Wall Street Has Begun to Think About Apple In a New Way

For the past few years, Apple shares have been judged by one metric on Wall Street: iPhone unit sales. As iPhone growth has fluctuated, so has the stock price. Analysts have been infatuated with quarterly iPhone sales gyrations and the impact they may have on Apple earnings and the stock. However, things are changing. The iPhone’s influence over Apple’s stock is subsiding on Wall Street. 

Wild Ride

Over the past five years, Apple shares have been volatile. As seen in Exhibit 1, Apple's stock has experienced distinct stretches of severe underperformance and outperformance. For a company valued at more than $700B, a 70% move in a year is surprising, if not downright shocking. 

Exhibit 1: Apple Stock Price Performance

Screen Shot 2017-07-19 at 12.57.07 PM.png

Five years of Apple stock price performance can be broken into four distinct eras:

  1. Samsung competitive fears. The 2012 to 2013 period was symbolized by Samsung commercials mocking Apple users waiting in line to buy small screen iPhones. The market was beginning to demand larger smartphone screens, and Samsung was running fast to fill the need. There were growing fears of iPhone losing to smartphones running Android, resulting in lower iPhone ASP and margins. Apple shares dropped nearly 45% over this stretch.
  2. iPhone 6 and 6 Plus excitement. The iPhone launch at China Mobile, along with Apple's entry into large screen phones, drove a two-year stretch that saw Apple shares more than double in price. iPhone sales growth returned with a vengeance, with quarterly shipment growth up as high as 46% in late 2014.
  3. iPhone's first sales decline. Once the excitement surrounding the iPhone 6 and 6 Plus launch subsided, the new reality set in for the iPhone business. iPhone warning signs were appearing. The era of significant unit sales growth was coming to an end. The iPhone business registered its first quarterly sales decline in early 2016. During this period, Apple shares fell 30% from the previous high. 
  4. Something new. Apple shares are now up nearly 70% from the low experienced in mid-2016. 

Recent Outperformance

Over the past year, AAPL shares have outperformed the overall market. There are now questions regarding what has driven a 53% increase in Apple's stock price from the bottom experienced in May 2016. 

  • Is Apple's services narrative finally catching on Wall Street?
  • Are investors becoming increasingly optimistic about iPhone sales prospects?

Apple has become much more vocal in telling its services story. Management went so far as to provide a rare financial projection of doubling the Services business over the next four years. While Apple analysts have certainly been talking more about Apple services, it's not clear if new investors have actually bought into Apple's new messaging. At the same time, greater attention is being placed on the upcoming OLED iPhone, which may be the most significant iPhone update to date. Not only is Apple expected to announce a completely redesigned iPhone, but the device will likely include significant changes to the user experience. Some analysts have been adamant that the device will kick off a "mega upgrade cycle." 

It may be easy to assume Apple services or new iPhones may have been responsible for much of Apple's latest stock outperformance. However, I don't think those factors alone were able to drive a 50% increase in Apple's share price.

Services represents less than 15% of Apple's overall revenue. Truly recurring services revenue in the form of subscription revenue occupies an even smaller portion of that total. It is a stretch to argue that such a small piece of the business can drive what amounts to nearly $250 billion of market capitalization gains in a little over a year. There would need to be a widespread change across Wall Street when it comes to investor attitude towards Apple services, and there just isn't any evidence of that occurring.

In terms of a new iPhone driving a mega upgrade cycle, consensus EPS estimates have barely budged for FY2018. This tells us there isn't widespread optimism flooding into the market. In fact, the trend has actually been for Apple EPS estimate cuts as talk of iPhone supply issues and potential delays grow louder.

Exhibit 2 takes Apple's stock price data from Exhibit 1 and superimposes iPhone unit sales growth (set on a three-month forward basis to account for investors' forward-looking tendencies). As clearly seen in Exhibit 2, Apple shares have skyrocketed over the past year despite a lack of iPhone sales growth. This represents a significant change from previous years. Something just doesn't add up. 

Exhibit 2: iPhone Unit Sales Growth vs. Apple Stock Price Performance

Note: iPhone unit sales growth is on a three-month forward basis (3Q17 and 4Q17 growth metrics are estimates).

Note: iPhone unit sales growth is on a three-month forward basis (3Q17 and 4Q17 growth metrics are estimates).

