Author: Horace Dediu

Counting Apple’s Customers

Berkshire Hathaway, led by Warren Buffett, now owns about $1.4 billion of Apple. Occasionally we hear about various “celebrity investors” taking positions in the company or exiting those positions. The last one I remember was Carl Icahn. He seems to have exited Apple before Berkshire entered. There are some who will act because of these decisions. You should not be one of them.

Nor should the management of the firm act in response to investor decisions or concerns. Management is specifically distinct from ownership in the corporate construct precisely in order to bring professionalism to the role. The manager must set priorities as they see fit, irrespective of what the transient owner might prioritize. The separation of ownership and management is one of the greatest innovations in commerce.

There are many opinions on what priorities should be. Delivering a specific financial ratio, achieving a certain market position, changing the world for the better. These have all been cited as top priorities. I happen to believe that what matters most is the creation and preservation of customers. That is because I see customer creation as causal to the other desirable outcomes and it is therefore the more important priority.

And this is why, whenever possible, I try to deduce how well a company is performing on this metric. The greatest companies (by market capitalization) today are certainly examples of achievement in customer creation. Facebook, Microsoft and Google are members of the “billion user club” or companies that crossed a billion active users.

But do they really have a billion customers? Microsoft has over 1.2 billion users but many (most?) of those users are using computers that their employers provide on which Microsoft software was installed. They may not have made the choice to purchase the tools they are using. Microsoft certainly has millions of customers in the form of “accounts” purchasing its products and services, but It’s not likely that there are a billion people who have directly chosen to buy a Microsoft product.

Facebook has over a billion daily users. Facebook users are certainly using the service of their own accord but they are not paying for the service. Quite the contrary, the actual customers of Facebook are companies buying an advertising service offered in the form of exposure to those billion users. The Facebook users are the product being sold, not the buyers. Thus Facebook’s total number of paying customers is probably only in the tens or hundreds of thousands.1

Same with Google. We don’t know how many accounts Google send invoices to but the number is very likely not even in the 100 million range. Its billions of users are beneficiaries of services but they are not paying Google/Alphabet.

Amazon has many millions of customers, if not billions. Prime membership is above 50 million but not above 100 million. Amazon may some day have a billion customers but there are limits to how quickly that can happen. The growth potential is governed by logistics and that’s as much an issue with atoms as it is with electrons.

Which brings us to Apple. Apple does not offer a figure on its specific user count, but we have some viable proxies:

  • iCloud accounts reached 782 million in February 2016.
  • iTunes accounts reached 885 million in September 2014
  • Active devices reached one billion in January 2016. That number is likely above 1.1 billion now. (Includes all devices, hence Macs and Apple TVs).

These figures are also parts of patterns (shown below) which offer an indication of predictable growth.

Screen Shot 2016-08-17 at 9.23.26 PM

Screen Shot 2016-08-17 at 9.27.38 PM

In addition to the absolute figures and their growth there is also the question of loyalty (frequently cited by the company), switching from other platforms (also frequently cited) and revenues. The company publishes specific figures on service revenues for consumer attached devices showing a run rate of $41 billion/yr in services for their device base.

In combination, a picture emerges which shows that Apple has nearly a billion customers. I can’t say how many with any precision but it’s certainly above 500 million (on the basis of iCloud and iTunes accounts). It’s below one billion because some users have more than one device.

Even though it has not happened yet, the trend is pretty clear. Apple will at some point in time have a billion paying customers.

What is more significant than the specific count is that these customers mostly chose to be customers individually. Some may have been given the products as gifts, but the vast majority bought the items for themselves. Apple benefitted from hundreds of million of individual purchase decisions.

Furthermore, having made the decision to purchase, chances are that they will do so again. Apple customers are a recurring revenue stream. In fact, it’s fairly easy to calculate that being an Apple customer is equivalent to spending about $1/day on its products and services, indefinitely.

Apple is not there yet, but a billion dollars a day from a billion customers is not inconceivable. That would be quite an achievement.

  1. Orr Sella @orrsella pointed out that Facebook has stated that they have 3 million businesses actively advertising on their networks. [↩]

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.

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 DisruptiveInnovation.org.

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? Continue reading “Tesla and SolarCity: Straddling the modular/integrated divide”

  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.

State of the Ecosystem

At WWDC 2016 Apple offered a set of new data points to illustrate its ecosystem’s robustness.

First, the number of registered developers increased by 2 million in the last year to a total of 13 million. That is a growth rate of 18%. To compare this total consider that Oracle claimed in 2014 9 million Java developers and IDC claimed in 2014 there were 18.5 million software developers in the world, of which 11 million were professional software developers and 7.5 million were hobbyist developers. It’s therefore possible that Apple’s “market share” among developers is close to 70%.

Second, App installs have now reached 130 billion. The cumulative growth is shown in the graph below:

Screen Shot 2016-06-16 at 12.25.11 PM

The rate of growth is also shown in the following graph:

Screen Shot 2016-06-16 at 12.33.35 PM

Note that the rate of growth continues to increase and is now above 30 billion/yr. It turns out that apps continue to be a popular download item. The size of the audience continues to grow (see graph below) and it’s therefore understandable that activity in the store continues to grow. Continue reading “State of the Ecosystem”