Apple 4Q19 Earnings Expectation Meters
There is increased attention around Apple’s 4Q19 results. Apple shares are up 19% since the company reported 3Q19 results back on July 30th. Since the start of the year, AAPL shares are up 58% while the S&P 500 is up 21%. For a trillion dollar market cap company, such outperformance is noteworthy.
Apple’s strong stock performance has led to questions regarding what management will have to announce on Wednesday to meet or exceed expectations. At the same time, Apple’s 4Q19 results have the potential of containing some noise as Apple works through its flagship iPhone and Apple Watch launch. For example, the iPhone was not in demand / supply equilibrium by quarters end.
The following table contains my overall estimates for Apple’s 4Q19. My expectation is for Apple to report strong 4Q19 results and 1Q20 revenue guidance.
A detailed discussion of these estimates, including the methodology and perspective behind the numbers, is found in my Apple 4Q19 earnings preview available here. Above Avalon membership is required to read my earnings preview.
Each quarter, I publish expectation meters ahead of Apple's earnings release. Expectation meters turn single-point financial estimates into more useful ranges that aid in judging Apple's business performance. In each expectation meter, the white shaded area reflects my official single-point estimate. The gray shaded area represents a result that is considered near my estimate. A result that falls within this gray area signifies that the product or variable being measured is pretty much performing as expected. A result that falls in the green shaded area denotes strong performance and the possibility of me needing to raise my expectations for that particular item going forward. Vice versa, a result falling in the red shaded area denotes the possibility of needing to reduce my expectations going forward.
Over the years, the expectation meters have evolved with Apple’s changing business and financial disclosures. Ahead of Apple’s 4Q19 earnings, I am publishing three expectation meters:
Products vs. Services Revenue
iPhone vs. non-iPhone Revenue
1Q20 Revenue Guidance
Products vs. Services
Apple breaks out revenue into two categories: products (i.e. hardware) and services. The iPhone likely weighed on Apple’s 4Q19 products revenue due to both declining unit sales and a lower average selling price (ASP). The end result is products revenue that will show little to no growth. Partially offsetting lackluster growth in products, Apple’s Services revenue is expected to grow in the vicinity of 15%. This dynamic will likely improve in FY2020 as both products and services will once again contribute to Apple revenue growth.
iPhone vs. Non-iPhone
Another way of thinking about Apple’s business is to allocate the company’s various products and services into two buckets: iPhone and non-iPhone. Last quarter, Apple’s non-iPhone business registered more revenue than the iPhone business for the first time since 2012. It is unlikely that this dynamic will repeat itself in 4Q19 as the iPhone business gains revenue momentum due to the flagship iPhone launch.
Guidance
Consensus expects Apple to report $86B of revenue in 1Q20. That seems on the light side. My estimate is for Apple to announce 1Q20 revenue guidance in the range of $88B to $91B. Apple has to report more than $88.3B of revenue in 1Q20 to reach a new all-time record for quarterly revenue.
Apple has two tailwinds for issuing strong 1Q20 revenue guidance:
Apple is facing one of the easier year-over-year quarterly compares in years given the demand implosion in China seen in November and December 2018. This will make it that much easier for Apple to report revenue growth in 1Q20.
The environment is conducive to both Apple Watch and AirPods selling well during the 2019 holiday shopping season. Apple not only faces a lack of genuine smartwatch or wireless headphone competition, but also has strong product lines with attractive entry-level pricing available.
On the flip side, one headwind worth monitoring is declining iPhone ASP. Apple cut pricing of its lowest-priced flagship iPhone by $50. In addition, Apple remains aggressive with pricing outside the U.S.
Despite Apple’s strong stock price outperformance so far this year, the company continues to have the lowest forward valuation multiples among the Wall Street giants. A good argument can be made that Apple’s strong stock price outperformance in 2019 hasn’t been driven by expectations of strong 4Q19 numbers or even solid 1Q20 guidance. Instead, the marketplace may be betting on improved visibility around Apple’s financials through FY2021. The environment is becoming more hospitable for iPhone revenue growth to return in FY2020. At the same time, Apple wearables continue to gain momentum. There is then growing smoke around the idea of Apple potentially having a busy first half of CY2020 from a new product perspective.
My working Apple earnings model as well as my granular 4Q19 estimates including unit sales, ASP, and margin expectations, are available here. Above Avalon membership is required to read my full 4,000-word earnings preview. Access to my model is available to members at no additional cost.
My Apple earnings review will be made available exclusively to Above Avalon members. To have the review sent directly to your inbox once published, sign up at the membership page.
Above Avalon Podcast Episode 157: Let's Talk Apple and China
Apple finds itself amidst another controversy regarding removing HKmap.live from the App Store in Hong Kong. However, Apple is facing a different kind of backlash this time. Episode 157 is dedicated to discussing Neil’s thoughts on Apple doing business in China. Additional topics include Tim Cook’s engagement philosophy, Apple’s tool-making mission, and kowtowing to governments.
To listen to episode 157, go here.
The complete Above Avalon podcast episode archive is available here.
A Different View on Apple and China
Last week, a firestorm erupted over Apple’s decision to remove HKmap.live from the App Store in Hong Kong. Apple claimed the app, which mapped crowd-sourced information regarding police activity, broke App Store guidelines and local laws. Hours earlier, Apple had been threatened by China’s People’s Daily newspaper about continuing to make the app available.
In the past, such a decision would have been accompanied by a debate regarding Apple’s decision to continue to do business in China. However, things are different this time. Instead of a debate, virtue signaling is rampant. U.S. ideologies are being weaponized in a broader U.S. versus China debate, and Apple is finding itself caught in the middle.
Based on narratives in the U.S. press, Apple should become some type of political entity tasked with undermining political institutions. iPhones and iPads are to be used as indoctrination weapons for Apple’s beliefs. If such objectives represent Apple’s future, the company will first need new management, employees, customers, and a different board of directors, as Apple is not in the business of waging political wars.
How did we get to this point? Are we seeing a byproduct of U.S. and China trade tensions boil over? Did the NBA versus China clash a few days prior to Apple removing the app in Hong Kong touch a nerve in the U.S.?
Instead of publishing an article on Apple and China last week, I used the Above Avalon daily updates to share my initial thoughts on the developments. After sending out updates last Wednesday and Thursday, I received comments from Above Avalon members who live outside the U.S. They saw the situation from a different perspective. Simply put, they saw the complexity associated with the latest developments in Hong Kong and China. That same complexity is missing from U.S. press coverage of the situation.
There are pros and cons associated with Apple doing business in China just as there are pros and cons found with doing business in a long list of other countries. Even Apple’s decision to engage with the U.S. administration on certain issues can be debated. In some countries, like the U.S., Apple can discuss where it stands on social and political issues. In other countries, like China, such openness is not possible. This has led some to call Apple a hypocrite for “pontificating” on certain ideals only to be willing to do business in a country that doesn’t follow the same ideals.
Apple is no stranger to criticism regarding its decision to do business in China. Back in 2016, Cook said the following in response to critics who said he shouldn’t engage with the government:
“From my American mindset, I believe strongly in freedoms. They are at the core of what being an American is, and I have no confusion on that. But I also know that every country in the world decides their laws and regulations.”
Cook then alluded to “The Man in the Arena” passage from U.S. President Theodore Roosevelt’s “Citizenship in a Republic” speech:
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
In most politically dicey situations, Cook has followed Roosevelt’s advice and picked engagement. While Cook has become more comfortable talking about the ideals that guide Apple’s culture such as environmental responsibility, privacy, and equality, he doesn’t weaponize them to issue ultimatums to foreign governments. Instead, Cook uses his position as CEO to explain to the world which ideals guide Apple employees and the company’s mission to create tools for people.
This brings up a few questions: What drives Cook to follow Roosevelt’s advice and engage? Why does Apple put itself in what appears to be compromising positions in terms of doing business with certain countries if it doesn’t intend to leverage its position to push for immediate change?
My suspicion is that Cook doesn’t want Apple to become an idealistic mirage of itself with closed-mindedness reigning supreme. If Apple only did business in countries that have laws matching its beliefs, Apple would operate in just a handful of countries. Such a strategy would represent a big step back in Apple’s toolmaking mission as the biggest loser would be the Apple customer. In my view, that is a good enough reason for Apple to remain engaged with China and other countries rather than retreat into some kind of self-imposed bubble. The fact that the preceding opinion is now viewed as extremist in the U.S. shows just how far the narrative involving China has shifted. Ongoing issues between China and the U.S. regarding intellectual property theft and economic prowess have taken over the discussion, making Apple’s “engaged” strategy seem naive and out of date.
Another factor that likely plays a role in Cook’s engaged strategy is how Apple views its customers. I don’t think of Apple as a U.S. company. Instead, Apple is a global company headquartered in the U.S. That may seem like a subtle difference in terminology, but it speaks volumes. Apple doesn't look at its customers as Americans, Chinese, Russian, or German. Everyone is an Apple customer. This becomes apparent when attending an Apple product event at Apple Park. The cultural diversity found in the audience isn’t visible when watching the keynotes online. English ends up being just one of many different languages spoken at Apple events.
