Category Theory

How much will the new iPhone cost?

The answer, regardless of when you ask, is: The same as the current iPhone.

Of course, this is the answer to the question of what will the average new iPhone cost. The average selling price (which combines the revenues and the volumes of all units sold and is reported every quarter) has not varied very much since early 2008. To the degree that there is variance (between $600 and $700) it is due mostly to seasonality and reflects a mix of more expensive units during the launch quarters and a cheaper units during later periods when the product is older and due for an update.

The graph below shows the average selling price as a dashed line and the corresponding prices of individual product variants available for sale in the US during the same time frame.[1]

The graph shows a high degree of consistency of pattern: Every year a new iPhone is launched which replaces the one launched the year before. The older product is still offered at a reduced price. Price brackets are very firm and set at fixed intervals about $100 apart.

A few minor changes in pattern over the years can be observed:

  • The original iPhone price changed due to a shift in subsidy model shortly after launch.
  • An increase of $50 mid-2011 when the iPhone became available unlocked.
  • Every three years a new, higher, price bracket is introduced, with a  doubling of maximum memory capacity.
  • The iPhone SE was introduced at a slightly lower price.
  • The last year saw a slight increase in the highest price.

The overall pattern looks like a staircase with a widening price range where the lowest price remains constant and the upper price rises every three years by $100.

The “floor” of the range is a consistent $400 while the “ceiling” has expanded from $700 to about $950.

This year’s ceiling is due for the fourth leg up and if the pattern persists, we should expect it to reach $1100.

This iPhone staircase has been built over 10 years and I don’t see it changing over the next three. I therefore drew the blank box over what I thought would be the price range from now until late 2020.

This is what I call the staircase model of Apple pricing. The staircase model must be understood in combination with the flat iPhone average price as the product matures.

As the product matures the user base grows (to nearly 1 billion today). Later buyers will opt for the lower price points, but the availability of higher, more aspirational models (sustained by the brand) means that a minority will gravitate upward, mainly because they can. This ensures that although the median and mode of the price trend downward, the average price stays the same.

The flatness of iPhone pricing is also to be understood in combination with the flatness of Mac, iPod and iPad average pricing (shown below)

The technique of preservation of average price seems to be in effect across Apple. In other words, the evidence suggests that Apple prefers to keep average pricing for all products constant. Individual variants are priced so that, as the category matures, the changing mix leads to consistency in price ownership.

Thus the iPhone can be seen as controlling the $650 point, the Mac $1200, the iPod $200 and the iPad $450. This pricing signals the product’s value and the value of the brand.

The signaling is not just to buyers but also to competitors. Ownership of price forces competitors to occupy adjacent brackets. This process begins at launch: the new Apple product is introduced in what is perceived as a premium stratum[2] thus the reaction from competitors is to “undercut” it. But, as Apple climbs the price staircase, preserving the floor, it keeps competitors bunched up at the bottom. Competing in the same brackets with Apple is futile as other brands can’t sustain the perceived premium position.

The result is a remarkable consistency of average pricing which, coupled with a remarkable consistency of competitive positioning, coupled with a remarkable consistency of customer satisfaction and loyalty, leads to a remarkable predictability of cash flows and ability to invest in new product creation..

Apple is thus quite easily understood as a remarkably consistent consumer products business. The only surprise that remains is how long it takes for that understanding to propagate.


  1. Prices outside the US vary depending on duties, taxes and currency hedging but generally are based on the US price []
  2. See for example the pricing of the new HomePod []

Other Products

From the way Apple reports its revenues you might think that the company has several operating segments. There are the iPhone, the Mac, the iPad for which units and revenues are reported. Then there are Services and Other Products for which we have revenues only.

Services is a collection of all non-hardware revenues and is (finally) being recognized as a non-trivial business. With reported revenues of $26.6 billion in the last twelve months, it’s big enough to be a Fortune 100 company and set to double in four years.[1]

That leaves “Other Products” which now becomes the revenue segment that is  “most likely to be ignored.” This segment had revenues of only about $11.5 billion in the last 12 months which would place it at only a Fortune 245 ranking, equivalent to a Toys “R” Us or Biogen. How should we value Other Products?