One may look at Exhibit 2 and argue that Wall Street is taking a longer view of the iPhone business. Instead of just looking at the next quarter of iPhone sales, the focus is on 2018 and even 2019 sales. That could very well be true. However, it may not be that investors are necessarily expecting the iPhone business to return to some kind of sustainable growth. In what is the most telling sign that something unusual is occurring, rumors of iPhone supply issues and delays that would typically send Apple shares sliding now seemingly have no impact on the stock. Something major has changed regarding how Wall Street is thinking about Apple. 

Balance Sheet Optimization

My theory is that the iPhone no longer has the same kind of influence over Apple shares as it once did. Instead, Apple has turned into a balance sheet optimization story on Wall Street. Apple's growing net cash balance (now standing at an all-time high of $158 billion) has taken the place of iPhone unit sales growth as the most influential variable impacting Apple shares. 

The best way to lay out this theory is to compare Apple's stock price performance to the change in market capitalization. As seen in Exhibit 3, over the past five years, the two data points have increasingly been on a divergent path. Apple's stock price is up 74% while its market capitalization has increased just 35%. Apple's enterprise value (market cap + debt - cash) is up just 36%. Why is Apple's share price significantly outperforming the company's overall change in valuation on Wall Street? The share buyback program is impacting Apple's share price.  

Exhibit 3: Apple Stock Price vs. Market Cap Performance

Apple management is using share repurchases to funnel excess cash from the balance sheet to shareholders selling their Apple shares. This not only reduced the number of Apple shares outstanding, but also gave each remaining share a larger ownership claim to Apple's future cash flows and earnings. It's not that share buyback is creating shareholder value with excess cash simply moving from the balance sheet to those selling their shares. Instead, investors are now willing to pay more for Apple's future cash flows and earnings.

There are a few reasons likely driving this higher valuation of future Apple cash flows.

  1. Higher ownership stake. As Apple uses excess cash to reduce the number of shares outstanding, each remaining Apple share has a higher ownership stake in a more optimized balance sheet and cash flows. This has led to a significant increase in EPS. Over the past five years, Apple's operating income has increased just 15%. However, Apple's EPS has increased 45%. As long as Apple continues to use excess cash and low-cost debt to buy back shares, this trend will continue indefinitely.
  2. Apple cash discount. While it may seem counterintuitive, it's actually not wise for a company to hold a significant amount of excess cash on the balance sheet. Apple was likely being penalized for holding so much cash. Another way of saying this is that investors were not fully valuing the $150B of net cash sitting on the balance sheet. This would materialize via below-average price-to-earnings (P/E) multiples. Investors just weren't interested in paying up for the full amount of cash on the balance sheet (technically, the amount of cash left over once Apple bought its foreign cash back to the U.S. at a lower tax rate). There is plenty of financial theory behind investors pricing excess cash at a discount, including fear of management misusing the cash on bad M&A or other improper uses. 
  3. Expectations for additional capital management. Wall Street is forward-looking and with $240B of foreign cash and cash equivalents sitting on Apple's balance sheet, investors are increasingly contemplating various use cases for the cash if it is returned to the U.S. The most likely outcome would be a significant increase in the share buyback pace. At that point, a Dutch auction tender offer would even be a possibility. This would reduce the number of Apple shares outstanding by up to another 25% (which would boost EPS even higher). 
  4. Shareholder base. Share repurchases are systemically shrinking Apple's shareholder base. Apple has reduced the number of outstanding shares by 20% since kicking off its buyback program. Apple investors who have done nothing but hold on to their shares over the past five years would have seen their ownership stake in Apple grow by 20%. As a result, long-term shareholders who have bought into the Apple story are gradually becoming larger Apple owners over time. While some of these holders may not be comfortable with their Apple stakes continuing to grow and represent an outsized portion of their portfolios, in theory, Apple is relying on fewer investors to buy into its narrative. 

