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Orthogonal Pivots

Microsoft has announced that by the end of the year the Groove music service will be phased out. Users are being offered the option to move their music libraries into Spotify.

This brings to an end a long story of Microsoft in the music distribution business. It started nearly 15 years ago with technologies in Windows that allowed for purchase and playback of various media formats. Microsoft sought to enable a large number of music retailers to market music through its formats and DRM and transaction clearing.

Services such as AOL MusicNow, Yahoo! Music Unlimited, Spiralfrog, MTV URGE, MSN Music, Musicmatch Jukebox, Wal-Mart Music Downloads, Ruckus, PassAlong, Rhapsody, iMesh and BearShare and dozens of hardware players licensed Windows formats. Almost all of these services have shut down and the devices disappeared.

The next stage was to offer an integrated experience through the Microsoft Zune player and Zune Marketplace music service. This too failed and was replaced by the Xbox Music brand in 2012. On July 6, 2015, Microsoft announced the re-branding of Xbox Music as Groove to tie in with the release of Windows 10.

There was a time when Microsoft was thought of as the certain winner in media distribution. Inserting media into the Windows hegemony was classic “control point” strategy: owning the access points was a sure way to collect a tax on what transacted through the network.

Instead we are facing a market where media is consumed through new access points: phones, tablets and TV boxes. Netflix, Spotify, Roku, Google, Amazon and Apple are all offering distribution and some are investing in original programming.

It’s perhaps worthwhile to recall that Microsoft and Apple both started their media efforts around the same time. Apple’s iTunes is 16 years old and the iTunes Music Store opened in 2003, almost 15 years ago. Today Apple is transitioning to streaming with 30 million subscribers. The graph below shows the history of subscription growth to Apple Music and Spotify.

Apple Music is a small part of Apple Services (part of the orange area below).

On a yearly basis Apple Services are this year crossing the $50 billion gross revenue run rate. This year Apple released a new Apple TV 4K and is releasing a new smart speaker called HomePod.

The contrast between Microsoft and Apple is most visibly between the Mac and PC. But the story of how media paralleled mobility and how Microsoft struggled with both is perhaps a cautionary tale.

Microsoft saw the limits of modularity when new product categories emerged and when new user behaviors were created. They attempted to pivot into being more integrated but those efforts also failed. The efforts continue today with Surface devices; looking forward they will continue with AR/VR and perhaps a pivot of Xbox..

But the long arc of history shows how hard it is to succeed in vertical integration after you build on horizontal foundations. Generations of managers graduated from the modular school of thought, specializing rather than generalizing. Now they are facing an integrated experiential world where progress depends on wrapping the mind around very broad systems problems.

Entire industries are facing this orthogonal pivot: media, computing and transportation come to mind. Huge blind spots exist as we see only what we’ve been trained to see.

S3X Appeal

On July 3rd, Elon Musk handed over the first 30 Model 3s and tweeted

“Production grows exponentially, so Aug should be 100 cars and Sept above 1500.”

He added,

“Looks like we can reach 20,000 Model 3 cars per month in Dec”.

In 2016 he stated

“So as a rough guess, I would say we would aim to produce 100,000 to 200,000 Model 3s in the second half of [2017]. That’s my expectation right now.”

He confirmed this estimate early in 2017

“Our Model 3 program is on track to start limited vehicle production in July and to steadily ramp production to exceed 5,000 vehicles per week at some point in the fourth quarter and 10,000 vehicles per week at some point in 2018.”

Overall 2018 production guidance has been 500,000 units and 1,000,000 units in 2020.

The company shipped 220 Model 3s in the July, August and September months. This is well below the expectation of 75,000 that the 2016 guidance would suggest[1] or the 1,630 that might be suggested by the “production grows exponentially” July proclamation.

I entered the Q3 production data and kept the previous run rate predictions for Q4 and 2018 and 2020 in the following graph.

