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Category Market

The allure of iTunes

My estimate of last quarter’s iTunes gross revenues suggested a spending rate of $40 per iTunes account. It would make sense to consider how that figure changed over time. The following graph shows the pattern:

Screen Shot 2013-05-14 at 5-14-9.49.40 AM

You can read each bar in the graph as the total “ARPU” or average revenue per iTunes user[1].

I overlaid a graph showing the total number of accounts as reported by Apple to the (retroactively) estimated revenue structure. Account totals are measured with the right axis and ARPU with the left.  Note that I also broke down each component of iTunes as currently defined (Music, Video, Apps, Books, Software and Services.)[2]

The time frame covered is from Q2 2007, or the quarter prior to the iPhone launch. A few patterns emerge:

Making rain

The following is a slightly edited transcript of a portion of the Critical Path podcast #79. I am reproducing it here for the sake of brevity and focus of discussion.

I’m going to try to put together an analogy together here that maybe will help us think through the Facebook Home and the Google Fiber issue.

I’ve been thinking a lot about how to illustrate Google’s business model. The problem is that discussion has been polarized: Two camps have formed. One camp suggests that Google is a benevolent entity that does great things and only asks that we indulge their hobby of a business model called advertising. Fundamentally they are about pushing the envelope on technology, making wonderful things happen.

That is one camp. I call them the utopians. It may not be a nice thing to call them but I frame it as being exceedingly idealistic.

The anti-utopian camp is one that suggests that Google is an advertising company primarily, and fundamentally and overwhelmingly. And anything they do technologically is in support of that. The implication is that Google is sinister and manipulative, bent on getting away with as much privacy extraction as possible.

I believe that the anti-utopians dismissing Google as an advertising company sounds a bit incomplete. It’s not incorrect. It’s not erroneous. It’s just not a complete story.

Reasons for iOS outperformance in the US

The comScore mobiLens survey for the US ending February 2013 shows continuing rapid expansion of smartphone usage in the US. Even though the 50% penetration threshold was passed seven months earlier, the rate of new smartphone users was second highest ever recorded with over 1 million new-to-smartphones users every week during February.

Screen Shot 2013-04-05 at 4-5-4.15.52 PM

Overall penetration increased to 57% with nearly 2% of the population switching in one month. Using the average growth rate for the last six periods, the US could see 80% penetration in another 19 months or by Q3/Q4 2014.

The cost of selling Galaxies, updated

Thanks to @jtk0621 via twitter I was able to obtain a quarterly view into Samsung’s SG&A expenditures by cost category.

The value of this data is in being able to understand why Samsung SG&A as a percent of sales remains fairly constant. To recap, the discrepancy with Samsung’s SG&A is that it has grown in proportion to rapidly rising sales. Normally, when sales grow, SG&A grows but when sales grow very rapidly, SG&A grows a bit more slowly since it’s primarily a function of headcount and hiring is necessarily organic and hence slower as a process.

The contrast is shown in the following comparison between Apple’s SG&A and Samsung’s SG&A as a percent of sales. [For more detail on Samsung revenue composition see: The Cost of Selling Galaxies].

Screen Shot 2013-04-02 at 4-2-3.09.39 PM

Apple’s SG&A has declined as a percent of sales, as one would expect, but Samsung’s hasn’t.

I have hypothesized that the reason for this might be in the practice of “outsourcing” many marketing functions. As Samsung expands promotional efforts, it does so partially by hiring people but even more so by farming out a lot more work. In this way, if and when sales subside, it can pare costs. This practice ensures that it’s not exposed to a huge cost structure that is hard to control. The downside to this approach might be obtaining “quality” marketing as oversight is still depending on inside teams who still have limited resources.

To test this hypothesis, I looked at the types of costs it reports and divided them into two categories:

Category 1 are what might be considered “internal” costs which are in function of employees or operations. These costs are:

  • Salaries
  • Retirement Benefits
  • Commissions
  • Depreciation
  • Amortization
  • Freight

I graphed these costs over time below:

Screen Shot 2013-04-02 at 4-2-3.12.09 PM

Category 2 costs are those which can be “outsourced” and are in function of budget items. These are:

How many iPhones will T-Mobile USA sell?

From the initial product launch until the end of 2012, AT&T has activated 72 million iPhones. Verizon began selling iPhones four years after AT&T and managed to activate 26 million since. Sprint began nine months after Verizon and has activated 8.5 million.

In proportion of their subscriber bases, the activations are shown in the following graph.

Screen Shot 2013-03-28 at 3-28-12.50.06 PM

 

I identified the reported iPhone activations with blue areas while the sum of green and blue areas represent total subs at the end a the given year.

I also took the liberty of forecasting 2013 data in order to try to estimate T-Mobile’s contribution.

Interview with Anouch Seydtaghia of Le Temps regarding the Galaxy S4

This interview took place on the eve of the launch of the Galaxy S4. Anouch Seydtaghia is Deputy Head of the Economic & Finance Section chez Le Temps Geneva, Switzerland.

Q: How can you explain that Samsung organizes such a huge event in NY for the S4?

A: The S4 is a very important product as it’s probably the second most profitable mobile phone in the world. Samsung is trying to position it as a premium product and is using every means available to do so.

What are your thoughts about the huge marketing budget of Samsung?

