Author: Horace Dediu

In my last post I asked if tariffs, antitrust remedies, distribution dissatisfaction and non-iOS competition make any impact on how customers perceive the company. Let’s begin with tariffs.

Broadly, tariffs are unpredictable and politically arbitrary. The greatest harm may come not from the misallocation of capital among nations but from the inability to plan and thus the non-allocation of capital altogether. A cessation of investment is a recipe for stagnation if not poverty but it’s not a management challenge. In most situations it behooves every manager to do nothing. Therefore it’s no more interesting to devise a strategy for tariffs as it would be to devise a strategy for volcanic activity. 

But still, how does it affect the relationship with the customer? One could argue that tariff-induced price increases might cause a decline in demand but there are always going to be alternatives for consumers. Let’s not forget that tariffs are being offered as punishment for US customers only and the US is less than 40% of Apple’s business (“Americas” is about 42% and that includes Canada, Mexico, Central- and South-America.) The rest of the world has already been punished to varying degrees with higher prices due to customs fees, value added and other taxes. This is why there was a thriving smuggling pipeline from the US to rest-of-world for as long as Apple has been in business. 

The smuggling of products across borders without payment of taxes on trade is called the grey market and is neither new nor small.  The grey market for electronics is estimated to range from 6% to 8% of the global market, worth up to $60 billion. Some studies suggest that 13% of global consumer sales involve products sold outside the manufacturer’s intended market with the electronics segment above 14%. The share of Apple sales generated through grey channels may be somewhere in the upper part of that range.

Even 10% of Apple sales being grey market could come as a shock to many but it shouldn’t. Many Americans may be unaware of this because the US has been the source of grey exports with couriers smuggling products from there to almost every other location on earth. This is mainly because the US is among the least taxed consumer products markets.   

Perhaps the pipeline will soon reverse direction. 

American couriers queuing in foreign Apple Stores hoping to bring home some “duty free” iPhones or doing it for friends, family or for a fee is certainly foreseeable. Prohibition era alcohol smuggling was a vast industry for the US, mainly from the Caribbean and Canada. Drug smuggling has been a vast industry since then. Consuming contraband is therefore not beneath US consumer dignity. Organizing this on a large scale enables criminal gang formation and it might appear harmful for a brand to be associated with such activity. But again, reflecting on this historically, it does not normally detract from the brand that it is the subject of smuggling. Marlboro, Dewars and other toxins retained their cachet throughout their smuggling to and from various markets. Firearms, tobacco and alcohol are as desirable now as they were when constrained to the point of exclusion.

When I was young it was common to see Levi’s jeans and boxes of American cigarettes being used as currency behind the Iron Curtain and nobody would argue that those brands suffered as a result.

Today, even with higher prices, satisfaction among non-Americans is not worse than with Americans, taxes and governmental pilfering notwithstanding. In other words, prohibitionism does not work in eliminating demand or brand value. Tariffs are a mild form of prohibition and therefore their value impact is quite limited.

It’s not unusual to see articles consisting of lists of reasons why Apple is facing an existential crisis. Agonizing and hand-wringing about Apple been a meme for decades, so much so that it had its own web site, The Apple Death Knell counter and the “Pray” for Apple imagery was a thing since the 90s. The original article from June 1997 offered 101 tips on saving the company starting with outsourcing hardware or scrapping it entirely.

Although the imminence of death has always been persistent, what’s changed over the years were the causes. There are far too many to recall or enumerate but I have through personal recollection and pattern recognition grouped them roughly into three categories:

1. Irrelevance due to low market share, i.e. insufficient network effects for its platforms which will eventually drive users away. This is fundamentally a size problem.
2. Insufficiency in capital/resources/talent/management. This includes the death of Steve Jobs, the departure of various other managers and historically the low spending on R&D. This is more qualitative but still fundamentally a problem of being too weak.
3. Externalities including but not limited to: law suits, regulations, taxes, technology standards. This includes everything from the absence of the Beatles in the iTunes store to confiscation of assets or extortion by governments. Extreme versions are antitrust cases alleging monopoly status. This is a problem of being too big or too strong. (Contrast with the first two categories)

For instance, during the last Apple Investor Event, I highlighted a typical article citing a list of problems for Apple. It was Titled “5 problems facing Apple it won’t talk about at is April event”. Published in August 2024 it cited the following:

1. Maintaining profitability. Citing a drop in operating margins in 2020(!) the problem was stated as a need to maintain momentum.
2. Antitrust regulation. Citing EU and US investigations against Apple and other Big Tech companies. Money quote: “reports have surfaced that several tech companies in China are actively testing ways to circumvent Apple’s new privacy update”).
3. Lawsuits in general, Epic trial in particular.
4. A lack of diversity in the management team. Essentially, insufficient DEI.
5. Competition. Google, Blackberry, Dell, Fujitsu, Microsoft and Samsung are cited.