Declining Influence

One unintended consequence of Apple's cash hoard gaining influence over Apple shares is that the iPhone no longer has the same kind influence it once did. This isn't to say that Wall Street ignores iPhone trends. The vast majority of free cash flow used for share buyback is coming from iPhone sales. The key difference is that Wall Street has grown less concerned about the quarterly gyration in iPhone sales. In the grand scheme of things, there is little difference between Apple selling 200M iPhones per year and 300M iPhones per year. It also doesn't matter if a new iPhone is delayed by a few months. These are relatively minor details that just don't matter in terms of the big picture. I suspect this is why ongoing iPhone delay rumors are having little impact on the stock. In addition, Apple's ongoing iPhone sales pressure and troubles in China and India are no longer viewed as significant hiccups that could derail the stock. Both countries combined represent approximately 20% of overall iPhone sales. U.S. and European sales strength would likely be enough to maintain the iPhone's current sales level.

Warren Buffett Symbolism

Warren Buffett's recent purchases of Apple shares over the span of less than a year (the stake is now worth $20 billion) symbolize how Wall Street is thinking differently about Apple. While Buffett is on record talking about how the iPhone is such a compelling consumer product, his comments regarding share buyback are quite telling.

Here's Buffett back in May on his Apple investment:

"Well the shares when we bought 'em, at least, were much more reasonable in relation to current earnings. Apple didn't have to do a lot better in the future than they were doing at the current time." 

It's not that Buffett expects any significant change in Apple's business going forward. Instead, he viewed Apple's valuation as compelling given Apple's current performance. This begs the question, why now? Why didn't Buffett buy Apple years ago when the valuation was lower? Buffett claims he now understands the competitive landscape facing Apple. However, my suspicion is that Apple's balance sheet optimization story had simply become too hard for Buffett to ignore. Here's Buffett back in February responding to questions about Apple's market cap being too large to grow from here in any significant way:

"[Y]ou could have a lot fewer [Apple] shares outstanding at some time and still do very well on a per share basis. [Apple management] bought about 4 percent of the company last year. And they've been pretty, pretty aggressive on that. So my guess is they've got about 5.25 billion shares outstanding now, but my guess is that ten years from now they'll have substantially fewer."

Buffett is buying Apple because he has confidence that the iPhone business is a good cash generating machine that can fund aggressive share buyback. The Apple story on Wall Street now revolves just as much around the company's balance sheet and significant cash balances as it does around the iPhone business.

Future Implications

There are a number of implications related to Wall Street thinking differently about Apple. 

1) Apple earnings will take on a different meaning. While quarterly earnings will still matter from the perspective of providing a window into Apple's current business trends, the way Wall Street responds to earnings will change. There will be less focus on weak/strong guidance or a beat/miss to iPhone or iPad sales. Instead, the focus will be on whether the overall Apple story has changed. This new reality will actually make it more important than ever for market observers to possess a longer view of Apple. Fresh and unique perspective will be needed to assess just how Apple's long-term competitive positioning is holding up. 

2) Share buyback will continue to gain importance. The single biggest factor impacting Apple shares isn't the upcoming new iPhone or competition with Amazon or WeChat. Instead, it's the probability of Washington passing U.S. corporate tax reform, including a lower tax rate for bringing offshore cash back to the U.S. Apple is poised to spend a significant portion of its $240B of excess cash currently sitting in foreign subsidiaries on buyback, assuming it can be bought back at a lower tax rate.

3) A potential new long-term Apple story. Apple still lacks a compelling business narrative on Wall Street. For analysts and investors focused on modeling Apple's forward cash flows, a company that sells customer experiences comprised of hardware, software, and services isn't exactly the easiest company to forecast. Of course, there is also unknown found with companies like Amazon, Facebook, and Alphabet. However, those companies have easier (and simpler) narratives revolving around non-hardware revenue. There is no evidence to suggest that Apple is now viewed as a design company focused on something much larger than just selling hardware. Apple's R&D pipeline, an item that plays a critical part in the company's mission statement of coming up with future product that can improve people's lives, is still not valued on Wall Street.

This dynamic presents an interesting theory as to Apple's future as a public company. The notion of Apple being considered some kind of annuity with recurring hardware and software revenue may never catch on Wall Street. At the end of the day, Apple's future will always be focused on coming up with new products. This makes it incredibly difficult for investors to model Apple cash flows going forward. What if Apple were instead viewed as a balance sheet stock? The company would go through cycles based on a varying degree of share repurchases. These repurchases would be based on the company's ability to generate strong cash flows. For example, we are currently in the cycle in which iPhone is funding share repurchases. In the future, we may see Apple AR glasses or transportation initiatives fund share repurchases. Simply put, regardless of Apple's product line at any particular moment, investors will likely remain more focused on Apple's balance sheet and cash levels. As a result, Apple's future as a public company would be one of a cash generating machine supporting the largest share repurchase program in the world. 

