At time of writing (December 12, 2019) AirPods Pro delivery wait time is over 4 weeks. It’s been like this since they shipped. I tried stores in several countries and although units can make an appearance on a shelf, they sell out immediately.

AirPods are part of the “Wearables & Home” category for Apple which used to be called Other Products and include also the Watch, iPod, Apple TV, Beats and HomePod (among other items.) iPod revenues were broken out as recently as 2015 but as the graph below shows, there have been no specifics on any product in “Wearables & Home” since then.

It therefore falls upon us to estimate how much of the entire category is any one product. It’s been very difficult as the only clues lie in growth rates, sometimes cited for the Apple Watch and sometimes for “Wearables” alone. As far as I can tell from the available clues, the split is roughly as shown between the Orange and Green areas. Orange reflects estimate for Watch and Green everything else.

This analysis helped me conclude the Apple Watch overtook the historic “peak iPod” which occurred in the fourth quarter of 2007 at $4 billion. My Watch revenue estimate was $4.2 billion in the fourth quarter of 2018. This conclusion was confirmed by statements from the Company.

The problem lately has been that AirPods have become huge unto themselves. There is literally no information about AirPods sales as a product category. The only option is to guess Watch and subtract it from Wearables and then guess again the portion of “non-Watch Wearables & Home” that is AirPods.

Looking forward to the next quarter, I am expecting a 51% increase y/y for Wearables and 24% growth in Watch. This results in a Watch revenues about $5.2 billion and non-Watch $5.7 billion. Now if we assume $1.7 billion for non-Watch-non-AirPods (i.e. Apple TV, HomePod, Beats, iPod, other) then this quarter AirPods will have overtaken peak iPod.

Remember that iPod was the phenomenon which reset all expectations for Apple. It caused Apple to cease calling itself Apple Computer. It (at least psychologically) laid the foundation for iPhone and everything else that followed. In 2005 and through 2007 Apple was “the iPod company”. I remember people working in a large search engine company calling Apple “that media company” as a result of over-intellectualizing iTunes.

(One more footnote on the AirPods Pro is that at $250 a pair and $300 for Apple Watch, throwing in a case puts these attached accessories for an iPhone at roughly the same average selling price for the iPhone of a few years ago.)

For the AirPods to overtake the iPod highlights just what a phenomenal category Wearables has become. In combination with Home and other accessories the category is going to decidedly overtake the Mac, having already passed the iPad.

And so it goes, something dismissed as inconsequential–”does not move the needle”–ends up becoming a massive force of change. The iPod was that, the original Apple II, the Mac and yes, also the iPhone. It’s the asymmetry of humility that this happens over and over again.

To hear more about the profundities of AirPods Pro tune in to the next Critical Path podcast.

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During 2016 Apple services revenues were $25.6 billion. In January 2017, just after the end of that year, Tim Cook said “We feel great about this momentum, and our goal is to double the size of the services business in the next four years”.

If Apple were to hit that target, during calendar year 2020, Apple’s services revenues should exceed $50 billion. In 2017 they were $32 billion, in 2018 they were 41.5 billion and so far this year they are 23 billion. If, as has been the case during 2017 and 2018 (see graphs below,) Apple were to maintain 30% growth in Services during the rest of this year they will have revenues of $51 billion in 2019; reaching the doubling tarted a year sooner than predicted.

Apple will have doubled Services in 3 years to a level equivalent to a Fortune 63 company (right behind Goldman Sachs).

Keep in mind that the reported revenues are not billings or what consumers actually spend. That figure is at a run rate of over $71 billion. You can see the difference between billings and reported revenues in the graphs above.

So what made this possible and what is the source of growth in the future?

As my estimates above show, the growth came from apps and licensing and other revenues. Apps include many third-party subscriptions and licensing includes Google TAC and other income includes Apple’s own subscription services and a few additional items like Apple Pay, AppleCare and iCloud.

What Apple is launching this year will boost this even further with TV+, Card, Arcade and News+. These are a new set of specific services that, apart from Card, will require subscriptions and will deliver Apple-specific content. Unlike previous Music and TV offerings, what Apple has embarked on is a high degree of involvement in the content creation process. These will be Apple TV shows, Apple video games and Apple-directed News feeds.

