One question that continues to plague Apple is the company’s ability to grow. Wall Street and Silicon Valley are unsure of the company’s business strategy and ability to foster innovation. The press thinks Apple is turning into a different kind of company in an effort to chase additional profits.
Thrown into this volatile and polarizing cocktail of opinions, the recent Jony Ive and Jeff Williams news has been met with mixed reactions. The leadership changes neither signify a company moving away from design or hardware nor suggest that management is facing some kind of growth crisis. Upon closer examination, the Jony Ive and Jeff Williams news are byproducts of Apple evolving into a much larger design company.
There have been three broad narratives regarding Apple’s growth strategy, and each has been distinctly negative.
Wall Street (Unit Sales)
Instead of focusing on Apple’s long-term prospects, Wall Street has historically centered on quarter-to-quarter fluctuations driven by unit sales. This would partially explain the severe pushback Apple management received when it moved away from disclosing unit sales. The decision forced observers to take a longer-term view of the company although many analysts still remain focused on unit sales.
As shown in Exhibit 1, iPhone unit sales clearly plateaued prior to the recent sales troubles in China. The warning signs for this dynamic were apparent as early as 2016 as highlighted in the Above Avalon article, “iPhone Warning Signs.” The combination of a slowing upgrade rate, Apple running out of premium users at the high end of the smartphone market, India challenges, and high smartphone saturation rates led iPhone sales to trade in a range of 180M to 220M units per year.
Exhibit 1: iPhone Unit Sales (TTM)
Silicon Valley (Data)
Press (Internal Drama)
Nearly every news article written about Apple now contains boilerplate language about slowing iPhone sales causing management to become desperate for new growth options. This narrative is characterized by assertions that management is becoming more focused on maximizing profits. At the same time, the picture painted is one of a company suffering from an identity crisis. Countless articles describe Apple as becoming a services company since services are said to represent the company’s only viable growth story going forward.
Enter Jony Ive and Jeff Williams
Three weeks ago, Apple announced that Jony Ive would form his own design company, LoveFrom, with Apple being his first client. As part of the move, Jeff Williams was officially given leadership over the design team.
It should come as little surprise that most reactions to this news reflected existing viewpoints. Those who thought Apple was becoming a services company viewed Jony’s departure as evidence of such a trend. For others, Williams’ expanded role over product development was viewed as a sign of Apple shedding its design skin to become more of an operations-oriented company, whatever that means. People unconvinced of Apple’s ability to innovate looked at the changes as Apple’s latest attempt to try to achieve innovation post Steve Jobs.
The common theme found with the reactions was a narrative that Apple finds itself in trouble and dramatic changes to the Apple machine are needed to reinvigorate growth. There was no better symbol of this than the WSJ’s article on the subject. The article, written in the form of an insider tell all tale, was a narrative-driven attempt to connect a series of unrelated dots, some inaccurate or grossly mischaracterized, to paint a picture of a company on the brink. The article was so off the mark that Tim Cook responded to the article - something that just doesn't happen often.
A Different Perspective
My approach to analyzing the Jony news was to look at his evolving role within Apple over the past eight years beginning with Apple Watch development. Doing so revealed that this latest news wasn’t in planning for years, contrary to popular opinion. Instead, there was evidence of Jony and Apple working to find a more sustainable path forward. (My complete analysis regarding Jony’s evolving role is available for Above Avalon members here and here.)
What drove this search for sustainability?
Apple’s immense growth over the years had become a burden on Jony.
Instead of measuring Apple’s growth using unit sales or revenue, metrics ultimately impacted by a product’s upgrade cycle and average selling price, a better approach is to track the total number of users in the installed base. This ends up reflecting the significant impact the gray market has had on Apple’s growth story in recent years. Apple may not be selling more iPhones each year, but the gray market has led to more people using iPhones.
Exhibit 2: Apple Installed Base
Apple’s installed base looks nothing like it did when Jony began Apple Watch development in late 2011 or even a few years ago when he was promoted to Chief Design Officer in 2015.
2011: 180 million people in the Apple installed base.
2015: 650 million people in the Apple installed base.