When I read this I thought it must have been AI generated (hallucinated more likely). The dates did not make sense (August publication predicting an April event) and the competition cited was obsolete (Blackberry? Fujitsu?). It was a random list of Apple news framed as problems. Rather than try to refute them, I realized that it did not matter. The objective of the author was not to illuminate but to discharge something, anything, as long as it was negative.

Since last August a lot has happened. A new US administration, a new set of problems. Judging by the share price and news flow, Apple bashing is once again in vogue. (Incidentally, the stock price reached an all-time-high in December 2024 at nearly $260/share, a substantial increase from $170 or so six months earlier.) Today everyone and their editor is jumping into the scrum writing lists of Apple problems.

The pattern however seems a bit different this time. Almost all the catastrophes Apple has are externalities. Let’s try to enumerate them (inspired by Bloomberg.)

1. Tariffs. Consequences include presumably negative impact to company’s operations, product development and device prices.
2. Antitrust. A US Department of Justice lawsuit for allegedly anticompetitive practices. Similar actions by the European Union, South Korea, Japan, India, etc.
3. Lawsuits. Apple must stop taking a commission on in-app purchases and subscriptions paid via the web. Epic again.
4. Distribution deals (Google antitrust). The threat of losing a $20 billion-a-year deal with Google for default search placement.
5. AI delays: the risk of falling even further behind its tech peers
6. Competition in China.

What these examples seem to share is that, except for the AI execution, they are externalities and thus of the third category. They are therefore problems related to being too successful.

Tariffs are a problem because Apple relies on massive scale and thus requires integrated production which creates concentration in production centers which are difficult to redeploy. Antitrust is a problem because Apple is too big and thus dominates developer distribution. Lawsuits center on having too much control—related to antitrust. Google antitrust remedy forces a decline in distribution revenue for browser search—a predicament coming about Apple’s enormous leverage vis-a-vis Google. Being so big means there is only one way to go: down, hence Chinese competitors gaining share. Lastly, AI execution problem is more Category 2 problem but would not be an issue if Apple did not insist on Privacy for its customers, something which caused much of its success with customers that it got too big.

Incidentally, profitability is now higher than ever, top line growth is consistent, bottom-line growth is even faster, the company is guiding growth in-line with current trajectory, the number of customers is at a new record, churn into the platforms continues, Apple is winning against non-consumption, capital is pouring into shareholder pockets and R&D spending is soaring. Cue the charts.

What the casual observer might note missing from the Doomed listicles is any mention of customer satisfaction, loyalty, acquisition and retention. The things the company actually talks about on earnings conference calls.

Do these externalities of tariffs, antitrust remedies, distribution dissatisfaction and non-iOS competition make any impact on how customers perceive the company?

We’ll discuss this in the next few posts, as the lead up to presentations at ACTIVE: The Apple Investor Conference on Tuesday June 10th, the day after the WWDC25 keynote.

Apple Investors are keen observers of metrics of financial performance. We have to track top line, bottom line and many lines in between. Updates to the data are delivered every quarter through official documents such as the 10K and statements made in conference calls. These data are then analyzed and opinions are formed on the viability, sustainability, and prospects for the company.

The community of investors changes rapidly, with shareholders able to enter and exit with a click of a button. All it takes is capital. Therefore many critics of shareholders as stakeholders point out how fleeting the commitment can be. Though there is skin in the game in the form of committed capital, there is no requirement for staying committed.

This is not the case for another set of stakeholders. In a previous post I pointed out how important employees are to the company and my belief that their commitment is probably management’s greatest concern.

But if one were to sum up the total population of a stakeholder group multiplied by its required level of commitment, there is a case to be made that the most vested community is that of Apple’s developers.

This group numbering in the millions makes an enormous contribution to the prosperity of the company and indeed of the other stakeholders. And they do so through tremendous personal risk. If you are a developer you know this, but perhaps other stakeholders do not. So let me elaborate.

An Apple developer must spend years becoming versed in the developer tools, purchase membership and equipment, navigate getting their software accepted and hope that someone, anyone buys the result. Afterwards, they need to maintain the code and update it frequently as the underlying software and hardware changes.

This adds up to enormous personal opportunity costs. Developing means not doing something else and developing for Apple means (typically) not developing for some other platform.

The benefits can be significant however. Apple publishes the amounts paid to developers. That is part of the graph shown below.

The dark blue area shown as “App Store Billings” includes about 70% paid to developers which I would estimate at about 100 billion in 2023. 

But these are direct payments based on App Store transactions. A great number of transactions and economic activity takes place outside the App Store. That is over $1.1 trillion in 2023. It should grow to over $1.3 trillion this year. 

And then there is AI. As Ben Bajarin and I discussed recently, the integration of AI is shifting the risk/reward equation for developers to include capital spending or monetization of computation itself. 

A lot is at stake. Not only in terms of upside but also downside. Developers need to understand the “state of the union” for Apple as a platform and ecosystem from a financial point of view. Conversely, investors need to understand the degree of dependence and commitment being made by the developers. 

There has been no forum for this to happen. Until now. 

At the first Apple Worldwide Investor Conference ( WWIC ), we will bring together individuals with a stake in Apple’s future—investors, analysts, and developers—to foster a meaningful conversation about Apple’s ecosystem, and a better understanding of Apple as a business.

The event will take place on September 19th, in-person in Boston with limited seating, and via remote livestream globally, where you can watch, ask questions, and discuss, live.

Tickets are available now. Asymco followers can get an additional discount using code asc24.

See you at WWIC—in person or online!

It’s Labor Day in the US (and Canada, though not anywhere else where it’s celebrated on May 1st.) This would be a good time to discuss Apple’s primary challenge. 

Writers whose unfortunate job is to cover Apple inevitably put forward lists of “challenges” faced by the company. It really is not possible to write or speak about Apple without manufacturing one’s own list of problems, obstacles, difficulties, rising competition, inevitable transitions, strategic failures, and the lack of innovation.

For instance, as recently as a week ago, in an article announcing the change in CFO, a pundit noted that “[the new CFO] Parekh’s main challenge will be navigating ongoing antitrust lawsuits. ‘These are challenging times for Apple on multiple fronts’, citing increased regulation, EU scrutiny, and growing competition in China.” Challenging times for Apple. Surely not like previous times which were not challenging at all.

I Googled “challenges facing Apple” and top hit was a list from CNN dated January 25, 2024. The tag line “It’s only a few weeks into 2024, and Apple’s year ahead is paved with trouble.” A discussion of its doom in China is followed by an Apple Watch ban challenging Apple “reputation”. Surprisingly, being behind on genAI and the existential crisis AI will bring only showed up third. Then came “revenue concerns” because of reasons and finally, being a regulatory target around the world rounded out the top five.

Clearly, repeating this exercise every few weeks would allow an entirely new list to be created with a completely fresh dose of dread. As the previous list fades in memory a reminder on your iPhone should get the list generation started on time. [AI only makes this easier.]

But what none of these lists seem to include is what I consider to be Apple’s primary worry. I believe this is the one thing that keeps Tim Cook awake at night. This being the preservation of employee morale. 

As evidenced by what I get as questions and what is enumerated endlessly, what most people don’t understand is that Apple is exceptional because of the combination of culture and talent and not the particular circumstances it finds itself in. Listicles of circumstances are easy to generate but a good management system is resilient to circumstances and indeed anticipates them or makes their own. The thing that Steve Jobs built was a mechanism that converts the talent and dedication of great people into product that is genuinely adored by the people who use it. That mechanism is beyond a set of rules. It’s culture. 

“Build” culture sounds far too vague and simplistic, but the reality in almost all other (large) organizations is that almost all talent is wasted. That primary asset, its employees, is perhaps less than 10% applied to the benefit of users. Much of it is wasted in politics, frictions, pointless disagreements, burning out, and what I call “creative inefficiency”. If Apple could just waste only 60% of its employees’ contributions it would be four times better than average and probably be the most effective company in the world.