While governments around the world play a role in how Apple is able to reach its customers, as seen with Apple’s most recent app removal controversy in Hong Kong, that doesn’t take anything away from the ideals that guide Apple’s toolmaking mission. Those who think Apple should abandon China at whatever cost fail to recognize that China is now home to approximately 15% of Apple’s customers. Advocating that Apple should succumb to various pressures and shun anyone who may disagree with its ideals is the very definition of closed-mindedness.
As for the increasingly popular claim that Apple isn’t just doing business in China but is instead going so far as to kowtow to the government, the supporting evidence is underwhelming. Following local laws is not kowtowing. For example, removing an app that delivers news from a publication banned in a country is not kowtowing to China. Apple would do the same in any other country with similar laws. Instead, kowtowing would involve breaking other country’s laws merely because China told Apple to do so. Another example of kowtowing would be Apple telling its employees to change their ideals because China told them that is the only way to do business in the country. We simply don’t see Apple exhibiting such behavior, contrary to what is being reported in the U.S. press.
One example of kowtowing to China would be international companies agreeing to refer to Hong Kong, Macau, and Taiwan as part of China. However, the uniqueness found with that example is duly noted. Given how following economic sanctions imposed by the U.S on other countries end up being another example of companies kowtowing to a government, it’s clear that the topic deserves a much more nuanced debate.
While Apple executives struggle at times with how best to do business in China, the company has shown little to no hesitation in its broader engagement strategy. For example, Apple’s apparent final decision to pull HKmap.live from the App Store in Hong Kong took nearly a week to play itself out. Apple initially pulled the app only to reinstate the app and then pull the app again. However, at the end of the day, it was Cook who wrote a message to Apple employees explaining his decision - a decision that was met with intense skepticism by those in Hong Kong and the U.S.
There is no playbook for Apple management to follow when it comes to leading a trillion dollar company with a billion customers around the world. Cook’s decision to engage Apple will mean that there will be more controversies such as HKmap.live. Apple may not be completely ready for such controversies, but the company will likely be willing to confront them. Such a stance shouldn’t take anything away from Apple’s steadfast pursuit to leave the world a better place.
I don’t know what will unfold politically in China in a month, a year, or a decade from now. No one does, not even Apple. However, I am confident that Apple will continue to develop tools for improving people’s lives. It was this tool-making mission that initially led Cook to begin building Apple’s supply chain and manufacturing apparatus in China in the late 1990s. Cook saw how China, not the U.S., could support such a global apparatus capable of making a lot of high-quality products in a short amount of time.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.
Above Avalon Podcast Episode 156: Apple's Content Distribution Arm
Content distribution has been a major theme for Apple in 2019. In episode 156, Neil goes over how Apple’s revised content distribution arm is structured. Neil also goes over his estimates for how much revenue and gross profit Apple’s content distribution arm can generate by FY2022. Additional discussion topics include the difference between Apple’s paid content bundles and content platforms, Neil’s initial estimates for the number of subscribers Apple will be able to grab for Apple TV+, Apple Arcade, and Apple News+, and why Apple’s new paid bundles will likely have lower profits than the App Store.
To listen to episode 156, go here.
The complete Above Avalon podcast episode archive is available here.
Measuring Apple's Content Distribution Arm
Apple has had a busy year expanding its content distribution arm. With the addition of Apple News+, Apple Arcade, and Apple TV+, Apple has revamped its paid content bundle offerings. Combining these new bundles with platforms like the App Store and iTunes, Apple will be in a position to have a content distribution arm bringing in more than $30 billion of revenue per year by FY2022.
Mapping Out Apple’s Content Distribution Arm
There are two parts to Apple’s content distribution arm: paid bundles and platforms. Paid bundles offer users access to third-party content (first-party content in the case of Apple TV+) for a set price each month. Platforms offer users the ability to consume a wide range of third-party content via paid and free downloads, in-app purchases, and paid subscriptions.
Exhibit 1: Apple’s Content Distribution Arm
Paid Bundles
Apple Music. Launched in 2015, Apple Music now has more than 60 million paying subscribers in more than 100 countries. In the U.S., an individual membership that includes a music catalog of 50 million songs goes for $9.99 per month ($99.99 per year) with student ($4.99 per month) and family ($14.99 per month) pricing also available.
Apple TV+. Apple’s new direct-to-consumer paid video streaming service will launch on November 1st in more than 100 countries. Built into the Apple TV app, Apple TV+ will include nine original video series and movies at launch, and new series and movies will be added each month. Apple is spending approximately $2 billion per year on original video content. An Apple TV+ subscription will go for $4.99 with Family Sharing although Apple is having a limited time promotion of one free year of Apple TV+ with a qualifying Apple device purchase. A detailed look at Apple’s TV+ strategy is available here.
Apple Arcade. Launched two weeks ago at $4.99 per month with Family Sharing, Apple Arcade offers subscribers access to approximately 70 exclusive games, and new titles will be added each month. Available in more than 150 countries, Apple Arcade utilizes a new business model for the App Store with Apple funding game development although ownership rights remain with the game developer.
Apple News+. Launched this past March, Apple News+ offers subscribers access to approximately 300 paid magazines and a handful of news publications. Built into the Apple News app, Apple News+ monthly subscription pricing of $9.99 includes Family Sharing with access for up to five other people. Apple News+ is currently available in the U.S., Canada, UK, and Australia.
Platforms
App Stores (iOS, tvOS, macOS). With 2.2 million iOS apps available to download, the App Store remains a cultural phenomenon. Various business models are supported through the App Store including paid and free apps, ad-supported, in-app purchases, and paid subscriptions.
Apple TV App. The new Apple TV app offers “channels” through which users can subscribe to approximately two dozen third-party video bundles.
iTunes. Despite Apple deemphasizing iTunes by breaking out functionality into different apps, the platform still represents a source of paid download revenue.
Apple Books. Apple offers a wide range of paid and free titles.
Apple News. Launched in 2015, Apple News offers users a wide selection of free and ad-supported written content from around the web. Apple News has 90M monthly active users thanks to prime real estate on Apple devices and a heavy emphasis on human curation.
Apple Podcasts. Apple is the leading distributor of podcasts with more than 600,000 available. Apple currently doesn’t directly monetize the Apple Podcasts app.
Subscription Estimates
In order to measure the size of Apple’s content distribution arm, one can first estimate the number of subscriptions Apple will generate from its four paid content bundles. Those totals can then be used to derive revenue estimates. The final step is to come up with growth trajectories for Apple’s various content platforms.
Exhibit 2 includes my estimates for the number of paid subscriptions Apple can achieve for its four paid bundles within three years, or by the end of FY2022 (September 2022). These estimates assume additional refinement and a certain amount of evolution such as an improved user interface for Apple News+, a larger video catalog for Apple TV+, and a continuously expanding number of games in Apple Arcade.
Exhibit 2: Apple Paid Content Bundle - Subscription Estimates (YE2022)
One important consideration found with these paid bundles is that each supports Family Sharing. While my estimates call for the four paid bundles to have a total of 188 million paid subscriptions, Family Sharing will mean that the number of Apple users having access to at least one paid bundle will likely exceed 350 million. This amounts to roughly one in three Apple users having at least one paid subscription to Apple Music, Apple TV+, Apple News+, or Apple Arcade.
Additional explanation regarding my paid bundle subscription estimates follows:
Apple Music. As shown in exhibit 3, it took Apple a little less than three years to reach 40 million Apple Music subscribers with the service available in more than 100 countries. Apple is currently adding 1.3 million to 1.4 million Apple Music subscribers per month. My 95 million Apple Music subscriber estimate by FY2022 reflects Apple being able to maintain the current growth rate over the next three years.
Exhibit 3: Number of Apple Music Subscribers
Tailwinds for Apple Music subscriber growth include the paid music streaming pie continuing to expand and Apple seeing continued success competing against Spotify in developed markets. Growth headwinds include Apple already experiencing some of the easier subscriber growth in the U.S.
Apple TV+. Apple has a few things going for it when it comes to grabbing a significant number of Apple TV+ subscribers in the coming years.
Netflix and Hulu have shown that many U.S. consumers see value in paying for direct-to-consumer video streaming bundles. In addition, the market will likely support a number of players and not just Netflix. A similar phenomenon is observed outside the U.S. as Netflix follows a localized content strategy.
Apple went with an aggressive $4.99 per month launch price for Apple TV+ as well as a limited time promotion of one year free with a qualifying Apple device purchase. Such a promotion will introduce quite a few Apple users to Apple TV+ in a very short amount of time.
My 55 million subscriber estimate for Apple TV+ assumes Apple sees stronger adoption for the service than it achieved with Apple Music over the same amount of time. For context, Disney expects Disney+ will be able to grab 60 million to 90 million subscribers by 2024. However, that range is likely conservative.
Apple Arcade. According to Apple, 500 million people visit the App Store each week. After taking into account Family Sharing, the number of families accessing the App Store each week may be closer to 350 million. My 30 million paid subscriber estimate assumes nine percent of families outside of China who frequent the App Store will sign up for Apple Arcade over the next three years.
