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One of the more interesting numbers reported by Tim Cook during the last earnings conference call was the total payment to developers during the fourth quarter. This is the first time that Apple reported a quarterly payout to developers.
The figure was $700 million and it was mentioned in reference to the total payments to date of $4 billion. The $700 million is interesting at least because it gives an idea of what Apple obtained in total sales of Apps. As it retains 30% and pays 70% to developers then it follows that it retained $300 million and the total “gross” sales was $1 billion in Q4.
The $700 million is interesting for another reason. The $1 billion in gross income can be tested against another set of data. As the countdown has already started, sometime in February Apple will report 25 billion total apps downloaded. The last such milestone was October 4th when it reported 18 billion downloads. Assuming that they will cross 25 billion by February 25th, then we can obtain an estimate for the download rate per day: about 48.6 million apps/day.
That is a figure we can plot historically:
Tim Cook on the 55 million iPads sold to date:
This 55 is something no one would have guessed. Including us. To put it in context, it took us 22 years to sell 55 million Macs. It took us about 5 years to sell 22 million iPods, and it took us about 3 years to sell that many iPhones. And so, this thing is, as you said, it’s on a trajectory that’s off the charts.
via Transcript: Apple CEO Tim Cook at Goldman Sachs – Apple 2.0 – Fortune Tech.
That gave me an idea. Here is a plot of each major computing product Apple sold throughout its history shown as a cumulative total since product launch.
There are several methods I turn to when estimating device sales.
Top-Down Demand analysis
The first is to look at so-called top-down views of the demand. This method takes a view of the overall phone market and assumes share for smart devices and, further, shares for individual platforms. There are several estimates out there. The most recent is Ericsson’s Traffic and Market Data Report, released November 7 2011.
It concludes that in five years’ time mobile subscriptions will reach 8.4 billion of which smart devices (incl. tablets) will total 6.2 billion. As iOS has approximately a 250 million install base at end of 2011 and as the total base from Ericsson’s estimate for 2011 is 1.44 billion then Apple’s share is approximately 17%. If we assume that Apple will be able to increase smart device share to 20% (3 percentage points in five years) then by 2016 Apple will need to have 1.24 billion iOS subscribers.
Assuming that half the installed base upgrades every year and Apple adds devices required to reach the install base necessary (1.24b or 20% share) leads to the following unit sales projection (I’ve added 2008 through 2010 actuals and 2011 estimates based on my own current Q4 projections).
This Approach yields an estimate of
Prior to the third quarter earnings report I discussed a part of Apple’s balance sheet related to tangible assets (Plant, Property and Equipment). In a series of three posts I covered the Land and Buildings (data centers and campuses), Leasehold Improvements (store investments) and Machinery, equipment (tooling and factory equipment as well as servers.)
The data shows that there is a consistent pattern of investment in pursuit of strategic goals: extending reach into distribution through stores, extending services through cloud infrastructure spending, and extending control over the supply chain. One story that still remains largely untold is how much does Apple know in advance what it will spend.
In other words, can we tell if Apple can anticipate demand and does it plan its expansion well in advance?
For an answer, the 10 K report comes in handy. Published only once a year, this document shows some data that is not present in any other public release. For example, Apple makes forecasts for capital spending.
But first, an update.
I began comparing Microsoft and Apple’s financial performance with a review of “top line” or revenues by product lines over a four year period.
This post is about the “bottom line” for the same companies and products.
Before I jump in I would like to make sure there is no confusion about the terms. I will be comparing “operating income” as a measure of “bottom line”. This is a common way to compare the profitability of companies because it excludes taxes and interest income. These non-operating expenses/income can distort a comparison of performance because they can be the result of investment activity or changes in tax law or where the company is domiciled. One should not make judgements of comparative performance on those non-operational bases.
Another challenge is that some companies report operating income by division while others don’t. We can usually compare overall operating income but usually not on a division or product-level. This is the challenge I will try to overcome in this analysis between two very different operating models.
The first chart shows Microsoft’s Operating Income by Division as reported by the company.
Each area represents a business division. Note some are showing negative income (losses).
Apple’s valuation has been discussed several times on Asymco. Apple’s relative valuation in terms of P/E ratio has not improved since the recession despite an acceleration in financial performance. As Apple seems to be getting punished for growth, we have to also ask if it is the only one.
When looking at valuation from an institutional investor or financial analyst point of view, the most common methodologies are discounted cash flow (DCF) as well as comparable company multiples. Most often, a DCF valuation is performed and cross-checked with comparable multiples. The justification for using comparable companies is the exposure to the same market dynamics including, for instance, market growth and profitability. So to understand this perspective, let us focus on a peer group valuation by looking at the average P/E multiples for the calendar quarters 1/2005 to 1/2008.
Nearly all the data on smartphone shipments is now available for the second quarter 2011. Some fragments are still not public, including ZTE and Huawei (and any others) shipments. We also have estimates for the various platforms including an estimate for Windows Phone and Bada (though not for WebOS).
This allows the following chart:
Using the traditional color scheme which separates “integrated” from “modular” vendors, the chart shows overall volume growth and how the volumes are split among vendors.
The market grew at about 73% y/y and 50% compounded over three years and 9% sequentially. The y/y growth rates for individual vendors were:
During the last WWDC Apple revealed that there were 54 million active Mac users. If we look at the history of the product we can see that it took about 5.5 years to sell 54 million Macs. If we assume therefore that the average lifetime of a Mac is 5.5 years and knowing that Mac sales generated revenues of about $73.8 billion then we can estimate the average revenues/year/mac user: $250.
Repeating the exercise with 180 million current iOS users who purchased about 200 million iOS devices and assuming a life span of 3.5 years gives the average revenue/year/iOS user of about $150.
These are recurring figures. If we assume these users are loyal then they will likely spend this amount indefinitely and each additional user will be worth a similar amount.
So, for example, if we assume that the number of Mac users reaches 100 million then we can also assume that they will generate about $25 billion/yr in recurring revenues.
Likewise, if we extrapolate growth of iOS to 500 million users then we can assume they will generate $74 billion/yr in recurring revenues.
Adding these together gives a potential recurring income level of $95 billion/yr for installed base alone (excluding iPods, Peripherals, iTunes apps/songs, and Software sales.) Today that figure is about $40 billion/yr. 
Interesting valuation exercises can follow.  It would also be interesting to perform a similar analysis for other vendors/platforms.
- Note that actual sales are considerably higher than this figure as new customers are added. These figures should be considered “baseline” sales.
- Thanks to a kind reader for suggesting this line of analysis.
According to 148apps.biz, the App Store has seen over half a million apps since inception. The number of available apps, according to Apple, is now 425k. (148apps claims 402k apps available in the US store.) The history of the App store catalog is shown in the following chart (showing both US and World-wide measures).
In an interesting new post by Appsfire, APPtrition – or why app store size does not matter that much… Ouriel Ohayon makes a good point: available is very different than accepted. When comparing catalogs it’s important to distinguish between these measures. Apps are published and then unpublished for various reasons. He calls this app attrition and details the reasons it might happen.
What makes this interesting is the contrast between attrition rates on Android’s Market and those on Apple’s App Store.