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)

Revenue

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)

Profit

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. 

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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 here. However, 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.

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: 

• iPhone: An AR navigator (mass market item)
• iPad: Computer for the masses (mass market item)
• Wearables: Various form factors with broad use cases (mass market items) 
• Transportation: Autonomous transport (mass market item)
• Home: Various form factors with broad use cases (mass market items)
• Mac: Graphics intensive content creation and computation (niche) 

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. 

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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.

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.

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