Apple News+. My 8 million subscriber estimate reflects Apple continuing to evolve News+ in the coming years. Limited availability will remain a major headwind for subscriber growth as it reduces the addressable market to a fraction of Apple’s billion users. In addition, my 8 million subscriber estimate is influenced by larger headwinds found with consumers not seeing value in many of the magazines included in Apple News+. At the end of the day, the scale associated with paid written news simply isn’t in the same league as video and music streaming. For context, the two largest news sites in terms of the number of digital subscribers, the NYT and WSJ, have 3.0 million and 1.8 million digital subscribers, respectively.
Revenue and Gross Profit Estimates
When estimating revenue and gross profit for Apple’s four paid content bundles, the accounting treatment associated with revenue sharing arrangements needs to be considered. Apple reportedly relies on a 50% revenue share arrangement with Apple News+. Similar to how App Store revenue is reported on a net basis, Apple will only report its share of Apple News+ revenue. Apple will report Apple Music, Apple Arcade, and Apple TV+ revenue on a gross basis as those services do not include any type of revenue share arrangement.
Exhibit 4: Apple Paid Content Bundle - Revenue Estimates (FY2022)
For this exercise, my gross profit estimates reflect costs tied directly to each paid content bundle. For Apple Music, the approximately 70% of every dollar that is paid out to music rights holders is taken into consideration. For Apple TV+ and Apple Arcade, the amount of cash spent on content is taken into consideration. It is important to point out that SG&A costs are not reflected in these calculations.
Exhibit 5: Apple Paid Content Bundle - Gross Profit Estimates (FY2022)
Apple’s Other Content Distribution Businesses
With estimates for Apple’s content bundles in hand, attention turns to estimating the amount of revenue generated by Apple’s content platforms. While Apple does not break out the amount of revenue generated by the App Store or iTunes, management has provided various financial clues that allow one to back into accurate App Store revenue estimates.
In FY2019, my estimate is that the App Store will be responsible for approximately $13 billion of revenue and $8 billion of gross profit. Apple reports App Store revenue on a net basis, reporting only its share of revenue although the full costs to run the entire App Store (84% of apps don’t bring in any revenue) are passed through the income statement. After taking into account every other content distribution platform, including iTunes, my estimate is that Apple will bring in close to $15 billion of platform revenue and $9 billion of gross profit in FY2019.
When forecasting revenue trends for Apple’s content platforms over the next three years, it is important to consider the possibility of Apple’s new content bundle offerings cannibalizing a percentage of paid downloads and in-app purchases. For example, a portion of App Store revenue will likely flow to Apple Arcade over time while iTunes revenue continues to decline due to Apple Music. Assuming 10% of App Store revenue ends up being cannibalized by Apple Arcade, my estimate is that Apple’s various content platforms will see 6% growth year-over-year leading to $16 billion of revenue in FY2022.
Adding my $15 billion revenue estimate for Apples four paid bundles with my $17 billion revenue estimate for Apple’s platforms leads to an overall content distribution arm expected to bring in $32 billion of revenue and $15 billion of gross profit per year by the end of FY2022.
Exhibit 6: Apple’s Content Distribution Arm - Revenue and Gross Profit Estimates (FY2022)
Risks
The following items represent risk factors to my estimates:
Industry dynamics. The single largest risk factor is mostly out of Apple’s control – the degree to which people will be willing to pay for written content from traditional magazines, rent music and videos, and pay a set price each month to access games.
Competition. My estimates do not assume much adoption among users in China. Accordingly, China / WeChat do not represent risk factors to my estimates. Instead, Amazon’s digital content distribution aspirations represent a much larger risk.
Regulation. There are a number of parties looking to attack the App Store on antitrust grounds. At this time, my estimates do not reflect any material adverse change to App Store economics from these efforts.
Takeaways
Based on the preceding estimates, there are a number of takeaways:
A $32 billion revenue run rate per year is roughly double the amount of revenue Netflix currently earns in a year. However, when considering Apple’s overall business, the content distribution arm will likely represent approximately 11% of Apple’s overall revenue. This reinforces the view that content distribution will continue to represent a relatively small fraction of Apple’s overall business.
Apple’s paid bundles will likely have lower profit margins than Apple’s content platforms given how Apple is funding original content for Apple TV+ and game development. Apple Music revenue being reported on a gross basis also pressures overall margins found with the paid bundles.
The App Store will likely remain the most profitable piece of Apple’s content distribution arm for the foreseeable future given that revenue is reported on a net basis.
While Apple’s overall content distribution arm will be highly profitable, it likely still won’t be as profitable as Apple’s other services including AppleCare+, iCloud, Search Ads, and Licensing. While different accounting treatments (net vs. gross revenue recognition) play a role in driving down profitability, the larger factor is that Apple will need to continue investing in Apple TV+ and Apple Arcade.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.
Above Avalon Podcast Episode 155: The Apple Keynote
Apple keynotes remain some of the most valuable marketing events in today’s media landscape. Episode 155 is dedicated to going over Neil’s thoughts on the Apple keynote. Discussion topics include the odd criticism facing Apple keynotes, the three primary benefits Apple derives from them, how the Apple keynote has evolved, and areas in which Apple can improve the keynote.
To listen to episode 155, go here.
The complete Above Avalon podcast episode archive is available here.
Apple Keynotes Still Matter
It didn’t take long for critics to go after Apple’s recent product event at Steve Jobs Theater. However, the backlash had a dramatically different tone this time around. Instead of focusing on the new products unveiled on stage, much of the criticism was aimed at the event itself.
The New York Times ran an opinion piece calling for the end of Apple keynotes and claiming there is no longer a place for such “pageants” in today’s polarizing world. Others took to Twitter to say how Apple’s dessert offerings suggested the company is tone deaf or to complain about members of the audience becoming too emotional while hearing Apple Watch users tell stories of how the device saved their lives.
While Apple cynicism isn’t new, the preceding opinions represent a new kind of outrage. Apple keynotes remain some of the most valuable marketing events in today’s media landscape. In addition, keynotes provide a number of intangibles that it would be difficult for Apple to communicate any other way. It is in Apple’s best interest to continue hosting keynotes and product events, especially as the company moves into the wearables era.
Odd Criticism
In an opinion piece titled, “The Last Apple Keynote (Let’s Hope),” Charlie Warzel wrote:
“But what started as a Steve Jobs TED talk has become a parody — a decadent pageant of Palo Alto executives, clothed in their finest Dad Casual, reading ad copy as lead-ins for vaguely sexual jump-cut videos of brushed aluminum under nightclub lighting. The events are exhausting love letters to consumerism complete with rounds of applause from the laptop-lit faces of the tech blogging audience when executives mention that you (yes you!) can hold the future in your hands for just $24.95 per month or $599 with trade-in.
The entire event is at odds with our current moment — one in which inequality, economic precarity and populist frustration have infiltrated our politics and reshaped our relationships with once-adored tech companies. But it’s not just the tech backlash. When the world feels increasingly volatile and fragile, it feels a little obscene to gather to worship a $1,000 phone. Serving journalists pastries topped with gold leaf doesn’t do much to help either.”
My initial reaction to Warzel’s article was that it must have been some kind of manufactured outrage piece since the “pageant” he describes didn't come close to describing an actual Apple keynote. The media doesn’t “worship” Apple at these events. The rounds of applause aren’t coming from the media / press.
The following screenshot from inside Steve Jobs Theater during the recent Apple event does a good job of showing who attends Apple keynotes at Steve Jobs Theater. Contrary to what some may think, the media and press, denoted by the laptops in use, make up 55% to 60% of the audience. The rest of the crowd is comprised of Apple employees, guests, and VIPs.
Apple’s decision to serve refreshments, which did include delicious desserts, isn’t obscene. Instead, it’s a courtesy extended to guests who wouldn’t otherwise have a chance to eat anything. Many tech writers and reviewers spend up to six hours on Apple event days doing their jobs (shooting videos, taking photographs, getting hands-on time with the products, filing reports by strict deadlines).
After reading Warzel’s piece a few times, the only logical takeaway was that the Apple keynote was a victim of a deeper discontent that he holds towards Apple. Warzel sounded uncomfortable with the idea of Apple having the audacity to sell approachable luxury in a world that is apparently turning against tech companies.
Value
Not surprisingly, Warzel failed to recognize any reason why Apple keynotes still matter and are of immense value in today’s media landscape.
Apple derives three primary benefits from its keynotes:
Earned Media. Apple keynotes command days of media coverage during an era when the news cycle is measured in hours. No other company is able to grab the kind of attention that Apple earns. When taking into account previews published ahead of Apple events and the various reviews in the days that follow, it is conceivable that Apple receives hundreds of millions of dollars of free press from a single keynote.
Theater and Design. Apple events are productions built and designed to provide an experience to those in attendance. This is one reason why Steve Jobs Theater is so important to Apple. The event venue ends up telling guests a little bit about the people who built the products announced on stage. The typical Apple keynote audience will include representatives from various Apple partners, industry leaders, and special guests.
Employee Morale Boost. No one wants the product that they have spent two or more years working on to be unveiled to the world in a press release. Instead, to have that new idea unveiled on stage at an event watched by a few million people provides an amount of satisfaction and accomplishment that goes a long way given the sacrifice that went into making that product a reality.
Any one of those items by themselves would be reason enough for Apple to continue putting on keynotes. With all three factors on display at most keynotes, there is no valid or logical reason for Apple to stop hosting these events. Holding keynotes is a smart and rational business decision for Apple.
