WWDC Clues Hint at Mac's Future

Apple used this year's WWDC keynote to let the world know it has every intention of supporting the Mac for the long haul. When reading between the lines, it becomes evident that the Mac's future is one of a niche product within Apple's portfolio. Meanwhile, Apple's messaging around the iPad during the same keynote couldn't be any different. As the Mac is going in the direction of niche, the iPad is being groomed to be the Mac/PC alternative for the masses.

Turning Point

The past few years have been an odd stretch for the Mac. Hardware updates have been unusually sporadic although the few updates that did ship were noteworthy. The MacBook Pro with Touch Bar, unveiled in October 2016, represented a prime example of Apple's strategy to use aspects of mobile to push the Mac forward. Apple silicon, Touch ID, and multi-touch displays bring a different kind of experience to the Mac. Throughout this awkward stretch for the Mac, the Apple Industrial Design team's influence on the Mac remained quite obvious, which only increased the level of uneasiness felt by many pro Mac users.

Management used this year's WWDC keynote to officially put an end to this odd Mac stretch. The keynote couldn't have been any different from the previous, somewhat awkward Mac event that took place this past October. This time around, Apple unveiled item after item, clearly targeting pro Mac users.

 
 

The new $4,999 iMac Pro was announced to much surprise and with certain configurations that were unimaginable for a Mac all-in-one just a few months earlier. Apple's decision to sell an external graphics development kit was also unthinkable just a few months ago.

It is likely that all of these Mac announcements had been in the pipeline for a while. Nevertheless, Apple seemed eager to spin a fresh Mac narrative around pro users. Much of this change in narrative and attitude was a carryover from management's recent Mac intervention with journalists at Apple HQ this past April. At that meeting, SVP Phil Schiller, SVP Craig Federighi, and VP John Ternus clearly telegraphed a revised Mac strategy focused on placing more attention on the tail end of the business. While one would think the new iMac Pro marks Apple's extent into niche Mac territory, the company still plans on releasing a completely redesigned Mac Pro. Given iMac Pro pricing, it is not out of question the for a new Mac Pro configuration to surpass $10,000. Let that sink in for a minute. 

The iPad Juxtaposition

If this year's WWDC keynote doubled as a Mac event (Apple dedicated 23% of stage time to the Mac), the event could have also moonlighted as an iPad event (Apple dedicated 21% of stage time to iPad). My full WWDC review is available for members hereHowever, when the two products were viewed back-to-back, there couldn't have been a more stark difference between them. While the pro in iMac Pro and Mac Pro stood for professional, the pro in iPad Pro stood for productivity.

During the Mac portion of the keynote, management's focus was on addressing the tail end of a 100M Mac user base. A $4,999 iMac Pro is not about adding productivity for the masses. Instead, it is targeting a particular kind of professional. Apple will likely sell fewer iMac Pros than cylinder Mac Pros sold to date. In terms of a redesigned Mac Pro, it is difficult to picture the machine even qualifying as niche. Instead, it will be a niche of a niche.  

Meanwhile, the iPad portion of the WWDC keynote was all about Apple bringing additional productivity to the masses. The new $649 10.5-inch iPad Pro continued Apple's multi-year bet on larger iPad screens (a very sound strategy). Apple also unveiled iOS 11 refinements for iPad that some had been hoping to see for years. One key aspect found in every major iPad software refinement was optionality. For those users craving additional capability, the new software features will prove to be quite valuable. However, for many iPad users, items like multitasking or the new Files app may never be used. In those cases, the same, familiar iOS experience will still be available. Apple was able to add productivity options to the iPad without changing what had gotten the product to where it is today - simplicity and ease of use. The not-so-subtle implication made on stage at WWDC was that the iPad is becoming more of a genuine laptop alternative for hundreds of millions of people.

Change in the Air

This year's WWDC keynote provided a glimpse of the Mac's future. A large portion of the Mac user base are going to find their computing needs met with iPad Pro. According to Apple, approximately 70% to 85% of the current Mac user base does not rely on professional Mac software. This amounts to approximately 80M people. These users are not app developers, nor do they have the need for the kind of power found in a MacBook Pro, iMac Pro, or Mac Pro. Instead, these users are likely attracted to the Mac for keyboard computing. 

As Apple pushes the iPad Pro forward with hardware and software advancements, including various keyboard improvements, these 80M Mac users are going to discover that the iPad is getting better at handling their computing needs. It's not that the Mac will lose value, but rather that a large multi-touch display running iOS will gain value. The shift won't occur overnight for the simple fact that consumers hold on to Macs for years. In addition, it is important to point out that Apple management won't have any issue with this development as long as these Mac users remain within the Apple ecosystem.

Over time, the exodus of non-pro Mac users to iPad Pro will transform the Mac into a niche product category. There will still be millions of users, but the machines will increasingly be geared toward narrow use cases such as VR and AR content creation. In addition, the Mac will become the preferred tool for those in various academic, science, and engineering fields.

 
Screen Shot 2017-06-22 at 12.57.41 PM.png
 

One may ask, what will happen to consumer-grade Macs, including the MacBook Air and 12-inch MacBook? They will be cannibalized by the iPad Pro line, much as the iPad mini has been cannibalized by larger iPhones. In fact, the entire Mac portable form factor is at risk of cannibalization at the hands of iOS screens. While this won't stop Apple management from pushing the MacBook form factor forward, consumer purchasing habits will speak volumes. 

The Achilles' Heel

Two months ago, I published "The Mac Is Turning into Apple's Achilles' Heel." My thesis was that Apple's inability to move beyond the Mac represents a vulnerability in an otherwise strong product strategy geared toward the mass market. Reaction to the piece came in swift and spanned the spectrum.

The issue facing the Mac has never been Apple's ability to give the product category attention. We saw evidence of this first-hand at this year's WWDC. Apple is able to update the Mac, along with every other product category. In fact, it is not a stretch to say the Mac's outlook within Apple has never been brighter and stronger than it stands today. If one were to place a bet on which current Apple product category will remain within Apple's product line the longest, the Mac would certainly be high on the list. This ends up supporting my thesis that the Mac is Apple's Achilles' heel.

It is very difficult envisioning Apple being able to move beyond the Mac. The product is on track to become a permanent niche within a continuously changing product line.

Apple is moving to a point where the product line will look something like: 

This may not seem like a problem for Apple. The Mac has been responsible for a lot of beneficial things at the company, including inspiring the current generation of content creators. However, the problem for Apple is that having a long tail end of the business comprised of niche Macs may pose a new kind of challenge. Apple Industrial Designers will need to look after the user experience found within a portfolio of mass market product. At the same time, they will need to handle the dramatically different user needs found with a niche product category, the Mac. It's not clear how they will do this. Will Apple designers cede control over the user experience to their engineering peers when it comes to niche Mac hardware? 

Unchartered Territory

While some people look at Apple's big risk as management's inability or unwillingness to move beyond the iPhone, that fear is misplaced. Apple is already moving beyond the iPhone as seen with more personal gadgets worn on our body.

Instead, the genuine risk facing management is that Apple will be unable to move beyond the Mac. This is unchartered territory for Apple. The theory that Apple has to move beyond legacy products in order to completely focus on the future is going to be put to test. It is also possible that the Mac will end up being the first product category that represents genuine growing pains for Apple. In the past, the company would have been able to bring its entire nimble user base from one product category to the next. A niche Mac line will put an end to that era.

Despite gaining niche status, the Mac will still play a major role in creating content consumed on future Apple products including wearables and transportation products. This will give the Mac a level of influence that should not be underestimated. While it is difficult for some to believe, now has never been a better time to be a pro Mac user. This year's WWDC made it clear that the Mac has a future at Apple. However, the amount of change headed towards the Mac should not be underestimated. 

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

HomePod

Apple unveiled a brand new product category last week at WWDC: HomePod. On the surface, HomePod seems like an unusual product for Apple. The company's most recent new products (Apple Watch and AirPods) form the foundation of an expanding wearables strategy. How does a stationary smart speaker fit into such a product strategy? Meanwhile, Amazon Echo and Google Home have led many to assume HomePod is merely Apple's me-too response to speakers piping voice assistants throughout the home. This isn't correct. HomePod isn't actually about Siri. Instead, HomePod will serve as the foundation for augmented hearing in the home.

A Computer with Speakers

While HomePod is technically a smart speaker, it is more correct to say HomePod is a computer with a touchscreen, speakers, and microphones. The device is powered by Apple's A8 chip, the same chip found in an iPhone 6 and 6 Plus. This chip is responsible for turning HomePod into a computer that contains the best-sounding speakers most people will have ever owned. 

 
 

I was able to listen to HomePod play various music genres last week. (My full WWDC review is available for members here.) Apple is not overselling the device's speaker capabilities. In a somewhat controlled environment resembling a typical living room, HomePod's sound output clearly stood out from that of Amazon Echo and Sonos Play 3. In fact, it made the Amazon Echo sound like a cheap toy, and the Sonos Play 3 sounded so inferior, I wondered if something was wrong with the Sonos.

As I walked around the room, there was no change in sound quality coming from HomePod. Standing to the side of the computer, I mean speaker, rather than sitting right in front led to the same listening experience. When two HomePods were used simultaneously (there was about a five-foot gap between the two computers), a different experience was produced. Instead of just amplifying the sound, the two units worked together to produce a richer experience. It is easy to imagine how situating two HomePods in opposite corners of a room could lead to a revolutionary listening experience.

 
Screen Shot 2017-06-08 at 9.06.55 PM.png
 

HomePod's Value

During the WWDC keynote, Apple positioned HomePod as a great speaker for playing music that can do a few other things. Those "other things" involve using Siri as a digital voice assistant. In addition to controlling various HomeKit-enabled devices around the house, Apple plans on allowing Siri to handle a set of its most popular requests out of the gate. These capabilities will be similar to those of other smart speakers in the marketplace. 

This has led many to conclude that HomePod isn't actually too different than the competition, especially if Siri is deemed not as capable as other voice assistants. However, such logic severely misinterprets the situation. HomePod's value isn't found in asking Siri for sports scores or controlling the kitchen lights. HomePod's value is found in an A8 chip controlling a series of microphones and speakers.  

HomePod is a computer capable of mapping a room and then adjusting its sound output accordingly. This is another way of saying that HomePod is able to capture its surroundings and then use that information to tailor a specific experience to the listener. It is easy to see how collecting data and then using that data to improve the experience will position HomePod as an augmented reality (or maybe we should say augmented hearing) device. 

Augmented Hearing

Whenever the topic of augmented reality (AR) is discussed, most people automatically think of the visual world. We are able to view additional information that augments reality. Apple began to lay out its big AR push with ARKit for iPhone and iPad. However, AR can also apply to hearing and sound. In both cases, we are given new sensory stimuli capable of changing our perception of the surrounding environment. 

Augmented hearing in the home begins to play in the realm of omnipresent computing. It is not out of question that HomePod will eventually be able to grab data from our surroundings and then provide personalized feedback to us wherever we are at home. (Given how multiple HomePods can communicate with each other, this could be both in and around the house.) Signal processing and far-field voice recognition, items which were not demoed last week, will make it possible for the user to respond to or interact with HomePods in a normal environment containing people and plenty of other noise. While HomePods will handle this task indoors, AirPods can serve as the solution for when we are away from the home. One would be correct to think of HomePods and AirPods as siblings. 

A few augmented reality examples include the HomePod recording and copying the sound from one location or room and then replicating that sound in another room. This would be game changing as it would be as though we were in a completely different room even though we hadn't changed locations. An adult would be able to speak to a child in another room by simply talking out loud in a regular tone thanks to multiple HomePods. In these examples, we are beginning to redefine how we consume sound in the home. Discussions will one day be able to be wired through HomePods and then delivered directionally so that someone in a crowded room will be able to have a private chat without the need for headphones. In effect, the definition of sound as we currently know it will be altered. In these examples, the use of multiple HomePods working together with each other multiples the value found with using the devices. 

The Strategy

The competitive tech landscape is changing as the battle for our attention when using smartphones is broadening into a massive land grab for the most valuable real estate in our lives. The tech battle lines are being redrawn around three areas: cars, homes, and bodies. HomePod is part of Apple's growing battle for our home.

 
 

There a few variables guiding this new competitive landscape. 

  1. Monitoring. Value will flow to devices and software that can monitor significant portions of our day.
  2. Intelligence. Devices will learn from this data in order to provide feedback to the user.
  3. Personalization. Hardware personalization will gain importance as the line between technology and fashion becomes blurry.

HomePod plays squarely in two of those three factors out of the gate. A HomePod will make for a great monitoring device while it will also be able to provide intelligent feedback via speakers and microphones. While HomePod doesn't play in hardware personalization similar to that of Apple Watch and other wearables, the personalization angle takes the form of tailored, personalized listening experiences suited to our specific hearing needs. 

When it comes to the concept of a smart home, we are still looking at pretty rudimentary ideas. A home won't be truly smart until tech companies build housing and we are no longer able to tell between smart and non-smart items. Up to that point, a smart home describes the concept of controlling things around the home that move. Given how the smart home battle is still in the early stages, Apple has the opportunity to do quite a bit with HomePod and the concept of augmented hearing in the home.

HomePod is not Apple's first product designed to compete for our attention in the home. Instead, Apple has been selling Trojan horses in its battle for our home called iPhones, iPads, and Apple Watches. These mobile devices are very likely to remain near us, or in some cases, on us, when we are at home. HomePod is unlike the Amazon Echo because it doesn't pretend that we lack smartphones, tablets, or wearables. This is one reason why Apple decided to take a straightforward path in pitching HomePod as a great music speaker. The device is all about producing sound so great that it cannot be replicated by any of our other devices, even if the HomePod has touch controls located on the top of the device. 

Pricing

When it comes to pricing, HomePod should not be compared to voice assistant conduits such as Amazon Echo or Google Home. The HomePod is not just a "smart speaker." Saying that HomePod is competing against Amazon Echo is equivalent to saying the iPod competed against generic MP3 players.

Instead, a more relevant HomePod comparison would be dedicated speaker systems from Sonos and Bose. With HomePod, Apple is aiming to sell the best speaker someone has ever owned. The Sonos Play 5, at $499, may be the closest comparable speaker to HomePod within the Sonos lineup. At $349, HomePod is priced very competitively not only when it is compared to the Play 5, but even when it is compared to the $299 Sonos Play 3, which was inferior to HomePod in terms of sound quality. Meanwhile, surround sound speaker systems from Bose retail from $700 to $1,000, or the same price as three HomePods. 

Of course, comparing HomePod to existing speakers in the marketplace ignores the fact that HomePod is powered by an A8 chip. This is like comparing AirPods to a simple pair of bluetooth wireless headphones lacking Apple's W1 chip. While Sonos claims to do some form of room mapping to alter its sound output, the process just doesn't compare to that which is found with HomePod. 

Challenges

As with any major new product category from Apple, management is placing a few big bets on HomePod. Apple is ultimately looking to sell a new idea to consumers. This idea involves positioning stationary speakers throughout the home. The concept may seem like a stretch today because it mostly is when looking at the current state of standalone speakers. Judging by sales, the standalone speaker market is niche. We have not seen the need to buy stand-alone speakers to accompany existing speakers found in TVs, iPhones, and iPads. Apple wants to change consumer behavior with HomePod. The other challenge Apple faces is convincing people of the value attached to augmented hearing. 

Goals

Apple likes to point out how music is in its DNA. We can look at iTunes, iPod, iPhone, Apple Music, and now AirPods, as well-known Apple products tasked with rethinking how we consume music. One product missing from that list is the iPod Hi-Fi. In what may come as a surprise to many, Apple actually sold a standalone speaker (which also retailed $349). The fact that iPod Hi-Fi was available for just 17 months back in 2006 and 2007 speaks volumes as to its ultimate success.  

There are key differences between that speaker and HomePod. iPod Hi-Fi was meant to sell iPods (and iTunes) by making it easy to connect an iPod to a great-sounding home stereo. HomePod is given a much more ambitious goal, which is to reinvent sound in the home. In fact, Apple wants HomePod to redefine sound in the home much as iPod, iPhone, and now AirPods, redefined sound on the go. Apple will begin this quest by initially positioning HomePod as a great speaker that can add value to the Apple ecosystem. Apple's audio engineering team is at a completely different place today than it was 10 years ago. However, the fundamental difference between HomePod and iPod Hi-Fi quickly becomes obvious as Apple silicon allows the HomePod to do revolutionary things with speakers and microphones. 

The writing is on the wall: Apple wants to control as many speakers in our lives as possible. Controlling sound is Apple's secret strategy for gaining a stronger foothold in the home.

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

iPhone Evolution

The iPhone's most remarkable quality is the degree to which its role in our lives has changed. In 2007, the iPhone was a computer that fit in our pocket. The product evolved into the most valuable communications tool in our life thanks to advances in camera technology. We are now on the verge of the iPhone becoming a new kind of personal navigator as Apple embraces augmented reality. The iPhone's role in our life doesn't remain static, but rather it evolves. This fact has major implications when it comes to thinking about iPhone sales and pricing, screen size preference, upgrade trends, and even how other gadgets will fit into our lives. 

