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Category Nostalgia

A small-screen iPod, an Internet Communicator and a Phone

Apple is now the biggest watchmaker in the world, overtaking Rolex during the last quarter. This achievement happened less than two and a half years after Apple entered the watch market. Rolex, on the other hand, was founded in 1905, 112 years ago at a time when watches were the avant-garde of technology. Given this revelation of sales, we can test the estimates I put forward on the Apple Watch sales, shown below:

We know that Rolex produces about 1 million watches a year and we also know that Rolex had sales of $4.7 billion in 2016. The average revenue per watch[1] was therefore about $4,700.

My estimate has been that Apple sold about 15 million Watches in the last 12 months at an average price of about $330. This puts the Apple Watch revenue run rate at $4.9 billion, indeed above Rolex.

They may be slightly high but the news makes me feel quite comfortable in my methodology. Note also that within the last quarter Apple said sales for the Watch increased by 50%. This is also reflected in my estimate of 3 million in Q2 vs. ~2 million for 2016 Q2.

Overall, about 33 million Apple Watch units have been sold since launch and they generated about $12 billion in sales. Coupled with a 95% customer satisfaction score, altogether, this has been a great success story. But only 2.5 years in, it’s still act one.

To understand the long term trajectory, it’s important to qualify this product as part of another, larger story. The Watch, even with LTE, is an accessory to the iPhone. It still cannot be activated without it. Even the coverage plan is an extension to an iPhone plan. The company is careful to address it as a companion product.

But how long will that last?

Notes:
  1. Includes services such as repairs []

Defining the 21st Century

The iPhone is the best selling product ever, making Apple perhaps the best business ever. Because of the iPhone, Apple has managed to survive to a relatively old age. Not only did it build a device base well over 1 billion it engendered loyalty and satisfaction described only by superlatives.

To summarize I can offer two numbers:

1,162,796,000 iPhones sold (to end of March 2017).

$742,912,000,000 in revenues. $1 trillion will be reached in less than 18 months.

But more important than any of these quantifiable measures of success are the unquantified accomplishments. These are the changes we note only when flipping an A/B switch on a decade. The changes ushered by the iPhone have been as momentous as those of the Ford Model T. Or those of electricity, telegraph, radio or TV.

These are epoch-making technologies. They shape the fiber of society and the definition of quality of life. They obsolete entire economies and change the balance of political power. They shift the center of gravity of society.

To glimpse the change you only need to observe how we shifted how we spend our time. The fact that 2 billion people are using Facebook every day. That the device is looked at for 2 hours a day. That it’s unlocked 80 times a day. That it holds almost all our memories and our conversations and all our secrets. That it created new modes of communication and destroyed others, ancient and respected.

That it substituted communications, entertainment, and interaction. That swiping became the most used human gesture. That we communicate with photos and not with words. That, like the voice call, transportation now comes to us rather than we to it. That it can answer to our voice. That we can never be lost again. That it makes us all publishers.

That all this happened while the product itself was always perceived as fragile, vulnerable, copyable, doomed to early demise. That imitators outnumber it 10 to 1. That it somehow found ways to become better even though we exhaust what we can ask of it.

For all these reasons I believe that future historians will point to the iPhone as the technological product that defined the 21st century. Much will follow from it and it may become something altogether different but it set humanity on a new course.

Gravity

Apple is doomed. So are you. As mortals we are used to the idea of death. We do not dwell on it even though it’s inevitable. We do know that we’ll die but what we don’t know is when we’ll die. That certainty/uncertainty makes us, more or less, do everything that we do. And so we carry on. But companies die too. And when they die is also a mystery but it’s not at all clear that their inevitable demise determines what they do. If you think you’re immortal you may live dangerously. Perhaps as a result they live shorter lives than we do.

Life expectancy for humans has been rising but for companies it has been declining. Even more curiously, the richer you are the more likely you are to live longer but the wealthier a company, the more likely it is to keel over at any time. The longest lived small businesses live over 1000 years but the longest-lived large business is probably the East India Company that made it to the ripe age of 274. But that was before 1800.