Evolution
The Apple keynote isn’t a static entity. What used to be smaller affairs targeting technology writers and gadget reviewers have evolved into global events bringing together people from different continents and diverse backgrounds.
Although it is now difficult to believe, Apple keynotes weren’t even live-streamed as recently as a few years ago. Instead, event live blogs were the only way to find out what Apple was even announcing. Meanwhile, the recent event at Steve Jobs Theater was live-streamed on YouTube for the first time and reportedly had three million viewers.
The now iconic iPod unveiling at Apple’s Town Hall auditorium back in 2001 doesn’t look anything like the modern day Apple keynote.
Apple events used to be targeted toward tech writers and gadget reviewers who would publish the all-important “yes” or “no” decision as to whether or not a new Apple product was worthy of purchase. Walt Mossberg, the dean of gadget reviewers, symbolized this era. Things are dramatically different today. No single reviewer or publication holds enough influence to make or break a new Apple product.
The Apple keynote presentation itself has changed dramatically as well. Fifteen years ago, Apple keynotes consisted primarily of Steve Jobs going through slide after slide with a few demoes here and there. In January 2007, during the iPhone unveiling, Steve Jobs was on stage by himself for 88% of the 103-minute presentation. Much of his focus was spent on making the case for why a certain new Apple product should exist. Apple had a user base that was a fraction of its current size. Steve ended up selling more than just the product announced on stage. Steve was selling Apple.
In contrast, last week’s Apple keynote had nine different presenters, Apple employees who worked on the product being unveiled. Tim Cook, in what has become his usual role of a master of ceremonies, was on stage for approximately 14% of the time.
Leveraging Video
A few years ago, the Apple keynote was thought to be on its last legs. Thanks to the rise of social media, Apple events were expected to have trouble remaining relevant in the news cycle for longer than a few hours. In addition, it wasn’t entirely clear how Apple would handle critical product unveilings, demos, and “one more things” that had been handled by Steve.
As it turned out, the Apple keynote went on to not just maintain its influence, but to actually gain value in today’s media landscape.
What changed?
Apple bet big on video.
Apple keynotes now include a heavy reliance on video for handling many segments of the traditional presentation. Everything from showing off products for the first time to going over the product’s sales pitch is handled by video. It helps that these videos are very well done.
While Apple’s initial move to video was viewed as a way to handle the presentation role that had been given to Steve, the increased usage of videos began to serve other purposes. Videos shown during Apple events now go on to be watched and passed around on social media. In 2007, the iPhone unveiling consisted of six short videos, most of which were just clips of TV shows and movies, representing 2% of stage time. At last week’s Apple event at Steve Jobs Theater, 11 videos were shown, representing nearly 22% of stage time. Three of those videos, some of which went on to be included in ad campaigns, have a collective 55M views on YouTube.
Apple extended this bet on video to include 120-second comical recaps of its keynotes. The videos have been receiving rave reviews after each event. Such recap videos were unimaginable just a few years ago as they would have been looked at as Apple essentially telling people not to bother watching the full presentation. As it turned out, the recap videos have become a great way for Apple to bring the keynotes to life. Recap videos receive four to five times the number of views as the full keynotes. Relatively speaking, few people go back to rewatch a 100-minute Apple keynote. However, people do go back and watch a two-minute recap video of that 100-minute Apple keynote.
Improvement
Apple is in a league of its own when it comes to product unveilings. Amazon’s strategy of shipping duds and failures in an attempt to find something that people will like doesn’t support large-scale product keynotes and events.
Google has tried to get into the hardware event mindset, but the company just doesn’t seem interested in following Apple down the big keynote path. Microsoft and Samsung try to emulate Apple keynotes with both companies going heavy on the theatrical side of things. At the end of the day, keynotes from these companies just aren’t able to generate and sustain the level of buzz and interest that Apple creates.
There are two areas in which Apple can improve the keynote.
Onstage demoes need to be rethought.
Aim for greater secrecy.
Giving precious stage time to game or app demoes is increasingly questionable. This isn’t meant to say that we have moved past demoes altogether and Apple should simply fill the time with more videos. There is a role for demoes to play if showing something in the flesh can prove a point more effectively than a simple video can - not an easy thing to accomplish given how good Apple’s marketing videos have become. However, a balance is needed between the tangible demo and video.
It’s been a while since there has been a memorable demo at an Apple keynote. One example that jumps out at me is from 20 years ago when Phil Schiller, Apple’s SVP marketing, jumped off a 20-foot ledge.
Another example is the Steve Jobs’ hula hoop demo. In both cases, the demoes were a clever way of highlighting the “freedom” associated with Wi-Fi on an iBook.
One reason the preceding demos worked so well was that they were performed in front of a massive audience of developers. Even today, Apple’s WWDC keynotes have a different vibe than events at Steve Jobs Theater given the 5,000 developers in the audience.
With on stage demos come risks, and it is understandable that Apple would want to de-risk its keynotes as much as possible. Two years ago, a minor mishap with a Face ID demo ended up being one of the most talked about items from Apple’s event with some going so far as to say the demo failure meant the feature wasn’t ready for prime time. Such a demo failure probably wouldn’t have been made into as big of a deal ten years earlier.
Well-done demos can give keynotes a certain amount of soul. During Apple’s Services event this past March, the “demo” involving Hollywood celebrities played out well from the perspective of being in the audience. Apple had a message that it wanted to push forward - it had the ability to grab the biggest names in Hollywood for Apple TV+, and the “demo” effectively reflected that message.
As we move further into the wearables era, Apple demoes involving smart glasses could prove to be a great way of unveiling new ideas and concepts to the world. The recent string of AR demoes at Apple keynotes have left much to be desired as people simply run around empty tables or desks with iPads in hand.
The other area that can always be improved upon is secrecy. There is something about seeing or learning about a product for the first time when it is announced on stage. Google’s decision to soft unveil the Pixel 4 removes much of the oxygen from its upcoming Pixel hardware event. While it’s not easy for Apple to maintain secrecy around unannounced products, the company has seen more success on the secrecy front recently. Last week, Apple was able to surprise the world by positioning an always-on display as a key feature of the Apple Watch Series 5. The feature didn’t leak beforehand.
Products
Apple keynotes end up reminding me a lot of Apple retail stores. The success found with each item ultimately depends on the product being sold. If Apple doesn’t have compelling products that people are interested in, the keynotes used to demonstrate such products will fall flat.
While some may hold cynicism towards a trillion dollar company unveiling $1,400 Apple Watches and $1,100 iPhones in an underground theater that cost more than $100M to build, such a stance ignores the impact Apple products are having on people’s lives. Apple keynotes end up being a way for the people building these tools to tell the world why such products should exist and how they can be used to improve the lives of a billion people. There is still a role for the Apple keynote to play in today’s always-changing world.
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Above Avalon Podcast Episode 154: Which iPhone Is That?
Naming iPhones is more art than science. In episode 154, Neil shares his thoughts on Apple’s iPhone naming strategy. The episode includes an oral history of iPhone nomenclature followed by a discussion of where Apple can bring iPhone naming in the future. Neil also goes over why the art of naming iPhones even matters when looking at the big picture.
To listen to episode 154, go here.
The complete Above Avalon podcast episode archive is available here.
Naming iPhones
Over the years, iPhone naming has had its ups and downs. There were the awkward names like iPhone 3GS and iPhone XS Max, and then there were strong industry-defining names like iPhone X. Based on the latest rumors, Apple appears to be in the early stages of moving away from an annual iPhone naming cadence altogether.
History
Most iPhones have an interesting story when it comes to nomenclature.
iPhone (2007). By going with “iPhone,” Apple relied heavily on consumers making the mental connection between a “breakthrough internet communications device” and a traditional cell phone. By relying on existing connotations, the iPhone sales pitch was made that much easier. Apple went on to use a similar naming strategy with Apple Watch.
iPhone 3G (2008). In retrospect, this may have been the most surprising iPhone name to date. Apple called the first update of its breakthrough mobile product after an industry term: 3G. The decision also spoke volumes about what drove iPhone adoption out of the gate. An iPhone with faster cellular connectivity was positioned as a key factor in customers' purchase decisions.
iPhone 3GS (2009). This is when things got weird with iPhone nomenclature. As explained by Apple’s Phil Schiller at the time, the “S” in iPhone 3GS stood for speed. The naming decision demonstrated how something that is now viewed as trivial - processor speed - was positioned as a key selling point for an early iPhone.
iPhone 4 (2010). Apple entered an iPhone naming scheme that would go on to last for years: a whole number characterized by a cosmetic redesign was followed by an “S” version the following year with more in the way of internal upgrades.
iPhone 4s (2011). An iPhone 4 with internal improvements. The “S” cycle provided Apple a few benefits. By sticking with the same overall iPhone design for more than a year, Apple was able to ramp up iPhone production quickly, and at a lower price, for “S” launches. The “S” cycle also reflected how consumers bought iPhones at the time. In the U.S., mobile carriers subsidized iPhones for $199 with the purchase of two-year contracts. The remaining price of the iPhone was recouped through higher monthly charges for data, texts, and service. This led to a two-year iPhone upgrade cycle and people choosing to either be on the whole number or “S” upgrade path.
