Before the iPhones 8 and X launched I made a prediction on what the iPhone would cost. I concluded that the iPhone price would not change. This is because it has never changed1. Apple collected $767,758,000,000 for the 1,203,732,000 iPhones sold to the end of June or $ 637.8147 per phone.

Of course this is the average price and that average is on a trailing 12 months basis and measures some of the deferrals in income that exist for obscure accounting reasons.

Now that the new iPhones have launched, how probable is my prediction? The first mild surprise is that the total number of phone models has increased to 16. I had no prediction on product count but did not expect the 6S and 6S Plus to remain available. The following graph shows the total number of products in the mix (excluding color variations).

The second surprise was that the iPhone SE has been upgraded in memory from 16Gb/64Gb to 32/128Gb and that the new 32Gb version is $50 cheaper than the old 16Gb. The 128Gb remains priced the same as its 64Gb predecessor.

This means that the SE 32 now occupies a new lowest price band for iPhone: $350. It’s a remarkably capable phone at the lowest price for an iPhone ever. It’s $100 cheaper than the 5C 8 Gb which I bought 3 years ago.

At this point my prediction looks precarious. Continue reading “Good, Better, Best”

1. Apart from seasonality. Quarterly Minimum = $437, Quarterly maximum = $695, Quarterly Median = $631, Standard Deviation=$58 [↩]

Apple reports second calendar quarter results in about a week. I propose the following estimates:

Fiscal Q3 2017:
Rev ($B) 45.321
EPS ($) 1.62
iPhone (units) 41 million
iPad (units) 9.8 million
Mac (units) 4.35 million
Watch (units) 2.5 million
Services ($) 7.2 billion
Other products ($) 2.6 billion
Gross margin (%) 38.4

The revenue estimate is visualized in relation to guidance (revenue between $43.5 billion and $45.5 billion) and shown in the context of previous actual revenues below:p

The estimates are also consistent with additional guidance provided:

• Gross margin between 37.5% and 38.5%
• Operating expenses between $6.6 billion and $6.7 billion
• Other income/(expense) of $450 million
• Tax rate of 25.5%

The estimates (and guidance) suggest modest growth of 7% in revenues and 13.7% EPS. The predictability of the quarter suggests that attention will mostly be focused on guidance for the next quarter.

Expectations can vary quite a bit because of the effects of a new launch. The product mix, pricing and timing are all unknown at this time.

What is known however is that the customer base for Apple is increasing and loyalty is higher than ever. What I sense, coming from very few data points, is that there are more iPhones in use than ever before. A few years ago when the market was less saturated it was easy to assume that commodity Android phones and tablets would surge and swamp iPhone/iOS usage.

This has not happened, indeed the data suggests that iOS usage is stronger than ever and that there are many more “switchers” moving from Android to iOS than vice-versa.

This may surprise some but if we look at the PC market, a similar phenomenon has been taking place for years. Mac usage grows and Macs are more visible and valuable than PCs.

It’s important to note that in the latter, post saturation stages, the markets for both phones and computers are increasingly driven by brand value. This resistance to commoditization is due to buyers’ perceptions of quality moving beyond utility and of the prioritization by buyers of new measures of performance. These new measures defy measurement.

Much of what is therefore required of market analysts is intuition.

The App Store is almost 9 years old. In that time it has generated about $100 billion in revenues, of which about $70 billion has been passed on to developers and $30 billion was kept by Apple. It’s very likely that running the App Store for 9 years did not cost $30 billion so, if it were an independent “business unit” it would probably have been and still be quite profitable.

But Apple does not run “business units” with separate Profit and Loss statements. The App Store is a part of Services which is an amalgamation of non-hardware sources of revenues but that does not mean it’s a business. The purpose of Services isn’t to turn a profit or define its value through some metric of financial performance.

The purpose of Services is to make the experience for the Apple user better. The combination of good experiences allows Apple to be perceived as a valuable brand and that allows it to obtain consistently above-average profitability through pricing power. I like to emphasize that the iPhone at over $600 in average price is more than twice the average price of all the other smartphones and captures over 90% of all available profits.

This is something that remains after a decade and indeed the price is rising in the face of overall price erosion, all without a decrease in volumes. The sustainability of this exceptionalism is due to no one single thing. It’s due to the persistence across all the things Apple does: product, stores, software and services and many other details too numerous to count.

The result is a large and expanding base of satisfied customers and a large and expanding base of partners both in hardware and software and services. The WWDC event this year showed how the ecosystem of Apple is booming with over 3 million new developers and Keynote screenfuls of partnerships. All this makes for a complex picture but it’s a real picture.

The latest numbers on Services try to tell this story: 180 billion App downloads from 500 million App store weekly visitors. The download rate is accelerating as shown in the following graph:

The revenue or payment rates can also be shown as accelerating though at a different rate. In both cases, the story of apps is not yet over, regardless of commentary to the contrary. Much of this growth comes from new markets like China and as India joins the iOS world, there is yet more opportunity emerging.

This enables part of the story of Services which can be tracked with several other metrics: reported revenues, iCloud accounts, active devices, and iTunes accounts are highly correlated.

The patterns after a decade are remarkably consistent. One would have thought that with mobile saturation in advanced markets, the content story would be told through horizontal lines. What we still see is the same slopes we’ve seen since the earliest days.

But the biggest story at WWDC was the re-design of the App Store as a curated content market. The changes are profound: discovery, curation and the surfacing of content have been revamped. It’s hard to predict the implications of this but one of the indications of direction was the separation of “Games” from “Apps”. This is a jarring idea since if all Apps are content, what makes Games different from other Apps? Is this a genre elevated to a new medium?

I can’t yet get a sense of where this is heading, if anywhere, but the remarkable story of Apps is that it’s still an ongoing story. We may be on chapter 2 and we can’t predict how many chapters remain.

Keep an eye on Apps and Services and developers. They are not lagging indicators of success for Apple. They are very much leading.

Predicting Apple’s yearly revenues has been fairly easy. The following graph shows the relationship between budgeted spending on Machinery, Equipment, Internal-use software, Land & Buildings and the shipment of iOS device revenues.

The company conveniently publishes a full-year forecast of these expenditures every fiscal year so by October we know roughly how sales will be during the following year. This pattern has held for 10 years so there is little uncertainty about the 11th year of iOS devices.

Continue reading “Predictably Profitable, Unpredictably Valuable”