Other includes many hardware products including iPod, Apple TV, Beats, Apple Watch, AirPods and, soon, HomePod. Each is a significant product, with Watch probably the largest single contributor. But since we don’t have specific unit numbers, we are left guessing at the contribution of each.

The Watch itself has been a point of scrutiny as it could be initially teased out of the mix through an observation of the before-and-after launch vs. trend-line as shown below:

This separation of Watch became harder to discern after the launch of AirPods. Though they are still very hard to obtain, they might be “moving the needle” by now with a contribution that would muddy the Other category further. Same with updated Beats headphones.

  1. Although a non-zero business, the valuation of Services continues to confound observers who cannot separate it from the hardware businesses it attaches to–which themselves are considered near commodity value–thus paradoxically valuing the overlying asset of Services near or precisely at zero. Incidentally, Facebook is Fortune 98 at $27.3 billion and it is also one of the top 5 largest business by market capitalization. []

The Genealogy of the MacBook Pro

I was an early user of the first MacBook Air. When that product was launched I saw in it something different: a dedication to a new measure of performance: thinness and conformability. The key image used to launch the Air was the laptop sliding neatly into an inter-office envelope. The implication was that the laptop does not need to have its own special “laptop bag”. It could fit into any bag. Users would be able to slip it into all manner of new contexts. It sought to compete with computing non-consumption.

The Air was launched by Steve Jobs in 2008 and was almost universally panned. It was considered underpowered and the dedication to thinness was seen as irrelevant to what consumers wanted. The stock price fell.

The product went on to become Apple’s most popular laptop. It still is. It grew the base of Mac users to over 100 million today.

For the same reason, I was an early adopter of the newest MacBook Retina. The even thinner new MacBook was spectacularly thin. It was smaller than an iPad. It had no ports except one USB-C and a headphone jack. It required dongles for physical connections. It had a new keyboard that barely registered movement and it had a new trackpad that did not move at all but played mind tricks to make you think it did.

As I used it over the last year, I became used to it. It was not my only laptop. I had an older 15 inch Pro, but over time I came to use the MacBook Retina exclusively. I thought I could not do “real work” with it but I managed. I got used to the keyboard. I got used to the trackpad. I got used to the need for a dongle to connect a display. But these challenges were more than offset by delightful improvements. I was delighted by the small power brick and the ability to use any USB power to charge it. I was delighted at the all-day battery life which meant I would charge it the way I charged my Phone: at night.  I was delighted that I could use it in places where I could not use a laptop: on any airplane tray, stowing it in the seat back pocket. And I no longer cared what bag I had for my computer. It did not make me productive by completing tasks more quickly. It made me more productive by letting me be do things when and where I otherwise couldn’t. I love my MacBook.

Now Apple launched a new Pro Mac laptop.The new Pro laptop has the same (slightly improved) keyboard as my MacBook. It has the same (larger) trackpad as my MacBook. It has the same (but more of) USB-C port.  It has something new called a Touch Bar which puts function keys into a touch screen but mainly it feels like a grown-up version of my MacBook Retina. It’s faster too.

Overall, the new MacBook Pro feels to me like an evolution of the MacBook of 2015. I remember at the time thinking that this baby MacBook is probably the wave of the future: the new keyboard, new trackpad, new thinness, new USB-C, deprecation of other ports. These required enormous engineering efforts and it would be silly to leave them on only one model. In any case, from where I was standing all these were “better”. Not along the previous definition of goodness but along a new definition: making the computer more conformable and easier to put into use in more places. The very ideas that drove the development of the Air of 2008. Indeed the very idea that drove the development of laptops since the 1990s.

What’s fascinating to me from a product management point of view is that the groundbreaking new features which re-define the product’s direction are not designed to trickle-down from the top-of-the-line to the bottom, but rather that they trickle-up. The low-end product gets the updates first and the the Pro products adopt them later.