iPhone 5 (2012). Arguably, this was the least noteworthy naming decision as Apple simply followed the existing pattern of using a whole number following the “S” model to denote a major cosmetic change. The iPhone 5 was the first iPhone to have a 4-inch screen.
iPhone 5c / 5s (2013). Apple faced its first major naming dilemma. In an effort to boost iPhone 5s sales and to maintain iPhone margins, Apple chose to replace the iPhone 5’s outer shell with lower cost colorful polycarbonate shells. Apple called this new model the iPhone 5c, and “c” presumably stood for color. Pundits ended up looking at the “c” as standing for cheap given the iPhone 5c’s lower price relative to iPhone 5s.
iPhone 6 / 6 Plus (2014). For the first time, Apple introduced two new flagship iPhones simultaneously - one with a 4.7-inch screen and the other with a 5.5-inch screen. Apple went with “Plus” for the model with the larger screen. The name worked as there was no other major difference between the two iPhone models aside from screen size (and battery life).
iPhone 6s / 6s Plus / SE (2015). This is where the iPhone “S” cycle began to lose much of its meaning from a feature and product development perspective. While the market would continue to look at “S” years as refinement years, Apple began to shift iPhone development so that every iPhone update contained a handful of useful new technologies and features. As for iPhone SE, Apple introduced a new model containing components from a few prior flagship iPhones in March 2016 with “SE” meaning special edition.
iPhone 7 / 7 Plus (2016). As was the year of iPhone 5, this was another uneventful year for iPhone naming. Apple followed the logical next step in an iPhone naming scheme that had been used for the previous six years.
iPhone X / 8 / 8 Plus (2017). iPhone naming seemed to cross the point of no return. Apple decided to call the first iPhone lacking a front-facing home button, something that had been rumored for years, iPhone X. For iPhone 8 and 8 Plus, instead of sticking with the “S” cycle, Apple skipped ahead to the next whole number. The decision was meant to have the new models be perceived as more advanced than what may have been implied with an “S” nomenclature.
iPhone XS / XS Max / XR (2018). Last year’s flagships were the most confusing from an iPhone naming perspective. Apple followed three general guidelines:
Apple reverted back to the “S” playbook to denote the model after a major redesign (iPhone X). Instead of this decision implying the return of the “S” cycle, in my view, Apple simply wanted to stick with the X branding for one more year.
“Max” was used to distinguish the larger iPhone model from its smaller XS sibling.
“R” was used for the lower cost alternative to the two iPhone XS flagships. According to Schiller, the “R” didn’t stand for anything, although some thought it stood for the model having a Retina display while “S” stood for Super Retina. Schiller mentioned that the letters R and S are used in the auto space to highlight special models.
The 2019 Lineup
Given Apple’s decision to go with the iPhone X naming scheme in 2017 and 2018, there aren’t too many logical paths that iPhone naming could follow unless Apple wants to try something completely new. There are two obvious choices:
iPhone XI (continue using roman numerals). Apple would say it’s pronounced “iPhone eleven” but everyone would call it “iPhone ex I.” While roman numerals could work if Apple were selling one flagship model, the fact that Apple has three flagships in the line would produce some confusion. Names like XI Max, XI Pro, or XIR aren’t as strong as the powerful iPhone X.
iPhone 11. This is a much simpler naming track. It makes more sense for Apple to use 11 than 12 as the implication is that the new iPhones are follow-ups to the iPhone X series. However, there is precedent for Apple to skip whole numbers as seen with the lack of iPhone 2 and iPhone 9.
The latest rumors point to Apple unveiling three new iPhones next week:
iPhone 11 Pro Max (successor to iPhone XS Max)
iPhone 11 Pro (successor to iPhone XS)
iPhone 11 (successor to iPhone XR)
The “Pro” would signal Apple wanting to draw attention to the differentiation between the two high-end flagship models and the lowest cost flagship. Apple has typically liked to use “Pro” to reflect models with greater specifications and capability as seen with iPad Pro, MacBook Pro, iMac Pro, and Mac Pro. In order to distinguish between the two “Pro” models, Apple would continue to use “Max” to denote the model with the largest screen.
Observations
Naming iPhones is more art than science. For example, the “R” in iPhone XR likely was chosen simply because it looked and sounded better than other letters. Meanwhile, Apple’s decision to go with “X” was likely heavily based on marketing, both in terms of marking the iPhone’s tenth anniversary and the fact that it looks cool and powerful from a branding perspective.
However, there is no question that iPhone nomenclature has been losing some of its usefulness and utility. Consumers are now routinely mispronouncing or misidentifying iPhone names and it’s easy to see why: iPhone XS Max doesn't exactly roll off one’s tongue. A similar issue will be seen if Apple ends up going with “iPhone 11 Pro Max.” People are increasingly saying “the new iPhone” or “the biggest one” when referring to the latest flagships.
It’s difficult to say if these changes have had a negative impact on iPhone sales. The iPhone business is being impacted by a number of developments including a longer upgrade cycle as people become content with what they currently have. It’s doubtful that a particular letter or number in the name would entice users to upgrade en masse to a certain iPhone model.
Future Considerations
Based on my calculations regarding the iPhone upgrade cycle, the next marginal iPhone buyer will likely hold on to his or her iPhone for a little over four years before upgrading. As the iPhone upgrade cycle continues to extend, the case for coming up with new iPhone naming every year declines.
There are subtle clues that suggest we may be approaching the point when Apple will do away with the annual iPhone naming cadence altogether. This wouldn’t mean that Apple would just go with “iPhone.” Instead, Apple would still need a way to distinguish iPhone models with different sizes and capabilities. In such a case, one likely option would be:
iPhone Pro (iPhones containing the most capability)
iPhone (the middle of the road option for the masses)
iPhone mini (the iPhone containing the smallest screen and fewest features)
One possibility is that Apple will expand the iPhone line to include more than three flagship models. For example, an updated iPhone SE would be a prime candidate for “iPhone mini.” Meanwhile, a larger model in the $699 to $799 range would make sense for “iPhone” while Apple would have more than one “Pro” model at the high end of the line. This naming strategy would be similar to how Apple currently names iPads: two “Pro” models, iPad mini, and iPad. (The iPad Air is positioned as a lower-cost iPad Pro.)
As for timing, 2021 may be a good bet for the earliest point when Apple would use this iPhone nomenclature. Consider the following:
By 2021, “Pro” will have likely been used in iPhone nomenclature for two years.
The latest rumors have Apple unveiling both a flagship iPhone with a smaller screen and an updated iPhone SE in 2020. These models would make it easier for Apple to use a simpler iPhone naming scheme. As it stands now, it would be difficult for Apple to position the middle-priced $999 model as just “iPhone.” Instead, the iPhone XR has been the best-selling model.
In the event that Apple plans on sticking with whole numbers for iPhone naming, the 2021 iPhones would potentially be called iPhone 13 - one of the more superstitious numbers in existence. Apple could use that occasion as a way of moving past numbers and letters altogether.
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Above Avalon Podcast Episode 153: The Bundler of Bundles
In episode 153, Neil discusses the strategy behind Apple TV+. Additional topics include the Apple TV app, five fundamental issues plaguing the paid video streaming market, Netflix’s business model, and what success in paid video streaming looks like for Apple.
To listen to episode 153, go here.
The complete Above Avalon podcast episode archive is available here.
The Apple TV+ Strategy
There is an opening for Apple to find success in paid video streaming. Letting others wage the content arms race, Apple will look to create a curated feed of compelling visual storytelling. Priced with sustainability in mind, Apple TV+ will be positioned as a way to push Apple’s broader video distribution platform forward. Combining Apple TV+ with other curated collections of content, Apple is developing a different kind of content consumption arm for hundreds of millions of highly engaged and loyal users. Apple TV+ has much higher odds of success than consensus assumes.
Content Distribution Arm
Apple has been in the business of distributing content to its users for decades. However, 2019 is shaping up to be the year of Apple reinvigorating its content distribution arm. To reflect the growing momentum found with subscriptions and to take advantage of certain ideals found with privacy and curation, Apple has been unveiling a revised content distribution arm that provides users access to human curated collections of media and entertainment. This content will be provided by both Apple (video) and third parties (news, video, music, games).
Apple News+ (human editors curating stories from hundreds of paid magazines)
Apple Music (human tastemakers creating playlists consisting of songs)
Apple Arcade (human editors developing a curated collection of games)
Apple TV+ (human producers creating a curated portfolio of visual stories)
Apple TV+ Details
Despite Apple remaining secretive and cagey about Apple TV+ details, we can have confidence in the service having a few key attributes.
Apple TV+ will be a paid service. Apple’s language at its March event implied that Apple TV+ would be tied to a subscription (i.e. not free). Last month, during the company’s 3Q19 earnings call, we received another major clue from Apple CFO Luca Maestri that Apple TV+ would be a paid service. Maestri said Apple TV+ will boost Apple Services revenue. Given that Apple had previously said Apple TV+ would be ad-free, the only way Apple TV+ could boost Services revenue is through paid subscriptions.
