Late-to-the-Party Thoughts on Apple 3.0’s Prospects, “Part 1”: Old News, Substantial Remaining Opportunity

I wonder if I’ll ever get around to typing Part 2. Anyway, TL;DR + stream-of-consciousness warning.

 

On which there’s general agreement

 

– Tim Cook is stewarding Apple with his own leadership vision, so we’re now officially in the Apple 3.0 era.

– Tim Cook is the operational equivalent of Steve Jobs. (So many stories, and so many energy bars chewed over the years.)

– Tim Cook is, over time, creating a culture of, at risk of massive oversimplification, “greater openness” both within Apple (collaboration, heightened intolerance of office politics and intra-company silos) and externally, whether it be media (more interviews, more access, generally a somewhat less cagey stance towards the media, eternal veil of product secrecy aside), developers (I’ll just refer you to the reams of WWDC coverage as a sufficient-enough example), or shareholders (I’m not sure how the institutional shareholder could ask for much more, considering the open line of communication about use of cash, and for the rest of us, the dividends being put on auto-pilot increase aren’t too shabby either).

 

A perfectly valid, open question that can’t really be answered right away

 

– Whether Tim Cook can, again at risk of massive oversimplification, “replicate the Apple magic” that Steve Jobs is famous for, as partially evidenced by the Greatest Second Act of Any CEO Ever resulting in Apple going from around $7B in revenues in fiscal 1997 to over $100B in fiscal 2011. And by “replicate the Apple magic”, I mean Apple remaining the immensely successful, still-growing ($175B ttm revs and climbing, albeit more slowly), still-hungry, still-experimenting, customer-and-user-experience-hyperfocused company it is today.

 

On major existing market opportunities remaining for Apple (read: Apple’s core hardware businesses)

 

– Sometimes I wonder if certain observers give Apple short shrift when it comes to the ultra/pocketable (currently, smartphone) and ultramobile (currently, tablet) computing arenas. Oh, sure, Apple’s constantly under pressure (from the media, punditry, etc.) to come up with “new product categories”. And Apple clearly feels the pressure as well, what with Tim Cook’s constant (and maybe Apple-2.0-uncharacteristic) promises that new product categories are on the way, presumably by the end of calendar 2014.

– Yet, the iEmpire is already quite well-established by most objective measures (you’d think Apple’s financials would speak to that, but apparently those billions are of the incredibly fragile and fickle variety). It’s tough to see consumers move away from pocketable computers (first) and mobile/ultramobile computers (second) for a different category of device (no, I don’t think the “phablet” counts). And incredibly enough, there remains vast territory to be conquered, even newly occupied in the pocketable/mobile computing spaces.

– Such as the “due-for-sea-change-any-day-now-to-hear-some-tell-it” smartphone market.

Smartphones/Connected Pocketables

Smartphones, as they’re still mostly called, are likely a 1B unit/year market now, and still growing (per Gartner). Mobile phone sales in general may reach 2B units/year (per IDC), and most all of them could be smartphones anyway before too many years pass.

– Smartphones feature a unique blend of “disposability” (perceived durability/useful life, zero upgradability, continued massive deltas in features and performance from year to year, continued incentive to upgrade) and indispensableness (self-explanatory).

– In the past four fiscal quarters, Apple has sold just shy of 160M iPhones. I don’t think Apple’s ambitions stop at <10% of the global handset market (per year), and it’s not like Apple isn’t armed with the technology and cost discipline to change up its product landscape a bit in the near future. For instance, in not much more than a year’s time, Apple’s “budget” chip could be be the exact same A7 SoC possessed of the bandwidth to scale from iPhone (5s) to iPad (Air/mini retina) and still deliver 2x claimed CPU/GPU performance deltas over both the A6 iPhone 5 and A6X iPad 4. Translation: It’s got power to burn and a healthy dose of longevity to be competitive in lower-cost product categories. Note also Apple’s continued (if “nominal”) attention to the A5-equipped iPod touch, starting at a not-crazy-expensive $199. I have to wonder if Apple still has those “interesting ways to approach the prepaid market” on a nearby shelf.

