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.
While a lot of the credit for Apple’s success is rightfully assigned to the iOS franchises, the OS X business has more than quadrupled in five years. This has happened without drastic price fluctuations. Neither holds for the overall PC industry which has seen both volume and sales decline while prices have eroded along with profitability. On top of that, growth has nearly evaporated.
Even with this success, as a percent of total value created, the Mac accounts for a mere 13% of Apple’s profit. Including software as part of the OS X franchise implies that OS X is enabling about 20% of Apple’s profits.
iOS, on the other hand, is accounting for more than 75%. These two platforms combined amount to 96% of Apple’s profits (up from 50% four years ago).
Yesterday I wrote about the growth in Android vs. iOS. The two platforms’ can be said to be enjoying healthy growth, though in markedly different patterns.
The consequences of this growth are being felt across the telecom and computing industries. There are almost 300 million platform devices in use today that were not even dreamed of three years ago. Operators are transporting petabytes more data and dozens of phone vendors are scrambling to meet demand. There are tens of billions of app downloads and hundreds of thousands of apps being sold by tens of thousands of new app publishers. There is a lot of hay being made while the sun shines.
But what about the poor saps that are funding the development? What about the shareholders of the companies behind these platforms. Are they being rewarded or punished?
The following charts tell the story:
As iPad shipment volumes increase and as the iPod touch becomes the de-facto iPod, it’s time to look at the overall split between iOS devices.
I will focus the discussion between iPhone and iOS “others” because I believe the two categories differ greatly in terms of their positioning and market strategy due to the different channels.
The company does not provide iPod touch units shipment data but it can be estimated that, based on overall iOS numbers released in September, iPod touch represents approximately 50% of iPod units sold.
If we put all we know together about volumes, we have the following chart: