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An interview with Chris Brennan for MacUser magazine UK

Chris Brennan asked a few important questions regarding potential saturation of the iPhone market.

Is the iPhone anywhere near saturation? Can Apple continue to shift iPhones in ever increasing numbers or is a sales plateau realistically on the horizon?

The market for mobile phones is approximately 5.5 billion connections, perhaps 5 billion users. The iPhone has approximately 300 million installed base. I consider a base of 1 billion users to be a minimum for continuing participation in this market long term. Licensed platforms will reach this in no more than two years. I don’t know what Apple’s ambitions are but if they don’t triple their base I don’t see a strong future for the company in mobile phones. In order to triple the base the company will need to sell substantially more than an additional 700 million iPhones. The retirement rate can be as high as 50% of installed base. Apple will need to sell at least 1 billion iPhones in the next few years. Seen another way, Apple has a market share of about 9% on a quarterly basis. This needs a lot of improvement. Chinese vendors are not standing still.

Can the Mac also continue to outperform the rest of the PC market for long?

The PC market is in decline. It will continue to decline as its disruption continues. The PC market will still exist 10 years from now but, similar to the mainframe market, it will be hard to notice. Apple is doing a fine job carving out a large portion of that market for itself but overall it’s an increasing portion of a decreasing pie. It would be better to track the share of profits captured or even share of value rather than units. The reason units were important 20 years ago was because platform dynamics determined whether a marginal platform could survive. Would a 5% share be enough to attract developers? That is no longer an interesting discussion. Applications for PCs are not an area of investment for any significant pool of capital. Development has moved almost entirely into mobile or web. Therefore, as the PC is now a commodity product, the best performers are those who can capture a larger margin. Those margins should be subsequently be invested in new platforms. PC vendors who neither capture margin, nor invest in new platforms are strategically insolvent.

Finally, this exponential growth of Apple products has to end some time soon doesn’t it? How many high-income buyers for expensive products can there be left for Apple to target?

Trying to calculate the limits to growth is futile. There are limits but they are not calculable and inaccurate estimates don’t offer any useful information.

In 1939 a total of 921 military aircraft were built in the United States. Five years later, in 1944, annual production was 96,318. A question could have been asked by an aviation analyst in 1939 about whether the American aircraft industry could grow. Aircraft, especially multi-engined ones used by the military were _extremely_ expensive. The reason an industry grew exponentially making extraordinarily expensive products was not because of organic demand but because the primary buyers engaged in a cataclysmic global war. In other words, there was a will to buy and hence there came a way to build. Therefore the answer to the question of sustainable growth comes not from an analysis of demand but from an analysis of the consequences of not growing. Not growing would have meant the end of many nation states.

Your question was framed by an implied market categorization: that buyers are either high-income or, presumably, low-income. This is a false dichotomy. Buyers are either needful of a job to be done or not. If the job is important enough, money will be found to hire a product. Sellers of products will also find ways to meet the demand through lower prices and increased capacity. Every product Apple makes used to be out of the reach of all consumers. Whether computers (portable or not), music players and professional grade software, voice recognizing personal assistant cellular phones and tablets are all luxuries or necessities is only a question of timing.

  • http://twitter.com/bsilent david gonzales

    “Apple will need to sell at least 1 billion iPhones in the next few years.” Which means Apple will need to BUILD 1 billion iPhones. This has to be the biggest challenge Apple will face. To think anyone questioned the Tim Cook ascension. Has Apple moved past disruptive products, and into disruptive operations. Am I wrong in thinking there were a lot of cars being built pre-Model T? But it was manufacturing operations (assembly lines) and corporate structure (vertical integration) that were the real disruptors. Plus, as you put it, a question of timing when cars became necessities.

  • Walt French

    We don’t often see such condensed sets of insights as in these two interviews; a big THANK YOU for posting them!

    I’d enjoy your response to the contrast between “I consider a base of 1 billion users to be a minimum for continuing participation in this market long term” and the article I saw in which you seemingly advised Facebook to do their own phone. I know many people use Facebook the way PC users visit “Portal” sites such as Yahoo and even Google, and perhaps a Facebook phone would serve as a mobile portal in the way that I have always thought Android would.