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 Turns Ten

Today marks the tenth anniversary of Apple launching the iPhone. It would be an understatement to say that the iPhone has changed Apple and the broader mobile industry. The iPhone fundamentally altered the way Apple views the world and measures ambition when contemplating new industries to enter. At the same time, Apple's steadfast approach to controlling both iPhone hardware and software ended up being a bet that is still giving mobile competitors headaches a decade later. 

The Numbers

There are three sets of numbers that stand out when thinking about ten years of iPhone. 

Unit Sales

On a cumulative basis, Apple has sold 1.2 billion iPhones to date. The magnitude of this number is difficult to grasp and put into context. Prior to launching the iPhone in 2007, Apple had sold approximately 180M devices since being founded in 1976 (70M Macs and 110M iPods). Assuming Apple is able to ship at least 200M iPhones per year for the next few years, Apple is on track to sell its two billionth iPhone at some point in 2020.  

Exhibit 1: iPhone Unit Sales (cumulative)


With an average selling price (ASP) exceeding $600, more than one billion iPhone sales translates to $743 billion of cumulative revenue. Apple is on track to report one trillion dollars of revenue from iPhone sales by the end of 2018. Even more remarkable, the iPhone's evolving role in our life has led to iPhone ASP increasing as time goes on. The probability of Apple unveiling the first $1,000 iPhone SKU in the U.S. this coming September is quite high.

Exhibit 2: iPhone Revenue (cumulative)


Apple has a monopoly on smartphone profits. Assuming an average gross margin of approximately 45%, Apple has earned approximately $330 billion of profit from iPhone over the past ten years. On a net income basis, the iPhone has brought in 1.5x more profit than the combined profits of Amazon, Facebook, and Google during the same time period.

Exhibit 3: iPhone Gross Profit (cumulative)

iPhone Lessons

The more intriguing impact from ten years of iPhone cannot be measured or quantified by sales, revenue, or any chart for that matter. Instead, the iPhone contributed quite a bit to preparing Apple for future pivots into new industries. Along those lines, there are three specific items that stand out when it comes to lessons Apple learned from the iPhone over the past 10 years: 

  • Ambition
  • Control
  • Platform

Ambition. Prior to the iPhone, Apple was primarily a computer company selling Macs and Mac accessories. The company had only recently begun to see broader consumer appeal with iPod. Apple had no expertise in mobile telephony prior to developing the iPhone. On paper, Apple shouldn't have been able to come up with something like iPhone. The company just didn't have the required core competencies for selling a great phone.

Former Palm CEO Ed Calligan's now infamous words regarding Apple's entrance into the phone industry were based on the belief that Apple would never be able to learn as much as established phone players:

We've learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They're not going to just walk in.

There was one glaring hole found in Calligan's logic. Phones were going to become computers. Instead of Apple worrying about becoming a good phone maker, phone makers should have been worrying about becoming good computer makers. 

The innate desire to rethink a gadget that many people had trouble using drove Apple into smartphones. Of course, the fear of smartphones one day impacting iPod sales also pushed Apple management. This led to a more than two year process during which Apple learned quite a bit about phones, mobile carriers, and itself. The learning didn't stop after launching the iPhone in 2007. In subsequent years, Apple learned, at times the hard way, about the ins and outs of mobile telephony. Over time, Apple's long-standing strengths in building computer hardware and software gave the company its advantage over the Blackberries and Nokias of the world. 

Today, Apple's ambition continues to be underestimated. Apple is approaching new industries in a way that is similar to how it looked at the mobile phone arena in the mid-2000s. The Apple Watch was tasked with rethinking wrist watches. Apple had to learn quite a bit when it came to fashion and luxury in order to get people to want to wear Apple gadgets. Management now has its sights set on the transportation industry, a sector that hasn't seen much change in 100 years. In addition, Apple is moving into the health and medical arena at an incredible pace.