And we can even trace this genealogy of features through to an even “lower-end” product: the iPhone. The iPhone “ethos” of usability and conformability has permeated through to the Macs, starting from the lowly and advancing to the top of the range. The question of where Apple’s design direction comes from can be answered: the bottom.

All this is consistent with a strategy of “low-end evolution”. A way to defend the low-end rather than abandon it in pursuit of what the most demanding customers are asking for. Rather, Apple seeks to incubate a new performance measure. Re-defining goodness.

So is this new MacBook Pro a worthy successor to the MacBook Retina? My attention is riveted by the Touch Bar. It seems a completely new way of interacting but requires discovery and practice. What Apple has to achieve is allow the product to work well without it but also to allow users to evolve their experience with it. Over time we got used to trackpads instead of mice (many resisted the change). We got used to a different, small travel keyboard. We got used to new ports (HDMI vs. VGA) and we got used to wireless everything (it may seem easier, but remember having to always enter credentials vs. plugging in a cable).

The touch bar is a new UI metaphor. It will take time but it is looking at me right now, winking.

My favorite questions

  • What is an innovation? What is the difference between ideas, inventions, novelties, discoveries and creations?
  • What is a disruption, formally-speaking? Also, what is it informally speaking? Why the distinction?
  • What is Performance (or P-space)? How does Performance relate to utility, quantity, price and other microeconomic concepts?
  • What is a new market? How do we distinguish a new industry from a new market.
  • Do firms matter? Are firms causal to economic growth?
  • What is the role of technology in innovation? Can we innovate without technology? Can we fail to innovate with technology?
  • Do firms have life in the biological sense? If not how do we measure their existence?
  • What are entrepreneurs? What do they do that’s different than what managers or business leaders do?
  • How do you navigate P-space? How do you think about your business and economy in performance terms.
  • What is a diffusion? Is adoption a good measure of technological progress? What is the connection between diffusions and disruptions?
  • How does Capital map to P-space?
  • How can we maximize economic growth? Is there a growth algorithm? What is the role of government policy in growth? What about the role of the creation of customers?
  • What is the difference between consumption and non-consumption? What is non-production?
  • What are the known forms of disruption? Can there be forms we don’t yet know about?
  • Why do customers buy solutions? Understanding the causes of purchase decisions.
  • Are profit motives necessary for growth? What motivates individuals, if not profit?

If these questions are of interest to you, join the conversation at

Tesla and SolarCity: Straddling the modular/integrated divide

A merger is the result of two entities in the same business joining forces. It is usually justified through “synergy”, a euphemism for removing redundancies from their unity. Arithmetically, the desired outcome is that the resulting organization should be smaller than the individual parts (which is desired if the available market is shrinking.)

An Integration is the answer to the question of “Why two companies in different businesses are better off together.” Arithmetically, it suggests that the proposed sum is greater than the individual parts.

The spin-off is the response to a situation where one company houses two unrelated businesses.

For completeness, we can define an acquisition as the purchase of an unequal entity in order to improve the value of the acquirer.

The logic of any of these is that there is a disequilibrium which offers an opportunity to those who can exploit it. What the analysis fundamentally assumes is that the status quo of firm boundaries is not optimal.

Much of the measurement of the balance in the equations assumes that the overall industry is stable and that the problems (technical or market) are largely understood and that there is no learning that needs to happen. Boundaries need to be re-drawn because they are imperfect. Boundaries may have grown imperfect for many reasons: founders/owners were separate, markets and technologies evolve at different rates, resources are inflexible, processes are entrenched and values are outdated.

However, all this arithmetic can be safely thrown out of the window if there is a new industry in the making. If there is no balance to begin with because there is an entirely new problem being posited. That is, not only do we not know the answers to technical or market questions, we don’t even know what the right questions are.