The iPhone 7 Plus

One takeaway from Apple's 2Q17 earnings was that the iPhone 7 Plus is selling surprisingly well. Management assumed the larger iPhone form factor would gain popularity, but iPhone 7 Plus demand has exceeded Apple's internal expectations. Not only has the iPhone 7 Plus sold well in the U.S. and Europe, but the model is seeing double-digit sales growth in China.

Relying on app usage trends provided by Fiksu, iPhone 7 Plus demand looks to be up at least 20% year-over-year compared to the iPhone 6s Plus. Given that overall iPhone sales are trending flat year-over-year, sales of the other iPhone models are not as robust as that of iPhone 7 Plus. In fact, management commented on how subdued interest in older iPhone models drove much of the sales weakness in China last quarter.

 
 

This raises an obvious question: Why has the iPhone 7 Plus seen such strong demand? The model looks very similar to an iPhone 6 Plus and iPhone 6s Plus. In addition, consumers have had the option to buy an iPhone with a 5.5-inch screen for three years. 

The most logical explanation is that the iPhone's role in our lives continues to change, and iPhone 7 Plus features have become more appealing than those of smaller iPhones. Bigger screens are gaining popularity because photos and videos are becoming a more crucial part of our daily communication. While large screen smartphones have been popular in Asia for years, momentum is only now building in Western markets. In addition, the dual-camera system in the iPhone 7 Plus has led to Apple's significant marketing campaign around Portrait Mode. The iPhone 7 Plus camera is actually one of the more marketable iPhone features in years, which speaks volumes about iPhone being the key communication device in our lives. 

 
 

Evolution

Up to now, iPhone evolution has meant the process of Apple gradually improving features and components each year. Rather than calling a new iPhone a revolutionary update, we look at year-to-year hardware and software changes as evolutionary. However, this doesn't do a great job of describing what is really taking place with the iPhone. The iPhone's role in our lives is the item actually evolving. The iPhone is not a static product providing a similar experience year in and year out, much like a laptop or desktop. Instead, the iPhone's definition changes over time thanks to software and hardware advancements.

2007. Next month marks the tenth anniversary of the iPhone's launch. In what is now widely referred to as the greatest product unveiling of all time, the iPhone introduction provides an easy way to see the iPhone's initial definition out of the gate. The iPhone was positioned as a widescreen iPod with touch controls, a revolutionary mobile phone, and a breakthrough internet communicator wrapped into one product. Judging by the audience's reaction and applause, the most anticipated feature was the revolutionary mobile phone, not the internet communicator. Said another way, the iPhone was initially viewed as a different kind of phone. 

 
Steve Jobs introduces the iPhone in January 2007.

Steve Jobs introduces the iPhone in January 2007.

 

2008. The App Store introduction in July 2008 set the iPhone on its current trajectory. It became clear that the iPhone wasn't just a phone, but rather a computer that fit in one's pocket. The potential found with iOS was not fully appreciated at launch. A smartphone was initially looked at as a device supplementing our PC usage while away from the desk or home. This is one reason why Blackberry was so popular among business users. For the first time, they had access to their email while away from the office.

2012. Facebook's acquisition of Instagram in 2012 was a turning point not for Facebook, but rather for the smartphone camera. Around this time, the iPhone's role in our lives was also changing. The device was no longer just about having email or webpage browsing in our pocket. The camera began to gain value. We started using cameras for more than just capturing memories. Social networks based entirely on pictures started to take off. Other companies, including Snapchat, soon followed in terms of fostering new forms of communication based on new visual mediums. If the camera renaissance began in 2012, then the video renaissance started a few years later. Everyone is now battling for live streaming prominence. The latest trend with video filters begins to reveal where things are headed: augmented reality.  

AR Navigator

There are signs that the iPhone's role in our lives is about to change once again. We are on the verge of the augmented reality (AR) era. Apple has been investing heavily in AR for years with a number of notable acquisitions including Metaio, Emotient, Polar Rose, Faceshift, PrimeSense, Flyby Media, and Perceptio. AR is going to turn the iPhone into a smart pair of eyes. These eyes will transform the iPhone's functionality. Much of what has been written and said about AR positions the technology as merely an interlacing of objects with a real-world layer. Snapchat filters come to mind. However, the much more interesting and valuable attribute found with AR is having a device extract data from our surroundings and then offer additional value and context to the user. The dual-camera system found in the iPhone 7 Plus is able to extract more data than any other iPhone camera. 

Near-Term Implications

Higher Pricing. As the iPhone's role in our live continues to evolve, the device has been able to capture an increasing amount of value. When phones were just phones, we were willing to spend a certain amount on the device and corresponding service (voice minutes and text messages). Once the iPhone kicked off the era of smartphones turning into computers, we valued "phones" differently. We were willing to pay much higher prices because the devices provided additional value. Once an iPhone becomes an AR device, we are going to place even more value on the device. This will manifest itself in higher iPhone pricing. There is a reason why there has been an increasing number of reports and rumors about future iPhone pricing exceeding $1,000: It makes plenty of sense. 

Higher Costs. Simply put, it is costing Apple more to build iPhones. Apple is passing these higher component costs on to consumers. Apple increased iPhone pricing by $100 in 2014 for the 5.5-inch screen found with the iPhone 6 Plus. Pricing was raised by another $20 last year to account for the dual-camera system found in the iPhone 7 Plus. An iPhone model exceeding $1,000 is inevitable due to the simple fact that screen and camera technology costs are increasing. This may seem to be a recipe for disaster when it comes to iPhone demand. However, iPhone 7 Plus shows there has been a certain level of inelasticity found with iPhone demand. It all comes back to iPhone evolution and the iPhone's role in our lives changing to support higher pricing. 

Screen Size Preference. The 4-inch iPhone SE served Apple well over the past year. According to my estimates, Apple sold 30M iPhone SE units to date. However, the iPhone's evolution will likely impact screen size preference going forward. The desire for one-handed iPhone use is being surpassed by the desire to consume photos and videos on larger screens. It is becoming difficult to see 4-inch iPhone screens remaining in Apple's product line. Instead, the product will likely be cannibalized by iPhones with larger screen to bezel ratios. Apple will be able to fit larger screens in a similar form factor, thereby solving the dilemma experienced by those wanting not only one-handed iPhone use, but also larger screens.