Apple TV+ will have a limited amount of content at launch. Apple TV+ will lack a back catalog of content at launch. Obtaining rights to an expensive back catalog would have led to a bidding war and plenty of leaks to the press. While the exact number of Apple TV+ shows that will be available at launch isn’t known, Apple highlighted five at its March event, and there are reportedly another 30 or so projects under development. Apple has shared four trailers for shows said to launch this fall (For All Mankind, Dickinson, The Morning Show, and Snoopy in Space).
Apple TV+ will have a free trial. Maestri disclosed on Apple’s 3Q19 earnings call that Apple TV+ will have a free trial. Such a trial would be unnecessary if Apple TV+ was available for free. In addition, the presence of a free trial may provide some clues as to how Apple plans on releasing new show episodes going forward. Apple has previously said that new series will be released on a monthly basis.
Early Skepticism
Consensus continues to struggle with some basic questions pertaining to Apple TV+. For example, the idea of Apple getting into original video in the first place still makes some people uncomfortable. However, much of the skepticism surrounding the service boils down to one thing: Apple is viewed as not having enough content to justify charging users.
One of the oddest criticisms that has been floating around is that there are now too many paid video bundles for consumers. This is a classic example of “the grass is greener on the other side.” The dream was for consumers to access their favorite TV channels a la carte. That vision is becoming a reality, but not quite in the way we expected. There are now ways to subscribe to individual “channels,” but they are large bundles of content fueled by content budgets in the billions of dollars per year. Nevertheless, some think that subscription fatigue will make it difficult for Apple TV+ to find a seat at the paid streaming table.
Strategy
Consensus thinks that if it wants to have a chance of Apple TV+ competing, Apple needs to dramatically increase its video content budget (likely around $2B per year) while keeping subscription pricing artificially low. The error found in such thinking is that Apple TV+ isn’t like other paid video bundles. Apple will look to fight a different battle.
Instead of competing in a content arms race or grabbing as much user attention as possible (both battles will be brutal), Apple will look to position Apple TV+ as a way to strengthen its broader video distribution platform.
Apple TV+ is positioned as an exclusive curated feed of content only available in the Apple TV app. Instead of paying to access a lot of mediocre video content that won’t be watched, for roughly the same price each month, subscribers will access a handful of exclusive stories that the entire family can watch together.
The Apple TV app, available on hundreds of millions of iPhones, iPads, Macs, Apple TV boxes, and various third-party smart TVs and streaming sticks / boxes, is designed to be a depository for a user’s video consumption. Success for Apple will be measured by the number of subscribers turning to the Apple TV app for video consumption. Similar to how Apple Card is leading users to become familiar with the Wallet app, Apple TV+ is a way to push the Apple TV app forward. As long as subscribers use the Apple TV app, Apple wins even if the subscriber watches content from HBO, Hulu, or Disney (since Apple earns revenue from those third-party subscriptions).
One problem for Apple is that the video streaming leaders, including Netflix, have no interest in playing ball when it comes to the Apple TV app. These companies want users to spend time on their own platforms, not Apple’s. This has resulted in the Apple TV app lacking the kind of deep integration with third-party content bundles that Apple management wanted. However, recent developments in the paid video industry are beginning to raise the question of whether or not the decision to bypass Apple’s home for various third-party video “channels” was the best business decision.
Industry Dynamics
There are five fundamental issues plaguing the paid video streaming market, and each one stands to be taken advantage of by Apple.
Subscription pricing is subsidized. Most companies are subsidizing paid bundle pricing in an effort to grab as many users (and their data) as possible. Given the amount of money being spent on content, a Netflix subscription in the U.S. probably should be more like $20 per month, not $13. Disney could have easily priced Disney+ at $15 to $20 per month rather than $7 given that a subscription includes access to the company’s evergreen library of content. This dynamic ends up helping new entrants like Apple as odds are good that consumers will subscribe to a few inexpensive bundles instead of one large expensive bundle.
User growth is prioritized too much. Companies are making questionable product and business strategy decisions in an effort to grow as quickly as possible. It’s time to start wondering if binge-watching, a development aimed at hooking people onto platforms for as long as possible, has actually been a positive development in the video space. The more bundles that embrace weekly release schedules for new shows, the more a central location such as the Apple TV app (where shows from various bundles appear when available) makes sense.
Mediocre content is becoming a problem. There is a finite amount of time each day. Companies are desperate to fill as much of it as possible with content. This battle for our time will lead to paid video bundles becoming bloated with mediocrity. This will result in users wanting more curating and filtering to focus on just the premium content - another tailwind for relying on something like the Apple TV app.
Data capture is a ticking time bomb. The degree to which video streaming companies are collecting viewer data has not received the attention it deserves. Data capture has been positioned as a selling point under the guise of something leading to better content recommendations. However, the failure found with “smart recommendations” represents a major hole in the claim that such data collection is even needed in the first place. Apple’s data privacy stance with its revised content distribution arm is being underestimated.
Value propositions are lacking. Not enough is being done to truly set paid video bundles apart from the competition. It is likely that churn will become a notable problem in the industry as consumers hop from bundle to bundle depending on which new shows are available. If this occurs, we will likely see more shows released on a weekly or even monthly schedule. While this will be done in an effort to reduce churn, it will likely lead many to crave a central depository for the newest shows.
The Difficult Truth
A harsh reality is unfolding in paid video streaming: There isn’t a sustainable business model for a standalone streaming service looking to compete in a content arms race. Netflix is trying to make a go at being a standalone paid video streaming service while also significantly ramping up content spend. It is noteworthy that Netflix has also taken actions to move away from Apple’s content distribution arm that include bypassing iTunes payment and not wanting much to do with the Apple TV app.
One way of assessing how Netflix’s business model is performing is to look at the company’s free cash flow. The situation doesn’t look good.
Exhibit 1: Netflix Free Cash Flow (Annual Totals on a Trailing Twelve Months Basis)
Netflix is burning through billions of dollars each year, and there is no light at the end of the tunnel. Netflix management will argue that negative free cash flow is merely a consequence of the company placing a huge bet on original content (higher costs up front). However, the company makes no attempt at suggesting free cash flow will turn positive anytime soon. Instead, Netflix plans on continuing to issue debt to fund its ballooning content budgets. This simply isn’t sustainable. Something has to give.
The $140 billion question facing Netflix is whether or not the company will be able to reduce its content spending and raise subscription pricing once it has achieved much of its user growth. There is reason to be skeptical. Competition for engagement is going to be brutal, and most companies playing in the paid video space are looking for other ways to monetize users and the intellectual property (IP) behind paid video streaming bundles. This will pressure Netflix’s ability to raise pricing.
Disney has three viable and profitable ways (movie tickets, theme parks, merchandise) to monetize the IP underpinning Disney+.
Amazon positions Prime Video as an add-on to a Prime subscription.
NBCUniversal is treating its upcoming ad-based video subscription service as another way to keep cable subscribers.
Given how easy it is to switch from paid video bundle to paid video bundle throughout the year, churn has the potential of ravaging the industry. Based on Netflix’s most recent earnings release, the churn effect is real, and we haven’t even seen genuine competition in the paid video streaming space. It is time to start wondering if Netflix would benefit from integrating into the Apple TV app and once again supporting iTunes for payment.
Long Game
Based on Disney’s aggressiveness with Disney+ (a $13 per month bundle consisting of Disney+, Hulu, and ESPN+ is going to make waves) and recent actions on the part of NBCUniversal and WarnerMedia to bring home the most valuable IP, it’s clear that companies are ready to wage war against the first-mover: Netflix.
Apple finds itself in a different situation as it both produces original video content and distributes third-party video bundles. From Apple’s perspective, competition in the paid video streaming space is a great thing. By having power move from one or two companies to a number of players, Apple’s strategy to become the “bundler of bundles” stands to benefit. It also doesn’t hurt to have an ecosystem of a billion users and 1.5 billion devices.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.
Above Avalon Podcast Episode 152: Let's Talk Wearables
Apple is the undisputed leader in wearables, and they are pulling away from the competition. In Episode 152, Neil discusses how Apple’s wearables business can be thought of as a train gaining momentum. Competitors face declining odds of being able to stop the train. Additional topics include Apple’s wearables performance in 3Q19, wearables as a percent of overall Apple gadget unit sales, Apple wearables revenue, the factors behind Apple’s wearables success, and why wearables represent a paradigm shift in computing.
To listen to episode 152, go here.
The complete Above Avalon podcast episode archive is available here.
Apple Deserves More Credit for Wearables
The wearables era at Apple began years ago. However, Wall Street and Silicon Valley are only now slowly starting to pay attention to what Apple has been building. Apple is the undisputed leader in wearables, and they are pulling away from the competition. Given how Apple’s wearables strength continues to be underestimated, the company deserves more credit for what it has achieved and where it is headed.
The Data
A takeaway from Apple’s recent 3Q19 earnings was that we are witnessing the wearables era continue to unfold at Apple. Segmenting Apple’s quarterly revenue growth into product categories is one way of highlighting wearables momentum. Both an accurate financial model and close following of Apple clues over the past four years are required to accurately estimate Apple Watch and AirPods unit sales and average selling prices (ASPs). Therefore, this exercise has not been practiced by many.
The preceding totals represent the change in revenue from 3Q18 to 3Q19.
