Mobile Computing Industry
Recently, I met Farshad Nayeri and Dave Sundahl—formerly of Christensen Institute, now at Disruptive MBA (dx.MBA)—when the topic of M1 Macs came up. The result was a multifaceted conversation where we took a long-lens look at Apple & Disruption around three core questions:
1. Is Apple Disruptive?
2. Is Apple Overserving with M1 Macs?
3. How does Apple defy Disruption?
You can read part 1 of our conversation at A Long-Lens Look at Apple and Disruption on the dx.MBA blog.
I think Lisa Jackson’s presentation at the September 2018 iPhone launch event was perhaps the most interesting and most profound.
Lisa Jackson is Apple’s vice president of Environment, Policy and Social Initiatives. Previously, Ms. Jackson served as Administrator of the U.S. Environmental Protection Agency (EPA). In her role at Apple she has been responsible for the transition to 100% renewable energy use by Apple across all its facilities.
This goal has been achieved and it’s a remarkable achievement deserving congratulations. But her presentation was noteworthy for setting a new goal.
She laid out a goal for Apple to eliminate the need to mine new materials from the Earth.
She said that to reach that goal Apple will have to do three things:
It’s this second point that I thought would bring the house down.
To emphasize the second point she said Apple now strives to design and build durable products that last as long as possible. That means long-lasting hardware coupled with long-lasting software. She pointed out that iOS 12 runs even on iPhone 5S, now five years old. Because iPhones last longer, you can keep using them or pass them on to someone who will continue to use them after you upgrade.
She said that “keeping iPhones in use” is the best thing for the planet.
At this point in the presentation I wondered if everyone would rush out of the room and call their broker to sell Apple shares. One premise of investing in durable goods hardware companies is that value depends on frequency of upgrades. If products are not replaced frequently they do not generate revenues and the company selling them ends up growing very slowly if at all after markets saturate. The smartphone business is certainly approaching saturation and the implication of making Apple products more durable would imply lower revenues from replacements. This anxiety around replacement rates and extended lives is used by analysts to discount future cash flows and if those lifespans are extended price targets come down.
So why would Apple want to do this? What is the logic of this durability focus as a business model? It may be good for the environment but is it good for the bottom line?
Of course, there would be not much business without an environment and we should all strive for sustainability. But this is an existential observation, and it’s defensive. The important call to make is that Apple is making a bet that sustainability is a growth business.
Fundamentally, Apple is betting on having customers not selling them products.
The purpose of Apple as a firm is to create and preserve customers and to create and preserve products. This is fundamental and not fully recognized.
To understand how this works, if you look at the pricing graph below, you can read it as a story of increasing prices for a decreasing market share. But if you understand that each advance in products increases absorbable1 utility then the cost per use remains steady or declines.
An iPhone at $1200 may be less expensive than an iPhone at $600 if the $1200 version lasts twice as long as is used twice as much each day. The $1200 phone delivers 4x the utility at twice the price, making it half the price. By making more durable products, both in terms of hardware and software, the customer base is satisfied and preserved.
Practically, the initial buyer may resell the iPhone and that 2nd hand devices may be sold yet again. This means an iPhone could have three users over its life and thus it could end up expanding the audience for Apple by a factor of 2 or even 3.
The expanded audience is offered accessories, additional products such as wearables and, of course, services. These residual business models are certainly profitable, perhaps even more so than the iPhone.
Overall Apple has 1.3 billion devices in use and perhaps as many as 1 billion users. This base is certain to expand and it will expand more rapidly with durable devices and software.
This is a hardware-as-platform and hardware-as-subscription model that no other hardware company can match. It is not only highly responsible but it’s highly defensible and therefore a great business. Planned obsolescence is a bad business and is not defensible.
Therefore the statement that Apple now prioritizes device and software longevity is very important and I consider it one of the most important statements made during the 2018 iPhone launch event.
At the latest Apple Summit in Los Angeles the question of Apple’s valuation was foremost on many minds. The illustration I used there to discuss valuation is shown below.
It shows the history of revenues (by reported segments) and gross margin for the five largest companies in the world by market capitalization. I have been publishing this illustration for five years1 in order to contrast the growth and perception of value between companies that might be considered comparable with Apple. Thus the graphs show the top and (near) bottom lines of the companies over an epoch of about a decade.2
In contrast with the histories above, there is a price set on the equities today. These prices are captured by the market capitalizations as follows:
| Current market cap (billion) | Peak market capitalization (Billion) | |
| Apple |
$918 |
$955 |
| Amazon |
$844 |
$856 |
| Alphabet |
$810 |
$825 |
| Microsoft |
$780 |
$789 |
|
$584 |
$589 |
Market capitalizations are interesting because they show perceptions of value. The traders in the equity are negotiating with each other on what the shares are worth and, as a voting system in a liquid public asset, share pricing is very representative of the perceptions about that asset. Representative because there are literally millions of decisions being made on a daily basis which determine this price.