Long-Term Implications

iPad Demand. As larger iPhone screens become the norm, small iPad screen demand will continue to decline. As discussed in my "Peak iPad Mini" article published in November 2015, there is no room for the iPad mini in Apple's evolving product line. Going forward, the iPhone will continue to represent the iPad's biggest headache. Larger iPhone screens handle many of the core items that were initially positioned as key iPad selling points. This will force Apple to position the iPad as a high-end device focused on larger screens and tasks such as writing, drawing, and sketching.

Wearables Demand. The iPhone may be great at capturing the world around us, but it comes up short in terms of capturing a crucial part of our lives: biometrics data. Health monitoring will represent a key use case for wearables (not just for Apple Watch). It may seem counterintuitive, but the more crucial of a device the iPhone becomes in our life, the more room there may be for a new breed of device. 

Upgrade Trends. While the iPhone upgrade cycle will continue to elongate, a ceiling may begin to appear preventing the iPhone upgrade cycle from approaching that of a PC or Mac. The iPhone's evolving role in our lives makes the product much more dynamic than a laptop or tablet. The amount of change seen over the course of four to five iPhone versions will likely keep the average upgrade cycle from extending beyond five years. The wild card is the degree to which consumers embrace annual upgrade plans that take much of the decision-making out of the process and make iPhones that much more accessible to the mass market. 

It's All About the Camera

Critics have been wrong about iPhone over the past 10 years because they failed to predict iPhone evolution. When the iPhone was just a computer in our pocket, the device was said to eventually lose to lower-priced computers. Instead, the iPhone became the most valued communication tool in our lives. Some now think the iPhone will lose to the most powerful communication services currently running on the iOS platform. However, the iPhone won't just remain a communication tool. Instead, the iPhone is quickly becoming a personal navigator capable of capturing much more data around us. 

My theory as to why the iPhone has evolved while larger screens like tablets, PCs, and TVs have seen much less change is that the iPhone contains the most valuable camera in our lives. As the iPhone's role in our lives has changed, camera usage has increased. We are giving much more value to the most mobile camera in our lives. The fact that we have our iPhones on us throughout the day breeds this evolutionary process. It also helps having an industry the size of the smartphone industry work on advancing certain core technologies found with the camera (hardware and software). The camera's importance to iPhone evolution raises an intriguing idea. The iPhone's future may be found by forecasting how we will use and value cameras in our lives.

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

Apple Wearables Sales Outpacing iPhone out of the Gate

Apple's wearables platform is gaining momentum. According to Apple's most recent earnings and management commentary, the company sold more than five million wearable devices last quarter. When combined, Apple Watch, AirPods, and W1 chip-enabled Beats headphones are now outselling Mac in terms of unit sales. More impressively, Apple wearables are tracking ahead of iPhone in terms of unit sales out of the gate. As competitors continue to approach wearables with caution, Apple is doubling down. 

Apple's Wearables Platform

Apple's wearables platform consists of three product categories:

  • Apple Watch. Launched in April 2015, Apple Watch is Apple's first wearables device. After reconfiguring the Apple Watch line this past September, Apple now sells five Watch models ranging from a $269 Apple Watch Series 1 to a $1,499 Apple Watch Hermès. To date, Apple has sold 25M Apple Watches (my estimate). 
  • AirPods. AirPods are much more than just a pair of wireless headphones. The inclusion of Apple's new W1 chip, along with a series of sensors and voice accelerometers, position AirPods as Apple's second major wearables product. Despite launching with very limited supply in December 2016, Apple has managed to ship at least three million AirPods (my estimate) in a little more than three months on the market. This amounts to $475 million of revenue in just the first 14 weeks on the market. 
  • Beats headphones. The inclusion of Apple's new W1 chip means three Beats headphone models (BeatsX, Solo3, and Powerbeats3) should be classified as Apple wearables. The expectation is that these headphones will gain additional features in subsequent versions. 

Apple launched a wearables platform with Apple Watch two years ago in April 2015. Apple has since expanded the platform to include devices for the ears (AirPods and Beats headphones). As Apple unveils new wearable devices and form factors, those products will expand the company's wearables platform.

Sales Trends

There has been an intense debate involving wearables and how to define sales success. The best way to begin addressing the issue is to go over the sales numbers. As seen in Exhibit 1, Apple Watch and iPhone have been trending similarly when we look at sales out of the gate. When looking at the first two years each product was available in the market, we see that both Apple Watch and iPhone are outpacing early iPod sales by a wide margin.

Exhibit 1: Early Sales Trends (Two Years Following Launch)

Rearranging the data from Exhibit 1 into cumulative unit sales removes the seasonal impact. It becomes easier to see how Apple Watch and iPhone are running neck-and-neck for second best-selling Apple product category across the first eight quarters following launch. The fact that Apple has sold nearly the same number of Apple Watches as iPhones during the first two years on the market will surprise many people. The narrative surrounding Apple Watch does not match that of a product very close to being the second best-selling product out of the gate in Apple's history.

 
 

This past quarter marked the eighth quarter that Apple has been selling a wearable device. When AirPods and Beats headphones unit sales are added to Apple Watch sales, the true extent of Apple's wearables platform becomes apparent. Apple's total wearables sales are outpacing iPhone sales out of the gate. As seen in Exhibit 2, AirPods and Beats headphones sales boosted Apple wearables sales in the seventh and eight quarters following Apple's wearables platform launch.

Exhibit 2: Early Sales Trends (Two Years Following Launch)

Screen Shot 2017-05-11 at 2.56.31 PM.png

On a cumulative unit sales basis, Apple wearables sales are exceeding iPhone sales by two million units after the first eight quarters on the market. Wearables are Apple's second best-selling product category out of the gate.