– Also, if the rumors are true, by September 2016, Apple’s “$0 iPhone” could have a sapphire-composite display, along with that “bigger screen” which “everyone’s” been wanting.

– As you know, there’s a carrier by the name of China Mobile beginning the very long game of 4G network rollout/adoption, with slightly over 1% of its total subscriber base (8.1M) currently on 4G not even half a year into the rollout. The battle for subscribers is and will continue to be brutal, and Apple’s premium strategy necessarily prices its products out of the reach of many (which is more noticeable in lower-ARPU markets such as China and India). Then again, there must be some reason why Apple’s been said to book such a large percentage of smartphone market profits. I doubt Apple will ever approach “majority 4G share” on China Mobile, but the more salient point is that Apple entered the China Mobile 4G market arena at about as perfect a time as is possible – very shortly after launch. While many brands have been supported by China Mobile prior to Apple’s very late partnership with the carrier, it helps that some millions of China Mobile customers (15 million as of March 2012) found iPhone compelling enough to buy without subsidy or official carrier support, and trundle along on EDGE for years.

– Don’t underestimate Apple’s “broad-based” strength in iPhone worldwide, or its ability to “steal” customers from Android. I know, sometimes it seems like the Android/iOS divide is even larger and more polarized than Mac and PC. But unless you think Tim Cook a liar, switching from Android to iOS is apparently a very real thing. And by Android, maybe I’m also emphasizing Samsung in particular. While Samsung is a far stronger, savvier, better-integrated beast of a global company than Nokia ever was, and should remain the volume leader for quite some time, its financials have been peaking as of late. That may or may not have to do with the S5’s incremental advances in an iPhone 6 year, the S5’s less-user-friendly take on fingerprint unlocking, or Samsung’s continuing to shy away from metal fabrication processes (which Apple’s embraced with fairly ridiculous enthusiasm ever since the Titanium PowerBook) while the Android competition continues to heat up. Whatever the case, Samsung’s had two straight quarters of year-over-year operating profit decline, and there’s hints that it’ll be three in a row – despite the 5S launching in April. In this continuing game of leapfrog, you’re supposed to be having stronger quarters (YOY) at your competitor’s expense with a new iPhone at least one fiscal quarter away. That it’s not happening is potentially very telling.

– Now, of course the global market is fiercely competitive with challenges unique to each region and sub-region. Apple’s iPod dominance was a once-in-a-great-while occurrence that Apple will likely never repeat. But with an ultrapocketable market this large, does it really matter? Just me, but what matters is growth, moreso than what others are doing (there’s more than enough space for multiple winners in this market, after all). And for now, the smartphone market, and iPhone, still has that growth – and that’s before iPhone 6 and the trickling down of the A7/Touch ID platform to lower price points, which can only help. Of course, the complicating factor is that Apple plays in the top tier of the smartphone market by ASP, so I’m not sure how relevant it is to compare a subset of a market against the entirety of said market. Frustrating, but I guess over time, we’ll just have to look to trends in iPhone “ASP”, overall gross margin, and YOY unit growth in an attempt to get a slightly better outsider’s view on things. Hey, if nothing else, we’ll get plenty of reminders and advance warning from all kinds of places should anyone find anything particularly amiss in Apple’s financials.

– As a sidenote, while it’d be the height of folly to ignore or otherwise dismiss the competition (such as Xiaomi, which is on a growth tear right now), it’s also a fallacy that a new, fast-growing competitor (such as Xiaomi) is “automatically” the doom of Apple, whether immediately or, as many like to say, slowly yet inevitably over time. Hence my focus on the aforementioned ASP/margin/unit growth trends over preconceived notions and media narratives.