In the modern, industrial era there are very few corporations that survived over a century and the Fortune 500 shows a turnover in inhabitants that resembles that of a plague-infested medieval inner-city. In contrast to their conservative, geriatric organic owners, synthetic companies are more likely to behave like live-fast, die-young punk rockers.

So it’s no surprise that Apple, at age 40, is seen as being well past its sell-by date. And yet it seems to be saying, somewhat faintly, “I’m not dead yet”. By generating more cash than can be comprehended by human observers and by controlling assets that are well beyond the means of many countries, they (it?) is confusing us with its persistence.

The confusion is exhibited in the following graph which shows the crises in confidence by that wonderful reflector of human perception–the stock market. By voting millions of times a day, the market shows us with great precision the totality of human emotion with regard to an asset. That emotion turns rapidly negative on Apple with surprising frequency.

Screen Shot 2017-03-16 at 2.32.03 PM

There have been over 8 bouts of collapsing confidence (exhibited by 40% drops in value) for Apple’s shares. Consider the latest where we’ve seen a 40% drop followed by 57% increase in share price over the last 12 months. 57% might not seem extraordinary for a small company but for the world’s largest market capitalization with the corresponding colossus of cash that it straddles, the robustness of brand and the loyalty of customers, the mind boggles.

The same thing happened in 2012 and 2008 and as far as I can tell the company has not changed one iota during that time. The same people, mostly, are in charge. With the same mission statement, and even the same product line. The resources, processes and priorities–the only determinants of the essential value of a firm–have not shifted.

One could try to suggest that even if Apple is unchanged, the world around it has changed. But if anything the world has come to match Apple’s own view: more mobile vs. fixed, more design vs. generic, more integrated experiences vs. more modular DIY.

The ethos of Apple is rigid so why is perception about the company so fickle?

If the graph above reflects perception about a constant entity then perhaps it charts how the world has changed rather than how Apple has. Perhaps perception revolves around a center of gravity far heavier and permanent. Perhaps the tug-of-war between fear and greed reflects more upon us that it does upon the object being observed.

The most popular product of all time

The following is a list of the best-selling products across several categories:

Car model: VW Beetle 21.5 million
Car brand: Toyota Corolla 43 million
Music Album: Thriller 70 million
Vehicle: Honda Super Cub 87 million
Book Title: Lord of the Rings 150 million
Toy: Rubik’s Cube 350 million
Game console: Playstation 382 million
Book series: Harry Potter Series 450 million
Mobile Phone: iPhone 1 billion

The iPhone is not only the best selling mobile phone but also the best selling music player, the best selling camera, the best selling video screen and the best selling computer of all time.

It is, quite simply, the best selling product of all time.

It is that because it is so much more than a product. It is an enabler for change. It unleashed forces which we are barely able to perceive, let alone control. It changed the world because it changed us.

And it did all that in less than nine years. One has to wonder what it will enable in the next nine.

The one where I offer stock tips

Let’s say I offered you the option to invest in a monopoly or in a hit-driven company whose survival depends on always finding the next big thing? Which would you invest in?

Before you answer, let’s say I offered you the option to invest in a person who has a large inheritance or a person who is poor but is hustling for any opportunity. Whom would you invest in?

Before you answer, let’s say I offered you the option to invest in real estate of a city which depends on a stable, capital-intensive manufacturing base or one where they make nothing but movies. Where would you buy land?

Each of these reflect the same choice: stability vs. instability, the known vs. the unknown.

Historically, capital has always gone toward the stable and away from the unstable. Wealth has gone the other way.

Onward.

 

Peak Cable

Paying for TV has been a curious consumer phenomenon. There was a time when TV was free to consumers. It was delivered as a broadcast over-the-air and paid for either by commercials (US mostly) or by taxes on viewers (Europe mostly). The consumers were delighted with the idea as it was far better than radio and radio was delightful because it was far better than no radio.

