer. This is incorrect. Cook is not Apple's top salesperson. He does not possess Ballmer's keen sense of how to push product into every enterprise crevice. Instead, Cook has delegated that task to others, primarily through partnerships. Accordingly, Cook should not be judged as a salesperson.  

Instead, Cook should be judged on his success in building out the Apple ecosystem. One way of visualizing this Apple ecosystem is to think of a sandcastle. The iPhone represents the highest tower in the castle while the iPad and Mac represent the much smaller outposts. Accessories like Apple Watch and Apple TV as well as services like iMessage and Apple Pay represent the high walls and moat meant to protect the castle against intruders.

Accordingly, Cook should be judged on his ability to build the sandcastle over the years. Since he became CEO in 2011: 

• The iPhone installed base has grown by 500M users. 
• The iPad installed base has grown by 175M users.
• The Mac installed base has grown by 50M users.
• Apple introduced Apple Watch, the company's first wearable product. Approximately 18M Apple Watches, a device positioned as an iPhone accessory, have been sold to date.
• Apple is earning more than $6B per year of revenue through app sales via the App Store.
• Apple successfully made the difficult jump from a paid music download model to streaming and is approaching 20M paying Apple Music subscribers. 
• Apple continues to push forward with Apple TV. The company is approaching 10M units sold since the device was updated in 2015.
• Apple continues to develop key services including Apple Pay, Messages, and Maps. 

(The math behind these figures and estimates are available for Above Avalon members. You can become a member here.) 

It quickly becomes clear that Cook has built a spectacular sandcastle. Apple has never had a stronger ecosystem. There are now more than one billion Apple devices in use and 800 million people own at least one Apple product. More remarkably, the average Apple user owns more than one Apple product. This is even more astounding when considering the competitive landscape.  

iPhone Focus

Apple is making a very bold statement that it is still time to double down on the iPhone. It would be an understatement to say that Apple stands out from its largest peers with that thinking. Look at some of the leading tech companies' primary advertising campaigns:  

• Apple: a smartphone (iPhone).
• Amazon: a voice assistant (Echo).
• Google: a voice assistant (Google Home).
• Microsoft: a touch-based laptop/tablet (Surface).

The companies lacking a smartphone offering are increasingly trying to get consumers to move on to the "next big thing." Amazon is pushing the idea of using a voice assistant and series of speakers to replace your smartphone. Google is doing the same with Google Home. (Pixel is actually a Google services play.) Microsoft is focused on trying to carve some kind of niche for itself by focusing on touch-based PCs. We can even add Snap to the mix and position Spectacles as early motivation for wanting to impact smartphone usage. 

Meanwhile, Apple is placing a big bet that we are still firmly in the smartphone era. In Apple's view, many of these competing products are distractions trying to get us to move prematurely beyond the smartphone. This stance has contributed to the view that Apple is missing a step and resting on its laurels. While Microsoft pushes Surface Book and Surface Studio and Snap unveils sunglasses with a camera, Apple is still betting on a smartphone, a product unveiled in 2007. 

Cracks at the Edges

This pursuit of milking the iPhone has contributed to cracks forming at Apple's edges. The friction is found when looking at Apple's efforts to build a wider ecosystem that extends beyond the iPhone. There is evidence that Apple management wants to follow a product strategy described in my "Apple Experience Era" article. Consumers can pick and choose a range of Apple products that best fit their lifestyles. This is why Apple is very vocal about continuing to invest in the Mac. In addition, Cook has reiterated his view that the iPad is the clearest expression of Apple's vision of the future of personal computing.

However, Apple's handling of the Mac line has been increasingly questionable. The same can be said of the iPad line. It will have taken Apple at least two years to unveil a line of "Pro" iPad models spanning from 7.9-inch screens to the 12.9-inch model. 

While some have been quick to throw Apple's functional organizational structure under the bus for causing these cracks, the organizational structure is not to blame. The issue doesn't relate to a lack of focus either. Apple still isn't selling that many products. Instead, these cracks are a result of today's changing tech environment. 

When looking at some of the key accomplishments during the Tim Cook era, the installed base growth figures for Apple's top products stand out. For every 100 users by which the iPhone installed base increases, the iPad installed base will grow by 35 users, and the Mac will increase by 10 users.