Culture is what makes the application of talent effective and efficient. It is the magic sauce. And losing that culture would be the greatest existential threat to the company.

So on Labor Day our reflection should be on how to keep what is now a very, very large organization meaningful to each and every employee. The CEO’s efforts should be prioritized on customers first but employees second (and shareholders at best, third). This means inducing employees to be creative and productive and keeping them in that state of “flow” for the duration of their employment. For top management it’s even necessary to keep their loyalty and dedication *after* their employment ends.

The methods vary and are some of the most secretive aspects of Apple. As I said many years ago, many want to copy Apple’s products but few want to copy being Apple. That is mostly because few even know what Apple is and how it works. Having said that, I would like to put forward some observations on “the Apple way” of management.

1. Provide incentives for employees to stay in the same functions as long as they continue to improve their skills. This means focusing on becoming better at their craft rather than “grooming” them for climbing the corporate ladder. 

2. Preserve a functional organization. Obviously this means avoiding market-driven or matrix org structures.

3. Tap individuals to become managers only if they exhibit management skill. This is far harder than it seems. Few highly talented individuals in a particular area of expertise want to give up practicing in order to become a general manager. 

4. Avoid political in-fighting by maintaining separations between functions and deciding budget allocations through a centralized process. This avoids “empire building” (and its corollary of back-stabbing) through budget and headcount accumulation. 

5. Top management should be deeply aware of all aspects of the business. This means keeping the business fairly narrow, with a short list of products and services. Narrow focus needs to be coupled with a wide base of applications. In other words, pick products and services which have broad appeal but keep their number low.

If you read this correctly, you will note how diametrically opposed this is to the modus operandi of corporate entities. It really is asymmetrical to how management is practiced and that leads to an outsized competitive advantage for Apple.

We’ll be exploring this topic further as part of a broader examination of the regulatory impact on Apple at WWIC on Sept 19th. Hope to see you there.

→ WWIC – Apple Worldwide Investor Conference, Sept 9, Livestream worldwide

As I remember it, at least 10 years ago, I began to hear anecdotes from developers who built apps for both iOS and Android about their economics. The story is that they tended to have twice as many users using Android but that iPhone App Store revenues were roughly twice those of Google Play Store. From that I devised a rule of thumb that an iPhone user was about 4 times more valuable than an Android user. Half the users, paying 4 times as much means double the income.

Over the years I came across a lot more data about market development (the diffusion of innovations) and market creation (the innovation process) and applied it to transportation. Along the way I also became more aware that figures of consumption and spending are not normally distributed. That it turns out that the governing function of much of human behavior is log-normal. That is, it is skewed rather than balanced or symmetric around an average. Classic examples are income distribution and the distribution of travel distances.

Consider the following diagrams: Trip Distances vs. Trip Speeds for New York Citi Bike travelers (n=42.7 million.)

The different lines represent different time periods spanning the months of the year.

The top graph shows that most trips are short, and the average distance is not the most common distance. The bottom graph shows that the average speed is the most common speed. The top graph is very accurately modeled with the log-normal function. The bottom graph is the classic bell curve of the normal or Gaussian function.

Income is log-normally distributed and so it has to be with services revenues. There must be a definite skew where there is a disproportionate spend by those who have more income. Thus segmenting or, to put it less kindly, discriminating customers properly is super important. Customer quality is just as important, perhaps more so, than quantity.

So let’s revisit the question of user quality for online services.

Unlike 10 years ago, there is a lot more data. The EU, for instance requires a report of the number of users on each platform.

The figures I want to focus on are those of Apple App Store and Google Play Store: 123 million and 284.6 million respectively. These are strikingly similar to the ratio of 2x between iOS and Android from my old anecdotes. However, if we look at global data, Apple claims 650 million active App Store users while Google claims 2.5 billion active users. That makes the global ratio closer to 4x Android. However, if we look at the US, the ratio is 167 million iPhone users vs. 144 million Android. In the US, iOS is a majority.

This is explained by income. The wealthier the user base the more iOS seems to be in use.

Now let’s look at revenues for the platform stores.