Apple Revenue Growth Drivers (3Q19)
Services: $1.5 billion
Wearables: $1.2 billion
Home / Accessories: $0.6 billion
Mac: $0.6 billion
iPad: $0.4 billion
Note: These totals do not represent revenue totals but instead the change in revenue between 3Q18 and 3Q19.
The revelation from the preceding data is riveting. Wearables nearly exceeded Services in 3Q19 as Apple’s top revenue growth generator when looking at absolute dollars. Consensus was not expecting this to occur as Services was positioned as Apple’s growth engine. It is clear that consensus spent too much time on the Services highway and ended up missing the exit for wearables.
In taking a closer look at wearables revenue growth, it becomes evident that Apple is benefiting from both higher ASPs for Apple Watch and AirPods as well as continued strong unit sales growth. For AirPods, unit sales growth is nothing short of spectacular at 80%.
Speaking of unit sales, one out of five gadgets that Apple sells is now a wearables device. Exhibit 1 highlights the growing share that wearables represent when looking at overall Apple device unit sales.
Exhibit 1: Wearables Share of Apple Device Unit Sales
Exhibit 2 depicts wearables’ growing share of gadget sales relative to Apple’s other product categories. Apple is currently selling approximately 70M wearable devices per year. This includes 30 million Apple Watches and more than 30 million AirPods.
Exhibit 2: Apple Gadget Unit Sales
On a revenue basis, Apple’s wearables business is now at a $16 billion annual run rate growing at 55% to 60%. At the current pace, wearables will surpass both the iPad and Mac near the end of 2020 to become the third largest product category behind iPhone and Services when looking at revenue.
The Wearables Train
One way of thinking about Apple’s wearables business is that it’s a train gaining momentum. Competitors face declining odds of being able to stop the train.
The Apple wearables train is boosted by three items that no other company has the luxury of utilizing or leveraging:
A massive installed base of iPhone users (925M globally).
Core competencies and a company culture built on making technology more personal, intuitive, and easy to use.
A thriving platform of multiple wearables products.
Apple is leveraging its ecosystem of users and devices to give its wearables business an ideal launching pad for success. While there are handful of companies with more than a billion users, no other company has an ecosystem of a billion users and nearly 1.5 billion devices (nearly 90% of which are running the latest software). The lack of a self-sustaining ecosystem is one of the primary factors driving Fitbit’s gradual fade into irrelevancy. This limitation manifests itself in new products like the Fitbit Versa smartwatch failing to catch the needed traction.
Design, or the lack thereof, is proving to be another high barrier for many companies to get over in terms of wearables. Silicon Valley continues to focus too much on technology and not enough on design, or how we actually use technology. Google’s ineptitude when it comes to wearables is partially due to the company not having a clue as to how to get people to wear wearable devices. Management thought consumers would want to wear Pixel earbuds because the devices had real-time translation. In reality, consumers don’t want to be seen in public wearing wireless headphones that don’t reflect aspiration and coolness. A keen understanding of how to play in the luxury and fashion realms while simultaneously appealing to the mass market is tricky.
Flying Under the Radar
In assessing why Apple’s wearables business has received so little attention to date, one doesn’t have to look much further than the iPhone. Preoccupation with trying to find a singular product capable of replacing iPhone made it difficult for many to see how a platform of wearable devices is the answer for what can eventually serve as a viable iPhone alternative.
A cellular Apple Watch paired with AirPods is already able to handle a number of tasks currently given to the iPhone. Add a pair of smart glasses to the mix, and mobile devices like the iPhone and iPad stand to lose even more use cases.
It doesn’t help that new Apple products are also graded on a curve next to iPhone. If a new product is unable to move Apple’s financial meter out of the gate, the product is looked at as a flop, toy, or mere iPhone accessory.
Guardrails
For competitors, the bad news is that there is evidence that Apple is still applying some breaks to its wearables train. In some ways, Apple is holding things back. An iPhone is still required to set up an Apple Watch. A truly independent Apple Watch that doesn’t require an iPhone would grow the device’s addressable market by three times overnight.
In addition, Apple currently only offers wearables devices for two pieces of real estate on the body: our wrists and ears. A compelling argument can be made that the most prized piece of wearables real estate, our eyes, remains untapped.
Looking Ahead
We are witnessing wearables usher in a paradigm shift when it comes to how we use and interact with technology. Apple deserves more credit for not only choosing to ride the wearables wave, but also playing a crucial role in getting wearables off the ground.
Apple is well on its way to having Apple Watch and AirPods installed bases of 100M people each. The company is more than half way there with Apple Watch and is quickly approaching the same level with AirPods despite the product being sold for half the time.
Apple also finds itself in the midst of a major investment phase to expand its wearables platform. There is an opportunity to bring more utility, in addition to clearer vision, to the eyes in the form of smart glasses. Such a product would be a precursor to a pair of AR glasses.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.
Above Avalon Podcast Episode 151: Apple's Financial Tug-of-War
A different kind of Above Avalon podcast episode - dedicated to discussing why earnings are so intriguing to Neil. After going over the two ways to utilize quarterly earnings, Neil goes over some of his expectations for Apple’s 3Q19 and how Apple is currently facing a financial tug-of-war
To listen to episode 151, go here.
The complete Above Avalon podcast episode archive is available here.
Apple 3Q19 Earnings Expectation Meters
Apple finds itself in a financial tug-of-war as declining iPhone revenue is being offset by growth in every other product category. When Apple reports 3Q19 earnings on Tuesday, we will get the latest snapshot of how this tug-of-war is playing itself out.
While the press remains infatuated with the storyline that slowing iPhone sales are driving Apple to become a services company, which isn’t true, such an intense focus on services is leading to a lack of attention being given to the incredible growth seen with Apple’s wearables platform and the turnaround story underway with the iPad business.
Historically, Apple’s FY3Q (April to June) earnings have proven to be more of a wildcard as FY4Q revenue guidance is heavily dependent on product launch timing in September. This produces a situation in which light guidance can be explained away more easily than in any other quarter.
Ahead of Apple’s 3Q19 earnings release, I am publishing four expectation meters:
iPhone revenue
Non-iPhone revenue
Products vs. Services revenue
4Q19 revenue guidance
Estimates
The following table contains my overall Apple 3Q19 estimates.
A detailed discussion of these estimates, including my methodology and perspective behind the numbers, is found in my Apple 3Q19 earnings preview available here (first half) and here (second half). Above Avalon membership is required to read my earnings preview. To become a member, visit the membership page.
iPhone Revenue
We know that iPhone sell-through demand improved moving from March into April and May. The question is, to what degree was iPhone demand in June impacted by U.S./China trade tensions? Given that roughly two-thirds of 3Q19 iPhone sales were already in the books prior to June and FY3Q is historically Apple’s weakest quarter for iPhone sales, any potential slowdown in demand will have a more modest impact than the sales implosion Apple experienced at the end of 2018. In addition, Apple has undertaken a number of initiatives in an effort to streamline iPhone upgrades, including lowering prices outside of the U.S. to neutralize demand headwinds related to foreign exchange.
My expectation is that Apple will report $25.3B of iPhone revenue, a 14% decline from 3Q18. An iPhone revenue number that exceeds $26.0B would be considered strong while a number less than $25.0B would be on the weak side.
Non-iPhone Revenue
Apple’s non-iPhone business includes revenue from the following line items:
Services
iPad
Mac
Wearables / Home / Accessories
My expectation is that Apple will report $27.7B of non-iPhone revenue. A revenue number north of $28.0B would be considered strong while a number less than $27.0B would be on the weak side.
Products vs. Services
In order to reflect Apple’s revised financial disclosures, the following expectation meter is being introduced for the first time. Apple’s revenue is broken out into two categories: products (i.e. hardware) and services.
4Q19 Revenue Guidance
Consensus expects Apple to report $61B of revenue in 4Q19. This seems on the light side. My estimate is for Apple to announce 4Q19 revenue guidance in the range of $62B to $64B. Light revenue guidance can easily be explained away by a flagship iPhone model or two being delayed into October while strong guidance may reflect an easier year-over-year compare as the iPhone XR launched in 1Q19.
Additional thoughts and perspective on Apple’s earnings and 4Q19 guidance are available in my 3,800-word earnings preview, which includes two parts:
Above Avalon membership is required to read my earnings preview. To access the earnings preview and have my Apple earnings review sent directly to your inbox when published, sign up at the membership page.
Above Avalon Podcast Episode 150: A Larger Apple Machine
The recent Jony Ive and Jeff Williams news has been met with mixed reactions. In episode 150, we discuss why 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. Additional topics include the various growth narratives facing Apple, the growing Apple installed base, and the Apple machine.
To listen to episode 150, go here.
The complete Above Avalon podcast episode archive is available here.
Jony Ive, Jeff Williams, and a Larger Apple
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.
Growth Narratives
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)
While Wall Street looks at Apple’s growth story in terms of unit sales, Silicon Valley thinks in terms of user data. The companies collecting the most user data are considered to have the most formidable business models and growth prospects. The list includes not only giants such as Amazon and Google, but also content distribution plays like Spotify and Netflix. Simply put, Silicon Valley’s concern with Apple is that the company will find itself at a major disadvantage due to its privacy stance pertaining to user 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.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.