 
Screen Shot 2017-05-10 at 5.34.44 PM.png
 

Key Considerations

Whenever sales comparisons are made between Apple wearables and iPhone and iPad, there are a number of key differences between the product categories that need to be discussed.

iPhone. In 2007, Apple launched the iPhone with very limited distribution. For the first four months, iPhone was only available at AT&T in the U.S. By time the iPhone 3GS launched in 2009, the iPhone was available in 80 countries. The iPhone's limited distribution masked the product's underlying adoption trends. During those first two years on the market, consumers began to see value in a hand-held computer. This makes it impossible to know how well the first iPhone would have sold if it was given a much wider launch. It took a few years for the mass market to become interested in iPhone. 

iPad. The iPad launch was timed perfectly and enabled the iPad to ride the iPhones' coattails. The iPhone app bonanza certainly contributed to iPad sales in addition to the fascination found with much larger multi-touch screens running iOS. While the iPad saw a limited rollout at launch, distribution was much wider than it was with the iPhone launch a few years earlier. 

Apple Watch. Despite Apple Watch seeing a much wider rollout at launch, the product has faced a different kind of constraint. Apple Watch requires an iPhone. This has the effect of more than doubling the entry-level price of Apple Watch for non-iPhone owners. Even though the Apple Watch was available in nine countries, including China, at launch, the product's target market was closer to 500M people. 

AirPods. AirPods launched this past December in more than 100 countries. Exhibit 2 adds AirPods sales to Apple Watch and Beats headphones sales beginning in the sixth quarter following Apple's platform launch. This ends up adding quite a bit of conservatism to Apple wearables sales as AirPods will likely be on an annual sales pace measured in the tens of millions per year by time they have been available in market for eight quarters. As long as supply improves, AirPods will likely give the iPad a run for its money in terms of it being the best-selling Apple product out of the gate over the first two years. (The methodology and math behind my AirPods sales estimates are available for members here.)

Context

One takeaway from all of these launch and distribution differences is that each product has faced its own set of unique situations and challenges. However, there is value found in comparing sales of wearables to those of early iPhone and iPad because such comparisons provide context for wearables sales.

Many people have been grading Apple wearables on a curve, looking at the devices through an iPhone lens. Since unit sales pale in comparison to current iPhone unit sales (220M a year), wearables are being cast off as either disappointing or irrelevant. This ignores what is growing momentum for Apple's wearables platform.

To have Apple wearables sales outpace iPhone sales out of the gate when looking at the first two years of availability demonstrates that wearables are a thing. Apple has built and sold more wearables than iPhones after the first two years in the market. That fact goes a long way in helping to define just how significant Apple wearables sales have been. It is irrelevant if Apple could have shipped additional iPhones by launching with wider distribution back in the late 2000s. An argument can be made that Apple would have sold many more wearables this past quarter if it wasn't for severely constrained AirPods supply.  

Redefining Wearables

Too much attention is being placed on Apple Watch as holder of the wearables torch. Instead, the focus needs to be placed on both Apple Watch and AirPods, with W1 chip-equipped Beats headphones representing Apple's third wearables product category. Instead of looking at these wearable devices as standalone products with few similarities or overlap, we should view them as coming together to create a platform, as shown below. AirPods usage increases the value found with Apple Watch ownership. The reverse applies as well. Apple Watch usage increases the value found in AirPods ownership. This interdependency is only going to intensify and likely boost overall Apple wearables sales.

 
 

Looking Ahead

According to my estimates, Apple is on track to sell more than 30M wearable devices in 2017. This is an astounding figure considering that it would represent approximately 15% of the number of iPhones Apple is expected to sell in 2017. As seen in Exhibit 3, there is a strong probability that Apple wearables sales will continue to outpace iPhone sales when looking at the first three years of availability following launch.

Exhibit 3: Early Sales Trends (Three Years Following Launch)

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Looking out a bit further to the first five years of availability following launch, things become even more interesting. The iPhone began to outsell the iPad three years following launch, and the sales gap has increased ever since. Similarly, Apple's wearables platform is positioned to outsell iPad in roughly the same amount of time following launch. It is not out of question that Apple wearables will continue outpacing iPhone as we move to four years of availability following launch. While this is no small task as Apple would likely need to double the number of wearables it is currently selling, AirPods would play a key role. 

Exhibit 4: Early Sales Trends (Five Years Following Launch)

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Note: AboveAvalon.com projections used for wearables sales quarters 9 to 12.

Momentum Building

This past holiday season, Apple passed Fitbit to grab the title of largest wearables company. This past quarter, for the first time, more Apple Watches than Fitbit devices were sold. The number of people wearing an Apple wearable device has likely surpassed 20M. Apple is laying the foundation for a wearables platform that will eventually grow to annual unit sales in the hundreds of millions of devices. 

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

Apple Isn't a Tech Company

Apple continues to be misunderstood. With the company's cash cows showing signs of maturity, Apple's interest in new industries is growing. Questions are swirling as to where Apple may be headed next. The answer is found by assessing how Apple views itself and the role it has to play in the world. Apple isn't a tech company, but rather it's a design company betting that consumers want something more than just technology in their lives. 

Defining Apple

Over the years, Apple has been given a number of labels: 

  • Computer company
  • Technology company
  • Product company
  • Consumer electronics provider
  • Mac company
  • iPod company
  • iPhone company
  • Luxury retailer
  • Consumer discretionary company
  • Consumer staples company

Some of these labels were more valid than others. In some cases, the label was meant to represent Apple's relationship with customers. Other labels went a bit further in an attempt to describe some aspect of Apple's culture or product philosophy.

Even Apple contributed to a few labels. In January 2007, Steve Jobs announced that Apple would drop the "Computer" from its name and become just "Apple Inc." to reflect the changing product line. The name change led some to believe that Apple now viewed itself as a consumer electronics company or even an iPhone company. However, a corporate name change doesn't tell us much about how best to define a company.

