Apple on Track to Buy 50% of Itself in Three Years

A path has appeared where Apple management can realistically buy back 50% of AAPL's outstanding shares within three years. With a stable iPhone business, a growing Services business, and U.S. corporate tax reform, Apple will have close to $300B of cash available to spend on share buyback in the coming years. The numbers are daunting, and as Apple management has shown no sign of curtailing its buyback plans, it's time for Wall Street to take notice. 

Share Buyback 101

Share buyback is the opposite mechanism of an IPO or secondary offering. Instead of raising cash by selling shares, a company uses excess cash on its balance sheet to buy back its shares from investors. These shares are then retired, or removed from the market, resulting in a lower share count. By using cash to buy back stock, a company's assets and equity totals decline while debt remains the same, all else equal.  

There are a few reasons for a company to buy back its stock. 

  • Signaling effect. Management teams can use buyback to signal to Wall Street its confidence in future prospects. In addition, share buyback is often thought to be a sign that management views its stock as undervalued.  
  • Balance sheet optimization. There is such a thing as holding too much cash on the balance sheet, especially if investors are not properly valuing it. By issuing low-cost debt to buy back stock, some companies will be able to lower their overall cost of capital, which is a value creation activity. 

Buying back shares increases the ownership percentage for existing shareholders. If a management team buys back all of a company's shares except for one, that last remaining share would, in theory, own 100% of the company. Of course, in the real world, this example isn't likely as the last remaining shareholders would have little incentive to sell their shares to the company at a low price. 

A few other considerations regarding share buyback:

  • Share buyback is not created equally. Not every company should repurchase their shares. Industry dynamics and company-specific issues may make share repurchases an unwise use of excess cash for some companies. Share buyback has gotten a bad rap on Wall Street in recent years because of its widespread use, including that by companies not in a strong position to be buying back shares. This buyback misuse has overshadowed examples of buyback representing a good use of excess cash. 
  • Share buybacks don't create shareholder value. Contrary to popular belief, share buybacks don't create value for shareholders. While existing shareholders do get a greater share of the balance sheet via share buybacks, the act of using cash to buy back shares means they are getting a greater share of a smaller balance sheet. Meanwhile, share buyback does not have any direct impact on how a company performs when it comes to using its assets to generate cash flows. The one example in which buyback may produce a small amount of value for a company is when the overall cost of capital is reduced due to share repurchases. 
  • Apple is not using buyback to secretly go private. One myth that has been circulating for years is that Apple is secretly using share buyback to go private. Not only is this false, but it ignores one crucial aspect found with Apple's share buyback program. Management is not holding on to repurchased AAPL shares. Instead, the shares are retired and removed from circulation. Existing shareholders see their ownership stakes rise due to buyback.

For more information on share buyback, and in particular Apple's stock repurchase program, an Apple Stock Buyback Primer is available for Above Avalon members here.

Apple's Buyback History

Since kicking off its buyback program in 2012, Apple management has repurchased 20% of outstanding AAPL shares. As shown in Exhibit 1, after peaking in 4Q12 at 6.6 billion shares, Apple's share count has declined by 20% to 5.3 billion at the end of 1Q17.

Exhibit 1: Apple Shares Outstanding (1Q11 to 1Q17)

Apple management has been a very reliable and consistent repurchaser of its stock. This stands at contrast with the average buyback program in which management teams are more interested in the positives associated with announcing a share buyback instead of actually parting ways with cash to repurchase stock. Share buyback authorizations often remain open as companies never finish their buyback programs. Apple has been an outlier in terms of its very aggressive pace of buyback, regardless of share price. 

The Path to 50%

With 20% of shares already repurchased, here's how Apple management can repurchase an additional 30% of shares over the next three years to reach 50% of Apple outstanding shares:

1) Continue to funnel $30B to $35B of excess cash into share buyback every year. Apple is currently relying on operating cash flow (U.S.) and debt issuance to fund its share buyback. With the iPhone business displaying a new level of consistency and with a growing Services business, Apple will likely see similar levels of cash generation in the coming years. If Apple can funnel approximately $30B to $35B of cash into share buyback in FY17, FY18, and FY19, the company will be in a position to buy an additional 16% of outstanding shares by the end of 2019. As seen in Exhibit 2, simply keeping the status quo should bring shares outstanding to 4.5B shares in three years, a 32% reduction from the 2012 peak.

Exhibit 2: Apple Shares Outstanding (1Q11 to 1Q20E)

2) Bring back most of the $230B of cash held in foreign subsidiaries. Apple currently has $230B of cash held in foreign subsidiaries. If Washington passes corporate tax reform and foreign cash is taxed at a rate of 15% or lower, Apple will bring back the vast majority, if not all, of this amount to the U.S. Apple will need this cash in the U.S. if it intends to use it for share buyback. Apple has been maintaining a deferred tax liability (now at $27B) related to foreign earnings as management has been accruing U.S. taxes related to unremitted foreign earnings. This will make it possible for Apple to pay tax on most of this foreign cash without taking a significant EPS hit.  

3) Use $150B of repatriated cash to repurchase another 23% of AAPL shares. Assuming Apple pays taxes on foreign cash at some point in FY17 or FY18, Apple will have approximately $250B of cash, cash equivalents, and marketable securities on its balance sheet. If Apple uses 60% of this total for share buyback, Apple will be able to buy back 23% of outstanding shares. Management could repurchase these shares quickly through a modified Dutch auction tender offer. Even after spending $150B on buyback, Apple would still have close to $100B of cash left over on the balance sheet. While the company's net cash balance would be at a multi-year low given Apple's increasing amount of long-term debt (quickly approaching $100B), the company would still be kicking off $50B of cash each year. As seen in Exhibit 3, using more than 60% of repatriated cash, in addition to keeping the status quo in terms of quarterly buyback, would bring shares outstanding to 3.3B shares in three years, a 50% reduction from the 2012 peak.

Exhibit 3: Apple Shares Outstanding (1Q11 to 1Q20E)

Risk Factors

There are four risk factors that may derail Apple's path to buying back 50% of outstanding shares. Deteriorating business fundamentals may jeopardize the amount of cash flow generation required to maintain a robust buyback program. If iPhone unit sales decline more than 10% year-over-year, this may have a negative impact on buyback. 

When it comes to corporate tax reform, if there are strings attached to the cash Apple brings back from foreign subsidiaries, this would have an adverse impact on Apple's plan to use the cash to buy back a significant portion of outstanding shares. If Washington simply lowers the tax rate on foreign cash instead of getting rid of the tax rate altogether, Apple may have more freedom as to how the cash is spent. Of course, there is no guarantee that Washington will be able to come to an agreement on corporate tax reform, although Tim Cook sounded confident in such reform occurring this year.

Apple's board would need to provide enough buyback authorization in order for management to use a significant portion of its cash to buy back shares. One likely scenario is that the board grants management larger share buyback authorization in FY17, FY18, and FY19, but it's spread out over a longer period. This would give management added flexibility when it comes to timing buyback. 

The last risk factor is a rising AAPL share price. As shares increase in price, it will become that much more expensive for Apple to buy back its shares. If shares rise 10% in 2017, it will be 10% more expensive for Apple to buy back shares in 2018. If Apple shares increase in price, the path to repurchasing 50% of shares becomes that much more narrow.  Of course, if AAPL shares fall in price, Apple will have a much easier time repurchasing 50% of outstanding shares, as buyback would require less cash. 

Calling a Bluff

Apple's iPhone and Services businesses are throwing off more cash flow than management needs to run the business and to invest for the future (M&A and R&D). This produces a very rare situation of a company generating hundreds of billions of dollars of excess cash. 

With shares trading in the vicinity of $130, Wall Street doesn't seem to believe Apple will actually spend $250B on buyback in the next three years. Wall Street thinks Apple is bluffing. Meanwhile, Apple has shown no indication that it will slow its share buyback pace and instead embrace a strategy of retaining excess cash for other purposes. This may set up a situation in which Wall Street calls out Apple on a bluff (i.e. the share price doesn't change much from current levels). In such a situation, Apple is given a clear path to buying back 50% of shares in three years.

The biggest takeaway from buying back 50% of outstanding shares is that Apple's shareholder base would essentially be cut in half. Shareholders as of year-end 2012 would see their ownership stake in Apple double in just seven years by simply holding on to their shares. This is quite rare on Wall Street. As Apple's path to buying back 50% of shares becomes more clear to Wall Street, Apple's share buyback program will gain more attention from investors. 

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Apple 1Q17 Expectations

There will be two ways to interpret Apple's 1Q17 earnings report. On an absolute basis, Apple is going to report its best quarter yet. Records will likely be broken when it comes to quarterly revenue, gross profit, iPhone unit sales, Apple Watch unit sales, and Services revenue. However, if judging Apple by year-over-year growth, Apple will report simply an OK quarter. Most line items will show only modest improvement from 2016 results. 

The following table includes my 1Q17 Apple estimates.  

My full perspective and commentary behind all of my estimates are available for Above Avalon members. (Click here to become a member and access the six parts of the earnings preview available herehere, and here.) 

Items Worth Watching

There will be a few numbers holding extra importance when Apple reports 1Q17 results on Tuesday.

  1. iPhone ASP. There has been a notable amount of evidence from the past three months pointing to the iPhone 7 Plus selling well. This has major implications for Apple's iPhone strategy going forward as a strong-performing iPhone 7 Plus suggests there is demand for higher-priced iPhones driven by feature differentiation. In addition, Apple's new iPhone storage configurations likely boosted iPhone ASP. Given that the $399 iPhone SE was not on sale during 1Q16, an iPhone ASP close to or exceeding the $691 reported in 1Q16 would confirm iPhone 7 Plus popularity. 
  2. Other Products revenue. Apple will likely report record Apple Watch sales. Similar to previous quarters, Watch results are expected to be lumped in with "Other Products" revenue. The major difference with 1Q17 results is that AirPods revenue will now be included in "Other Products" given the December 2016 launch. This will make it a bit trickier to back out Apple Watch revenue. Accordingly, one should expect a wider variation in Apple Watch sales estimates. In addition, the "Other Products" line item contains revenue from Beats headphones, a good seller during the holiday quarter. Taking into account AirPods and Beats revenue, "Other Products" revenue exceeding $4.5B will bode extremely well for strong Apple Watch sales (5M+ units). 
  3. iPad unit sales. The iPad has turned the corner. While unit sales growth may still be out of reach, a unit sales number close to 15M would suggest that iPad fundamentals are continuing to improve. 
  4. R&D expense. My suspicion is that Apple's Project Titan was the primary factor driving the significant increase in R&D expense beginning summer of 2014. With Apple making some modifications to the project in recent months, will this change be reflected in slowing growth when it comes to R&D expenditures?
  5. 2Q17 guidance. Since Wall Street is forward-looking, management's revenue and margin guidance will likely always have a place on a list containing important quarterly numbers. With a relatively strong year-over-year compare (i.e. 2Q16 revenue growth was weak), management's 2Q17 revenue guidance will likely point to continued top-line growth. 

1Q17 Expectation Meters

Each quarter, I publish expectation meters for Apple earnings. These diagrams help add value to what is fundamentally a complicated estimating process. Quite a bit of modeling goes into each Apple financial estimate. Accordingly, there is room to turn single-point estimates into ranges in order to more accurately judge Apple's quarterly performance. 

In each expectation meter, the grey shaded area is considered to be my expectation range. In most cases, a result that falls within this range would signify that the product or variable being measured is performing as expected. A result that lands in the green shaded box would denote strong performance, likely leading me to raise my assumptions and estimates going forward. Vice-versa, a result that lands in the red shaded area would have the opposite effect and lead me to reduce my assumptions going forward. 

For Apple's 1Q17 earnings report, I am publishing three expectations meters: iPhone sales, iPad, sales, and 2Q17 guidance. My iPhone unit sales expectation range stretches from 77M to 81M iPhones. Any unit sales number within this range would be labeled "expected." 

Turning to iPad, unit sales between 15M and 16M would fall within my expectations range. Unit sales in excess of 16.1M would signify the iPad has returned to unit sales growth. 

When it comes to guidance, Apple management has displayed a tendency to not play the expectations game and provide artificially low guidance simply to report a big  "beat."  Accordingly, Apple looks to be in a good position to report a revenue guidance range that exceeds 2Q16 results, implying ongoing revenue growth. 

The primary question facing AAPL (the stock, not the company) is, how much will Wall Street care about modest iPhone sales growth or declines? Attention has already shifted to what is being built up as a significant update to the iPhone line later this year. It remains unclear if such a shift in attention is masking a much broader development where Wall Street is focused more on earnings and cash flow stability than on unit sales growth. We will likely get some answers regarding this development in a few days. 

Above Avalon members have access to additional commentary regarding my Apple 1Q17 estimates (six parts):

  1. Setting the Scene
  2. Services, iPad, Mac, Apple Watch
  3. iPhone
  4. 2Q17 Guidance
  5. Estimate Summary
  6. Apple and Wall Street Expectations

Members will also receive my exclusive earnings reaction notes containing all of my thoughts and observations on Apple's earnings. To access my Apple earnings preview and receive my earnings reaction notes, become a member by visiting the membership page

Grading Tim Cook

It's not easy describing Tim Cook's role within Apple. Yes, he is CEO serving at the discretion of Apple's board of directors. However, there is much more than this going on behind the scenes and Cook's formal title. Apple isn't run like an average company and shouldn't be judged as one. This impacts how we should grade Tim Cook's performance as Apple CEO. 

A double standard is being used to judge Tim Cook. No other tech CEO is being graded on the same scale as Cook. He is being penalized for not entering questionable product categories. In addition, the new products that Apple has decided to sell are looked at through an iPhone lens. Apple has the best-selling smartwatch in history, with sales approaching 25M units in less than two years, and yet the product is looked at by some observers with a yawn. This type of criticism is just not found when it comes to judging Cook's peers. In fact, some of Apple's largest competitors have voting structures in place that make judging CEO performance a mere formality as boards don't have enough power to do much of anything. 

In an effort to grade Tim Cook fairly, one soon discovers that this is no easy task.  Apple has a unique corporate culture and organizational structure, and Cook is not your typical tech CEO. 

Tim Cook, COO

Tim Cook joined Apple in March 1998 as Chief Operating Officer. His job was to save Apple, literally. Cook quickly went to work drawing down excess Mac inventory in addition to laying the groundwork for Apple's outsourcing strategy. When it came time to build the iPod, it was Cook who built the supply chain and positioned Foxconn as an Apple assembler. When it came time to build the iPhone, it was Cook who made sure all the trains were running on time in terms of procurement and production. When it came to time introduce the iPhone to new customers around the world, it was Cook who negotiated with mobile carriers to begin selling the iPhone. 

By the end of Cook's time as Apple COO, a title he held for 13 years, Cook had taken on a role much more similar to that of a traditional CEO. In a little known fact, during the last few years of the Steve Jobs era, it was Cook (and Apple SVP Marketing Phil Schiller) who were tasked with coming up with Apple's corporate strategy. This allowed Steve Jobs to spend time with Jony Ive and focus on the product. Said another way, Tim Cook was the one that allowed Steve to be Steve. 

When it came time to relinquish his CEO title, Steve selected Cook as his successor. While the move was met with controversy outside Apple, the selection signaled that Steve didn't look at the CEO position as something that needed to be held by a product person. Much of that belief likely resulted from the fact that Cook had been handling many of the traditional CEO duties himself as COO for years. 

Tim Cook, CEO

How has Tim Cook been doing over the past six years?

In trying to find an answer to this question, much more information is needed regarding Cook's actual role within Apple. Is he single-handily guiding Apple forward or has Cook come to depend on a smaller, inner circle within Apple's SVP ranks? The answer plays a role in determining Cook's contributions to Apple. Meanwhile, how much of Apple's product strategy is actually determined by Cook rather than Jony Ive? This seems like critical information to have when judging Cook's performance. 

The Apple Watch serves as a great example of how power within Apple is much more decentralized than many assume. Apple Watch is Jony's baby. As told in the The New Yorker profile of Jony Ive published two years ago, Jony met some resistance among Apple executives regarding the Apple Watch's main tenets involving fashion and luxury. Apple would become a very different company selling a device like Apple Watch. After some convincing, Jony was able to alleviate most concerns, and Apple marched towards Apple Watch. When it came time to manage the Apple Watch team, Apple COO Jeff Williams was eventually put in charge. This doesn't exactly jump out as an obvious decision given that Jeff Williams is a supply chain expert.

With this information in hand, who should we look to as being responsible for Apple Watch's performance? The people in charge of the product's design and user experience (Jony Ive, Marc Newson, and the rest of Apple's Industrial Design group)? Those in charge of Apple Watch development (Jeff Williams)? Tim Cook as Apple CEO? 

One can repeat this exercise with every major Apple product and initiative. Should Tim Cook be judged by Apple's success or failure in music and video streaming even though that is clearly Eddy Cue's domain? 

Cook's Inner Circle

Tim Cook is leading a different type of Apple than that which existed under Steve. Things are done differently, down to how decisions are made and then communicated throughout Apple. This leads to a theory that may seem controversial today but is becoming increasingly clear as time goes on. It is impossible to grade Tim Cook as CEO without grading Cook's inner circle. 

While Cook has at least seventeen VPs and SVPs reporting directly to him, a very high number, there is evidence that many of the key decisions regarding Apple's strategy are determined by a much smaller group of SVPs.  This team likely includes Eddy Cue, Phil Schiller, and Jeff Williams. The three have been at Apple since the 1990s, experiencing Apple at its best and also worst. Eddy Cue joined Apple in 1989. 

Instead of grading Cook by himself, on his own contributions, it makes more sense to grade this inner circle with Cook as its leader. The primary reason is that it is difficult to differentiate where and how Apple strategy is decided within this group. Notice how some of the key product responsibilities have been doled out in recent years: 

  • Jeff Williams, COO: Oversees Apple Watch development and Apple's health initiatives. 
  • Eddy Cue, SVP Internet Software and Services: Controls Apple's expanding content strategy into music and video streaming although he is also in charge of Apple's overall services strategy. 
  • Phil Schiller, SVP Worldwide Marketing: Took on more responsibility with the App Store and developer relations, items that lack a direct relationship to product marketing. 

Apple's most important new product and initiative (Apple Watch and health) are run by a member of Cook's inner circle. In addition, the items that have caused the most pain and controversy for Apple in recent years (services and the App Store) are now run directly by people in Cook's inner circle. 

Outside board seat appointments provide another clue as to the power held by this inner circle.

  • Tim Cook sits on Nike's board. 
  • Eddy Cue sits on Ferrari's board
  • Phil Schiller recently joined Illumina's board.

It is not a coincidence that Apple's product road map includes plenty of wearables and fashion (Nike), transportation (Ferrari), and health (Illumnia). 

The removal of Scott Forstall as SVP of iOS back in 2012 takes on a new level of importance when discussing the topic of Tim Cook and his inner circle. It has been reported that Forstall did not get along with other Apple executives. While we have never officially heard Forstall's side of the story, which is odd, Cook's desire for a powerful inner circle does support the theory that Forstall was removed in order to position this tight-knit group of Apple SVPs as a type of brain trust. Forstall was clear in his ambitions to one day be CEO. Cue, Schiller, and Williams don't hold similar ambitions. Instead, ideas are bounced off each other and disagreements are hashed out within this group before being funneled to the rest of the company. Forstall threatened to throw off this dynamic and risk having Cook's leadership structure collapse. 

There is one missing piece pertaining to Cook's inner circle. Who is in charge of the most important thing at Apple, the product? This is where Jony and the Apple Industrial Design group enter the equation. Cook and his inner circle have given much more power to Jony and the Apple Industrial Design group in recent years. The biggest benefactor in terms of grabbing power from Forstall's departure was Jony

Jony has taken on the role of Apple's product visionary while Tim Cook's inner circle has taken on the role of running Apple. In attempt to visualize this leadership structure, the following diagram depicts Apple's leadership structure. 

Tim Cook and his inner circle look after Apple's day-to-day operations, while the Industrial Design group look after Apple's product strategy. Meanwhile, Jony Ive as Chief Design Officer is left to do what he wants. If that role sounds familiar, it is the exact role formerly held by Steve Jobs. 

Evaluating Cook and His Inner Circle

With this new framework regarding Tim Cook's inner circle in mind, let's grade their performance:

Product Strategy. While companies like to think they have a lead against Apple when it comes to the next "big thing," it's difficult to find major fault with Apple's overall product strategy. We have been in the iPhone era for the past six years and unsurprisingly, the iPhone has performed well. Apple's primary new product initiative, Apple Watch, is starting to gain momentum. Apple is on track to sell more than 10M Apple Watches in 2017. This would position Apple very close to taking the title of best-selling wearables brand away from Fitbit. Meanwhile, AirPods will likely end up outselling Apple Watch. Blemishes when its comes to Apple's product strategy include sporadic Mac and iPad updates, seemingly slow progress with Siri, questionable user interface choices with new products like Apple Watch and Apple Music, and early mishaps with Apple Maps. 

Product Pipeline/R&D. The competitive landscape in tech is changing with the battleground centering around the body, automobile, and home. Apple is showing significant investment and interest with wearables (body) and transportation. Apple has been funneling cash into R&D at an alarming rate. In addition, Apple's M&A activity points to continued elevated awareness of Apple's limitations and weaknesses.

Operations. Ironically, one of Apple's sore spots in recent years has been Tim Cook's long-standing area of expertise. Apple has been experiencing increasingly noticeable supply chain troubles. It is becoming rare for Apple to have much, if any, supply available on product launches. While one assumes much of this is due to Apple simply meeting greater demand at launch, that is unable to explain everything. For much smaller product launches, such as that of Apple Watch, Apple has also faced severe supply issues. It has been three months since Apple Watch went on sale, and there is still a three-week wait to buy Apple Watch Series 2. Meanwhile, specialty items like Apple Pencil are pretty much out of stock for months at launch. Is this a byproduct of Apple having troubling maintaining such a large supply chain? Is it becoming harder to source components? Is Jeff Williams being stretched too thin? With all of that said, it's important to not grade Apple on a curve. The company is shipping more than 290M devices per year - not exactly a small feat.  

Marketing/Storytelling. Apple has had its fair share of lows over the past six years when it comes to product marketing, both with ads and explaining new products. Cook and the inner circle have been making changes to Apple's ad campaigns, including beefing up Apple's internal teams. The recent hire of Tor Myhren as VP Marketing Communications contains much promise, and early indications do show an improvement in Apple ads. However, Apple is still struggling when it comes to telling a product's story. While Jony appears to be the one able to tell that story, the lack of desire on his part to participate in keynotes leaves this story to be told either through keynote videos or subsequent press interviews. It probably is worth pointing out that this is one area on which Steve spent quite a bit of time and attention. Apple appears to be still trying to figure out how to fill his shoes in this regard. 

Culture. It's clear that Apple has changed under Cook. Power has moved to new people, which implies others have lost power. Apple is not the same little startup that it was during the iPod days. There is evidence that Cook and team are comfortable with giving Richard Howarth and the Apple Industrial Design group quite a bit of power. This implies other groups have likely lost some influence with Cook and his inner circle. The fact that Project Titan is completely separated from Apple suggests management is aware of some changes in how things are done within Apple. Titan needs more of a start-up mentality, something that may be more difficult to find within Apple itself. However, at the end of the day, the most important aspect of Apple's culture is putting the product above everything else. There is no clear evidence to suggest this ideal has disappeared or is any less important to Cook and team. 

Public Face. Cook has displayed the motivation and fortitude to represent Apple to the outside world. If judging Cook strictly on his own performance, this would likely represent his strength, which is surprising given his operations and numbers background. Cook recognizes that Apple holds quite a bit of power as the most valuable company in the world and truly believes that Apple and its broader mission should follow the concept of leaving the world in a better place. 

Financials. If we were grading Apple strictly by financial performance, Cook and his inner circle would get a passing grade. Apple's revenue is up 99% to $216B since 2011. Operating margins have remained steady. More than $185 billion of excess cash has been returned to shareholders through dividends and share repurchases. Apple shares are less than 10% off from their all-time highs. With all of that said, there are blemishes. It would be difficult for Cook and team to earn an "A" if going strictly by Apple financials. Apple hit a rough patch in 2016. Apple reported its first annual decline in revenue in 15 years. Management missed its revenue and operating income performance targets for 2016. In addition, AAPL shares have essentially been tracking the broader indices over the past two years. Nevertheless, it's been rare to see a public board penalize a CEO for essentially performing in-line with the overall market. 

In attempt to add a bit of relative context to this subjective grading: 

  • Product Strategy: A- 
  • Product Pipeline/R&D: A 
  • Operations: B- 
  • Marketing/Storytelling: C+ 
  • Culture: B+ 
  • Public Face: A+ 
  • Financials: B 

Obviously, there is room for improvement. The three weak points include: marketing/storytelling, supply issues, and finding a sustainable Wall Street narrative. While some people may penalize Cook and his inner circle for their treatment of the Mac, it would be tough to hit them over the lack of a Mac strategy driven by the Industrial Design group. (There is one although some may disagree with it). In addition, many have been quick to hit Cook for Apple being "behind" its peers when it comes to core technologies. There is not only quite a bit of subjectivity found in such a claim, but also evidence that suggests capability should not be interchanged with functionality and usefulness. 

The Apple ecosystem now includes more than 1.1 billion devices and approximately 800 million users. The iPhone, iPad, and Mac installed bases have seen significant growth over the past six years. If Apple were a sandcastle, Cook has overseen quite the massive construction phase. While credit for this achievement should indeed flow to Cook and his inner circle (the four were instrumental with iPhone, iPad, and Mac), there is a much more straightforward way to judge Cook as Apple's CEO. Is the product still the most important thing at Apple? It's not by accident that the only way to answer that question is to bring Jony and the Apple Industrial Design group into the question. This leads us to the most effective way to judge Cook and his inner circle. Is Apple still a design studio with a large technology company attached to the side? In response to that question, Cook and his inner circle are doing what needs to be done in order to maintain Apple's relevancy. 

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The Battle Lines in Tech are Being Redrawn

The competitive tech landscape is changing. Some companies with proven track records in mobile will struggle while new players are poised to find success. The battle for our attention is broadening into a massive land grab for the most valuable real estate in our lives. Unlike the usual refrain found with new technologies, this new era is already upon us. In fact, it began years ago.

Old Landscape

This week marks the 10th anniversary of Apple unveiling the iPhone. While many looked at that original iPhone as just a smarter smartphone, the device set off a revolution that is still unfolding today. The iPhone kicked off two battles; one has been settled while the other is still going strong.

Contrary to popular belief, the iPhone's most formidable competitor was never Google and its Android operating system. Instead, the iPhone's success was dependent on a smartphone being able to gain power and value in a sea of laptops and desktops. Apple saw this battle coming from a mile away. Here's Steve Jobs explaining why Apple decided to use OS X to power the iPhone:

"[S]oftware on mobile phones is like baby software. It's not so powerful, and today we are going to show you a software breakthrough. Software that's at least five years ahead of what's on any other phone. Now how do we do this? Well, we start with a strong foundation: iPhone runs OS X. [big round of applause from audience] Now, why would we want to run such a sophisticated operating system on a mobile device? Well, because it's got everything we need. It's got multi-tasking. It's got the best networking. It already knows how to power manage. We've been doing this on mobile computers for years. It's got awesome security. And the right apps. It's got everything from Cocoa and the graphics, and it's got core animation built in, and it's got the audio and video that OS X is famous for. It's got all the stuff we want. And it's built right into iPhone."

Apple knew in the mid-2000s that smartphones would become more than just smart phones. It took some of Apple's competitors years to come to this realization. The smartphone not only became much smarter, but also turned into the most valuable computer in our lives. While there is still a place for laptops, desktops, and of course tablets, the smartphone's value proposition no longer needs to be explained. That battle is over. 

However, the other battle kicked off by the iPhone is still ongoing and involves how we use our smartphones. Every company from Facebook, Instagram, Twitter, and Snap to Netflix and Spotify are competing against each other. All of these companies are chasing our time and attention. Time spent watching video on Facebook is time not spent watching original content on Netflix. Sharing photos on Instagram takes time away from sharing photos on Snapchat. We have a finite amount of time each day available to give to these companies. At stake is not just relevancy but all of the advertising and content dollars that are found with relevancy.

The Winners

Thanks to geographical limitations, this battle for our attention has produced two big winners:

  • Facebook (1.1 billion mobile daily active users)
  • WeChat (800 million daily active users)

Facebook and WeChat share much in common as they aren't just social networks or messaging platforms but instead curated versions of the web. There is then a long list of secondary players, including some Facebook-owned properties like Instagram and WhatsApp. Others like Snapchat and Twitter are struggling to match Facebook's users numbers but still have more than 100 million daily active users. These companies are battling each other for the advertising leftovers. 

Another big winner in the fight for our attention has been Apple. In a battle between Facebook and Twitter, Apple wins as the iPhone is the common denominator. The same can be said for competition between Netflix, Hulu, Amazon Video, and YouTube. This is one reason why Apple has been so complementary over the years to Facebook, Netflix, WeChat, Twitter, Uber and pretty much every other major iOS partner. It is in Apple's best interest for there to be a vicious fight for our attention when using iPhones as the more disjointed our attention is among various apps and messaging platforms, the more power falls to the device itself. Of course, Apple wouldn't mind if we spent time using their own dedicated apps, content, and services. Judging by Apple's profit share in the smartphone industry and cumulative iPhone unit sales, competition for our attention when using iPhones has resulted in very good business for Apple over the years. 

Exhibit 1: iPhone Unit Sales (Cumulative) 

In the extreme case of consumers giving most of their attention to a single company like WeChat in China, Apple still has a built-in advantage of being the company responsible for not just crucial components like the screen, processor, and fingerprint sensor, but also the camera and overall design of the phone. Bear case scenarios involving iPhone sales drying up in China due to WeChat grabbing so much power haven't panned out. Last month, WeChat reported that half of its users spend 90 minutes on one its properties every day. This means that attention is still being shared among a handful of mobile properties.  

New Landscape

Change is in the air. While the fight for our attention and relevancy is not over, advancements in hardware and data collection are leading to tech battle lines being redrawn. While the smartphone is the most valuable computer in our lives today, a new crop of devices are popping up. A land grab is unfolding as companies go after the most valuable real estate in our lives: our cars, homes, and even bodies. 

 
 

There are three key variables guiding this redrawn competitive map:

  1. Monitoring. Simply grabbing our attention while we use hand-held computers is no longer enough. Instead, value has begun to flow to devices and software that can monitor significant portions of our day. The end goal is capturing more of our data. 
  2. Intelligence. As devices collect a growing amount of our data, there will be a stronger need for these devices to learn from this data and then provide feedback to the user. Buzzwords like "machine learning" and "artificial intelligence" are now paraded around to describe this variable. In reality, a much simpler way of describing this trend is that computers will have to become smarter. 
  3. Personalization. In what may be the most underappreciated trend in tech today, new manufacturing techniques are allowing hardware personalization like we have never seen before. This will become critical as the line between technology and fashion becomes blurry. 

New Battleground

The best way of mapping this new competitive landscape is to look at the new battleground. 

Body. While smartphones continue to gain value in our lives, the form factor doesn't lend itself to being a great monitoring device. As software continues to invade the healthcare industry, the need for biometrics monitoring will increase. Advancements in terms of what can be captured using noninvasive sensors have already led to a new range of small computers that can be worn throughout the day and night. 

Automobile. We have been using boxes on wheels to get us from Point A to Point B for the past 100 years. The extent to which these boxes can be customized after purchase has involved folding down a seat or two. In addition, car utilization associated with car ownership is abysmal. The combination of electric powertrains, ridesharing, and autonomous driving represent the change that is needed for massive innovation to occur in the auto industry. Once these technologies and services become a reality (we are still waiting for autonomous driving), new design and manufacturing ideas will render boxes on wheels into smart rooms on wheels. This will have major implications not only on how we travel, but also on what takes place inside automobiles. 

Home. The smart home has been forecasted for decades. Ironically, much of what is now taking place in the category isn't too different from the utopian picture of us talking to our appliances. We are currently seeing a wave of what will likely turn out to be transitory products in the form of stand-alone microphones and speakers, such as Amazon Echo and Google Home, that use voice assistants to control what is still a very manageable number of smart home items. Over time, as the number of smart home items increase, new control methods and interfaces will need to be developed. 

Key Considerations

If the new tech battleground is expanding to the body, home, and car, each one of those realms seems to be a logical area for voice to gain quite a bit of power. At the same time, there are ongoing questions as to the role screens and cameras will hold in our lives. 

Voice. The current buzzword in tech is voice. The major theme from this year's CES dealt with hardware companies announcing their support for Amazon's voice assistant, Alexa. The plan is to put Alexa in anything that contains a microphone and speaker. Everything from large-screen TVs to cars is on the table. This has led to a narrative centering on "voice first" and "voice only" interfaces. Instead of relying on screens to gather and consume data, we will instead simply talk to a digital assistant using microphones worn on our bodies or situated throughout our homes and cars. In a world without screens, the tech landscape would be turned on its head. 

There are a number of glaring issues with the idea of voice as an interface. The biggest problem is that voice is simply not a great conduit for sharing and consuming large amounts of data. A simple weather query demonstrates this limitation. While a quick question about the current temperature to Alexa or Siri will lead to a straightforward answer, it becomes much harder to rely on voice to get the forecasted hourly temperature change throughout the day. This information can be easily consumed via a screen in a few seconds. Another example is found with consuming news. Using voice to stay informed of current news, also known as radio, will produce an experience inferior to a quick swipe through one's Twitter timeline or Facebook news feed.

Many are using voice in 2017 in a very transitory way, as a stepping-stone to something much more sustainable and valuable. No wonder one of the most popular uses for Amazon Echo is setting kitchen timers - something easily done with a smartphone. 

Instead of voice replacing our screens or becoming the only way we interact with our computers, voice will become a way we interact with our proactive assistant. However, the smarter this assistant becomes, the less talking will take place.

  • Why ask about the weather when a proactive assistant will know the best time to feed us the information we want to know?
  • Why ask about the day's top news when a proactive assistant can curate and then deliver stories to our nearest screen when it thinks it is the most convenient time?
  • Why use voice to turn on or off our smart home devices when home automation is a much better alternative?

The smarter a computer becomes, the less we should need to talk with that computer. The future of voice will include a whole lot more listening than talking. 

Screens. A bet that screens will retain value in the future will likely end up being a very good bet. Screens provide something that voice will never be able to offer: a visual window into the world. While the look and feel of screens as well as how we use screens in our lives will change, we will continue to use screens for a very long time to consume images, video, and even text. 