 

Notes:
  1. 100,000 to 200,000 for the second half of 2017 suggests an average of 150,000 for the six months or 75,000 per quarter []

Silicon Valley

You’ve probably heard of Jony at Apple but probably don’t know about Johny.

Jony is a celebrity executive known as the face of Apple Design. Johny is the executive in charge of custom silicon and hardware technologies across Apple’s entire product line.

Under Johny’s leadership, Apple has shipped 1.7 billion processors in more than 20 models and 11 generations. Currently Apple ships more microprocessors than Intel.[1]

The Apple A11 Bionic processor has 4.3 billion transistors, six cores and an Apple custom GPU using a 10nm FinFET technology. Its performance appears to be almost double that of competitors and in some benchmarks exceeds the performance of current laptop PCs.

A decade after making the commitment to control its critical subsystems in its (mobile) products, Apple has come to the point where is dominates the processor space. But they have not stopped at processors. The effort now spans all manners of silicon including controllers for displays, storage, sensors and batteries. The S series in the Apple Watch the haptic T series in the MacBook, the wireless W series in AirPods are ongoing efforts. The GPU was conquered in the past year. Litigation with Qualcomm suggests the communications stack is next.

This across-the-board approach to silicon is not easy or fast or cheap. This multi-year, multi-billion dollar commitment is rooted in the Jobsian observation that the existing supplier network is not good enough for what you’re driving at. Tiny EarPods, Smart Watches, Augmented Reality, Adaptive Acoustics require wrapping your arms around all parts of the problem. The integration and control it demands are in contrast to the modular approach of assembling off-the-shelf components into a good-enough configuration.

There are times and places where modules are adequate and times and places where they aren’t. The decision depends on whether you are creating new experiences or new “measures of performance” vs. optimizing for cost within existing experiences or measures of performance.

The very notion of a microprocessor is a rejection of the discrete component designs that preceded it. Earlier computers had central processors made up of many discrete components. VLSI stands for Very Large Scale Integration with emphasis on Integration. As computing has progressed toward ambience and ubiquity the idea of using discrete components became normative again but that was not considered sufficient by Apple.

So while the “Silicon” in Silicon Valley has come to be seen as an anachronism, silicon development today means competitive advantage. The only problem is that it takes years, decades even to establish competence. The same duration that it took for the building of Apple as a design-centric business fronted by Jony Ive.

Apple also now needs to be understood along the dimension of silicon-centric engineering as led by Johny Srouji.

Notes:
  1. Trailing 12 months’ PC shipments 265 million. Equivalent iOS devices 281 million. Not included are Apple processors in Apple TV. []

Micromobility Podcast with Henrik Føhns

It was a pleasure to spend a day with Henrik, the leading tech journalist in Denmark, and the Micromobility Summit at the Techfestival in Copenhagen.

We did the recording live in front of a large audience the evening after the event and it is already causing a stir in Denmark. I think it’s worth a listen (about 30 min.)

Here is a link:
Podcast with Henrik Føhns

There is a short Danish intro, which Henrik did while riding his bike.

 

techtopia.dk (Danish).

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Face Time

Since the iPhone launched 10 years ago, 1,253,000,000 units have been sold.[1] Given that they don’t last forever, we can assume that only the most recent units sold are still in use. If we measure just the units sold in the last 3 years, the total is about 663 million. Rounding down, we can say that there are perhaps 650 million iPhones in use.

Repeating the exercise for the iPad but extending time in use to 4.5 years, gives a population or install base of about 240 million.

That’s a total base of 890 iOS million units, well below the 1 billion total “active devices” Apple reported in January 2016. The difference can be filled by Apple Watch, Apple TV, iPods and Macs.

Apple also reports that the iPhones get unlocked 80 times per day. That figure was also reported in early 2016. We don’t have a figure for the iPad but I’m going to take a guess of 15 unlocks per day on average. Feel free to argue about these figures in the comments below.