This is quite the watershed moment. Apple, a company dedicated to providing tools to content makers and content consumers, choosing to be involved in the lottery-like game of choosing and backing winners in creative works.

Can a company with good taste about devices and software successfully extend that capability to content? That seems to be the question many are asking: How good is Apple at creating hits? The process of hit creation is difficult but it’s not completely random. There are many individuals who have skills or taste. And Apple’s approach seems to be to hire people with such skills. These “executives” then proceed to attach people with great track records in hits and who may have the star power to attract audiences. It’s not a matter of complete guesswork. It’s actually the approach most “streamers” have: They hire studio executives, attach talent to projects and spread bets.

This is why there has been a rush by streamers to secure programs and A-listers. There might be a variety of subscriptions users are likely to pay for but there is a fixed number of bankable names in the business.

But let’s pause here to think more deeply about what is happening. Without much notice, we are seeing a content world where distributors are locking up talent and creating a studio model where production, talent and distribution and display are under one roof. This is exactly where the movie industry was in the so-called golden age of Hollywood. The era of the studio system. An era that ended with divorcement—the complete separation of exhibition interests from producer-distributor operations or the forced divestiture of theaters by production/distribution.

Another observation to be made is that the bundling and binding of content into specific distributors creates a walled garden effect. This extends beyond video content to games (a larger business than film, at least at the box office, see below) and to apps. Arcade games are Apple-exclusive. Many apps which depend on Watch, AR and other unique technologies become exclusive, and of course unique titles.

As far as consumers are concerned this might be just fine. There are very implicit lock-in effects of ecosystems, from UX muscle memory, switching costs for data, network effects from friends/family/co-workers in the same system. The extension of this to cultural content, news curation, music curation and privacy curation could be the comfortable default for many.

In this world-view the proposition Apple offers is very attractive. Look at the preference vacationers have toward packaged experiences. Look at the popularity of cruises. Look at the way features are packaged in cars. Look at meal delivery and the packaging of ingredients into something you can cook at home. Look at fitness and the packaging of instruction with the exercise venue. The examples are plentiful.

A garden is lovely after all. The walls are there to keep danger and chaos away as much as to keep you in it. The constraints simplify as much as they restrict. Though it may be contrary to some modular and interoperable utopias which paralyze with choice, we might well be experiencing a triumph of the walled garden.

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The old cliche is that we were promised flying cars but ended up with x where x is something trivial or mundane. Perhaps the best “x” is “140 characters”. This statement is meant to de-value the technologies developed in the last few decades. Instead of building grand things, we build trivialities. The irony is that x is often wildly popular and ubiquitous. x also generates a lot of profits and is likely to change behavior. Indeed, the flying car alternatives are almost always better ideas.

Flying cars are an example of “extrapolated technology” where we take a trajectory of improvement and expect it to continue forever. x are examples of “market creating” technologies which create new behaviors and which allow more people to do more things that they could not do before.

The flying car dream comes from a century of improvements in cars, and airplanes. The idea that cars must continue to get better and flying must come to personal transportation. When they are faster than what roads and human reaction times can allow and when they have more space than we can fill and when they have more cupholders than we can drink from it’s time to look for a new domain–the sky–for them to enter.

The alternative is literally unthinkable to the extrapolator: that we might drive less or not at all.

The promise of super-fast computers on every desktop and every living room of the 1990s is countered by an acceptance of a computer in every pocket and a tablet in every living room in the 2010s.

So in many ways the grandest technological revolutions are a study in humility rather than ambition.

Humility as a business model or as an operating principle is one of, if not the most most powerful tools for a manager . The queen of the virtues is most elusive but most enabling.

And so here we are, the Apple Card has arrived. And the Apple car hasn’t. The contrast is deliciously ironic. The cynics are out and having their fun. The users are out ordering the product. The cycle repeats.

Except the Apple Card demands explanation. It’s not explained by Apple sufficiently. It sounds like a slightly easier credit card. Perhaps a bit easier to keeps tabs on, perhaps a bit easier to manage payments and easier getting bonuses. It sounds, well, easier.