    But it seems there’s a HUGE range of services etc necessary to be competitive with phones, and I don’t see how Facebook should be expected to come up to speed if firms like Nokia, which has long prided itself in maps, photos and various innovations such as browsing, has failed so spectacularly.

    And surely, while mobile is the future, Facebook faces the very difficult challenge of building some solid profitability in the space to fund an emphasis on phones versus being a major participant in the two or three dominant platforms.

    • http://www.asymco.com Horace Dediu

      For Facebook the participation in the phone market would be a means to an end. They are a platform but not on the trajectory to redefine computing. I see their role in the market as similar to that of Amazon.

    • http://twitter.com/davidchu David Chu

      “… the very difficult challenge of building some profitability in the (mobile) space”.

      Here is where I think the major opportunity lies. I believe that the mobile space will require a different business model to become dominant. The company that figures it out and builds out the infrastructure first has a real opportunity to disrupt a company like Google.

      One problem to building out the mobile market that I see is the problem of how you will collect payments. I think one of the backbones of the web has been credit card processing. In mobile, you are talking about a huge increase in accessibility to the web. Many of these users may not have a credit card.

      One aspect of iTunes’ success that I don’t think is talked about enough is the iTunes gift card. That people without a credit card (like a teenager) could easily purchase credit at their local convenience store. I think the mobile web may need infrastructure such as this in order to succeed. This is just a guess of course.

      Living out in Asia for the last two years has really opened up my eyes of how much we take for granted in the developed world when it comes to payments. I wouldn’t be surprised to see the eventual solution come out first from here.

    • JohnDoey

      There are many Facebook users who are not Web users. They just go through the Web to get to Facebook. Facebook as a hardware device might be a compelling shortcut for those users.

  • vladiim

    “I consider a base of 1 billion users to be a minimum for continuing participation in this market long term.”

    It would have been great for Chris to unpack this a little more. I don’t understand why ~20% market share is required for sustainability.

    • Ian Ollmann

      I can’t speak for Horace, but I assumed this was because below critical mass, developers flee the platform and your apps story disappears. Without that, it gets hard to sell devices.

      • http://www.asymco.com Horace Dediu

        That’s what I had in mind. The logic stems from a book I read a while back on Windows where the magic “tipping point” for an ecosystem was described inside Microsoft as 20% share. It’s probably apocryphal but a handy rule of thumb.

  • melci

    Horace, why are you only talking 1 billion *phones* as necessary?

    Shouldn’t you be saying 1 billion iOS devices? In fact you say the installed base of iPhones is 300 million – I assume you do in fact mean iOS devices? As well over 60 million iPod touches and well north of 55 million iPads have also been sold. Apple announced they had sold 365 million iOS devices not that long ago, so I assume you are estimating the still-active portion of that number?

    After all, it is the app platform and ecosystem that is important not individual devices and as tablet, mini-tablet, phone-equipped tablet all merge on the Android side with tablets ranging from 2.7″ to 3.5″ to 4″ to 5″ to 7″ to 8″ to 9″ to 10″, some with cellular phone hardware and some without, it becomes readily apparent that this market is not just about phones anymore.

    This continual separation of iPod touch from iPhone from iPad needs to end if we are going to seriously talk OS and app platforms.

    • http://twitter.com/nuttmedia nuttmedia

      I believe Horace was specifically addressing the mobile phone market, exclusive of other devices, as the question was directly about iPhones. Your point is a good one when taking the full context of ecosystem, app development and the like, but the numbers to consider are different within a mobile phone industry context because of the presence of intermediaries.

      • melci

        My point is: what does reaching a “minimum for continuing participation in this market long term” actually mean?

        Does it mean the minimum number of phones needed for developers to keep developing for the platform? Does it mean the minimum needed for advertisers to keep advertising on the platform? Does it mean the minimum needed for content providers to keep providing content? Does it mean the minimum for accessory and 3rd party hardware peripheral manufacturers to keep making accessories and peripherals for the platform? Does it mean the minimum for media providers to keep providing media?

