Dan and Horace talk about Apple’s quarter with an eye toward the operational commitments being made. We cover the cost of store openings, data center purchases and machinery used in manufacturing iOS devices. By tracking capital expenses we can get a clue about where Apple wants to go.
Last quarter I was wrong because I thought Apple would throttle production of the iPhone 4 in the fourth quarter post-launch. “The reason growth would moderate was that Apple slowed production of the old model in order to switch out to the new model–we saw the same thing happen with the slowdown in iPad 1 and transition to iPad 2.”
As a result I seriously under-estimated iPhone volumes in the second quarter (FQ3). That failure led me to question whether the theory I was using in forecasting was still valid. When it came time for a new estimate I hesitated.
I had to choose whether to apply the old seasonality theory or to assume that the game had changed and that the product would now grow organically.
The first assumption would put the iPhone growth at 100%+ while the second would place it in the 60% to 80% range. I decided to dial in a figure somewhere in between at 90% but I’m not very confident in this
The result was an over-estimation by almost the same error as that of the previous quarter. Most of the other product lines were accurately predicted, but again, as a always, the whole forecast rides on the iPhone.
So where does that leave the theory?
At the Open Source Business Conference in March 2004 Clayton Christensen gave a presentation. It’s available as an audio file for download here: Clayton Christensen | Capturing the Upside. I strongly recommend listening to the whole thing because it’s the quintessential Disruption lecture.
It has relevance in many areas of analysis, but when I was trying to think of a way to characterize the potential for Siri I recalled one particular passage that I saw as almost clairvoyant. Seven and a half years ago, Clay said:
… the next time you go to a computer superstore, go to the voice recognition software shelf and pick up a box there that’s called the IBM ViaVoice. Now don’t buy it, but just look at it! They have a picture of the customer on the box, and it’s an administrative assistant who is sitting in front of her computer wearing a headset speaking rather than word processing.
In the last two posts (How much does an Apple store cost?, The down payment on iCloud) I discussed two line items in the PP&E asset class on Apple’s Balance Sheet. In isolation, the data is interesting as it gives us an idea of the cost structure of stores and facilities being developed to sustain its current business model. In aggregate, it provides insight into Apple’s strategic intent.
To complete the picture, I will look at the third asset: “Machinery, equipment and internal use software.” It’s the yellow line in the chart below:
It’s plain to see at first glance that it’s the most significant asset. What does it represent and what conclusions can we draw about Apple’s strategy?
Apple loves to talk about its stores. They do it in every conference call, keynote event and SEC filing. There is a monotony with the repetition of how many they have and how many they are building and how pretty they are. They start to seem like commodities.
But if they were commodities why aren’t there any other networks of successful “vendor stores”?
The answer is partly in the odd integrated business model Apple maintains asymmetric to every other modular technology provider. Apple seems to want to control the relationship with the buyer. It’s also partly in the uniqueness of design, an obsession with the brand. But still, that does not explain why can’t it be copied.
The answer is in the economics.
To understand the cost of developing an Apple store, we turn again to the balance sheet. Fortunately for us, Apple reports details of a particular asset called “Leasehold Improvements.” It’s a substantial asset worth over $2.3 billion in the last statement. It represents “alterations made to rental premises in order to customize it for the specific needs of a tenant.”
The following chart shows the change in that figure quarter-over-quarter.
Can we tie these expenditures directly to stores?