Now, if each of these iOS devices would be unlocked using a 4-digit PIN, the time to bring them into use would be about 2 seconds. Expanding to a 6-digit PIN would probably increase that to perhaps 2.5 seconds (accounting also for failures due to input errors.)

Moving to 6 digits, although more secure, would add friction and hence time to the unlock process. This reminds me of the story of Steve Jobs arguing that decreasing boot times for the Macintosh would save lives. I wondered what would be the savings in time for speeding up the unlock process.

It turns out that, based on the installed base numbers, moving to the more secure 6-digit code would add 2.8 billion hours to the total time to unlock the world’s iPhones and iPads. That’s 321,000 years of waiting added for every year of use.

Fortunately we got Touch ID to replace PIN entry and the time to unlock the iPhone/iPad has decreased to perhaps 1 second, saving 5.6 billion hours of unlock time vs. 4-digit PIN.

Now we have the prospect of Face ID which promises to be faster still. Of course, it won’t be available on all iOS devices for some time, but if it that base of 890 million iOS devices were to migrate to Face ID and if it took a mere 0.5 seconds to unlock, Face ID would save nearly 8.5 billion hours of time that otherwise would be spent typing unlock codes.[2]

That’s almost a million years.

That’s 12,500 lifetimes.

I’m glad to see Steve’s ideas continue to motivate Apple engineers.

 

 

Notes:
  1. This includes the current quarter that ends in 4 days []
  2. Given this methodology one wonders how much time is spent using, rather than just unlocking, iOS devices. I’ll leave that as an exercise to the reader. []

A small-screen iPod, an Internet Communicator and a Phone

Apple is now the biggest watchmaker in the world, overtaking Rolex during the last quarter. This achievement happened less than two and a half years after Apple entered the watch market. Rolex, on the other hand, was founded in 1905, 112 years ago at a time when watches were the avant-garde of technology. Given this revelation of sales, we can test the estimates I put forward on the Apple Watch sales, shown below:

We know that Rolex produces about 1 million watches a year and we also know that Rolex had sales of $4.7 billion in 2016. The average revenue per watch[1] was therefore about $4,700.

My estimate has been that Apple sold about 15 million Watches in the last 12 months at an average price of about $330. This puts the Apple Watch revenue run rate at $4.9 billion, indeed above Rolex.

They may be slightly high but the news makes me feel quite comfortable in my methodology. Note also that within the last quarter Apple said sales for the Watch increased by 50%. This is also reflected in my estimate of 3 million in Q2 vs. ~2 million for 2016 Q2.

Overall, about 33 million Apple Watch units have been sold since launch and they generated about $12 billion in sales. Coupled with a 95% customer satisfaction score, altogether, this has been a great success story. But only 2.5 years in, it’s still act one.

To understand the long term trajectory, it’s important to qualify this product as part of another, larger story. The Watch, even with LTE, is an accessory to the iPhone. It still cannot be activated without it. Even the coverage plan is an extension to an iPhone plan. The company is careful to address it as a companion product.

But how long will that last?

Notes:
  1. Includes services such as repairs []

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Good, Better, Best

Before the iPhones 8 and X launched I made a prediction on what the iPhone would cost. I concluded that the iPhone price would not change. This is because it has never changed[1]. Apple collected $767,758,000,000 for the 1,203,732,000 iPhones sold to the end of June or $ 637.8147 per phone.

Of course this is the average price and that average is on a trailing 12 months basis and measures some of the deferrals in income that exist for obscure accounting reasons.

Now that the new iPhones have launched, how probable is my prediction? The first mild surprise is that the total number of phone models has increased to 16. I had no prediction on product count but did not expect the 6S and 6S Plus to remain available. The following graph shows the total number of products in the mix (excluding color variations).

The second surprise was that the iPhone SE has been upgraded in memory from 16Gb/64Gb to 32/128Gb and that the new 32Gb version is $50 cheaper than the old 16Gb. The 128Gb remains priced the same as its 64Gb predecessor.