When looking at the history of industry creation, the breakthroughs were always about the discovery of the right questions to ask. The early automobile industry was a scramble for solutions to a huge number of technical and market questions: technology, business model, infrastructure, usability, customer segmentation. From 1886 until 1915 there were many grand experiments with thousands of automobile firms springing up.[1]

Early computing, internet, mobile and consumer durables industries went through similar periods of grand experimentation. But the breakthroughs occurred when someone was able to ask (and subsequently answer) a question that nobody had asked before.

Henry Ford asked, “What would enable everyone to have a car”. The result was  not a better car but a better production system.

Steve Jobs asked, “What would enable everyone to have a computer”. The result was not a faster computer, but a more approachable computer.

Akio Morita asked, “What would enable young people to have their own music”. The result was not a better audio quality but a smaller audio player.

Kiichiro Toyoda asked, “How can a car be built without faults”. The result was not a bigger factory but many smaller ones.

Jeff Bezos asked, “What would cause people to do their shopping online”. The result was not a lot of unique sites but one infinite one coupled to a logistics and computing service.

Having great taste in questions turns out to be the principal quality of the successful industrialist: The creation of economic value and power well beyond the boundary of the firm itself.

When the correct question is asked, resources can be efficiently marshaled to answer it. The wrong or incomplete question leads to inefficient resource allocation. And so the architecture of the solution can be built. If the new problem statement is a technical one then an integrated implementation is required. If the new question identifies non-consumption then a modular implementation is required. Each of these approaches suggests different customer sequencing strategies and different application of resources and processes.

There is no right architecture for industry creation. What matters is asking the right question.

So is Elon Musk, today, asking the right question?

  1. Estimated 3000 world-wide []

Missing the boat in music

When Spotify and Pandora were starting their streaming services many were quick to point out that Apple was about to be disrupted. The future, they said, was streaming because (young) people could not be bothered with ownership of music and the limitations of a personal collection. Who would want to pay for a few hundred songs when they could listen to millions for free?

This perception continued and became more vocal over the years. Seven years in fact. Spotify collected 20 million paying subscribers while Apple did nothing. Pandora grabbed 80 million active listeners and possibly 4 million paying subscribers while Apple did nothing. The boat had sailed and Apple was not only not on it but oblivious that there was a boat in the first place.

At first Apple launched a half-hearted streaming service and then a paid service finally showed up with Apple Music in mid 2015. Since then the company managed to add 15 million subscribers. A tiny number compared to the 900 million iTunes accounts it had reported a year earlier. Pathetic. The number of music subscriptions relative to iCloud accounts, iTunes accounts and active devices is shown the the graph below.

Screen Shot 2016-06-20 at 3.30.38 PM

It may be paltry compared to the count of users Apple may have in total, but how does a 15 million user base in 1 year compare with the growth rate for the incumbents Spotify and Pandora?

The following graph shows the ramps for Spotify, Pandora and Apple Music since their moments of market entry. The accumulation of users by Apple looks to be the fastest yet.

Screen Shot 2016-06-20 at 3.31.02 PM

This is, of course, due to a maturing use case. Apple did not have to educate people to the notion of music as a subscription. It could just announce it and users would discover it and just sign up, especially if they were already iCloud subscribers and had a credit card attached to their iTunes account.

But that’s the whole point. Apple did not have to move first in music subscriptions. It did not even have to move second or third. When it did move it could just skim the market and add to its already healthy Services revenue (orange line in the first graph above.) Missing the boat in music in this case meant capturing all the value quickly and with minimal expense.

Fundamentally, Apple’s entry into music subscriptions was a sustaining effort. Streaming sustained Apple rather than disrupting it. The difference may seem merely one of semantics, but it is also the difference between life and death for a challenger. Meaning matters.

This is a cautionary tale for those who would pronounce every new idea as “disruptive” to Apple or anyone else on the basis of novelty alone. The tests for disruptiveness are easy enough and it behooves the analyst to apply them before dropping the d-bomb.

The Next 40

In Apple’s first 40 years it shipped 1,591,092,250 computers[1].