The process of convincing consumers to pay for something that used to be free was quite interesting. The first benefit to be articulated was that the quality of the picture would be much better. It would, in essence, be noise-free.[1]

The second benefit was an increase in the number of channels. VHF and UHF television would cover about three and 5 channels respectively while cable could offer dozens, many specializing on specific types of content like the Home Box Office (HBO) offering movies and ESPN offering sports only and MTV music videos and CNN news only.

The third benefit was fewer (or no) commercials for some of the channels. This was especially valued by fans of movies whose interruption by commercials was often detracting from the immersive value and continuity of the cinematic experience.

These benefits were very attractive during the 1980s, to the extent that about 60% of US households adopted cable. An additional group later adopted satellite-based pay-TV as the technology became reasonably cheap.

Screen Shot 2015-03-19 at 2.29.06 PMThese benefits were priced modestly but as the quality and breadth of programming increased, prices rose. An average cable bill of $40/month in 1995 is $130 today[2]. Some of that revenue went into upgrading the capital equipment in use (the plant) and some into paying for the higher production values. Yet more went to the sports leagues and their players whose business models increasingly depended on broadcast rights.

Notes:
  1. This was in fact the birth of cable TV: a shared antenna for a community in an  electromagnetic shadow []
  2. a 6.1% compounded rate of price growth vs. a 2.4% rate of inflation []

Conversations with Apple’s brand

According to Folkore, in 1981 Apple took out a two page ad in Scientific American which explained that whereas humans cannot run as fast as other animals, a human on a bicycle is the fastest species on earth.

Jobs had made the observation that a computer was “a bicycle for the mind” earlier, in 1980, at a time when the decision to purchase a computer was driven by an intellectual curiosity and justified as an improvement or assistant to the intellect. It was to make the lighten the labors of our intellect.

Apple brand at the time as an appeal to the intellect via a humanistic argument. A more emotive positioning of a tool, but a tool nonetheless. This positioning evolved throughout the 80s and 90s into an “intersection of technology and the liberal arts.”

We can see how the conversation with the potential buyer was along the lines of appealing to the intellect while offering a humanist sweetener. Humanizing the product allowed it to be accepted into a world that feared the complexity and awkwardness of such a machine.

During the 2000s, with the ascent of iPod, the conversation shifted to prioritizing  the emotions more than the intellect. The products had to appeal to those who wished to express and enjoy products of emotional value. Products like music and videos and the output of the arts rather than the sciences. The brand became emotional rather than intellectual. It created an aesthetic, and become culturally iconic.

During the 2010s, with the ascent of iPhone and the emergence of the Watch, the brand speaks a language of instinct, leaving intellect and emotion as secondary or tertiary voices. Instinct is visceral, lust-inducing. It seems to short-circuit any of the rational. Non-rationalism does not mean irrational. It just skips right over the head and heart and hits the gut.

One could argue that during these three decades, the organs the brand was engaging in conversation shifted from the mind to the heart and then to the glands. Those glands which release hormones and are directed by non-rational neurons. The evidence of the conversation would be in resulting products causing pupils to dilate, breaths to be quickly drawn and skin temperatures to rise.

The brand therefore has managed to move from a rational, to a neurological, to an endocrine response.

The curious thing is that during these shifts, Apple’s entry into new biological spheres of influence has been largely unchallenged. I suspect this is because emotional or instinctive products are appealing due to their lack of rationalized value. In other words, what makes a product hormonally appealing is a lack of intellectual appeal[1]. Apple can enter into the world of lustful appeal while lustful brands can’t enter into functional appeal.

This is a classic asymmetry which perhaps no other brand can pull off.[2]

Notes:
  1. and vice-versa in many cases []
  2. The reason is complicated but stems from the firm having been built to execute nothing but home runs. By shunning portfolio theory, Apple can wander into new categories far from its biological home grounds. []

Haunted Empire

The “Stupid manager theory of company failure” (and its corollary, the “Smart manager theory of company success”[1]) remains the most popular, perhaps even the most universally accepted theory of management. Book after book, thoughtful article after article alludes to this theory and whenever a company is perceived to be under-performing, all fingers point to the leadership with demands for blood letting.