A vast majority of these new iPhone users will never own a Mac. As iPhones have become larger, odds have increased that these iPhone users may never own an iPad either. The iPhone has gained so much power in recent years that the iPad and Mac's long-term sales trajectory have faded. I suspect this reality explains why iPad updates are less frequent these days. The same can be said of the Mac. More frequent updates for iPad or Mac likely wouldn't increase sales.

Many have been quick to label the new MacBook Pro as flawed and not truly a "Pro" computer. In reality, Apple is focused more on redefining Pro's definition in addition to expanding the MacBook Pro's mass market appeal. This is why Apple is focused on bringing aspects of the iPhone to the Mac (multi-touch screen positioned above the keyboard, Touch ID). 

Risks

Apple faces a major risk in relying so much on the iPhone to build its ecosystem. While this may be heresy in Silicon Valley, ecosystems are not everything. There has never been an ecosystem strong enough to stand the test of time. The App Store is not invincible. At a certain point, Apple will need to be willing to put its iPhone ecosystem at risk. 

There are many signs that Apple management is keenly aware of this since Apple has had to risk its ecosystem multiple times over the past two decades. During the late 1990s and early 2000s, Apple spent years rebuilding the Mac ecosystem. Recall Apple's "Mac as the hub of your digital life" product strategy. The iPod was merely a Mac accessory at launch. However, Apple's decision to eventually bring iTunes to Windows changed the game. The move threatened the very same Mac ecosystem Apple had spent years building. Users would no longer need a Mac to use an iPod. Apple was willing to risk its current ecosystem in order to catch the next technology wave. 

However, instead of doom, the iPod became a household name and played a role in helping the iPhone get off the ground. Meanwhile, the Mac was no longer going to be the center of Apple, and more importantly, our lives. 

This raises an interesting question. Is it possible that Apple management is okay with the cracks that are forming at the edges? While the new MacBook Pro may infuriate loyal Mac users, a strong case can be made that management truly thinks such a product is the right one to ship in today's environment. To see why, notice how Apple is milking the iPhone: having the product appeal to a wider user base. Instead of chasing profits, Apple is following the same strategy with the new MacBook Pro. Apple has no interest in repeating mistakes from the early 1990s and selling product to the smallest of niches. 

Chasing Waves

Apple is confident we are still in the era where it makes sense to milk the iPhone. Consumers are giving even more tasks to their smartphones. This may continue for another two years, or maybe even five years. While Apple may be building a sandcastle around the iPhone today, the company will need to find the next big wave that may topple that very same sandcastle. The company is looking at two industries to pivot into: 

• Wearables. We are talking devices for the wrist (Apple Watch), ear (AirPods), body (clothing), and possibly even eyes. Apple's growing investment in health is a big clue as to Apple's intentions in this area. 
• Transportation. Apple would develop an array of personal transportation options in various geographies. With ridesharing and autonomous driving, someone will be in a position to rethink the car within the next 10 years. Apple has many of the ingredients in place to be that company. 

Neither industry is niche. Health is something that will appeal to pretty much every human. Wearables have the potential to have adoption curves similar to smartphones. Similarly, nearly every human has some need for moving form Point A to Point B. More importantly, transportation is the gateway to the grand prize: housing. When contemplating a smart home, there is nowhere better to start than developing smart rooms on wheels. 

In both cases, the ecosystem that Apple has spent the past nine years building with the iPhone will provide the company a head start. It is much easier selling Apple Watches into an ecosystem of 800 million users familiar with Apple products. However, Apple will need to eventually take a leap without knowing exactly where it will land. 

One question facing Apple today is whether opportunities are being passed over because of its iPhone dependency. A convincing argument can be made that Apple's early missteps with Apple Watch were due to the company looking at the device too much through an iPhone lens. What if Apple approached the Apple Watch as something other than an iPhone accessory? 

A Fundamental Theory

This brings us to one of my fundamental theories regarding Apple. For Apple to remain relevant in the future, the company will need to attack itself. Management will need to risk its own ecosystem.

When it comes to catching the next big wave, an Apple Watch with cellular connectivity may end up representing the single biggest game-changing device Apple has shipped since the original iPhone. It would be that big of a deal. The reason such a product contains so much risk for Apple is that it threatens the iPhone. Why buy a brand new iPhone every year when your Apple Watch (with AirPods) are handling tasks that you used to give your iPhone? In addition, a cellular Apple Watch will more than double the device's addressable market to include all Android users.

There is a possibility that Android users may embrace Apple Watch without buying an iPhone, iPad, or other Apple product. Apple would seemingly be giving away the keys to its iPhone sandcastle. However, instead of causing panic within Apple HQ, this would be done by design. Apple would be willing to risk its ecosystem in order to build a new ecosystem around wearables. 

Apple shouldn't get rid of its functional organizational structure. In addition, there is no evidence of Apple needing a management reshuffle. While there is clearly room for improvement in many parts of Apple's business, management's actions are very rational. Apple is taking lessons learned from the 1990s and using them to not repeat the same mistakes with the iPhone. Milk the iPhone today, and then figure out what comes next. 

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Skating to the Apple Car Puck

Recent reports have cast doubt on Apple's automobile ambitions. With Apple shifting its focus to auto software and autonomous driving, many have interpreted the move as Apple giving up on building its own car. I look at the situation very differently. Apple remains interested in transportation, and the case for an Apple Car continues to build.  

Apple's Initial Car Strategy

Apple management began to think about the feasibility of designing and selling its own car in early 2014, and early musings likely stretched as far back as late 2013. This was right around the time that management was becoming confident in Apple Watch becoming a commercial success. It is conceivable that Apple had begun to contemplate new product categories after Apple Watch.

As seen in the photos below, what had seemed like Tim Cook innocently checking out BMW's new i8 electric car outside of Apple HQ in June 2014 took on a whole new meaning eight months later when the Financial Times was the first publication to break the story of Apple thinking about selling its own electric car. 

Source: Twitter

I suspect Apple's initial car strategy was to design and build a premium-priced car that would be bought or leased by consumers. An Apple Car would stand out from peers due to the compelling experience produced by combining Apple hardware, software, and services. 

The plan included Apple's Industrial Design (ID) group coming up with prototypes. Product designers and hardware engineers would then work with ID to turn a prototype into a product capable of being mass produced. In terms of manufacturing, Apple would rely on the same playbook used with most of Apple's other products. Instead of building the car themselves, Apple would have a third-party contract manufacturer assemble the car. Apple management reportedly visited Magna Steyr, BMW, and Daimler to see the feasibility of using contract manufacturing in the auto industry. Apple would then be in a good position to sell an Apple Car through its Retail store network around the world. 

In mid-2015, Apple went on a real estate shopping spree, quickly buying or leasing enough land to build another Apple Campus 2 near San Jose International Airport. I suspect the land purchases were related to Project Titan. Apple also bought various heavy manufacturing facilities around Sunnyvale and Santa Clara, a very obvious sign of its growing automobile ambitions. (More information on each Project Titan building is available here). Project Titan seemed to be firing on all cylinders. The team was given approval to expand to 1,800 employees, and all indications seemed to suggest the pieces were coming together for some type of automobile product in a few years. 

Hitting the Brakes

In what turned out to be the first sign of major trouble, news broke in January 2016 that Steve Zadesky, head of Project Titan, was stepping down. Apple product managers were increasingly battling with those hired from the auto industry. In a stark contrast to iPhone development, Apple had relied on outside hires to boost its auto expertise, especially when it came to auto hardware expertise. This ended up producing a culture clash as each side had a different view on how best to achieve goals in a timely manner. To make matters worse, the goals themselves were changing. Senior Titan managers were reportedly having doubts as to how an Apple Car would be able to leapfrog existing competition from Tesla and BMW. 

As we later discovered, things had deteriorated so much with Project Titan in early 2016 that Apple convinced Bob Mansfield, former SVP of Hardware Engineering, to come out of retirement in April 2016 to take over the project. (A complete Project Titan timeline is available here.) Up to that point, one of the major clues pointing to Apple's growing interest in automobiles was the sudden rise in R&D expense. However, something changed this past summer. As shown in Exhibit 1, Apple R&D expense growth slowed dramatically beginning in July. In fact, Apple reported the slowest R&D expense growth in nine quarters. On a sequential basis, 4Q16 was the third-weakest quarter for R&D growth since 2009. 

Exhibit 1: Apple Year-Over-Year (YOY) Quarterly R&D Expense Increase

As reported in September, Apple had begun to curtail parts of Project Titan this past summer. Dozens of employees, including many focused on automobile hardware, were let go or moved to other divisions within Apple. Ultimately, Apple hit the brakes on Project Titan because the auto industry was rapidly changing and Apple had lost sight of the car "puck." 

Skating to the Puck  

In January 2007, one of Steve Jobs' final slides of his iPhone unveiling keynote included a Wayne Gretzky quote. 

"I skate to where the puck is going to be, not where it has been."

Jobs held the quote in very high regard, saying that Apple had always tried to follow it and that it would remain Apple's goal forever. Over the years, the "puck" quote has been used so frequently that it has lost much of its meaning. Skating to where the puck is going to be does not mean having to predict the future to be right. If that were the case, the probability of success would be quite low. Instead, success is achieved by reading the market and positioning oneself as the catalyst that leads to market change. If we return to the hockey analogy, Wayne Gretzky's skill was found in his ability to read the current situation and position himself to increase the probability of impacting game play. 

Jobs included the quote in the iPhone keynote because Apple felt confident that the iPhone would not just change the smartphone industry in 2007, but would also become the catalyst for change in the coming years. The iPhone would alter the smartphone's trajectory. Apple ended up being right. The iPhone's revolutionary user interface and groundbreaking software positioned Apple well for the eventual app revolution, which only solidified iOS as the most profitable mobile platform.

A more recent example of Apple skating to where the puck will be involves Apple Watch. While many companies remain unsure of where the wearables puck will be in a few years, Apple is laying the groundwork for being a leading wearables player with Apple Watch and soon, AirPods. Apple is betting that it will be well-positioned for the inevitable trend of wearable devices handling tasks that we used to give to smartphones and tablets. 

The Apple Car Puck

When it came to skating to where the car puck is going to be, Apple made a miscalculation. Much of the change now taking place with Project Titan is a result of Apple trying to rectify that mistake. 

If we look at where the car industry was in early 2014 when Apple began to investigate the feasibility of building a car, the world was a very different place.

• Tesla had sold only 21,000 Model S cars.
• BMW had just begun to sell its i3 electric car. 
• Google had just announced it would create a self-driving car without a steering wheel or pedals. 
• Uber was valued at only $3.5 billion.

From Apple's perspective, the goal for Project Titan was to capitalize on declining battery costs and new manufacturing techniques involving new materials, including carbon fibre. Apple looked at Tesla and BMW as inspirations. The plan was to do to the car industry what Apple had done to the phone industry, namely, use software and manufacturing to rethink the car. Over time, Apple could include self-driving capabilities.

However, after only a few years, the auto industry had undergone significant changes. 

• Tesla is now producing cars at a rate of 100,000 per year but is increasingly focusing on building the low cost ($35,000) Model 3.
• Elon Musk expects to have a fully autonomous car by the end of 2017. Tesla has begun equipping all of its new cars with self-driving hardware.
• BMW's i series electric car program has lost all momentum.
• Ridesharing adoption is exploding around the world. 
• Uber is valued at $65+ billion, Didi at $35+ billion. 

Putting the pieces together, we see that the car industry has embraced ridesharing much more quickly than it appeared to be a few years ago. Meanwhile, autonomous driving is no longer looking like a pipe dream that will take 10 to 20 years to become a reality. In a world with self-driving electric cars that are part of a ridesharing fleet, relying on a traditional buy/lease model for a premium-priced electric car doesn't sound like the puck worth tracking.

The Blackberry of the Auto Industry

Electric car sales remain quite niche in the auto industry. In 2015, electric car sales represented only 0.66% of all car sales in the U.S., down from 0.74% in 2014. Optimistic sales forecasts have had to be dialed back time after time.

There has been much speculation that Tesla's Model 3 will significantly alter the auto industry, serving as the catalyst that will finally place electric car ownership in the mainstream. This would impact not only legacy automakers struggling to sell electric cars, but also Apple's car plans. I suspect Apple's original goal with Titan was to sell an electric car to consumers, helping to expand electric car adoption. However, the world is changing.

Electric car ownership may turn out to be the "Blackberry" of the auto industry, a near-term phenomenon that will end up being a head fake and not representative of the future. The combination of ridesharing and self-driving cars threatens to undermine car ownership as car utilization would be improved. (Currently, the average car is not used 96% of the time.)

Titan Reset

According to published reports, Bob Mansfield is overseeing significant changes to Apple's car strategy. Project Titan has been rearranged into three teams:

• Software
• Sensors
• Hardware

The focus has been put on autonomous driving, and auto hardware has been put on the rear burner. These changes reflect a type of reset as Apple rethinks were the car puck is headed. By placing autonomous driving as Project Titan's focal point, Apple is giving us a clue that it now thinks ridesharing is the future worth betting on. It is worth pointing out that Apple made its $1 billion investment in Didi soon after Bob Mansfield had announced major changes to Project Titan with a focus on autonomous driving. The timing between these events surely doesn't seem coincidental.  