Just a few years ago, this kind of product pipeline would have been labeled an ambitious pipe dream for Apple. Something changed over the past 10 years. The iPhone showed Apple how a single product with a rethought user experience can change an entire industry to make it much more hospitable for the company. At this point, it is fair to say that Apple is willing to compete in any industry as long as there is room for someone to rethink the user experience. The same couldn't be said prior to iPhone. 

Control. The iPhone taught Apple quite a bit about the power found in controlling one's destiny. While the iPhone did not introduce the company to the idea of controlling both software and hardware, the iPhone played a major role in showing Apple benefits associated with owning the core technologies powering a device. Some of the early bets Apple placed in this regard, such as the P.A. Semi acquisition in 2008, are still paying dividends.

Here's Tim Cook talking to Businessweek following the WWDC keynote earlier this month:

Steve’s DNA will always be the base for Apple. It’s the case now. I want it to be the case in 50 years, whoever’s the CEO. I want it to be the case in 100 years, whoever’s CEO. Because that is what this company is about. His ethos should drive that—the attention to detail, the care, the ­simplicity, the focus on the user and the user experience, the focus on building the best, the focus that good isn’t good enough, that it has to be great, or in his words, “insanely great,” that we should own the proprietary technology that we work with because that’s the only way you can control your future and control your quality and user experience.

It says a lot that Cook looks at owning core technologies as an inherent aspect of Apple's culture. The iPhone contributed quite a bit to that reality. There is now an increasing amount of evidence pointing to Apple working on its own GPU solution in addition to LTE modem chips. We are moving to the point at which it will no longer be enough for Apple to just own the most important components powering a device. Rather Apple will need to come up with its own solutions that combine the most important components to power increasingly smaller, wearable gadgets. 

What were once hardware and software bets that gave Apple a five-to ten-year head start on the competition are now turning into technological bets that will give the company advantages measured in decades. 

Platform. While Wall Street remains infatuated with iPhone sales, Apple continues to see a strengthening iOS platform thanks to robust new iPhone user growth and an engaged developer community. The iOS platform has afforded Apple a new way to think about the world. There are signs of Apple management being well aware of the power and influence found with iOS.  

Here's Eddy Cue in August 2016

[Apple] can’t be everything. One of the reasons we’ve been highly successful is that we focus. We can’t be great at everything; nobody’s great at everything. I mean, come on. So, if you want to be great at something, you have to focus and do a few things. We’ve been lucky. We’ve had a few, and not just one. That’s the only way we know how to work. So we don’t want to be Amazon and be Facebook and be Instagram and so on. Why? Or Uber. Why? I think it’s awesome that Travis [Kalanick, Uber’s CEO] and his team have done Uber on our platform. It would not exist without our platform, let’s be clear. But great for them for thinking of that problem, and solving it. We would never have ever solved that problem. We weren’t looking that way. We would have never seen it.

It's easy to read Cue's response as Apple taking responsibility for Uber's success in rethinking personal transport. However, Cue is correctly pointing out that the iOS platform served as the breeding ground for innovative ideas and business models. With the iOS platform, Apple has played a major role in creating a number of new industries. In the coming years, management will determine which parts of the iOS platform are worth Apple playing in themselves. Management has already determined a need to play in music and video streaming in addition to messaging and mobile payments. It's not yet clear if ridesharing or another larger industry will one day make sense for Apple. Even more importantly, the iOS platform has given Apple a fighting chance to create the most attractive platforms for third-party developers around a new suite of products including Apple TV (tvOS) and Apple Watch (watchOS).

Defining Legacy

A great deal of iPhone's success can be traced back to the fact that Apple bet on a very big product category at just the right time. The smartphone redefined a computer for billions of people in just a few years. 

While some people are convinced that nothing will match the smartphone in terms of its influence on our lives, such prognostications end up selling future innovations short. Odds are very good that a new device, or series of devices, will one day serve as a viable smartphone alternative. It's likely that these new devices will achieve even greater market penetration than smartphones.

Regardless of where technology is headed, we are already starting to get an early glimpse of the iPhone's legacy. The iPhone spawned an industry that redefined a computer, transforming it from a niche tool into a mass-market phenomenon. For Apple, the iPhone went further than any other Apple product before it in terms of making technology more personal. The iPhone was Apple's first genuine mass-market product. All of this occurred in just ten years, which ends up being the most remarkable part of the story. 

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.

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.


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. 


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. 


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. 


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. 



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.