Categories

Counting Apple’s Customers

Berkshire Hathaway, led by Warren Buffett, now owns about $1.4 billion of Apple. Occasionally we hear about various “celebrity investors” taking positions in the company or exiting those positions. The last one I remember was Carl Icahn. He seems to have exited Apple before Berkshire entered. There are some who will act because of these decisions. You should not be one of them.

Nor should the management of the firm act in response to investor decisions or concerns. Management is specifically distinct from ownership in the corporate construct precisely in order to bring professionalism to the role. The manager must set priorities as they see fit, irrespective of what the transient owner might prioritize. The separation of ownership and management is one of the greatest innovations in commerce.

There are many opinions on what priorities should be. Delivering a specific financial ratio, achieving a certain market position, changing the world for the better. These have all been cited as top priorities. I happen to believe that what matters most is the creation and preservation of customers. That is because I see customer creation as causal to the other desirable outcomes and it is therefore the more important priority.

And this is why, whenever possible, I try to deduce how well a company is performing on this metric. The greatest companies (by market capitalization) today are certainly examples of achievement in customer creation. Facebook, Microsoft and Google are members of the “billion user club” or companies that crossed a billion active users.

But do they really have a billion customers? Microsoft has over 1.2 billion users but many (most?) of those users are using computers that their employers provide on which Microsoft software was installed. They may not have made the choice to purchase the tools they are using. Microsoft certainly has millions of customers in the form of “accounts” purchasing its products and services, but It’s not likely that there are a billion people who have directly chosen to buy a Microsoft product.

Facebook has over a billion daily users. Facebook users are certainly using the service of their own accord but they are not paying for the service. Quite the contrary, the actual customers of Facebook are companies buying an advertising service offered in the form of exposure to those billion users. The Facebook users are the product being sold, not the buyers. Thus Facebook’s total number of paying customers is probably only in the tens or hundreds of thousands.[1]

Same with Google. We don’t know how many accounts Google send invoices to but the number is very likely not even in the 100 million range. Its billions of users are beneficiaries of services but they are not paying Google/Alphabet.

Amazon has many millions of customers, if not billions. Prime membership is above 50 million but not above 100 million. Amazon may some day have a billion customers but there are limits to how quickly that can happen. The growth potential is governed by logistics and that’s as much an issue with atoms as it is with electrons.

Which brings us to Apple. Apple does not offer a figure on its specific user count, but we have some viable proxies:

  • iCloud accounts reached 782 million in February 2016.
  • iTunes accounts reached 885 million in September 2014
  • Active devices reached one billion in January 2016. That number is likely above 1.1 billion now. (Includes all devices, hence Macs and Apple TVs).

These figures are also parts of patterns (shown below) which offer an indication of predictable growth.

Screen Shot 2016-08-17 at 9.23.26 PM

Screen Shot 2016-08-17 at 9.27.38 PM

In addition to the absolute figures and their growth there is also the question of loyalty (frequently cited by the company), switching from other platforms (also frequently cited) and revenues. The company publishes specific figures on service revenues for consumer attached devices showing a run rate of $41 billion/yr in services for their device base.

In combination, a picture emerges which shows that Apple has nearly a billion customers. I can’t say how many with any precision but it’s certainly above 500 million (on the basis of iCloud and iTunes accounts). It’s below one billion because some users have more than one device.

Even though it has not happened yet, the trend is pretty clear. Apple will at some point in time have a billion paying customers.

What is more significant than the specific count is that these customers mostly chose to be customers individually. Some may have been given the products as gifts, but the vast majority bought the items for themselves. Apple benefitted from hundreds of million of individual purchase decisions.

Furthermore, having made the decision to purchase, chances are that they will do so again. Apple customers are a recurring revenue stream. In fact, it’s fairly easy to calculate that being an Apple customer is equivalent to spending about $1/day on its products and services, indefinitely.

Apple is not there yet, but a billion dollars a day from a billion customers is not inconceivable. That would be quite an achievement.