Samsung’s marketing budget has been a constant percent of their sales (approximately). As sales have risen, the budget has risen. This is not considered a normal situation if sales grow very rapidly but Samsung seems to consider x% of sales to be appropriate spending level. Note that Apple’s marketing has fallen as a percent of sales while its sales have grown dramatically.

If we read the media, we see a lot of speculation about the features of the future S4. Can we now compare that to the expectations before a new iPhone?

There are speculations about all phones, from Nokia to HTC and BlackBerry. I don’t see the speculation to be different between all the major companies.

Can Apple regain the lead in the smartphone market? If yes, how?

An update on Android activations

Two days after I posted a reminder that Google had not updated their Android activations for five months, Google updated their Android activations.

The new total is 750 million. My expectation (based on a rate of activation acceleration of 30,000 activations/day/week) was 800 million. Google did not update their download rate but it can be derived. Between September and March the average has been about 1.4 million/day. I had previously estimated that the rate of activation was 2 million/day.

This is a modest increase from the 1.3 million/day that was reported in September implying that activation acceleration has slowed.

After resetting the acceleration to 5,000 activations/day/week my new forecast for 1 billion activations moves to the end of August.

Coincident with this update on activations, Google reported that Andy Rubin has stepped aside as the head of Android and that Android and Chrome would be under the same management.

Putting aside the exit of the founder, the implications of the merger with Chrome will need significant contemplation.

Where are the Android users?

Google occasionally reports data regarding Android. Very occasionally. The last time we had some data was in September 2012 when we learned that activations were running at 1.3 million per day and that a total of 500 million total activations had taken place.

As of today, being March 2013, the time between updates has reached five months. It’s the longest gap so far. Benedict Evans also notes that it’s been five months since the data regarding screen size stats has been updated on the Android developer site.

But we have to live with what we get and, in the absence of an update, the pattern of growth in Android, if sustained, looks like this:

Screen Shot 2013-03-10 at 3-10-11.05.14 PM

The job the iPhone is hired to do

In the latest quarterly report Apple changed how it reports product revenues. In previous quarters the iPhone and iPad were reported including accessory revenues while iPod accessories were reported under “Music” revenues.

“Under this new format revenue from iPhone, iPad, Mac and iPod sales is presented exclusive of related service and accessory revenue […] revenue from all Apple and third party accessory sales is presented as a single line item [Accessories.]”

Apple provided a document showing re-classified product summary data.  By measuring the difference between original revenue and re-stated revenue per product we can determine how much service and accessory revenue was being attached to each product.

I did this for two quarters as a sample:

Screen Shot 2013-01-24 at 1-24-2.16.14 PM

 

The analysis shows that the iPhone has been receiving about $15 of accessory attached value and the iPad about $25. Interesting trivia, but how is this insightful?

Consider the impact on this analysis of revenues/unit shipped:

The iPhone MOQ

[Kaoru] Kato, president of NTT DoCoMo Inc., said that the firm would want to add the iPhone to its lineup of serviced smartphones if it could form a mutually beneficial contract with Apple, Inc.

Apple requires that carriers servicing its devices sell a fixed amount per year. Katō said that his company could handle such quotas if iPhones accounted for approximately 20%-30% of its overall smartphone sales.

via NTT DoCoMo President Interested in Servicing iPhone — BrightWire

When thinking about an iPhone launch, especially with a new operator, the crucial question is what is the minimum order quantity (MOQ). Some of the iPhone production is sold direct (as in the case of orders coming from Apple’s online store) but the majority of units are sold via operator who order in batches.

This issue came to light when Sprint’s order was leaked in late 2011.  I discussed the order size at the time and put it in context. I concluded that Sprint MOQ was on average 7 million/yr., ramping with 4, 6, 9 and 12 million over a four year period.  I concluded that this was not a particularly aggressive gamble.

Data published since then shows that Sprint actually sold 6.3 million during the first year, well ahead of my expected minimum order of 4 million and above even the expectations for the second year of sales. So far then Sprint and Apple gauged minimum demand quite accurately.

I also showed that the Sprint MOQ was probably indexed off their sub base. I suggested that, based on subs data at the time, Sprint was committing to roughly 13% of its subs buying an iPhone every year. This was indexed off the data showing that 17% of AT&T subs were buying iPhones every year and 10% for Verizon. (I also assumed that this run level would be ramped over time).

The updated totals for the 12 months ended October 2012 are 19% of AT&T subs purchased an iPhone, 12% for Verizon and 12% of Sprint. The performance is shown in the following graph:

Screen Shot 2013-01-17 at 1-17-3.33.10 PM

Which leads us to think about how the MOQ for the iPhone is calculated. If we assume Sprint and Verizon performance is typical it would imply that an operator like DoCoMo would be required to purchase iPhones at the rate of about 10% to 12% of its sub base each year, modulated to some degree by a ramp.

NTT DoCoMo had 60.7 million subs in September 2012. 10% is about 6 million. Is Mr. Kato’s quote above of 20%-30% of smartphone sales consistent with this?

In an earlier interview (in July) Mr. Katō also stated that the target for smartphone sales in the year to March 2013 was 13 million. 30% of that would be 4 million units.

This suggests that the iPhone MOQ for DoCoMo is only about 6% of subs. (4 million) Perhaps this is the basis of negotiation for an iPhone deal. Apple may have held out for 10% subs/yr. with Sprint on the basis of performance of the iPhone in the US but might be willing to settle for 6% subs/yr with DoCoMo, at least for the first year.

The MOQ figure as percent of subs for China Mobile would also be an interesting point of debate.