On the right side is the history of retail revenues by year from 2016 to 2022 and split between Apple App Store and Google Play Store. Mirrored on the left is the number of users, also split by store but also by region, but only for 2022. [App Store revenues are my own analysis (with validation against other sources) and include billings not just Apple’s own cut. Play Store revenues are from Business of Apps.]

The ratio between revenues has kept remarkably steady, with 2016 revenues at a Apple:Google ratio of 29:15 (1.93) and 2022 at a ratio of 81:42 (1.93).

The global user numbers are, as mentioned, 3.8 to 1.

[Aside: One sanity check on the data is that the 650 million App Store users is about half of my estimate of iPhones in use (1.2 billion). That might be alarming. Why are only 54% of iPhones in use paired with App Store use? However, if we take the sum of both App Store and Play store users (3.15 billion) and compare it with the total number of global smartphone users (6.92 billion), we discover that 45.5% of all smartphone users use some store. Adding Chinese Android stores we can see that the ratio of 54% for iOS is somewhat consistent.]

Thus we can compare the app revenue per user of the two platforms by dividing global revenue number by the global user numbers. The results are shown below:

I scaled the spending to a per-month basis.

So the picture becomes clearer. The iPhone customer is 7.4 times more valuable than the Android customer. This is more impressive than the 4x rule I had 10 years ago. The reasons are mainly that my anecdotes were from developers who sold products in the US or EU whereas expansion of smartphones to 7 billion global users has drawn in more lower spending customers.

But Apple’s base has also grown to over 1 billion users (650 million store users). This highlights that Apple has effectively grown and discriminated customers effectively. It obtained not just 1 billion customers but the best 1 billion customers.

How to discriminate effectively is the holy grail of marketing. The naïve approach is to keep prices high. But that usually only results in a “luxury” branding and a small base that tends not to grow. The alternative “premium” approach is to offer functionality and multiple tiers and distribution options and financing and merchandising. There is no simple formula.

The bottom line is that Apple’s approach is attracting 650 million $10/month app spenders. When we factor in additional subscription services, we get to the juggernaut that is Apple Services. This analysis has shown how difficult it is for anyone to come close to this quality of revenue.

As we look forward to Spatial Computing, the idea of increasing that spend from $10/month for a small glass rectangle in your palm to perhaps $100/month for an immersive 360-degree 3D experience does not sound too crazy.

But only if you can find those customers. I suspect Apple already knows who they are.

If you want to learn more and hear an in-depth discussion on this topic make sure you subscribe to the Asymetric Podcast on Supercast and Apple Podcasts.

The App Store ecosystem crossed $1 Trillion in 2022.

To be precise, in a report published in May 2023 by the Analysis Group the ecosystem is estimated to have exceeded $1.1 trillion. This ecosystem is defined as the total transactional value of the sale or distribution of digital and physical goods and services through apps. It also includes in-app advertising. The analysts relied on a variety of data sources, including data from Apple, app analytics companies, market research firms, and individual companies.

Note that this includes Apple’s own services as well as App Store developers. Unlike Apple’s own reporting of payments to developers (and thus partially revealing its own App Store revenues) this data includes payments which are not captured by Apple directly. In the words of the authors, “More than 90% of this figure originated from transactions that did not happen through the App Store, meaning that these amounts accrued solely to developers and other third parties, and that Apple collected no commission on them.”

This $1.1 trillion figure is almost double the value from 2019. Ecosystem estimates were first provided in 2019 at $519 billion, with $643 billion in 2020, $868 billion in 2021 and $1,123 billion in 2023. These correspond to growth rates of 24% in 2020, 35% in 2021 and 29% in 2022. The compound growth rate has been 29.4% since 2019.

It would be ambitious to expect this CAGR to continue after the Covid boom but at the same time, it’s worth noting that this growth out-paces Apple’s own services growth rate. Services (reported) revenues grew at 18%, 27% and 10%. The actual figures and growth rates are shown below.

This Analysis Group report is very much worth reading and adds an important new metric of resilience and scope and scale of the platform and ecosystem that Apple has created.

However it is also not the complete picture. I strive to see the larger picture of what I call the Apple Economy. This includes the ecosystem as well as the direct revenues Apple obtains from products and services. [Of these revenues, roughly 60% is then passed on to Apple’s suppliers, with less than 20% retained as earnings].