Instead of owning cars, consumers will share cars. It is just too difficult to make a case for owning a self-driving electric car in the future. Even Tesla is showing early signs of embracing a different kind of business model in which Model 3 cars could be used to form a ridesharing network. If Apple is unable to come up with autonomous driving, the company's successes in auto hardware or manufacturing would be wasted. 

While Apple has reportedly scaled back its auto hardware ambitions, much of this reduction does not preclude a future revamp if Apple's autonomous driving research proves successful. However, Apple may approach auto hardware differently next time in an effort to improve odds of ultimate success. We know that Apple held talks with McLaren concerning some type of strategic investment. (My complete thoughts and observations on McLaren are available here.) These talks reportedly occurred after Mansfield had refocused Titan, which included de-emphasizing auto hardware. This tells me that the odds of Apple partnering or acquiring an established team of auto hardware experts have increased. 

The Big Picture

All of the evidence still points to Apple being extremely interested in transportation. The company apparently has retained all of the buildings and land associated with Project Titan, including the massive amount of open land near San Jose International Airport. Apple is now doubling down on auto software and autonomous driving talent, which includes rebuilding the QNX team in Canada. Recent Apple M&A related to augmented reality has been tied to the company's autonomous driving efforts. Apple has a seat on Didi's board. In addition, Apple ID has the freedom to continue working on car ideas.

As to where Apple thinks the car puck is headed, a self-driving smart room on wheels is the leading contender. In the beginning, these self-driving cars may be limited to specific routes or geographies with the expectation of being rolled out to additional locations over time. Apple would need to embrace new business models and partners. Apple can leapfrog the competition by keeping focus on the user experience attached to the product.

Ford 021C concept car from Marc Newson, a key member of the Apple ID group.

In a world where we share cars, there will be a significant desire for the ability to change the inside of a car for the current occupants. With control over various services including mobile payments, communication, mapping, and entertainment content, Apple will be one of the companies better positioned to come up with a premium experience in the auto industry. And of course, we can't forget Apple ID's contribution to such a product as design contains the most power to alter the car industry. Apple is still thinking about where the car puck is headed. 

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Above Avalon Turns Two

Today marks the second-year anniversary of Above Avalon's launch.

This past year has been a busy one. Above Avalon reached sustainability and continues to be 100% supported by members. Along with weekly articles and podcast episodes, there were 192 daily updates focused exclusively on Apple that were sent to members over the past year. In addition, an Above Avalon group in Slack was established for members this past January and is now home to a thriving, daily discussion about Apple.  

As I prepare for the next year, I would like to share a few observations and lessons that I've learned about Apple and the dramatically changing media landscape since starting Above Avalon in 2014. 

Apple Observations

1) Apple is changing. Apple is not an opaque object, unable to be analyzed and studied. The company's intense product-driven culture is reflected in most of management's decisions and actions. The key to understanding how Apple views the world is to approach the particular topic at hand with this product-driven culture in mind. While Apple remains unpredictable, especially when it comes to items such as product marketing, the company's broader strategy has displayed a pattern of rationality.

With that in mind, there are clear signs that Apple is changing. While Apple still values product secrecy, the company has become much more open in terms of using the press and social media to weave a narrative. In addition, Apple management has become more straightforward when discussing Apple's product direction. Apple is not afraid to try new things, even if it means the company will look differently in the future. 

2) Jony Ive is Apple's product visionary. Over the past year, I published 38 weekly articles. The one that surprised me the most in terms of reader feedback was "Jony Ive Is Making People Uneasy." The article's premise was that under Tim Cook's leadership, Apple's industrial design group has continued to consolidate power within Apple. With Jony Ive positioned as overseer of Apple design, his influence on Apple's product direction cannot be overstated.

However, much of the reaction I received questioned not only Jony's power, but also the fundamentals that underpin Apple's design-led culture. Tim Cook is not Apple's product visionary. More importantly, Cook was never expected or groomed to be Apple's product visionary. Instead, Apple's industrial design group is in full control of the user experience, and by extension, the product. This structure was put in place more than 15 years ago to ensure that the product is always placed ahead of everything else. Despite other tech giants increasingly dipping their toes into hardware, no other company has Apple's design-led culture. 

