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Month May 2015

Winning Against Non-consumption

In the fourth quarter of 2013, mobile phone sales in mature regions fell due to weaker demand.”Mature markets face limited growth potentialis the markets are saturated with smartphone sales, leaving little room for growth with declining feature phone market and a longer replacement cycle,” said Anshul Gupta, principal research analyst at Gartner. “Lack of compelling hardware innovation has further exacerbated replacement cycles for high-end smartphones in 2013 because consumers don’t find enough reasons to upgrade.” – Gartner

Anshul Gupta’s assertion of market saturation was not the first. IDC also cited “a number of mature markets nearing smartphone saturation” in late 2013.

Shortchanging the smartphone market is nothing new. It was happening very early in the market’s formation when initial growth was not as rapid as expected. I recall Nokia managers disappointed with sales growth losing faith in smartphones in 2004.  Eleven years later, the market is still growing.

comScore reported that during the first quarter of 2015 the US market was adding over two million new smartphone users every month. These are not two million units sold every month but two million new users who began using smartphones for the first time ever, every month.

Screen Shot 2015-05-11 at 5-11-2.33.07 PM

 

Since the end of 2013 when both IDC and Gartner declared the onset of saturation in “mature regions”[1] 31.5 million new-to-smartphones Americans adopted the product. That’s an addition of 11% of the sampled market.

And the sampled market is just a subset of the addressable market. comScore only counts ‘primary phones’ in use and excludes company-purchased devices and any users below age 13.

So according to comScore’s data, the US market is at 77% smartphone usage. My assumption is that saturation would come at the earliest at 90% and could be 100%.[2] The fact that conversion to smartphones is still proceeding at roughly the same rate it has been for five years, makes this assumption pretty safe.

The pattern of growth fits a diffusion S curve (Logistic curve) as closely as ever: 

Notes:
  1. The US is the most mature by penetration data []
  2. Of the market comScore measures []

The Instrument Makers | The Christensen Institute

When we think about how great theories are built, one pattern seems to pop up repeatedly: breakthroughs are preceded by the insight into one (n=1) insight. The key observation of an anomaly that disabused us of a false assumption leads us to a far deeper causal understanding.

I’ll illustrate with a simple history of astronomy. For millennia, the theory of astronomy was informed by data provided by our eyes. The human eye could observe celestial objects with great acuity, and with great patience and record keeping the recognition of patterns in movements allowed the building of a vast database of predictions about the universe. We see this in many societies around the world: from Nordic seafaring navigators to Mayan calendars to Greek scholars. They all built predictive models and associated mythologies around the observable night sky.

These models included a construct called the calendar, the horoscope, navigation charts and even rare event predictors such as eclipses. Computing devices were even built to allow the calculation of these events by laypersons rather than a priestly class.

Our eyes remained the observational instruments underpinning all these theories. The world (and otherworld) view was informed and repeatably tested through eyesight. It wasn’t until the technology of lenses was developed (initially for a completely different purpose) that new instruments could be used to augment the eye.

These telescopes (and their brethren, the microscopes) changed many theories profoundly. The information that optical telescopes could convey allowed the observation of anomalies (e.g. planets) which changed the earth-centric view of the universe which, in turn, challenged much of the balance of power in society.

Read more and comment: The Instrument Makers | Christensen Institute

How many iOS devices will Apple Ship in the next six months?

Of the $42.5 billion Apple spend buying capital assets[1] more than half was acquired in the last three years. Net of depreciation these assets are currently worth $20.1 billion and the spending rate is about $12 billion per year.

This strategy of spending on capital assets is primarily in support of its particularly integrated approach to its product strategy. The purchasing of tooling for product manufacturing gives many benefits, including ability to deliver uniquely differentiated hardware, a predictable ramp and availability of parts throughout the product lifecycle.

Screen Shot 2015-05-05 at 3.02.04 PM

One additional benefit (for us) is that we get to inspect the allocation of resources prior to production and therefore we can more easily forecast the product’s supply. Spending on tooling happens in advance of production and the company also provides full year predictions of its spending.

The fiscal year forecasts relative to actual spending is shown below. Note the correlation with iOS units shipped one quarter after the spending was booked.

Screen Shot 2015-05-05 at 3.08.24 PM

After reporting its second quarterly earnings, we received an update on what amount to half of the full year’s spending giving us only two more quarters of variability. The current projections for the next two quarters imply about $2.8 billion per quarter spending.

Screen Shot 2015-05-05 at 3.05.29 PM

The pattern from previous years is shown below for comparison. Note the Even/Odd year patterns.

Screen Shot 2015-05-05 at 3.05.35 PM

 

The company also offered revenue guidance for FQ3 and therefore we can even make an educated guess on the next data point (57 million iOS devices) on the following graph:

 

 

Screen Shot 2015-05-05 at 3.20.52 PM

 

The result is likely to be 120 million shipped between April and September.

It’s remarkably predictable.

 

Notes:
  1. Includes land and buildings $5.6b, Machinery, equipment and internal-use software $32.1b and Leasehold Improvements $4.7b []

The Critical Path #149: Whippersnapper

From impressive iPhone sales to slowing iPad revenues, Horace and Anders recap the most recent Apple earnings. In the second half of the show, Horace answers listener questions from Twitter.

Source: 5by5 | The Critical Path #149: Whippersnapper