Continue reading “On knowing the value of everything and the price of nothing”
The iMac launched May 6 1998, exactly 20 years ago. It is not the most significant computer to ever exist. It was a clear descendant of the original Mac which established the “all-in-one” desktop computer category. That category, to which it still belongs, is a modest segment. The last time Apple reported portable sales separately was in late 2012 when the desktops/servers and pro systems combined made up only 20% of all Mac sales by units. If iMac were 10% of Mac sales, it would represent about 2 million units in 2017.
Desktops evolved into laptops and personal computing evolved into pocket computing. Becoming more personal means more intimacy and this is leading to wearable computing. There is more beyond that to be sure.
But the iMac is a historically significant machine. It allowed Apple to start on a new trajectory. It did this by first offering a financial lifeline. Sales of Macs, which were at the time the only source of revenues for Apple, increased from 2.7 million to 3.8 million a year. This at a time when Windows PCs were shipping about 100 million units. That was enough to ensure survival. Today Mac units are five times higher while Windows PCs are about 2.5 times higher. The following graph shows the impact of iMac on the Mac’s trajectory. Continue reading “Just in Time”
In its latest update on the App Store Apple reported that iOS developers earned $26.5 billion in 2017. A year ago the figure was $20 billion. The growth rate is then about 33%. The cumulative payments to developers can be calculated as $86.5 billion. This amount was generated in a span of less than 10 years, with the first billion paid by June 2010.
The following graph shows the history of cumulative payments and the corresponding payment rate (in $/yr.)
Note that this represents the payment to developers, not the spending by the customer. Apple keeps about 30% of the revenue. The total spending on the App Store is then about 43% higher.1. The equivalent figures for spending on the App Store are shown below. Continue reading “The iOS Economy, Updated”
Microsoft has announced that by the end of the year the Groove music service will be phased out. Users are being offered the option to move their music libraries into Spotify.
This brings to an end a long story of Microsoft in the music distribution business. It started nearly 15 years ago with technologies in Windows that allowed for purchase and playback of various media formats. Microsoft sought to enable a large number of music retailers to market music through its formats and DRM and transaction clearing.
Services such as AOL MusicNow, Yahoo! Music Unlimited, Spiralfrog, MTV URGE, MSN Music, Musicmatch Jukebox, Wal-Mart Music Downloads, Ruckus, PassAlong, Rhapsody, iMesh and BearShare and dozens of hardware players licensed Windows formats. Almost all of these services have shut down and the devices disappeared.
The next stage was to offer an integrated experience through the Microsoft Zune player and Zune Marketplace music service. This too failed and was replaced by the Xbox Music brand in 2012. On July 6, 2015, Microsoft announced the re-branding of Xbox Music as Groove to tie in with the release of Windows 10.
There was a time when Microsoft was thought of as the certain winner in media distribution. Inserting media into the Windows hegemony was classic “control point” strategy: owning the access points was a sure way to collect a tax on what transacted through the network.
Instead we are facing a market where media is consumed through new access points: phones, tablets and TV boxes. Netflix, Spotify, Roku, Google, Amazon and Apple are all offering distribution and some are investing in original programming.
It’s perhaps worthwhile to recall that Microsoft and Apple both started their media efforts around the same time. Apple’s iTunes is 16 years old and the iTunes Music Store opened in 2003, almost 15 years ago. Today Apple is transitioning to streaming with 30 million subscribers. The graph below shows the history of subscription growth to Apple Music and Spotify.
Apple Music is a small part of Apple Services (part of the orange area below).
On a yearly basis Apple Services are this year crossing the $50 billion gross revenue run rate. This year Apple released a new Apple TV 4K and is releasing a new smart speaker called HomePod.
The contrast between Microsoft and Apple is most visibly between the Mac and PC. But the story of how media paralleled mobility and how Microsoft struggled with both is perhaps a cautionary tale.
Microsoft saw the limits of modularity when new product categories emerged and when new user behaviors were created. They attempted to pivot into being more integrated but those efforts also failed. The efforts continue today with Surface devices; looking forward they will continue with AR/VR and perhaps a pivot of Xbox..
But the long arc of history shows how hard it is to succeed in vertical integration after you build on horizontal foundations. Generations of managers graduated from the modular school of thought, specializing rather than generalizing. Now they are facing an integrated experiential world where progress depends on wrapping the mind around very broad systems problems.
Entire industries are facing this orthogonal pivot: media, computing and transportation come to mind. Huge blind spots exist as we see only what we’ve been trained to see.
I will be presenting my latest analysis of Apple at the Sustain event in San Francisco on Thursday Sept 8th, the day after Apple’s keynote, along with Ben Bajarin, Carolina Milanesi who will alsob equipped with their latest market insights.
There is a time to disrupt and there is a time to sustain.
Sustain event is about understanding Apple’s levers of control to sustain the iPhone as it moves into direct competition with Android. We will also examine positions of top five technology brands: Apple, Amazon, Facebook, Google, and Microsoft.
Learn more about the event at Airshow.io. Given he short notice, we are keeping this event on the small side so reserve your seat soon.
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:
These figures are also parts of patterns (shown below) which offer an indication of predictable growth.
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.
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”
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:
The rate of growth is also shown in the following graph:
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”