Notes:
  1. Orr Sella @orrsella pointed out that Facebook has stated that they have 3 million businesses actively advertising on their networks. []
  • Harmonica2

    Clear explanation of what makes Apple unique – and why it is sustainable. Typo: “a picture emerges which shows that nearly Apple has nearly a billion customers.”

  • Duane Bemister

    Apple has customers, everyone else has traffic that they are desperately trying to contain.

    • mjoecups

      And most of all they desire Apple’s customers as traffic, since those are the people that actually spend $.

  • BMc

    Would be interesting to know if any work has been done in trying to determine how an “average” Apple customer grows in value over time. I am sure I am not alone in starting with buying something like an iPod, then a few more iPods, a Mac, iPhones, iPads, and expanding it throughout the household. While my family doesn’t upgrade any individual component frequently (the iMac as an example is 7 years old and counting), we will be sticking with Apple products and the growing ecosystem.

    Also to note, although 4 persons in my family who all enjoy their own different Apple products, we only have one iTunes/iCloud account at this time. I am sure many families are the same, so certainly would point to Apple being closer to 1B than 500M in terms of customers.

    • http://www.coreadvantage.com.au Thomas McInnis

      On the flip side, I know a few people who are on their second iTunes account after they forgot their password, as well as their recovery questions etc. Even I have one under my old student email address from college. Then I decided to get an @mac account and abandoned the old one. I was only reminded of this when I tried to play an album the other day and it wouldn’t let me because it was purchased under that college account. Am I being double counted?

      • Alex Hon

        Unless you have always paid for your hardware in cash (or buy through authorized retailers), never registered/linked your devices to an iTunes account and never linked your credit/debit cards to iTunes, then Apple should be capable of figuring out who you are, which devices you own and what you are consuming through iTunes or the App Stores.

      • melci

        @Thomas, Apple specifically stated only “Active” iTunes accounts were counted.

        In the case of iCloud users, Apple reported that was the number of unique users who had contacted Apple servers in the last 3 months.

  • fstein

    Brilliant insights backed with data.
    Adding: In the long arc of the computer industry, software and services outgrows hardware revenue. With one billion customers, the best is yet to come. Ironically, Apple’s massive growth in iPhones, blinded most investors to it’s software and service franchise growing at about 25% YoY.
    If one digs deeper, the picture is even brighter. Apple open-sourced Swift. They acquired Turi. They’re making the iOS plus the CPU and GPU and other chips more useful to developers. After customers, developer engagement (and employee morale) may be the most important metrics.Apple’s employees and the Apps from developers make the iOS/MacOS platforms useful and delightful. Apple’s investments in developer tools never make headlines. Often the monetary value is small or far into the future.

  • Tarun Jain

    I guess one more thing that matters is customer sat. Nothing like having hundreds of millions of customers who are highly satisfied. Business will thrive without monopoly. Comcast or Microsoft were (going to be) doomed the moment customers get options.

    • GreedEggsandHam

      On Facebook, no, I do not think Facebook can ever charge customers a fee. Even a modest fee would be considered betrayal. Facebook’s most frequent users would go up in arms if “their” content suddenly went behind a paywall. Now Facebook could charge for some sort of premium service. But really their current model is working great, so why switch. They are getting vast amounts of revenue from the ads, and can probably gain more in the future. Facebook is basically a personalized magazine that everyone reads and everyone publishes to. I think folks will be consuming that content for a very long time. And while I don’t think Facebook can charge a direct fee, I also don’t think it will need to.

  • blacks329

    It seems ill advised to discount the 100’s of millions of Google Play Accounts. Are they not customers of Google? The same way an iCloud account with Apple App Store access is a customer of Apple?

    • art hackett

      What do you advise?

    • melci

      Google reported in Sept 2015 that there are only 1 Billion active Google Play accounts compared to the 782 million active Apple iCloud accounts.

  • Secular_Investor

    “Apple is not there yet, but a billion dollars a day from a billion customers is not inconceivable. That would be quite an achievement.”
    A billion dollars a day of recurring revenue with very high margins shows the true long term value of Apple