– What about Apple’s reliance on carriers for much of its success (and up-front subsidy payments)? No doubt it’s a “dependency” and a vulnerability in the abstract, though not in the sense of carrier power over Apple – just ask China Mobile and NTT DoCoMo. And as far as the carrier model is concerned? Please correct me if I’m wrong, but the most “reliable”, secure, country-scale, high-speed providers of mobile bandwidth (when they’re not Google or something) are generally those who’ve put in, or otherwise own, a heck of a lot of network infrastructure. China Mobile’s said to be paying $12B to deploy 500,000 TD-LTE base stations across the country. Anyway, until the (pay-for) wireless access dynamic changes, it’s difficult to see the smartphone business model fundamentally changing. Don’t use your “smartphone” as a phone at all? Fine, don’t call it a smartphone, but data-connected ultrapocketable cameras/camcorders with productivity/connectivity/B2B/leisure/commerce/messaging/gaming/etc. app functionality wouldn’t seem to be falling out of fashion anytime soon. There’s also that “more cores” phenomenon that tends to go against any “thin client” trend.

– As far as consumer payment preferences, sure, there could always be a megatrend from postpaid to prepaid, but that…doesn’t quite explain the sudden shift away from traditional 2-year contracts to the Next/Edge/One Up/Jump “leasing” model (at least in the US), which seems a step still further removed from prepaid. Apple doesn’t seem terribly disadvantaged here due to their excellent iPhone resale value reputation. It’s true that a paradigm shift to prepaid would disadvantage Apple, but it sure seems like most carriers would prefer to recoup their new-generation wireless broadband costs first – and prepaid isn’t a terribly efficient way to go about it.

– I’d also mention that Apple rather ruthlessly, though without much warning to shareholders, trimmed its gross margins from a dizzying peak of over 47% (fiscal Q2 2012) to 37% (fiscal Q3 2013). Meaning that Apple, if so inclined, is quite capable of sacrificing (iPhone 5) or diluting (iPad and iPad mini) margin where it feels the need to.

Mobile and Ultramobile Computers

Tablets and traditional PCs probably represent a combined market of well over 400M units/yr (source: IDC), even if you try and adjust downward for tablets that are really more like new-generation portable media players.

– Apple’s prospects in the tablet market seem a bit murky given the arc of Apple’s iPad unit growth lately. While Apple did sell 71 million iPads in fiscal 2013, the last four YOY unit growth rates starting from Q3 2013 to Q2 2014: -14%, basically zero, 14%, -16%. Not something you’d expect from a product line younger than iPhone and broader than it’s ever been – at least in the abstract, right? And these (lack of) growth rates aren’t something sell-through figures can fully “explain away”.

– On the other hand, Apple remains incredibly bullish on iPad, and it’s gained the credibility to make that assessment on account of its surprisingly strong fiscal Q2. Tim Cook’s “theory”, reading between the lines, that iPad’s meteoric rise may also have contributed to an “early” plateau-type phase seems arguable at least. There’s also my pet theory, quite possibly hilariously wrong, that Apple’s post-PC device remains in substantial competition with consumers’ wallets for those passé, truck-like PCs that, while fading, still sell around 300M units a year. If the future belongs to tablets like this, so be it. Given the arc of computing thus far, though, I’m thinking a very large fraction of desktop/laptop “trade-downs” will be to the higher-performing tablet class. Yes, those tablets which are currently derided as not being for “real work”, though that criticism typically seems leveled at iPad in particular.

– Right, about the humble, dinosaur PC. That eternal underdog Apple’s done a steadier, better business in Mac than you might expect.

– How many Macs did Apple sell in fiscal 2004? 3,290,000. Yes, in an entire fiscal year, for $4.923B in revenue. In fiscal 2013? 16.341M Macs, for $21.4B in revenue (about 497% unit growth and about 435% revenue growth).

– For reference, for calendar 2004, IDC and Gartner reported worldwide PC shipments of 177.5M and 189M units, respectively. Compared against recent 2014 forecasts from IDC (295.9M) and Gartner (278M) and averaging the estimates out, that’s about 55% estimated unit growth in a decade. Not directly comparable since it’s 2013 actual Mac numbers vs. 2014 estimates, but you get the idea.

– Despite all that apparent progress, Apple still can’t even break into the Top 5 worldwide PC vendors list (though if revenues were the ranking factor, that would probably tell a different story). Now, it’s true that fiscal 2013 represents a down year for Mac which a supply-constrained new-gen iMac can’t really account for (but the tablet market probably can). But with an $899 MacBook Air on the market compared to the iPod-hard-drive-wielding first-gen that debuted in 2008 for $1799, it doesn’t look like Apple’s ready to cede the PC market to anyone anytime soon. Yosemite and Continuity should assist in Apple’s efforts to grow the Mac business year-over-year despite an admittedly shrinking market.


To wrap up “Part 1”: In very general terms, Apple sells somewhere around 15% of all smartphones, roughly 10% of all handsets, and maybe 20% (possibly less) of PCs/tablets in a year (that aren’t basic media devices). Apple does occupy the “premium” market segments of these markets, but it also has more moderately priced offerings, and c’mon, is $299 really that expensive for a tablet?

Yes, these markets are maturing. Yes, Apple will need to continue playing its differentiation, cost control, quality engineering and user experience cards well for the best chance at marketing its products on its own pricing/margin terms. But Apple has the track record, the capability, the enormous opportunity, and the best product pipeline Eddy Cue has seen in 25 years.

Maybe I’m wrong, but it sounds like Apple has everything it needs for continued core business growth for years to come. Sure, we’re probably not talking 15% year-over-year revenue growth – maybe not even 10% most quarters.

But it no longer needs to be.

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2 thoughts on “Late-to-the-Party Thoughts on Apple 3.0’s Prospects, “Part 1”: Old News, Substantial Remaining Opportunity

  1. Jobs was one-of-a-kind, but he had flaws. He deserves all the credit he gets, but Cook and others at Apple deserve more credit than they get. The iTrilogy of iPod, iPhone & iPad in a single decade is a level of success that I can’t imagine any company ever matching. It’s like the Boston Celtics of the 1960s, who won 9 of 10 NBA championships. Such things just won’t happen ever again.

    So folks who expect another iTrilogy from a Cook-led Apple are just not going to see it happen; new product categories notwithstanding. They’ll also not see a 14x increase in revenue over the next decade. So they’ll deem Cook a “failure” regardless what Apple actually does produce. But personal judgments of this sort are purely a matter of opinion. It’d be like saying the 60s Celtics “failed” for not winning 10 of 10. Oh. Kay. Whatever.

    I agree that iPhone is gradually stealing away high-end Android customers. That’s why I don’t think there’s much urgency for them to focus on the mid-range market…yet. There’s plenty of $ left in the high-end. By the time they’ve established 80-90% market share of the $400+ market, the 5c series BOM will be low enough for them to start invading the $300-399 market.

    RE: carrier subsidies. It seems recent moves by T-Mobile are pushing the other big U.S. carriers towards a lease or 24-month payment plan for unsubsidized phones. If consumers go for this new scheme, I think it may be even better for Apple. Most people would rather pay $27/mo. for the iPhone rather than save a few bucks per month for something of lower quality.

    I think the next 6 quarters will give us a better idea on what’s happening with iPad. If the lull in growth was due to the enterprise market completing their evaluations of the iPad, then there could be a pretty good surge when they start fully deploying them. It’s also about time when the 1st & 2nd gen iPads start dying. Maybe the 1st wave of consumer replacement cycle is about to kick in?

    The Mac is going to be interesting. We now have nearly a billion users of Apple products and most have never owned a Mac. Of course many may have stopped needing a traditional PC of any sort. Their iPhone and/or iPad serve all their personal computing needs. But those that DO still need a laptop or desktop may decide it’s best to go all-Apple. As you pointed out, Continuity & Handoff may make a very compelling case to leave the Windows world. Besides, the price differential between Mac & PC is at all-time lows.

    10% annual revenue growth would mean Apple hits $300B revenue by FY2019. I’ll take that, but let’s not discount the effects of various new products that almost definitely will enhance the Apple universe. But first they’ve got to hit $200B. A couple of years ago I thought they would’ve hit it by now. Now it’s possible we may have gone the other way and become too conservative with growth rate estimates.

  2. Great comment! Thanks.

    iPad is a puzzle, but that puzzle might be the tablet market in general vs. iPad not doing well in its competitive set.

    Agreed, one step at a time on thinking about Apple’s annual revs. $200B is a big enough number as it is – only Samsung Electronics has that kind of revenues ($230B or so in FY ’13).

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