3) Apple continues to think differently. It may be cliché, but when it comes to nearly every major topic that Apple faces criticism over, whether it is machine learning, AI, AR, VR, or voice, such criticism is misplaced. The old adage of "think different" is being turned on its head. While consensus remains focused on figuring out when these technologies will hit the mainstream, Apple is dedicating resources to better understand how these new technologies can be used to make technology more personal and improve the user experience. The question isn't when Apple will embrace these new ideas, but rather how Apple will approach these new technologies. 

4) Transportation and wearables represent Apple's future. One of the more intriguing topics over the past two years has been Apple's transportation ambitions with Project Titan. While the project has seen significant changes in recent months (my current thoughts on where things stand with Project Titan are available here and here), it would be incorrect to conclude that Apple's interest in transportation is waning. The same can be said about Apple's long-term plans for Apple Watch and the broader wearables category.

Despite a number of recent head fakes across the industry, the transportation industry will see more change in the next 10 years than seen in the past 100 years. The fact that such a statement doesn't actually say much given the lack of prior change demonstrates why a company like Apple will ultimately enter the industry. As for wearables, Apple's growing interest with health will end up being positioned as a key factor for driving wearables adoption. The wearables category likely contains the most potential to have a product that reaches smartphone-like penetration in the marketplace. 

5) Apple's biggest risk is losing focus. Over the past two years, I have periodically received a variation of the question, "What is Apple's biggest risk?" The usual answers passed around the web involve Apple missing some type of technology wave or being unable to adapt to the changing tech landscape. In reality, the one item that has the potential of threatening Apple's product-led design is management choosing to do too much.  

Thoughts on the Changing Media Landscape

1) Changing consumption patterns. The shift to mobile continues to impact how we are consuming content. Curated versions of the web, also known as Facebook and Twitter, are gaining even more power in terms of news and research dissemination. However, drawbacks to this development are beginning to appear. Interestingly, email has become a very powerful antidote to these drawbacks. People are using email as a way to build an ad-free curated stream of written content. The company to watch going forward is Slack and whether or not it can better position itself as a destination for content consumption. Judging by the Above Avalon team in Slack, there is much promise. 

2) Rise of the independents. One byproduct of this shift in content consumption has been a schism when it comes to media publications. This has led to a rise of the independents, a new breed of sites built on lean, low cost structures and scalable business models based on various forms of paid subscriptions. These sites are focused not on chasing page views or unique visitors, but instead on building high-quality relationships with readers. The reason these sites are able to compete against much larger peers with additional resources is that they are in a better position to build communication channels with readers. Along with Above Avalon, sites such as Stratechery and The Information have found a core audience. I expect this list of sites to expand and diversify as we move forward.   

3) Apple news industry. The cottage industry consisting of a few dozen sites focused on Apple rumors, news, and analysis is undergoing some changes. Ad-based rumor sites are experiencing consolidation while the leaders diversify into video, podcasting, and email newsletters to maintain mindshare. Ad-based indie blogs are increasingly turning to podcasting and different types of memberships/patron support for more attractive monetization opportunities. Although a few publications are ramping up their Apple coverage while others dial back efforts, the news portion of the Apple blog sphere remains disjointed. Going forward, I would not be surprised if several of the larger news publications dip their toe deeper into the Apple rumor sphere. This will lead to ad-based rumor sites experimenting with memberships and doubling down on forums/communities. 

Above Avalon

I launched Above Avalon on November 10, 2014 with the goal of studying Apple at the intersection of Silicon Valley and Wall Street. The main takeaway from these past two years is that while I have learned a great deal about Apple, there is much more to discover. I look forward to watching Above Avalon grow and welcoming new faces as Above Avalon members. (To sign up, visit the membership page.) 

Thank you for a great two years. 

Neil Cybart

Apple Is Placing a Big Bet with the New MacBook Pro

For the second year in a row, Microsoft's October hardware event won the hearts and minds of a segment of the Mac user base. While many have been quick to call these past two weeks a renaissance for the personal computer, such proclamations fail to recognize the harsh realities of the mobile era. The new MacBook Pro tells us a lot about Apple's plan for the Mac in today's mobile world, and it doesn't revolve around saving the PC. 

What Is the Mac? 