Cameras. One of the biggest revolutions to take place during the smartphone era has involved the camera. There is a very high likelihood that the camera found in your current smartphone is the best camera you have ever owned in your life. This has produced a situation in which photos and video are no longer just about memory capture. They have become a primary form of communication. Instead of voice wiping this medium away, there is a much higher likelihood that additional cameras and screens will enter our lives. Cameras will be the smart eyes that make self-driving cars possible. Cameras will make it possible for augmented reality to be consumed on our iPhones. Cameras will begin to be found in many devices, some of which will come as a surprise. 

Apple's Roadmap

Apple has done extremely well in the current tech landscape. The company has sold more than a billion iPhones and grew its iPhone installed base by a hundred million users in 2015 and 2016. Since unveiling the iPhone, Apple's stock price is up 800%. As the competitive maps are redrawn, Apple will face new opportunities and challenges. New competitors are going to enter the arena while surprising partnerships will likely jolt the space. 

Body. Apple's best chance of success will be found with the body. Apple excels at creating devices that require a deep integration of breakthrough hardware design and software. Wearables closely fit the bill. In addition, the manufacturing experience Apple has spent more than a decade building will help the company tremendously when it comes to producing increasingly smaller and more personal devices that fit into our lives. Apple is already on track to sell 30M wearable devices this year when combining Apple Watch and AirPods sales. In addition, Apple's stance on privacy has the potential to become a much more important topic in a world where devices are monitoring and collecting an increasing amount of our data, including sensitive biometric data. 

When it comes to competition for the body, Nike and Under Armour should not be ignored. While Nike was correct in getting out of the wrist wearables space years ago, the environment is going to change as the gap between technology and fashion shrinks. Nike's adaptive lacing technology may seem like a gimmick today, but it is a sign of Nike embracing technology in a much more direct way. We already see Nike and Apple partner with Apple Watch Nike+. This will likely grow into a much broader partnership between Apple and Nike that spans a number of products. Meanwhile, the legacy watch and fashion industries are going to face extinction-level competition.

The other realm of competition will come from the same companies currently competing for our attention on smartphones. Spectacles are the beginning of a much broader push by Snap that will eventually lead to the company selling augmented reality glasses. Facebook has indicated similar interest in placing screens on our faces. These devices will represent a prime example of how screens and cameras will continue to a play a pivotal role in our lives for a very long time. Will Apple be able to recreate the iOS platform for glasses? The company benefits from the fight for our attention on smartphones, and creating an environment in which there is a new battle in front of our eyes may be even more attractive. (Jony Ive and the rest of Apple's Industrial Design group are going to first need to solve the many issues found with wearing computers on the face.)

Automobile. When it comes to rethinking the car, some of the major themes found in the smartphone market are going to reappear. Today's cars are boxes on wheels. Tomorrow's cars are going to be smart rooms on wheels. There may be an opportunity for the car industry to experience its very own "iPhone" moment. Tesla's current offerings don't represent this earth-shaking change. 

As it does with the smartphone industry, value is going to flow to the companies that control both auto hardware and software. Autonomous driving and the machine learning powering these cars will require both significant hardware and software advancements. In addition, passenger compartments are going to become prime real estate for lots of data consumption (music, video, etc.). The fact that these smart rooms on wheels will be surrounded by lots of screens (i.e. windows and windshields) should give us clues as to how important augmented reality will become in the auto space. 

Apple has many of the ingredients to go very far in the car industry although the company is also missing some crucial technologies. My suspicion is that Project Titan's change in strategy is geared to first fill some of these technology gaps before proceeding with automobile hardware. Meanwhile, ridesharing and different ownership models will increase a car's utilization rate by almost 20x. This will have a major impact on the cost of travel. However, at the end of the day, design and manufacturing will be the two most important variables to watch in the auto space - two of Apple's biggest strengths. There is simply too much at stake for Apple (or any major tech company for that matter) to not have a comprehensive strategy for the automobile as cars turn into smart rooms on wheels.

Home. This is where Apple has the least attractive position. Given Apple's culture and functional organizational structure, one should not expect Apple to move down the path of selling various smart devices for the home. Selling niche hardware that will be owned for long periods of time without upgrading doesn't exactly sound too attractive of a business for a hardware maker either. Apple's answer to get around the lack of Apple-branded hardware is HomeKit and the Home app: Rely on third-party device manufacturers to come up with smart devices that can be controlled via iOS and Siri.

On paper, the strategy makes sense. Unfortunately, reality is quite a bit different. Expecting consumers to go out and buy lots of smart home devices at prices that are in some cases 10x more than those of their non-smart alternatives doesn't bode well for the smart home going mainstream any time soon. This is why Apple expects this process to proceed gradually, with consumers buying a few smart items in the beginning and then slowly building their collections over time. This is why predictions of Amazon and "voice only" interfaces ruling the home seem immature. It is simply way too early. When it comes to the home, value is going to eventually flow to automation, an element that Apple seems to be betting big on with its Home app. However, the hardware piece of the equation just isn't there. 

The TV industry remains a mess with no clear winner when it comes to video streaming, and the home may end up in a similar state. In some ways, Apple's Home app is similar to its TV app. Both strategies contain holes. 

After the iPhone

Everyone wants to know what will come after the iPhone. This is likely the wrong way of thinking about the future tech landscape. The new tech battle lines being redrawn don't assume there will be a "new iPhone." The iPhone will likely remain a very valuable device in our lives for many years, and companies are still going to be fighting for our attention when using smartphones. However, value has begun to flow to those companies able to place hardware and software in the most important parts of our lives: our bodies, cars, and homes.

The unknown found in this new competitive landscape concerns just how much autonomy these new devices will have. (Hint: It's much more than people think.) Instead of seeing wearables remain as iPhone accessories, we are going to see smartwatches, wireless headphones, and maybe even smart glasses gain independency. Instead of cars being controlled by our iPhone, cars will become like our iPhones.

The iPhone has had a major impact on society because it redefined a computer. For the first time, we had a computer that could fit in our pocket. We are quickly moving to the point of having many new computers on our bodies, on our roads, and in our homes.

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Apple Questions for 2017

I don't see any value in coming up with tech predictions at the beginning of a calendar year. Predictions are nothing more than an attempt to add a bit of manufactured clarity to what is ultimately a lot of unknown. Instead, January is a great time to embrace that unknown. One easy way of doing this is to come up with a list of questions for the new year. This not only helps guide our analysis in the coming months, but also proves incredibly useful for navigating Silicon Valley and Wall Street. 

My first set of Apple questions was published in January 2015 (available here), followed by the second installment in January 2016 (available here). My thoughts and observations on Apple's 2016 are available here

Here are my Apple questions for 2017: 

iPhone

  • New iPhones. How many new iPhone models will Apple unveil in 2017? For the first time, Apple is in a position to potentially unveil three different iPhone screen sizes simultaneously. Significant design changes are on the table for at least one model as well. This should not be treated lightly as it will test Apple's supply chain and demand forecasting. 
  • New Features. What will be the key new features found with the new iPhones? Traditionally, Apple has positioned three or four new features as the primary selling points. These are often a combination of hardware and software features. With the iPhone 7, Apple unveiled a list of 10 features although one could boil the list down to four primary features: Jet Black, the camera, stereo speakers, and wireless (AirPods).
  • OLED Displays. How will the rumored OLED display shortage hamper Apple's iPhone strategy in 2017? It's been hard to miss stories about the looming shortage of OLED displays. Meanwhile, the long-standing rumor about the iPhone line has been that Apple wants to transition to OLED due to the potential benefit on battery life in addition to OLED producing better picture quality.
  • iPhone Plus. Will Apple continue to differentiate the iPhone Plus model from the rest of the iPhone line? In 2016, the iPhone 7 Plus received a dual-camera system. It is not unreasonable for Apple to eventually give the largest-screen iPhone a completely different design than its smaller siblings. 
  • iPhone SE. What are Apple's plans for the iPhone SE? The $399 4-inch iPhone SE was the sleeper hit of 2016. While the product may not garner many headlines, the iPhone SE has played a major role in returning the iPhone line to unit sales growth. The combination of a smaller form factor and low price has been appealing to many customers (both existing iPhone users and new users). 
  • Pricing. How will Apple price its new iPhone lineup? Apple wasn't shy in passing along higher component costs found with the iPhone 7 Plus. At the same time, Apple is currently milking the iPhone when it comes to positioning the device as a new user magnet. This involves continuing the multi-year trend of gradually lowering iPhone pricing.
  • New User Growth Trends. Will Apple see a slowdown in iPhone new user growth in 2017? While the iPhone's contribution to Apple financials cannot be overstated, the product plays an even more important role for Apple. The iPhone is Apple's single most effective tool for expanding the user base. In 2016, the iPhone installed base grew by more than 100M users. This is on top of the iPhone seeing 100M new customers in 2015. (The math behind these figures is available here.) A vast majority of these users are new to the Apple ecosystem. No other Apple product comes close to having these new user numbers. 
  • Upgrade Cycle. The iPhone upgrade cycle has been slowing as iPhone users hold on to their devices for a longer stretch of time. How will the new iPhones impact the upgrade cycle heading into 2018? 

Apple Watch

  • New Apple Watches. Will Apple unveil new Apple Watches in 2017? Given the product's unique attributes, one cannot assume that Apple will follow an annual cadence with Apple Watch updates. However, September is a logical time for updates given the device's propensity to be gifted at the holidays. In addition, Apple's expansion of the Apple Watch line into Series 1 and Series 2 opens the door for a number of different options when it comes to updating the Watch line. 
  • New Features. How will Apple push the Apple Watch forward? Given the product's smaller supply chain footprint, especially in comparison to iPhone and iPad, there has been a noticeable lack of leaks surrounding potential new Apple Watch features. Logical choices include better battery life and faster processors.
  • Watch Bands. What kind of new Apple Watch bands will Apple unveil? Watch bands play a crucial role in Apple Watch adoption. New colors, materials, and collections seem likely at some point this year.  
  • watchOS 4. Which new features will anchor watchOS 4? New Watch faces and complications are high on the list. In addition, further refinements to the user interface would go a long way. 
  • Marketing. How will Apple Watch marketing evolve? We have seen Apple take Apple Watch messaging from a mini iPhone on your wrist to a health & fitness device that can do other things. This change gives Apple a much more effective strategy for competing against Fitbit. While the health & fitness focus may suffice in the near term, it's not a long-term marketing strategy as it will ultimately sell Apple Watch short.  
  • Price Cuts. Will Apple lower Apple Watch's entry-level price? The company has been aggressive when it comes to Apple Watch pricing. In just 17 months on the market, Apple Watch's entry-level price went from $349 to $269. This past holiday shopping season, Apple Watch Series 1 was available for $199 thanks to Black Friday promotions in the U.S.  
  • New Partnerships. Will Apple unveil new partnerships for Apple Watch? In 2015, Apple kicked off its Hermès partnership. Instead of announcing another traditional luxury partnership in 2016, Apple unveiled a significant tie-up with Nike for Apple Watch Nike+. Each partnership contains much intrigue with Apple not holding anything back in supporting its Watch partners. 
  • Financial Disclosures. When will Apple begin to disclose additional details about Apple Watch sales? The company already provides clues as to how Watch sales are trending. At a certain point, the benefits associated with releasing quarterly unit sales data will outweigh the drawbacks. 

AirPods

  • New AirPods. Does Apple plan on updating AirPods in 2017? AirPods aren't just a pair of wireless headphones. They are Apple's second wearables product. September would seem to be the most logical time for a revised version given its proximity to the holiday shopping season. 

Mac

  • New Mac Desktops. Does Apple plan on updating Mac desktops in 2017? Due to a number of reasons, Apple has been updating the Mac line in a piecemeal way. In 2015, Apple unveiled a 12-inch MacBook that gave major clues as to Apple's design strategy for Mac portables. Seventeen months later, Apple unveiled the new MacBook Pro with Touch Bar, which unsurprisingly shared much of the design language found in the 12-inch MacBook. We have not yet seen Apple's plans for the Mac desktop. 
  • Mac Pro and Mac mini. What is going to happen with the Mac Pro and Mac mini? A Mac mini increasingly looks out of place given its heritage as a product designed for enticing Windows users to Mac. Meanwhile, the Mac Pro may still interest the Apple Industrial Design group for no other reason than lessons learned from its unique manufacturing process.  
  • iMac. Where is the iMac's place within Apple's ecosystem? Management has provided a few clues suggesting that the iMac will continue to receive attention and resources. This may alleviate some concerns held by current iMac users worried about the lack of future updates. However, it's difficult to shake the theory that there may be something greater in store for the iMac. Are we moving to a point at which Apple will look at the iMac as the only Mac desktop? This would certainly create a firestorm within some parts of the Mac community.  
  • MacBook Pro Pricing. Will Apple reduce pricing for the new MacBook Pro in 2017? 

iPad

  • New iPads. Will Apple unveil new iPads in 2017? As with the Mac line, Apple has been updating the iPad line in a piecemeal way. Apple unveiled a 12.9-inch iPad Pro in September 2015, and this was followed by a 9.7-inch iPad Pro in March 2016. The current iPad line feels incomplete as only two of the five models that make up the line are new. 
  • iPad mini. What are Apple's plans for the 7.9-inch iPad form factor? Even though we have seen Peak iPad Mini, Apple is still selling more than 10M 7.9-inch iPads every year. There would be demand for an updated model. 
  • New Apple Pencil. The Apple Pencil was released in November 2015. Should we expect an updated Apple Pencil in 2017? Will the iPhone receive Apple Pencil support? 

Apple TV

iOS

  • Redesign. What does Apple have in store for iOS 11? This question could arguably turn into an entire post on its own. Given Apple's direction with the iPhone, an iOS redesign is high on the list. The traditional home screen and rows of apps are dated. In addition, an iPhone with the home button built into the screen requires iOS changes. We already saw some of these changes with iOS 10 with the greater emphasis on swiping left, right, up, and down instead of going back and forth to the home button. There is much more that Apple can do along those lines to have iOS 11 build off of iOS 10. 

Apple Music 

  • Paid User Trends. What is a realistic year-end goal for Apple Music paid users? Apple grew Apple Music by approximately 10M paid users in 2016. This would suggest that 35M to 40M paid users is an attainable year-end goal for Apple Music.  
  • Pricing. Will Apple reduce Apple Music pricing to drive stronger customer adoption? 
  • Music Exclusives. We know Apple will continue to bet on music exclusives. How will Apple double-down on music exclusives? 
  • Tidal. What is going to happen to Tidal? Jimmy Iovine has been very careful to paint a rosy picture of the relationship between Apple Music and Jay-Z. However, Iovine is then quick to argue there will be consolidation in the music streaming space. Notice how Tidal, and not Spotify, received a spot on this year's questions list. Apple Music's success is increasingly becoming decoupled from Spotify's path forward (an IPO or sale). 

Services

  • Apple Maps. How will Apple improve Apple Maps? We are getting to the point where Apple Maps is legitimately great in certain parts of the world compared to its competition. In the U.S. Northeast, Apple Maps is a winner. In other parts of the world, it's another story. Nevertheless, Apple has made much progress with Apple Maps and the incentive is there for ongoing improvement given maps' importance to Apple's transportation initiatives. 
  • Apple Pay. How will Apple work to improve Apple Pay acceptance in the U.S.? Outside the U.S., Apple Pay is seeing quite a bit of success. However, the U.S. is proving more difficult from the perspective of getting retailers to support Apple Pay. This has had a negative impact on customer adoption.  
  • Messages. What new features will Apple bring to Messages? Apple Pay support is coming eventually. Picture and video filters are other items worth considering. 
  • Siri. Needless to say, Siri will be a popular talking point in 2017. What does Apple have in store for SiriKit? Greater third-party support via Siri APIs would be high on the list. In iOS 10, the Siri API works with just six types of applications. Regardless of the progress made with Siri, I have a strong feeling that a certain segment of the Apple user base will remain incredibly disappointed with Siri's capability in 2017.

Project Titan

  • Autonomous Driving. After a strategy shift in 2016, what kind of progress will take place within Project Titan in 2017? Reports have positioned 2017 as a critical year for Apple's autonomous driving R&D efforts.  
  • Hardware Hires. Will there be new clues regarding Apple's ongoing interest in automobile hardware? A few months after Titan hit some speed bumps, Apple poached Alexander Hitzinger, a Porsche technical director responsible for the Porsche 919 hybrid. Hitzinger easily qualifies as one of Apple's most accomplished and talented hardware hires from the auto industry. 
  • Bob Mansfield. A hardware guru, with a proven track record of success, is leading Apple's car development project. It's difficult not to come up with a long list of questions about that dynamic. 

Washington and Wall Street

  • U.S. Tax Reform. When will we see U.S. corporate tax reform? While this question is seemingly put forth every year, odds of some kind of progress in 2017 are at their highest in years. 
  • U.S. Manufacturing. How will Apple respond to calls to bring more manufacturing to the U.S.? Upon closer examination, there is little chance of Foxconn and other Apple assemblers bringing high volume production to the U.S. any time soon. 
  • Wall Street Narrative. Apple still doesn't have an effective narrative on Wall Street. Will management find a sustainable narrative for Apple on Wall Street?
  • Buyback. How will Apple approach its buyback program in 2017? For the past few years, Apple CFO Luca Maestri has been overseeing a buyback program operating at its limits. Having the vast majority of its cash offshore hasn't helped Apple's capital management program. Apple can only raise so much debt to fund its dividend and buyback activity. Corporate tax reform, including changes to how offshore cash and earnings are taxed, will have a major impact on Apple's buyback (and dividend) strategy. 

Management

  • Turnover. Will there be any executive turnover in 2017? There hasn't been much movement within Apple's upper ranks in recent years. 
  • M&A. Will Apple continue to adjust its M&A strategy in 2017? Even though Apple continues to rely on M&A for filling holes in its asset base, there have been signs of change taking place in terms of Apple's investment philosophy. The company is willing to be a bit less secretive in order to get better access to newer technologies. The $1B investment in Didi and allowing AI researchers to publish are two examples. We already see signs of this revamped M&A strategy in 2017 as Apple just confirmed it will invest $1B into SoftBank's tech fund. 

Apple Industrial Design (ID)

For the first time, I am giving ID its own dedicated question category. Given the sheer amount of power given to ID within Apple, it only seems fitting.

  • Jony Ive. Simply put, will we get any surprises from Jony in the new year? It's safe to say Jony will continue to make some people uneasy in 2017. For 2016, the Apple design book certainly counts as a surprise. The completion of Apple Campus 2 this year may represent a major news event involving Jony given his immense contribution to the project. 
  • Marc Newson. Will we get any clues as to Marc Newson's role within Apple? I continue to think Marc Newson's involvement within Apple is being underestimated. Newson played a critical role with Apple Watch development and has experience with various product categories, including jewelry and cars, as well as a range of materials. 
  • Departures. Will we see any departures from the close-knit group of industrial designers in 2017? Danny Coster, who was considered one of the most senior members of the team, left Apple last year to help GoPro find a future. While one departure is not necessarily a sign of concern, it is something worth noting. Additional departures would clearly reveal changes are taking place within Apple Industrial Design.

Wildcards

  • New iPhone Nomenclature. Will Apple change its iPhone naming strategy? As the iPhone upgrade cycle gets longer, it makes that much less sense for Apple to stick with its current iPhone nomenclature. I will admit there is quite a bit of risk found with altering naming for such an iconic and popular product. However, that is usually the exact scenario that requires a name change. We are likely moving to the point where we simply refer to iPhones as "iPhone mini," "iPhone," and "iPhone Plus."
  • An iOS-powered MacBook. When are we going to see an ARM-based MacBook powered by an iOS variant? Given Apple's unusual Mac updating schedule, 2017 seems off the table for a release. Nevertheless, we may receive additional clues during the year that such a product is coming down the pipeline. It is becoming not a question of if, but of when. 
  • Foxconn. What should we expect from Foxconn in 2017? Apple's relationship with Foxconn is becoming more intriguing by the day. Foxconn has become Apple's most important business partner
  • New Products. What are the leading candidates for brand new Apple products in 2017? For 2015, I positioned an "Apple Pen" as a likely product in the R&D labs. That same year, Apple unveiled the Apple Pencil. Last year, I positioned a ring and "wireless EarPods" as the leading candidates for a brand-new Apple product. We got AirPods in December 2016. For 2017, a brand new health-focused product, possibly working alongside an Apple Watch, and a ring worn on your finger stand out as possible new products. Wearables are increasingly becoming a focal point for Apple's industrial design group.
  • Other Products. There is a somewhat large bucket of rumored products (hardware, software, and services) in the Apple labs. We can include various AR, VR, wearables, stand-alone speakers, etc. Will any of these see daylight in 2017? 

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