        If Horace means any or all of the above by his statement, then he MUST include all members of the iOS platform because the iPod touch and the various models of iPad ALL add to the size of the iOS OS and app platform that makes up the total addressable installed base that runs these apps, media, content, ads, accessories, peripherals etc etc etc.

        All of these aspects are what gets consumers to buy a phone – the ecosystem.

        Individual devices are irrelevant, platform and ecosystem is everything.

      • http://twitter.com/nuttmedia nuttmedia

        Hopefully Horace will expand on his thesis to help clarify things. Again I would point out that he is specifically referring to the economics of the mobile phone industry and the relevance the presence of intermediaries pose in this equation. A 50% retirement rate is extremely steep. I don’t imagine it being nearly as high for iPod touches and iPads . I would guess it being more in the vicinity of that of PCs. For many reasons, the mobile phone industry is a different animal and as such, it requires a different lens.

        The elements you cite (app/content ecosystem, accessories etc) absolutely goes towards Apple’s ability to effectively stand against such high turnover, but I think part of his point is that it will require more than maintaining its current base to remain relevant. Apple’s done a great job at exerting upward pressure on switching costs, but they will have to continue to increase their share as the transition from feature phones accelerates.

      • melci

        I would think that with Apple’s 74% – 80% share of the profits of the entire cellphone market on the 20-30% share of smartphone unit sales that Apple could easily bear a smaller proportion of the much larger unit sales pie in the future. This is assuming they weren’t for some reason able to maintain their current unit sales marketshare.

        However, iPhones and iOS devices in general have such a vastly higher “Usage share” than Android devices and points to iPhones always being a far more lucrative platform for developers, advertisers, content providers, media retailers, accessory and perhiperal hardware manufacturers.

        For example, it is iPhones that make up 25% of all mobile web browsing traffic compared to only 16% for Android according to NetMarketshare (iPads push the iOS total to 63%)
        iOS devices capture 69% of advertising web views according to Chitika.
        It is the iPhone that makes up 73.9% of business smartphone activations according to Good Technology.
        It is iOS devices that rake in 90% of all mobile commerce revenue according to Rich Relevance.
        It is iOS that captures 84% of all mobile gaming revenue.
        It is the iPad that accounts for 97.3% of business tablet activations according to Good Technology.
        It is the iPad that represents 94.64% of all tablet web traffic according to Chitika.
        It is iPhone developers that rake in 4x more income than Android developers and iOS developers in general that rake in 6x more income than Android according to Distimo.
        It is Apple that has captured 60-70% Marketshare of the digital music market.

        This sort of dominance where the rubber hits the road in actual user participation makes the vast numbers of Android smartphones that are evidently used for nothing more than feature-phone use meaningless. With sales of iPads and iPod touches adding another 17-23 million units to the iPhone’s 35-37 million quarterly sales, Apple’s iOS device Marketshare is significantly larger than their iPhone-only footprint.

        I think it is this level of end-user participation that will make that mystical “1 billion smartphones” achievable, but in the big picture just a small part of Apple’s larger and much more important iOS platform dominance of the mobile OS market.

  • http://twitter.com/AdamChew1 Adam C

    I may be wrong, I don’t believe this 1b user base idea.

    What I believe a continuous innovation of a great product backed by great software and yes supported by an extensive ecosystem.

  • http://www.facebook.com/shawnpetriw Shawn Petriw

    “strategically insolvent”

    What a fantastic phrase.

  • Sacto_Joe

    Well said, Horace. The story of the modern age, perhaps of every age, is that luxuries become necessities. Apple is not striving to be a boat on a river; it’s striving to become the river itself. And so far, it’s succeeding. It is turning luxuries into necessities before our very eyes.

  • http://www.facebook.com/profile.php?id=100000728233984 Kristian Iskanius

    Great answers! You nailed it.

  • Macyourday

    Is Brennan playing devil’s advocate or is that level ignorance and superficiality the norm at Dennis Publications? I suspect the latter from the deterioration in usefulness of their magazines over over the last few years, especially the gutting of the newbie hacker mag MacAddict a few years ago.
    One gets the feeling of Murdoch under(over?)tones.
    Brilliantly cool and comprehensive responses from Horace as usual in spite of the tones of arrogance and ignorance from his inquisitors.