Therefore, the combination of ecosystem and revenues is shown in the following diagram.

Note that the “Economy” size was over $1.4 trillion when the ecosystem alone was $1.1 trillion. Note also that I’m also suggesting that it’s likely to be $1.6 Trillion this year. This diagram shows the story since 2019 but also makes a forecast to 2025.

I’m expecting the ecosystem to grow more modestly at 18% in 2023 (down from 29%) and 16% in 2024 and 15% in 2025. Apple’s own product and services sales are also subject to estimation error.

Nevertheless, it’s not unreasonable to believe the forecast above where the Apple Economy expands to over $2 Trillion by 2025. This is an acceleration from previous forecasts.

It’s difficult to write about the implications of this. Any value in the trillions is hard to put in context. Certainly, Apple’s market capitalization is in the trillions. For fun, we can calculate that Apple is trading at a multiple of 1.74 of its economy.

But rather than trying to assess valuation directly, Apple’s Economy is more like a GDP figure: I think it’s helps to understand the overall scale and resilience. You might even ask what would happen if it were to cease to exist. The number of people who are employed in a $2 trillion economy is in the millions; perhaps 10s of millions of people.

In 2023, global GDP is expected to reach $105 trillion. It’s nice to think that Apple could soon be about 2% of the world.

Software is eating the world. But are users consuming software?

Every day, the software industry wastes millions of dollars developing flawed software that’s abandoned by users. Yet the industry’s focus continues to be on the supply side: client or server, full-stack or specialized, out-source or in-house.

The Jobs to be Done method presents a fresh approach. By studying the demand side, developers can focus on how products are used by consumers to overcome their daily struggles. This method has brought success to a range of popular consumer products, from Snickers to Tide Pods. 

Friend of the blog IGEN has been building software with top Jobs to be Done thought leaders for the past six years. Amplified with 30 years of software development experience, this makes IGEN the ideal partner to realize the ambitions of corporate leaders, nimble startups, and multi-national initiatives, alike. 

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As a rule, I don’t like to make a forecast for Apple’s performance during quarters where there is no guidance. There is a good reason why there is no guidance. The management does not feel confident that there is enough information to make a reasonable prediction. Keep in mind that the management has very detailed, very frequent updates on their business metrics.

Anyone who has run a business knows that signals of performance are abundant and one can only imagine how many signals arrive at Apple HQ from the 1.5 billion active devices, tens of thousands of points of sale, and a vast network of resellers. There are also billions of interactions in services. Then there are search queries, store visitor counts (online and physical), developer payments, app downloads, content downloads, subscriptions. All this information is collected and analyzed on (probably) a daily basis.

Also when guidance is given, it’s usually a month into the next quarter. The company will have already seen about a third of the quarter already pass before they predict the next two thirds.

This last quarter in particular was even more difficult given the delays in launching the new iPhones and the dynamics related to the broader portfolio.

And yet, the company feels that they can issue some “insights on our expectations”. Here is what was said about three months ago:

These directional comments assume that COVID-related impacts to our business in November and December are similar to what we’ve seen in October. […] [W]e expect iPhone revenue to grow during the December quarter despite shipping iPhone 12 and 12 Pro 4 weeks into the quarter and iPhone 12 mini and 12 Pro Max 7 weeks into the quarter.

We expect all other products in aggregate to grow double digits, and we also expect services to continue to grow double digits. For gross margin, we expect it to be similar to our most recent quarters despite the costs associated with the launch of several new products. For opex, we expect to be between $10.7 billion and $10.8 billion. We expect OI&E to be around $50 million and the tax rate to be around 16%.

Luca Maestri, Chief Financial Officer

So, given this information and some hints from IDC, Gartner and CIRP and China I’m willing to offer some estimates:

• iPhone Revenue: $63.9 billion
• Mac Revenue: $9.3 billion
• iPad: $7.4 billion
• Services: $15.1 billion
• Wearables & Home: $12 billion
• Net sales: $107.8 billion
• Gross margin percent: 37.7%
• EPS: $1.48 (Growth: 19%)

Of course, this is very speculative and I don’t have a lot of confidence in it. If anything it may be on the high side.

I don’t expect there to be guidance for the next quarter with a resumption of guidance only after the pandemic has largely subsided (probably Q3 of this year.)