The best way to describe the Mac is to revisit a product theory that Phil Schiller, Apple SVP of Worldwide Marketing, introduced last year that I coined "The Grand Unified Theory of Apple Products." All of Apple's major product categories are interrelated. The goal or job for each is to gain enough capability to reduce the importance of the next most powerful product. For example, the goal of the iPad is to handle so many tasks that we no longer need a Mac.  

In this theory, the Mac's role is to serve as the product that pushes the rest of Apple's product line forward. As Schiller put it, the Mac desktop's role is to "challenge what we think a computer can do and do things that no computer has ever done before." 

The Mac Fell Behind

Judging by the way Apple management continues to talk about the Mac, the product category still occupies a surprising amount of mindshare within Apple despite the iPad outselling the Mac by 2.5x and the iPhone outselling both the iPad and Mac by 3.3x in FY2016. Here's Tim Cook kicking off the Mac segment of Apple's keynote last week:

"The Mac is more than a product to us. It's a testament to everything we do and everything we create at Apple."

This follows on the heels of Apple placing the Mac in the spotlight in 2015 by granting Steven Levy a surprising amount of access to one of the Mac labs. Apple had just updated the iMac and introduced the Magic Mouse 2 and Magic Trackpad 2. In retrospect, Apple was likely feeling some of the growing outcry facing the Mac. 

While Apple was pledging continued support for the Mac, the product category became long in the tooth. Circling back to The Grand Unified Theory of Apple Products, the Mac was no longer keeping up with Schiller's proclamation of it being the computer meant to push Apple's entire product line forward. While the tech press has remained infatuated with the debate as to whether an iPad can replace a Mac, consumers have already determined that the iPhone is able to handle most of the tasks once given to the Mac.

The Mac had fallen behind and was no longer challenging what we think we can do with a computer. Instead, the iPhone and iPad were overachieving, seeing much success at handling jobs formerly given the Mac.

Three Paths

Last month's Microsoft Surface event exposed the degree to which the Mac business has fallen behind in the eyes of some Mac users. For these customers, the idea of Microsoft ushering in some kind of PC renaissance was a sight for sore eyes. When it came time to unveil the biggest update to MacBook Pro in four years, Apple's presentation last week could have taken three different paths. 

Option 1: Give Mac users what they think they want. 

In this scenario, Apple Industrial Design (ID) would admit defeat in their long-standing views on Mac design and user experience. The end result would be other divisions within Apple pushing out the most powerful Macs to date from a spec perspective, with plenty of ports and customization. 

Option 2: Write a new chapter in the Mac playbook.

I refer to this option as the "Microsoft." Apple could rethink the Mac with the goal of pushing the boundaries of the modern Mac. Similar to Microsoft, Apple would turn to the tablet for inspiration regarding where to bring the Mac. Apple would strive to place the Mac on a better trajectory in an increasingly mobile world. With a focus on niche, creative use cases, touch-screen Macs would likely make an appearance as the Mac tries to become more like a Mac/iPad hybrid. 

Option 3: Throw the Mac playbook out the window  

In this scenario, Apple recognizes the Mac will never be as popular as iPad but that there is still a need for the Mac in the Apple lineup. The plan would be to position the Mac in such a way as to push the rest of Apple's product line forward. Apple ID would take lessons learned from mobile to rethink the Mac user experience. 

The New MacBook Pro

Last week's Mac event gave us a clear indication as to which path Apple chose. The new MacBook Pro with Touch Bar demonstrates how Apple is placing a very different bet than Microsoft. The sheer amount of criticism pointed at the new MacBook Pro from a small but vocal segment of the Mac user base demonstrates how much risk is found with Apple's bet. Jony Ive and the ID group want to rethink the notebook and are throwing the old Mac playbook out the window.

I was able to spend some time with the new MacBook Pro and Touch Bar in the Apple demo room. I left intrigued. (My complete thoughts and observations from attending Apple's keynote are available here and here). A multi-touch screen positioned above the keyboard with adaptive inputs based on what appears on the screen will alter the way we use a Mac. The change will not be dramatic at first. In fact, for some users, Touch Bar usage may only occur when playing music. However, similar to haptic feedback on the iPhone, the Touch Bar's influence will grow over time.  