This means that the SE 32 now occupies a new lowest price band for iPhone: $350. It’s a remarkably capable phone at the lowest price for an iPhone ever. It’s $100 cheaper than the 5C 8 Gb which I bought 3 years ago.

At this point my prediction looks precarious.

Notes:
  1. Apart from seasonality. Quarterly Minimum = $437, Quarterly maximum = $695, Quarterly Median = $631, Standard Deviation=$58 []

How much will the new iPhone cost?

The answer, regardless of when you ask, is: The same as the current iPhone.

Of course, this is the answer to the question of what will the average new iPhone cost. The average selling price (which combines the revenues and the volumes of all units sold and is reported every quarter) has not varied very much since early 2008. To the degree that there is variance (between $600 and $700) it is due mostly to seasonality and reflects a mix of more expensive units during the launch quarters and a cheaper units during later periods when the product is older and due for an update.

The graph below shows the average selling price as a dashed line and the corresponding prices of individual product variants available for sale in the US during the same time frame.[1]

The graph shows a high degree of consistency of pattern: Every year a new iPhone is launched which replaces the one launched the year before. The older product is still offered at a reduced price. Price brackets are very firm and set at fixed intervals about $100 apart.

A few minor changes in pattern over the years can be observed:

  • The original iPhone price changed due to a shift in subsidy model shortly after launch.
  • An increase of $50 mid-2011 when the iPhone became available unlocked.
  • Every three years a new, higher, price bracket is introduced, with a  doubling of maximum memory capacity.
  • The iPhone SE was introduced at a slightly lower price.
  • The last year saw a slight increase in the highest price.

The overall pattern looks like a staircase with a widening price range where the lowest price remains constant and the upper price rises every three years by $100.

The “floor” of the range is a consistent $400 while the “ceiling” has expanded from $700 to about $950.

This year’s ceiling is due for the fourth leg up and if the pattern persists, we should expect it to reach $1100.

This iPhone staircase has been built over 10 years and I don’t see it changing over the next three. I therefore drew the blank box over what I thought would be the price range from now until late 2020.

This is what I call the staircase model of Apple pricing. The staircase model must be understood in combination with the flat iPhone average price as the product matures.

As the product matures the user base grows (to nearly 1 billion today). Later buyers will opt for the lower price points, but the availability of higher, more aspirational models (sustained by the brand) means that a minority will gravitate upward, mainly because they can. This ensures that although the median and mode of the price trend downward, the average price stays the same.

The flatness of iPhone pricing is also to be understood in combination with the flatness of Mac, iPod and iPad average pricing (shown below)

The technique of preservation of average price seems to be in effect across Apple. In other words, the evidence suggests that Apple prefers to keep average pricing for all products constant. Individual variants are priced so that, as the category matures, the changing mix leads to consistency in price ownership.

Thus the iPhone can be seen as controlling the $650 point, the Mac $1200, the iPod $200 and the iPad $450. This pricing signals the product’s value and the value of the brand.

The signaling is not just to buyers but also to competitors. Ownership of price forces competitors to occupy adjacent brackets. This process begins at launch: the new Apple product is introduced in what is perceived as a premium stratum[2] thus the reaction from competitors is to “undercut” it. But, as Apple climbs the price staircase, preserving the floor, it keeps competitors bunched up at the bottom. Competing in the same brackets with Apple is futile as other brands can’t sustain the perceived premium position.

The result is a remarkable consistency of average pricing which, coupled with a remarkable consistency of competitive positioning, coupled with a remarkable consistency of customer satisfaction and loyalty, leads to a remarkable predictability of cash flows and ability to invest in new product creation..

Apple is thus quite easily understood as a remarkably consistent consumer products business. The only surprise that remains is how long it takes for that understanding to propagate.

 

Notes:
  1. Prices outside the US vary depending on duties, taxes and currency hedging but generally are based on the US price []
  2. See for example the pricing of the new HomePod []