January 2013
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Month January 2013

Cracking the China code: Microsoft vs. Apple

In 2011 Microsoft’s CEO bemoaned that revenue in China was about 5% of what it obtained in the US. Yesterday Apple’s CEO suggested that revenue from China will overtake the US in the near future.

The contrast is even more stark when one considers the time and effort each company has made in China. Microsoft has been investing and promoting itself in China for decades while Apple barely had any presence 3 years ago.

To put a finer point on this I show below Apple’s sales by region:

Screen Shot 2013-01-11 at 1-11-10.08.26 AM

Apple’s China net sales in fiscal 2009 were only 769 million. In 2012 they were $22.8 billion. That is a figure greater than US sales three years earlier. Put another way, China sales grew in three years as much as they did in the US in 33.

The growth rates were astronomical: over 250% in 2010 and 350% in 2011. In 2012 the growth slowed to 83% but that is still almost twice the US or the global average. The growth rates are shown in the following chart:

Getting to know the meaning of sisu

Nokia announced 4.4 million Lumia smartphones were shipped in Q4. That’s about 14 million since the Lumia line was launched a year earlier. It isn’t however nearly enough to replace the lost sales from Symbian. One year earlier Nokia shipped 19 million Symbian phones in the fourth quarter and the year before 28.3 million. The history of smartphone sales from Nokia is shown below:

Screen Shot 2013-01-10 at 1-10-6.23.00 PM

I repeated the forecast I drew up in February 2011 when the platform switch was announced. That forecast was based on the company stating that 150 million Symbian phones would still be shipped. Symbian fell far more rapidly than I (and Nokia) expected and to date only 98 million have shipped. The last quarter’s 2.2 million seems to be so low that it will be hard to imagine the platform lasting more than a few quarters.

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A more complete picture of the iTunes economy

As it did yesterday, on occasion Apple reports the cumulative total downloads and payments to developers. Since this is done in variable time intervals, it makes analysis of the value of the app store difficult.

But not impossible.

The provision of developer revenues means we can determine the pricing of apps. The pricing of apps and the download totals allows us to determine the revenue of the store. Using the time stamps of the reports allows us to determine these quantities over time.

I’ve combined the data we have so far into the following graph.

Screen Shot 2013-01-09 at 1-9-3.17.11 PM

It shows three quantities (on three separate scales) at a monthly resolution:

  1. Download rate (in millions/day, interpolated from download totals)
  2. Payment rate to developers (reported change in payment to developers/reported time interval)
  3. Resulting revenue per download (in red, trailing average over a 10 month period)

Having a price and quantity of app downloads allows for a complete picture of App Store revenues over time, shown below:

App Store Download Rate Forecast

Apple reported over 2 billion unique app downloads (excluding re-downloads and updates) in December. The total downloads reached 40 billion, payments to developers reached $7 billion and the total iTunes accounts reached one half billion.

The total downloads is shown relative to total songs is shown in the following graph:

Screen Shot 2013-01-08 at 1-8-2.09.04 PM


Although we have not received an update on song downloads for some time, it’s probably safe to assume that twice as many apps have been downloaded as songs.

This data can be reduced to a download rate:

Estimates for Apple’s first fiscal 2013 quarter

I’ve postponed my estimates for the fourth calendar for a long time. The reason is that there have been conflicting data to deal with and I’ve been hoping for some clues to give clarity. Unfortunately, even though I waited, I have not received many clues. Here are the challenges we have to deal with in this quarter:

  1. Management gave very low guidance for the quarter’s earnings and sales. Normally this should not be a concern since the long-term pattern has been for them to “sandbag” significantly. For example last year’s fourth quarter was guided at $9.3 EPS while the company delivered $13.87, a 49% “beat” to their guidance. However Q2 and Q3 beats were only 7% and 13% respectively and if we assume a similar number (10%) for Q4 we get about $13/share which would be a year-on-year decline in earnings (down from $13.9). This has not happened for many, many years. Management explained this through a lengthy set of reasons including a shorter quarter (13 weeks vs. 14 weeks), new product launches, currency fluctuations, deferrals and unfavorable component pricing. Then again, similar explanations were used in the past with no reflection in what actually happened.
  2. Management also launched a large number of new products. This normally leads to a surge in sales. In fact, 80% of revenues would come from a new portfolio of products. Having such a broad launch quarter into a holiday, would normally imply huge growth. Not only is this a critical launch quarter for many products but they also rolled out the iPhone to more markets more quickly than ever: 100 countries in three months. The broad roll-out implies a steeper ramp in production and thus more volumes. This would also contradict the lowered expectations from the CFO. However…

When will smartphones reach saturation?

50% penetration for smartphones in the US turned out to be fairly predictable. I tracked my predictions based on comScore data and the results are shown in the following graph.

Screen Shot 2013-01-04 at 1-4-6.50.52 PM

I began making predictions in May 2010 and updated the estimate every month since. As the chart shows, the prediction converged to early September 2012 by early 2011. The actual date was sometime in late August 2012.

The last feature phone

During the last 12 months 31 million American phone users abandoned the use of feature phones. During the last 24 months over 60 million switched. Over 550k users are switching every week and this rate of switching has not changed much since late 2009.

Screen Shot 2013-01-03 at 1-3-3.26.17 PM

Screen Shot 2013-01-03 at 1-3-3.26.24 PM

5by5 | The Critical Path #69: The Concentration of Power

A discussion on a forthcoming blog post titled “The Last Feature Phone”. Also why stock markets are intractable: the problem with understanding the motivation of buyers and sellers of equities, especially those who act on behalf of others as fund managers. Finally, a review of what’s on Horace’s to-do list for 2013 and a hint at the new 5by5 show High Density, the first episode which is linked in the show notes.

via 5by5 | The Critical Path #69: The Concentration of Power.

5by5 | High Density #1: Glenn Fleishman

Announcing a new 5by5 podcast: High Density.

In the first episode I interview Glenn Fleishman and talk about what it takes to be on Jeopardy (and how to win.) We also go on a journey into the lore and charm of The Economist and the curious state of modern journalism.

via 5by5 | High Density #1: Glenn Fleishman.