Apple is making a very deliberate decision that the Touch Bar, and not a focus on power and ports, is the best way to push the Mac forward in today's mobile world. As Phil Schiller explained to The Independent earlier this week, Apple was expecting pushback from some of its Mac users. This is a sign that Apple was aware that it was placing a big bet with lots of risk. The new MacBook Pro is the first Mac to have a ARM processor, albeit a secondary one with the T1 chip, and a multi-touch display, albeit a narrow strip positioned above the keyboard. However, more importantly, this MacBook Pro begins to question the "Pro" in MacBook Pro. 

Microsoft vs. Apple

No other consumer-facing tech company is going after the Mac with as much vigor as Microsoft. (I view Google's Chromebook as impacting the iPad more than the Mac.) It is often said that this type of competition benefits consumers because it motivates each side of the battle, pushing companies towards greater innovation. I think that adage is outdated. If Apple's motivation to innovate merely came from increased competitive pressure from Microsoft, Apple would have much more serious problems on its hands than slowing innovation.

Instead, the primary benefit to consumers from Microsoft's multi-year push into niche PC hardware targeting "creatives" is that there is additional choice in the marketplace. A look through Microsoft's financials would reveal that there aren't many consumers taking Microsoft up on that additional choice, but that's for another day and weekly article. 

It was very clear in watching Panos Panay, head of Microsoft's Surface division, explain and demonstrate Surface Studio that Microsoft is not copying Apple. Microsoft is truly blazing a trail for itself. However, this isn't exactly a new thing for Microsoft, the company that was vocal about inventing tablet computing ten years before Apple unveiled the iPad.

Microsoft's foray into touch-based laptops and desktops does not represent competition for Apple because each company is on a completely different path when it comes to vision for the user experience. 

• Microsoft wants users to get lost within Surface Studio hardware (see photo above). 
• Apple wants hardware to melt away.
• Microsoft wants its products to help you create and produce. 
• Apple wants its products to improve your life. 

At the heart of the issue is a difference in motivation and agenda. With the new MacBook Pro, Apple is taking elements of iPhone and iPad to push the Mac forward. This is being done to then serve as a catalyst for pushing the iPhone and iPad forward. Revisiting The Grand Unified Theory of Apple Products, the Mac is positioned as the device that pushes the boundaries of a computer. The consequence is that the iPad, iPhone, and Apple Watch have to then work just a little bit harder to handle the tasks given to the Mac. 

However, Microsoft has a different goal with Surface Book and Surface Studio. Microsoft doesn't have a wrist wearable, smartphone, or dedicated tablet to push forward. Instead, its goal is to redefine the PC for a mobile world. This is why Microsoft is betting on touch-screen laptops and desktops. While Microsoft is betting on a PC renaissance, Apple is using the Mac to double down on mobile. 

The Bet

Apple's bet with the new MacBook Pro is that the Touch Bar will position the Mac as a tool that is able to push mobile devices forward. This is part of a comprehensive strategy that I call "The Apple Innovation Feedback Loop."

As shown in the diagram below, the driving factor that establishes the feedback loop is Apple ID taking lessons learned from making technology more personal with iPhone, iPad, and Apple Watch, and improving the user experience found with more powerful products such as the Mac. As these more powerful products are given additional capabilities, the incentive is to then push the less powerful products forward with improved technologies. 

While much of the criticism facing the new MacBook Pro concerns power, ports, and adapters, the much more interesting item to watch is how users embrace the Touch Bar. The risk found with this bet is that customers do not embrace the new user experience found with Touch Bar and MacBook Pro.

Combining The Grand Unified Theory of Apple Products with the Apple Innovation Feedback Loop produces the diagram below. The underlying principle that guides both the Grand Unified Theory and the Innovation Feedback Loop is to focus on the user experience created by different input and output mechanisms.  

The Mac's Future

With the MacBook Pro's Touch Bar, Apple is combining multi-touch with a mechanical keyboard. This new input will lead to a different user experience that may position the Mac as a more capable device than an iPad. One example is how an photo editing toolbar is removed from the screen and instead positioned in the Touch Bar, freeing up precious screen real estate. Another example is a music DJ placing a MacBook with multi-touch and a keyboard above an iPad in terms of capability and utility. If a MacBook Pro with Touch Bar appeals to a DJ, Apple's new goal is to come up with a way for the iPad Pro to handle the tasks given to the MacBook Pro.

Apple thinks the Mac still has an important role: to help push mobile and wearable devices forward. This is why Apple management speaks so highly of the Mac. It is quintessentially Apple. 

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