Above Avalon Podcast Episode 149: Letting Go of the Rope
Despite there being no discernible change to the grand vision behind Apple’s product development, there does appear to be a noteworthy change in strategy. Episode 149 is dedicated to discussing how Apple’s product strategy has changed from a pull system to a push system. Additional topics include product-related implications raised by Apple’s revised strategy, the Grand Unified Theory of Apple Products, and why I’m hesitant about some aspects of the change.
To listen to episode 149, go here.
The complete Above Avalon podcast episode archive is available here.
Apple's Product Strategy Is Changing
This year’s WWDC felt different. While every WWDC keynote is filled to the brim with new features, this year’s announcements included highly anticipated items like a new Mac Pro and differentiated iPad software features. In addition, there were some genuine surprises such as SwiftUI (a big deal with wide-ranging implications for Apple’s ecosystem). Despite there being no discernible change to the grand vision behind Apple’s product development, there does appear to be a noteworthy change to strategy.
The Past
Apple had been following a product strategy that can be thought of as a pull system. The company was most aggressive with the products capable of making technology more relevant and personal.
One way of conceptualizing this product strategy is to think of every major Apple product category being attached to a rope. The order in which these products were attached to the rope was determined by the degree to which technology was made more personal via new workflows and processes for getting work done. Accordingly, Apple Watch and iPhone were located on the end of the rope held by Apple management. Meanwhile, Mac desktops were located at the other end of the rope while iPads and Mac portables were somewhere in the middle.
As Apple management pulled on the rope, the Apple Watch and iPhone received much of the attention while the Mac increasingly resembled dead weight.
The preceding exhibit may make it seem like all of Apple’s product categories moved in sync with each other as Apple management pulled on the product “rope.” In reality, the quicker Apple pulled on the rope, the more chaotic the end of the rope moved. The following exhibit does a better job of demonstrating the chaos found at the end of the rope.
The Apple Watch and iPhone were Apple’s clear priorities while the iPad, Mac portables, and Mac desktops ended up facing a battle for management attention. The iPad seemed to have the clear advantage in that battle, at least when it came to capturing mindshare among Apple’s senior ranks. Recall Tim Cook’s comment about the iPad being the clearest expression of Apple’s vision of the future of personal computing.
Today
Over the past two years, we received clues that a major change was beginning to take hold in Apple’s product strategy. This change was on display during this year’s WWDC. Consider the following announcements:
The Apple Watch continues to gradually gain independence from iOS and the iPhone with its own App Store and the ability to create watchOS apps without an iPhone app.
iPadOS is a promise from Apple that iPad will be given unique software features versus iPhone. Features like multitasking and Apple Pencil support give iPad differentiation from its more popular sibling (iPhone).
The new Mac Pro is clear evidence of Apple industrial design, along with the engineering and product design teams, attempting to come up with a long-term solution for the most powerful computer in the product line.
SwiftUI is the kind of foundation Apple needs to properly leverage a thriving iOS developer ecosystem in order to benefit other product categories.
Apple no longer appears to be relying so much on a pull system when it comes to advancing its product line. Instead, a push system is being utilized, and every major product category is being pushed forward simultaneously. The change was designed to reduce the amount of chaos found at the end of the “rope” that Apple was pulling. Accordingly, the primary benefactors arising from this new strategy are the iPad and Mac. This explains why this year’s WWDC announcements felt more overwhelming than those of previous years. Apple was able to move its entire product category forward at the same time.
This revised strategy ends up supporting a core tenet of my Grand Unified Theory of Apple Products - a product category's design is tied to the role it is meant to play relative to other Apple products. (A deep dive into Apple’s product vision and the Grand Unified Theory of Apple Products is available here for Above Avalon members.) By pushing the products geared towards handling the most demanding workflows, Apple has a greater incentive to push the products capable of making technology more personal and relevant.
It’s not that every product category in Apple’s line is now on equal footing in terms of importance and focus. Some products will receive updates every few years while others require more attention due to needing annual updates. In addition, Apple’s revised product strategy likely won’t change the sales ratios between product categories (iPhone outselling iPad by four times while iPad outsells Mac by more than two to one). Instead, the change from a pull to push system manifests itself with each product category being given a defined and unique role to handle within the Apple ecosystem.
Wearables are tasked with handling entirely new workflows in addition to a growing number of workflows that had been given to iPhones and iPads.
The iPhone is the most powerful camera and video player in our lives.
iPads and Macs are content creation tools.
Implications
There are a number of product-related implications arising from Apple’s revised strategy:
Mac Desktops. Despite being in the post-PC era, desktops are experiencing some kind of renaissance. Some of this isn’t entirely surprising given how the desktop has always been viewed as an antidote to some of the ideals found with mobile. However, what is new is the realization of the desktop’s role in the AR era. Mac desktops are niche in terms of the number of users relative to other Apple product categories, albeit a very powerful and crucial niche.
Mac Portables. It is time to take Apple management at its word when it says the Mac is important to Apple’s future. Mac portables will likely retain a place in Apple’s product line for the foreseeable future. A few years ago, low-end Mac portables seemed to be on a dead-end path thanks to iPads. There is no longer any evidence that such thinking is widely held in Apple’s senior ranks. An ARM-based Mac portable seems inevitable at this point.
iPad. Just a few years ago, some in the tech pundit world thought the iPad lacked a future. Such thinking was due to slowing iPad sales combined with larger iPhones being able to handle many of the use cases originally given to iPad. While the iPad has always been viewed as the future of computing within Apple, we are starting to see that vision materialize. iPad sales are now routinely surprising to the upside as Apple adds a “pro” layer to the iPad category in terms of powerful hardware and software.
iPhone. The iPhone as a product category continues to mature, as seen with a longer upgrade cycle. Going forward, the iPhone will primarily be known as the most powerful camera in our lives and a video consumption device. Many of the less intensive use cases and workflows currently given to the iPhone will naturally flow to wearables over time.
Wearables. Apple is the wearables leader. Fitbit would arguably be the closest from the perspective of unit sales but even then, the company is quickly losing momentum. Lessons that Apple learned with iPhone and iPad are now giving the company a wearables advantage that is likely at least five years. An independent Apple Watch not requiring an iPhone to set up is inevitable. The move would increase Apple Watch’s addressable market by three times overnight. In addition, Apple is well on its way to establishing a wearables platform as it competes for prime real estate on our wrists, in our ears, and in front of our eyes.
Will It Work?
Is Apple making the right product strategy decision moving from a pull to push system? It’s too early to tell. At first, the revised strategy may seem like a no brainer as each product category ends up benefitting from more attention. However, it’s not a given that such a dynamic is in Apple’s best long-term interests.
The source of my hesitation in Apple’s new product strategy is that the company’s long-term success is dependent on one item: making technology more personal. Anything that takes away from that goal ends up being a hurdle. Is Apple supporting legacy workflows to the detriment of Apple’s long-standing mission of making technology more personal and relevant?
One reason Apple decided to change product strategies in the first place was to avoid an all-out uprising among the 1% of the user base creating content consumed by the other 99%. The mistake Apple made over the past few years was pulling the product “rope” too fast and in the process, leaving many of its pro users, defined by the workflows needed to be supported, behind.
For a company that is resource constrained when it comes to time and attention, there is no guarantee that Apple’s functional organizational structure and design-led culture can realistically scale to push an endless number of product categories at the same time. This was the key benefit found with Apple’s pull system. The focus was to advance the products capable of making technology more personal and relevant while trying to bring as much of the broader product portfolio along for the ride. The move to a push system is inherently more complex. Apple finds itself doing a whole lot more that it did just a few years ago.
Some will push back at the claim that Apple is resource constrained considering the company has $113 billion of net cash on the balance sheet. However, such a view doesn’t take into account how Apple functions. Apple could have thrown together some components in a big box and shipped a new Mac Pro shortly after realizing that the previous Mac Pro design was a dead end. Instead, Apple’s industrial designers, working in close collaboration with various teams, took a little over two and a half years to come up with what is marketed as a long-term solution for handling the most demanding content creation workflows. Similar questions now plague Apple pertaining to its approach to “pro” Mac portables.
My concerns regarding Apple’s revised product strategy would be alleviated if Apple came up with a plan to push legacy platforms forward by doubling down on future initiatives involving making technology more personal. This is why SwiftUI is intriguing. Apple is positioning SwiftUI as a way to improve a developer's productivity by requiring less code, resulting in better code. What if that is only scratching the surface as to Apple’s ultimate objective? What if the Mac is being repositioned as an AR creation platform while iOS is gradually positioned as a platform for developing wearables apps? Using a billion iPhones to develop apps consumed on billions of wearable devices is the type of goal that would require years of work, foundation building, and periodic changes to product strategy.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.
Above Avalon Podcast Episode 148: Apple's Billion Users
Apple has reached a level of ecosystem strength that still hasn’t been fully digested by the marketplace. In episode 148, we discuss Apple’s ecosystem ahead of the company’s developers conference. Additional topics include how I estimated the total number of Apple users, various revenue per user figures for different parts of Apple’s user base, the difference between Apple in 2019 and the 1990s, and how wearables represent one of Apple’s key growth opportunities.
To listen to episode 148, go here.
The complete Above Avalon podcast episode archive is available here.