This is not a new phenomenon. When catastrophe strikes, as a thoughtful species, we have always asked for leaders to be sacrificed. In Europe during the Iron age leaders were sacrificed when crops failed. In South and Central America leaders were ceremonially tortured for similar reasons.

Of course most crop failures were due to weather phenomena and the anointed leadership had nothing to do with these causes. Nevertheless ancient correlation analysis would have revealed the pattern that good leadership meant good weather and bad leadership meant bad weather.

There was a balance to the downside however. When times were good the leadership enjoyed luxuries and praise. This was the essential deal societies made: we’ll keep you in riches and allow you to be idle as long as times are good but ritualistically slaughter you when times are bad. We’ll declare you “chief magical officer” and place all our faith in you. But, of course, if you fail, we will will be vengeful.

And so it goes in today’s corporate world. I’ve often said that corporate governance is medieval, or pre-scientific in its approach to understanding causality. That may be too generous. As far as the reward/punishment system (also known as Human Resources) it’s probably pre-neolithic. The luxuries and extravagance which we heap upon the leader provide abundant evidence. Leaders insist on these ironic “pay packages” and boards approve them because they know they can and will be ritualistically sacrificed if and when the mobs turn against them.

A manager would be a fool to accept even generous pay given the risk, actually near certainty, of ritualistic slaughter. They demand and are unquestionably given absurd pay that has no relationship to performance. Such pay has no relationship to performance because it isn’t designed to reward performance but to account for the risk of arbitrary and very public sacrifice. Boards (and hence shareholders) are deliberately hiring a scapegoat for sins as yet unknown. Luxury and violence are thus finely balanced in what is called “Executive Search”.

Notes:
  1. As well as the “Smart/Stupid leader theory of national success/failure” []

Biggest news of 2014

As corporate romances go, IBM and Apple’s must rank among the most unexpected. As I wrote on the date they changed their Facebook status, the two companies were antagonists for the better part of twenty years and their rapprochement was met with a shrug mostly because yet more decades passed since.

Screen Shot 2014-12-26 at 11.28.03 AM

Nostalgia aside, this new union is profoundly important. It indicates and evidences change on a vast scale. The companies’ antagonism was due to being once aimed at the same business: computing. Since the early 1980s, “computing” came to be modularized into hundreds, perhaps thousands of business models. It is no longer as simple as selling beige boxes. IBM was forced out of building computers and into services and consulting while Apple moved to make devices and the software and services which make its hardware valuable.

The convergence of interests which was consummated into a deal this year stems from the migration of computing around what has come to be called “mobile”. Apple intends to accelerate the adoption of its mobile platforms among the remaining non-adopters: enterprises–a group which, by now, qualifies as laggards.[1] Simultaneously IBM intends to connect data warehouses at those same enterprises to their employed users.

Notes:
  1. There was a time–when Apple was young–when enterprises were the innovators, early adopters. That role ended approximately in the year 2000 []

What next, Samsung?

I received a few questions from Shirley Siluk of NewsFactor as a follow-up to my post on the trajectory of successful companies.

1. Do you foresee any hope for a turnaround for Samsung? If so, where do its best opportunities lie?

Screen Shot 2014-10-13 at 1.44.54 PM

The smartphone business was a huge opportunity for Samsung and they took full advantage of it. Unfortunately, it’s a difficult business to stay on top of. The list of victims in that industry is quite long and there have been no long-term winners. Samsung’s operating model seems to be to invest as a ‘fast follower’ filling in the market after it’s established while leveraging capital intensive components synergies. That has also worked for them in consumer electronics (at the expense of Sony and other Japanese vendors). If the modus operandi does not change then their turnaround will depend on the creation of new opportunities/categories. Wearables may be such an opportunity but it may not be as big as the phone business.[1]

2. What has contributed most to Samsung’s decline? Which competitors are posing the greatest threat?

Notes:
  1. The graph shows estimates of smartphone shipments for a select number of vendors. []