A more interesting clue about how Apple views itself came three years later, at the end of the iPad unveiling keynote, when Jobs talked about how Apple was able to make a device like the iPad. Here's Jobs: 

"The reason that Apple is able to create products like the iPad is because we've always tried to be at the intersection of technology and liberal arts. To be able to get the best of both. To make extremely advanced products from a technology point of view but also have them be intuitive, easy to use, fun to use, so that they really fit the users and users don't have to come to them, they come to the user. And it's the combination of these two things that I think let us make the kind of creative products like the iPad."

 
 

Clues

This location at the intersection of technology and liberal arts explained why competitors had such a difficult time competing against iPad (as they still do today). There was something more to the iPad than just technology. However, this still doesn't tell us how best to define Apple going forward. Instead, a closer examination of Apple's business provides more valuable clues. 

Power Structure. In the late 1990s, Steve Jobs shifted the power structure within Apple so that designers had control and influence over engineers. The logic in turning Apple into a design-led company was that design is the item that leads to great products. The iMac was the first product to be born out of this new power structure. 

Since becoming CEO in 2011, Tim Cook has made a number of leadership and managerial changes that amount to giving even more power to Apple designers. My theory is that these changes have reinforced a structure that splits Apple leadership into two groups:

  • Operations and corporate strategy
  • Product

An inner circle comprised of Tim Cook, Eddy Cue, Phil Schiller, and Jeff Williams oversees Apple's day-to-day operations and broader corporate strategy. This inner circle is supported by a number of SVPs and VPs. In addition, Cook increased the number of direct reports to the CEO while expanding the managerial reach of those making up the inner circle.

Meanwhile, the Apple Industrial Design group is positioned as the overseer of Apple's product direction. Christopher Stringer is a veteran Apple industrial designer who recently was reported to be leaving Apple. A few years ago, during Apple's Samsung trial, he explained that the job of an Apple industrial designer is "to imagine objects that don’t exist and to guide the process that brings them to life."

As seen in the following diagram, which was published in my "Grading Tim Cook" article, Apple leadership is split into two groups: operations/corporate strategy and product. This structure doesn't resemble that of a technology company. The Industrial Designers have continued to consolidate power during the Tim Cook era. 

Organizational Structure. It is logical to assume that the significant amount of change in power structure has resulted in cracks forming elsewhere within Apple. While some of this has manifested itself in certain groups losing influence or sway with management, the broader culture at Apple doesn't appear to have been jeopardized. The company's functional organizational structure has played a significant role in keeping corporate politics somewhat at bay. The focus, by design, remains on the product. 

In managing the Industrial Design group, Howarth isn't simply overseeing a team of 17 industrial designers. Instead, he is managing Apple's in-house design studio. Even after including the Human Interface team, Apple's core group of designers is remarkably small. This creates a contrast with tech companies employing hundreds of designers or utilizing various outside design consultants. Today, Apple handles all of its design internally.  

By rearranging the Apple leadership structure diagram shown above, we obtain a different look at Apple. The company is comprised of a nimble design studio supported by one of the largest technology arms in the world. It would be incorrect to classify Apple as just a design studio. The technology arm allows Apple to develop the technologies powering products created by the Industrial Design group. This dynamic is made possible by close collaboration between the designers and Apple's significant engineering resources. 

 
 

Storytelling. The next big clue as to how best to define Apple comes from observing how management has tried to tell the Apple story through the press. Consider some of the recent articles and interviews published in cooperation with Apple executives.

  • Jony Ive profile in The New Yorker (February 2015). The 16,000-word profile had Apple's full support and was one of the defining pieces written about the company this decade. Ian Parker used the Apple Watch as a prism to show how today's Apple is Jony's Apple. The messaging was clear: Apple's product strategy was now led by an industrial designer. Jony now had the role formerly held by Steve Jobs. 
  • Charlie Rose's exclusive look inside Apple (December 2015). Rose was given unprecedented excess inside Apple for a 60 Minutes report. The tour included the world's first genuine look inside Apple's Industrial Design studio. While a few photos of the studio were released in the past, Rose's access was unprecedented. In one scene, Rose and Jony talk about how few people get to be in the lab. Jony laughed and said "We don't like people in this room, period," in an obvious recognition of how unusual it was to have Rose and his entire entourage sitting in the studio. This raised the question of why Apple gave Rose such access in the first place. Apple felt that a look inside the design studio would help explain itself to the world.
  • Charlie Rose interview with Jony Ive (March 2016). The 72-minute interview aired in March 2016 and was aimed at figuring out what drives Apple. The interview went into detail as to how products are developed at Apple. It also addressed various topics pertaining to Jony and his design philosophies. 

In each of the preceding examples, Apple had one goal in mind: Shape its public image. Apple wanted to be known as more than just a technology company. Instead, Apple viewed itself as a company that puts the product above everything else. 

Products. Given that the product plays such a prominent role at Apple, the clue that best helps us define Apple is found in its products. Last month, Apple unveiled a number of new products through a series of press releases. (My complete review of Apple's new products is available for members here.) The new Apple products that contained the most intrigue were Apple Watch bands. There were a number of new Woven Nylon bands as well as Classic Buckle, Sport Band, and Hermès band options. The changes amounted to Apple unveiling its spring 2017 Watch band collection.

While Apple Watch bands remain a source of mockery within some Apple user circles, the product is incredibly important for Apple. Watch bands are the primary reason Apple has been able to sell close to 25M Apple Watches to date and become the wearables leader in the process. While there is value and convenience found with having a small screen positioned on the top of one's wrist, the only reason people are willing to wear that screen in the first place is because of Watch bands. It is not a coincidence that Apple Watch bands are the most frequently updated product at Apple.