This shipment total is higher than any other computer company in its first 40 years. Actually there are no other PC makers that are 40 years old. One computer maker (IBM) is older but they only sold PCs for 24 years and what they still sell they don’t sell in high numbers.

That does not make it the top seller in a given year. Looking at only the Mac, Apple’s traditional form factor personal computer, Apple has only returned to the top 5 last year. Only if including the iPad it was the top computer vendor in 2011 and including iPhone, it was first in 2009.

Screen Shot 2016-03-28 at 11.36.56 AM

After having a 40 year run and after selling more computers than all American and Japanese computer companies put together, how should we think about the next 40 years?

First, clearly Apple shifted from being a “computer company”. It has already changed its name to exclude the word “Computer” but that has been interpreted as saying that it sells devices (which happen to also be computers.) The word “computer” is already archaic. We stopped using computers to compute in the 40s. We used them to make decisions, keep track of things, speed things up and then to communicate and then to entertain.

Devices, it seems, are what customers mainly use to do, well, everything. Computing has grown to encompass most activities we engage in. So is Apple then a device maker?

  1. including Apple II, Mac, iPhone, iPad and iPod touch; excluding Apple Watch, Apple TV and other iPods. Includes Q1 shipments estimated at 63,597,000 Macs, iPhones and iPads []

Priorities in a time of plenty

How Apple is managed is one of its enduring mysteries. The idea that a company with $235 billion in sales is managed with a single P/L[1]  is fascinating in many ways. Not least of which is how it allocates resources. The fundamental question of which great idea gets to be funded and which great idea gets to be ignored is the core of every manager’s dilemma. The Apple problem is at scale  when each decision’s consequences are so momentous. In the case of Apple there are so few projects that reach the market and their impact is so great that one wonders how they can be sure they are doing the right thing.

Conventionally, product development is filtered through a sieve of  metrics, market sizing and impact on top/bottom income lines. These “financial” measures of success are considered prudent and optimized for return on equity (also known as the maximization of shareholder returns).

But this can be a toxic formula. The financial optimization algorithm always prioritizes the known over the unknown since the known can be measured and is assigned a quantum of value while the unknown is “discounted” with a steep hurdle rate, and assigned a near zero net present value. Thus the financial algorithm leads to promoting efficiency at the expense of creation. Efficiency may be the right priority when times are difficult and resources are scarce but creativity is the right priority in a time of plenty. And abundance is what being big is all about.

To allow for some creation large firms create divisions. Some divisions are tasked with “core products” which are measured by a set of firm metrics and some are tasked with “emerging products” which are given a set of loose metrics. This leads to obvious resentment and war between divisions when resources need allocating.

Ominously, the core divisions tend to always win. At the root of divisional power struggles are measurements–the roots of financial metrics. Managers fight with data. “You can’t manage what you can’t measure” they’re taught. But if you have something that can be easily measured and something that is difficult to measure, won’t the easily-measured be managed and the hard-to-measure be ignored?

There is a general principle at work here: Managing by measurement is fraught with the pitfall of measuring the wrong thing. Making sure that you’re measuring the right thing becomes the value-adding role of the manager. A role that is increasingly being neglected.

The mass phenomenon of measuring the wrong thing because it’s the easiest to measure is called “financialization”. Financialization is the process by which finance and finances (rather than creation) determine company, individual and society’s priorities. It comes about from an abundance of data that leads to fixation on what is observable to the detriment of awareness of hazards or obstacles or alternatives. This phenomenon is more likely when the speed of change increases and decision cycles shorten.

Financialization is creeping into all aspects of society and the extent to which it infects companies is the extent to which they suffer from early mortality.

So is Apple avoiding financialization? How can anyone avoid the tyranny of mis-optimization?

The unified P/L might be a clue. It obviates the need for divisional rivalry and power-based or financial politics. Without divisional P/L, management can be organized functionally with the obvious benefit of de-politicization. The singular P/L does create another problem however: the absence of an alternative resource allocation algorithm centralizes the decision. By centralizing decisions at the highest level, few decisions can be taken and that means each decision has to be right more often. We swap a distributed but financialized process for a central but capricious one.