But easier doesn’t rock anyone’s world, they say.

It’s just another card, they say.

How can this change anything?

Here’s the thing: follow the integration. First, Apple Card comes after Apple Pay, more than 4 years ago. Apple Card builds on the ability to transact using a phone, watch and has the support of over 5000 banks. Over 10 billion transactions have been made with Apple Cash. Over 40 countries are represented.

I am quite sure Apple considered their card entry at the same time they considered Pay entry. The extension to a credit instrument is only logical as an addition the the Wallet.

The emphasis is on convenience, ease of use, integration and assistance. It’s what a credit card should be if you invented it today.

The application process is easy. It’s designed for the iPhone. No delays, no paper, no signatures.

It promises “A healthier financial life” through help in understanding your spending and acting on it. The goal is not to keep users in debt but to keep them loyal. Think about the asymmetry here.

The partner, Goldman Sachs, is chosen for their willingness to also align on incentives.

But more than anything the release of the Apple Card brings into question what could be next. The Card may not have been on everyone’s mind four years ago when we first saw Pay.

Now the die is cast. Apple’s goals seem to include enhancing financial and physical health. These are mundane goals, perhaps.

Or perhaps not. What matters more?

For the last two years I’ve been studying the transportation economy and introducing the idea of Micromobility. Simply, Micromobility promises to have the same effect on mobility as microcomputing had on computing. Bringing transportation to many more and allowing them to travel further and faster.  I use the term micromobility precisely because of the connotation with computing and the expansion of consumption but also because it focuses on the vehicle rather than the service. The vehicle is small, the service is vast.1

One of the elements of analysis for Micromobility is the notion of Unit Economics. The idea is that each vehicle can be seen as an independent business. It requires an investment, has a revenue attached, requires operating costs and fixed costs and finally, hopefully, generates earnings. A fleet’s economics is therefore a multiplication of the unit economics by the fleet size. A similar partial construct exists for mobile network operators where the network revenue is defined by ARPU (average revenue per user). In consumer hardware we also have the idea of ASP (average sales price) and BOM (bill of materials) which describe the revenue and variable cost of each device.

In the case of Micromobility the unit economics is more broadly applied in being an entire P/L statement for each vehicle. One example for the e-scooter sharing company Bird is here. If the unit economics of Bird is consistent across geography and time then the entire business can be valued based on one “average unit”. Measuring the health of the business can thus be summarized in BOM, Utilization, Lifespan, Attrition and Cost structure or one unit.

For some time now I’ve advocated a similar approach for Apple.

Continue reading “Apple’s Unit Economics”

1. If you want to learn about the real future of transportation sooner rather than later, do consider coming to the Micromobility California conference. [↩]

Last year’s Micromobility Summit was a great success. We had a great turnout and the presenters and audience met to discuss the future of this new modal shift that seemed so imminent.

Perhaps partly because of our meeting, the shift has since accelerated. The amount of capital allocated, firms participating and usage have all exploded. In one year micromobility went from a curious hobby to the biggest startup story in the world now attracting mainstream attention.

Bird, Lime, Skip have pioneered scooter sharing. Smide in Switzerland is offering e-bike sharing and Uber, Lyft and Didi made acquisitions. More OEMs and Tier 1 suppliers are betting on this sector and we have hundreds of new e-bike models entering the European market and literally billions of vehicle miles traveled using micromobility. 400 million users are registered in China alone with 70 million daily active.

Micromobility Summit 2017 was the catalyst of several startups that operate in the space today. It was great opportunity for like-minded entrepreneurs to discuss this market.

It’s time then to follow-up with the second Micromobility Summit. Coming almost exactly a year after the first, we will conduct a similar approach: speakers and panels covering the following topics:

• Micromobility definition and categorization
• Micromobility competitiveness relative to incumbents
• Micromobility business models and asymmetry to macromobility
• Regulation and evolution of normative behaviors

I will present research currently under peer review on the competitiveness of new modalities relative to existing and their conversion potential. Titled “When Micromobility Attacks”, it’s an adaptation of a paper just submitted to a peer-reviewed journal (written with ETH Zurich)

If you would be interested in attending or speaking let me know through the sign-up sheet at the event web page.