With Watch bands, Apple is shipping a product that isn't powered by any software or technology. Instead, Watch bands are judged by tangibles and intangibles more likely to be found in the fashion world than in Silicon Valley. Watch bands end up serving as a big clue for the kind of company Apple is striving to be. It's certainly not to be just a tech company. 

The Mac provides another clue as to how best to define Apple. While we can point to a number of red flags appearing in the Mac business, the major trend taking place with the Mac is that the product is changing in an iOS world. What was once geared toward the liberal arts mindset is now finding itself more appealing to those in fields such as engineering. This transition coincides with the Mac becoming a bigger headache for management. The company knows how to make technology more personal, as with the iPad. However, when the same goal is attempted with the Mac, Apple receives pushback from a small but influential segment of the Mac user base. The struggles Apple is having with Mac end up showing that Apple isn't just a tech company. There is something else at play. 

Not Tech, but Design

All of the preceding clues for how best to define Apple contain a similarity: They revolve around some element of design.

  1. Apple is a company in which designers hold the most power and influence.
  2. Apple is structured to position the product above anything else.
  3. Apple management is eager to use design to tell its story.
  4. Apple's product line embodies the principle of technology not being enough.

At every turn, Apple is quick to discuss how something more than technology is needed. Even Apple's WWDC 2017 announcement reiterates this point, saying "Technology alone is not enough." That is a powerful statement to define what is arguably Apple's most tech-focused event of the year. 

 
 

Apple isn't a tech company, but rather it's a design company. 

By being defined as a design company, Apple is positioning the user experience  - how consumers interact with technology - as more important than focusing on the sheer power found with technology. This goal permeates throughout Apple. The company isn't just a design studio with a technology arm. Instead, every group at Apple is in one way or another focused on design. Apple is betting that design is the ingredient that will continue to put the product above anything else. 

Design vs. Technology

There is a way to differentiate a design company from a tech company: Observe how the company approaches technology. In every case, Apple views core technologies not as products themselves, but as ingredients for something else. Instead of wanting to chase after technology's raw capability, Apple is more interested in technology's functionality as it relates to the user experience. This brings up Jobs' reference to Apple being at the intersection of technology and liberal arts. By looking at the world through this lens, we receive a clearer roadmap as to where Apple is headed in terms of product strategy. 

Augmented Reality (AR). Apple has been investing significantly in AR for the past few years. Instead of acting like a tech company and positioning AR as a standalone product, Apple's primary focus is to incorporate the technology into products we already use (smartphones, tablets) and products we will begin to use in the future (entirely new wearable form factors). Apple views AR as a core technology that will transform products into a new breed of navigation tools. This will add a new dimension to the technology. The way we will interact with AR is often the part of the equation not discussed much by tech companies. Apple will attempt to figure it out. 

Autonomous Driving. Contrary to reports, Apple still wants to design its own car. Apple recently was granted a permit to begin testing autonomous driving technology on California public roads. Apple is researching autonomous driving technology because it will be a core ingredient powering a range of Apple products in the transportation space. Instead of partnering with legacy auto companies, Apple will look to do everything on its own. The motivation and ambition in such a move is born from Apple's adherence to design and the quest to control the entire user experience. 

Health Monitoring. There is a reason why Apple Watch bands are the most frequently updated product in Apple's line. The best way to get people to wear health monitoring technology is to have people want to wear health monitoring technology. Today, health monitoring primarily describes simple fitness and health tracking. Apple is actively researching different technologies, including those for possible blood sugar monitoring. If successful, the technology will play a vital role in Apple's wearables products. 

Voice. A tech company positions a voice assistant as the product. Cheap standalone speakers would be positioned as a way to get people to use the voice assistant as much as possible. Apple sees voice playing a different role in computing. Voice assistants can add value to products we already use and wear throughout the day. Instead of making the voice assistant the focus, Apple is interested in how we can use our voice to make technology more manageable. 

TV. Apple's decision to not ship a television set provides an example of not enough core technology resulting in a product receiving a "no" from the company. According to reports, Apple was not able to figure out a way to differentiate itself from the competition. This is another way of saying there was little found with a television set that could lead to an entirely new user experience. Television sets are stationary, large pieces of glasses positioned a few feet in front of us. While new technology in the form of a few front-facing cameras and sensors may add a few new twists to the equation, Apple didn't think the final offering would be compelling enough. Instead, Apple focused on the piece of the television experience we do interact with - the remote control and tvOS user interface. As it turned out, Apple ended up selling more than 255M "television sets" in 2016 anyway. They are called iPhones and iPads. 

Criticism

Much of the criticism directed at Apple can be traced back to how the company is defined. Because it is not a tech company, some have questioned Apple's ability to grasp future technology waves. These critics don't give Apple enough credit for the large technology arm connected to its design studio. Suggestions that Apple's services will remain inferior to those of its peers are becoming common occurrences. However, the progress Apple has made with Apple Maps suggests this is not the case. Apple's ability to excel at machine learning is routinely questioned. The criticism boils down to Apple focusing too much on functionality (how we use the technology) and not enough on capability (what the technology can do). 

At the same time, Apple receives pushback from being a design company. The significant backlash Apple is receiving from a portion of its pro Mac user base boils down to a broader dissatisfaction with the company betting too much on design. There are some Apple users who don't want the version of technology Apple is selling. In addition, there is no sign of this dissatisfaction going away.

In reality, Apple's largest risk isn't found in being a design company or not being a technology company. Instead, it's in becoming a tech company. If Apple finds itself moving away from being design-led, the product will be put into jeopardy. This is likely one reason why Cook continues to bet so heavily on design. 

The Apple Design Book

AirPods wasn't the surprise product of 2016. Rather, Apple's $199 design book came as a shock to the Apple community.

 
 

While many looked the book as Apple designers getting intoxicated by nostalgia, the book ends up being the clearest expression of what makes Apple a design company. Apple is focused on creating products that can change the world. The secret to accomplishing this goal is to place a bet that technology alone is not enough. 

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