So how is the central decision process made fair? What guides the allocation process?

  1. Profit and Loss statement is an income statement usually applied for a subset of a larger company which allows subdivisions to be managed individually. []

Why does Apple TV deserve to exist?

Since writing Peak Cable six months ago, surveys, research and analysis have contributed to the themes of unbundling the TV package. The data under scrutiny is, as usual, the data that can be gathered. Unfortunately the data that can’t be gathered is where the insight into what is happening may lie. For instance, what matters for an entertainer is not how much you’re watched but how much you’re loved. Measuring love is done poorly with data on payment for subscriptions.

A better proxy might be time. Liam Boluk makes the point in his post that “focusing on cord cutting or even cord shaving largely misses the point.” Don’t follow the dollars, he says, follow the time or engagement. “Relevance” is what matters.

His data shows how linear TV has fallen by roughly 30% among the young (12-34) in the last five years. The trouble for the TV bundle (and advertisers) is that this is the most culturally influential group. They are also the group which will grow into the highest income group over the next decade. And this group does not love TV.

We have to remember that it was the youth who drove early radio, TV and consumer electronics markets. Those young are now the old which still cling to the old media, served by companies that grew old with them. They are the “high-end” customers with which Nielsen itself has grown. They have the most money to spend and they are the targets for the ads[1]

Paying $150/month to watch incontinence and erectile dysfunction ads—at a time not of your choosing—is preposterous for the young. They may like the programs but not the way they are packaged, delivered or interrupted. They are not smarter than their parents. They, like their parents, took to new technology more quickly. What makes the technology new is also what lets its makers separate the content from its delivery. These new technologies allow “modularizing” or unbundling that which was was integrated/bundled and thus allow their developers to focus on the customer’s real jobs-to-be-done.

Unsurprisingly, incumbents have responded by throttling access to original programming–an asset over which they still exert influence as distributors. Netflix and Amazon are taking the path of responding with their own blockbuster productions. Although Silicon Valley has more capital to deploy than Hollywood  this battle of attrition is by no means one that incumbents will win, and generally, it’s not going to be pretty.

Tweaking the nose of the incumbent might not be the way to establish asymmetry. The better tactic may be to help the system survive but offer a “short-term alternative”. This is how iTunes took on and won Music. When Napster and file sharing created a clear and present danger to the industry, Apple’s approach of a controlled alternative allowed the industry to finally move to a digital download model.

  1. no longer the Pepsi generation, they are the Depend and Viagra and pharmaceuticals generation []

What it means to be great

What makes a product great? I struggle with this question because being great is not just being better than good. Greatness is to goodness as wisdom is to smarts. Just like getting smarter and smarter may never make you wise, getting better and better does not mean ever becoming great.

Greatness is transcendental. It’s hard to pin down. It inspires debate. It divides as much as it unites. It creates emotions as much as thoughts. It builds legends. It engages and persists. It lives in memory and penetrates culture. It implants itself in our consciousness persistently, to linger and dwell in our minds while we are bombarded with stimuli.

We use words such as “iconic” or “epic” to capture this permanent “mental tattoo” that we get from greatness. As important as this notion is, we struggle to define it. We don’t even have a proper word for it. Perhaps it is what art tries to be, or what drives us to achieve beyond surviving. As vague a notion as it may be, it is one of the most important notions I can think of. Greatness is the cause, perhaps, of our ascent.

In the absence of any measurement of greatness, how do we spot it?
It may just be down to “knowing when we see it”. But not everybody does.[1]

  1. Language is another indicator. When people attach brands to entire categories we get an indication of ubiquity and permanence. As much as the brand owner fears it, the genericization of a trademark is very probably an indication of greatness in consumer products. Aspirin, iPod, xerox, jell-o and app are examples where brands became words. []