Having the Apple installed base grow by more than five times in just eights years contains various implications for Jony and Apple.
There is an undeniable larger thirst for tools capable of changing people’s lives. Instead of selling 170M devices per year in 2011, Apple is on track to sell 320M devices in 2019.
The days of focusing much of the company’s top talent and resources on one major new product initiative are in the rearview mirror. Apple now finds itself having to lead multiple massive teams pursuing different paradigm shifts at the same time.
The leadership changes Apple announced three weeks ago weren’t driven by any one product. Instead, the changes amount to a recognition of how much Apple has grown over the years. Not only has the overall design team grown, but the expectations placed on Jony had continued to increase. For a creative like Jony, having a company with a billion users depend on your every decision ends up being a burden. Expectational debt can be toxic to a creative. We are seeing management make changes to the Apple machine to let it operate as originally intended.
The Apple Machine
The Apple machine describes the process powering the company’s design-led organization that leverages the power found with small groups. By ensuring that collaboration exists between multiple disciplines and viewpoints in this small group structure, Apple is able to keep the user experience the priority during product development.
Jony and Steve didn’t build this machine to be dependent on either one of them. Such a machine would be inadequate and unsustainable. Instead, the machine was designed to take on a certain level of autonomy in order to instill Apple’s values in all employees. Over the past 15 years, most of the leadership changes within Apple have occurred in order to let the machine operate as intended. Any obstacles or perceived threats to the machine have been removed.
Changes to the Machine
Fifteen years ago, Apple did well with a management structure that included having one curator oversee most product decisions. However, Apple was a much smaller company in the early 2000s.
Apple now finds itself doing a whole lot more.
The company is embracing a dramatic change to product strategy in which management is pushing all major product categories forward at the same time. This has never occurred before.
Apple is moving deeper into content distribution services that include coming up with original content. The company thinks it has something to add to the mix in terms of data privacy and curation that other companies don’t have as much of an incentive to uphold.
Apple’s annual R&D expense has grown by nearly seven times in just the last eight years, reflecting a company investigating many more ambitious ideas and technologies.
The takeaway from the Jony and Jeff Williams news, and this is something that I did not fully contemplate up until two weeks ago, is that the Apple machine is operating at such speed and scale, it’s not realistic to think one person can control or run the machine. Instead, we see Apple fine-tuning the machine to allow for greater autonomy.
Simply put, the Apple machine’s ability to automate has been grossly underestimated over the years while the idea of any one individual needing to oversee the machine 24/7 has been overestimated.
An example of this autonomy is seen with the structure involving Jeff Williams and Apple design. At first, giving Williams control over the design team seems like a formidable task based on size and scope. However, the structure makes more sense when considering the degree of autonomy that exists in design and other teams at Apple. It’s not that Williams is moving into some kind of product czar role and that every decision has to be run by the same gatekeeper. Such a structure isn’t sustainable given Apple’s size. Instead, designers of various disciplines have been given greater say over the user experience while Williams works with Evans Hankey and Alan Dye to ensure everyone remains on the same page.
Apple’s Growth Story
The clearest piece of evidence that the latest leadership changes aren’t being driven by some kind of growth crisis is that Apple already has a working growth story.
Position the iPhone and iPad as the strongest sources of new users into the ecosystem.
Position wearables as alternatives to the iPhone and iPad.
Come up with services that add value to Apple hardware and the broader Apple ecosystem.
Apple will likely add approximately 50M people to the iPhone installed base in 2019 despite unit sales being down by about 14%. A large opportunity for Apple is appealing to the 40%+ of its installed base that still only use one Apple device: an iPhone. The iPad installed base will grow by about 30M users in 2019. Apple is unveiling its most aggressive Services rollout to date. Apple’s wearables platform has strong momentum.
The Jony Ive / Jeff Williams news doesn’t amount to Apple building an entirely new machine powering product development. Instead, Apple continues to rely on the existing machine, but modifications are being made to let it operate more efficiently. Additional brackets and supports have been added, and parts have been swapped out for improved components. Apple is betting on its existing machine in an effort to remain a design company focused on coming up with tools that people love.
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