We are proud to announce the second investor summit dedicated to the long-term investors in Apple. It’s happening in New York City at The Merceron August 16th from 10am to 10pm.

We will host people interested in discussing the fundamentals of Apple as a business and how it operates as a recurring revenue model.

Titled “The Goose That Lays The Golden Eggs” it was inspired by a blog post from 2013 foreshadowing how human nature instinctively discounts Apple and yet how that nature is mismatched to how Apple actually works.

If you are curious about why Wall Street says “Sell” and Warren Buffet says “Buy” on Apple you might want to spend some time with us.

Agenda:

• How to read the company’s performance given its published results. We will review how to build a model of the company’s financials and how it can be used to forecast the next quarter. We can go line-by-line through the income statement.
• How to think about the markets Apple considers important. This is the best way to forecast the company’s performance beyond its current portfolio. This requires calibrating your sense of timing of innovations. What is too early, what is too small, what is something where Apple can’t exercise control? Innovation theory is essential to this understanding. If you know where Apple could go next and where it won’t it helps you build patience into your planning.
• How to understand Apple’s culture and its resources and processes. This gets into the critical management question that leadership at Apple is concerned with. I’ve had a few conversations with and have some great insight from former managers. Curiously, this is Apple’s greatest competitive advantage and its sustainability is the key “moat” question. Most people don’t even realize that this is the most important question for investors.
• How to understand the market’s reaction to Apple. If you understand the three points above it becomes necessary to juxtapose how others see the company. There is a compelling case of asymmetry of information even though “everyone” is watching the same data. I use the fable of “The Goose that Lays the Golden Eggs” to best describe how most people react when they observe Apple. Apple is something which cannot possibly exist and therefore it is fragile and must be treated as a transient system. It leads to deep discounting in the market. This cognitive illusion has an opposite: monopolies are over-valued because they are seen as invulnerable and permanent even though they are brittle. I use antifragility as another metaphor. Many anecdotes from Steve Jobs also indicate that he understood this asymmetry and instilled it in the company. Investors need to understand this dynamic in order to profit from it.

Sign up here.

Technorati and I are proud to announce the first investor summit dedicated to the long-term investors in Apple.

We will host folks interested in discussing the fundamentals of Apple as a business and how it operates as a recurring revenue model.

Titled “The Goose That Lays The Golden Eggs” it was inspired by a blog post from 2013 foreshadowing how human nature instinctively discounts Apple and yet how that nature is mismatched to how Apple actually works.

If you are curious about why Wall Street says “Sell” and Warren Buffet says “Buy” on Apple you might want to spend some time with us.

Agenda:

• How to read the company’s performance given its published results. We will review how to build a model of the company’s financials and how it can be used to forecast the next quarter. We can go line-by-line through the income statement.
• How to think about the markets Apple considers important. This is the best way to forecast the company’s performance beyond its current portfolio. This requires calibrating your sense of timing of innovations. What is too early, what is too small, what is something where Apple can’t exercise control? Innovation theory is essential to this understanding. If you know where Apple could go next and where it won’t it helps you build patience into your planning.
• How to understand Apple’s culture and its resources and processes. This gets into the critical management question that leadership at Apple is concerned with. I’ve had a few conversations with and have some great insight from former managers. Curiously, this is Apple’s greatest competitive advantage and its sustainability is the key “moat” question. Most people don’t even realize that this is the most important question for investors.
• How to understand the market’s reaction to Apple. If you understand the three points above it becomes necessary to juxtapose how others see the company. There is a compelling case of asymmetry of information even though “everyone” is watching the same data. I use the fable of “The Goose that Lays the Golden Eggs” to best describe how most people react when they observe Apple. Apple is something which cannot possibly exist and therefore it is fragile and must be treated as a transient system. It leads to deep discounting in the market. This cognitive illusion has an opposite: monopolies are over-valued because they are seen as invulnerable and permanent even though they are brittle. I use antifragility as another metaphor. Many anecdotes from Steve Jobs also indicate that he understood this asymmetry and instilled it in the company. Investors need to understand this dynamic in order to profit from it.

Sign up here.