    • http://twitter.com/adambanksdotcom Adam Banks

      I think you’re confusing Dennis and MacUser with a different publisher. Happy to send you a copy if you get in touch at mailbox @ macuser.co.uk.

      • macyourday

        Terribly sorry about that spray Adam. Being dissapointed with the general state of many Mac publications is no excuse for getting simple facts wrong. Macuser remains one of the best but the questions still seem superficial.

  • JohnDoey

    You are right — Apple products are not high-end. The Mac is only a high-end PC, but iPad is only a low-end PC. iPod touch is the cheapest battery-powered computer ever made.

  • RobDK

    Great post, Horace.

    Whilst most would agree that Apple kickstarted the mobile computer revolution in 2007 with the iPhone, the implications of this market transformation for Apple are huge. We can expect 5 billion mobile computing devices in use in not too many years, and Apple’s challenge is to stay relevant in this expanding market. You do this, if course, by driving the development with new products, and Apple has done this with the iPhone and the iPad. The next challenge is the ramping up of production so that Apple can continue to sit on a growing proportion of revenue and profit.

    I have always been ‘long’ on Tim Cook’s leadership qualities. I think he is on the front of the wave in this respect. As Horace’s analysis of Apple’s CapEx for machinery shows, Apple is expecting to continue the exponential growth in supply chain investments, with the implication of at least a doubling of production and sales each year. Apple’s approach to product line and segmenting mean that they cover nearly all price points at a minimum of investment. Large production runs, minimal component variation and the purchasing of future production capacity mean that Apple is able to produce and sell vast quantities of iProducts at relatively low price and with feature sets that the competition cannot match, in relation to the rest of the market. The war chest is being put to work hard!

  • http://twitter.com/nuttmedia nuttmedia

    Another great post Hoarce. Looking at the numbers, I am curious… The assumption that smartphones will achieve that scale requires that the consumer pay the higher monthly data fee that accompanies the use of such devices. This is the more significant cash flow barrier in my mind to adoption. I would imagine you must have some degree of fee compression with the added scale to accommodate such an adoption rate. Around what rate do you think it will settle in the next 5-10 yrs? I’m wondering if the price equilibrium to achieve that scale provides sufficient economics to fund the substantial infrastructure it takes for mobile companies to provide the capacity for service. I’m guessing it must since they have already begun building it, but I’m curious if you could provide some figures/assumptions for perspective. Again, thanks a bunch for making us all so much smarter on this subject.

    • http://www.asymco.com Horace Dediu

      Service rates shave always scaled down to meet user ability to pay. If you consider emerging market ARPU and consider the quality of service it delivers, it’s only a question of time before affordable mobile broadband is universally available and in use. In Europe $10/mo for mobile data (3G) is quite common.

      • http://twitter.com/nuttmedia nuttmedia

        Great! Thanks.

  • http://www.facebook.com/jsugai Jonathan Sugai

    Hi Horace,

    Great interview. I really enjoy how you factor perceptions into your analysis and take a systems and “big picture” view of everything demonstrating your polymath background.

    I’d like to share with you another polymath named Dr. John Demartini. He is a human behavior specialist with one of the most diverse and in depth backgrounds that I know of. He has read 29,000+ books and studied 280+ different “ologies” and has accumulated & synthesized the universal laws that govern the seven areas of life: Mental, Physical, Social, Familial, Business/Vocational, Financial, & Spiritual.

    I’ve been studying with him and his materials recently and I see many similarities on how you view the world. Check him out if it interests you.

  • Steph

    “Licensed platforms will reach this in no more than two years.”

    Horace, do you think Windows Phone can really reach one billion users? To be honest, I’d rather see this OS out of the market in two years given Nokia’s problems, so I find that statement surprising.

    • http://www.asymco.com Horace Dediu

      Windows Phone, perhaps not. I was thinking more about Android and variants.

  • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

    So can we take away from those last two paragraphs that you won’t make any more predictions about Apple’s growth? You basically explained that nobody can predict what will happen

    • http://www.asymco.com Horace Dediu

      I predict only short terms (less than four quarters and usually less than 2) when I feel comfortable enough with what can be read from the market data.