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Contact Less

In September 2016 Apple Pay came to support the world’s largest public transit system. It happened through the integration with Japan’s FeliCa and gave Apple Pay access to 160 million daily transactions.

This, along with many other milestones don’t get a lot of attention. Apple Pay is in what could be considered an attritional competition with non-consumption. There are no decisive battles won or lost, only the relentless pressure to make progress against a reluctance to change.

Before I go on, I should make the attrition/decisive type of conflict clear. The terms come from military science. A war of attrition is one where two sides essentially grind against each other and the winner is the one which lasts longest. A decisive battle is one where a conflict is won through a single, acute encounter where, due to either demoralizing or circumstance reasons, one side gives up. It’s the knock-out punch vs. the fight to exhaustion.

When applying this dichotomy to competition, we need to be careful about who we define as competitors. Note that I said that Apple Pay is in a fight with non-consumption. It’s tempting to say Apple Pay competes with some other payment system like Samsung Pay or Google Pay. But none of these alternatives are as powerful as the existing mix of contact payment systems: cash, credit card magnetic swiping and some other hybrid of codes and user experiences (especially online.)

When seen this way the challenger must compete through persistence. It’s impossible for Apple Pay to decisively defeat non-consumption in one battle. It takes literally millions of decisions for adoption: each consumer, each merchant, each bank, each point of sale. It’s a relentless grind of pitching, selling, demonstrating and shaming into action.

It’s been three years of this type of competition and progress may seem hard to spot. That is because we don’t see the big wins. We can only see small wins. The win in Japan, as significant as it might be (160 million daily transactions added to the addressable market) is still small compared to all transactions world-wide.

Continue reading “Contact Less”

iPad Optics

The iPad has an installed base of over 300 million. This is a far larger audience than that of the Mac (which has somewhere between 100 million and 150 million). And whereas the iPad acquired this audience in about 7 years, the Mac took 33 years.

Curiously however, it is the iPad that is seen as the more fragile product. The iPad is considered to be failing, with a presumption of an end of life in the near future. The evidence of this failure the year-on-year decline in units sold. This is illustrated by the following graph. Screen Shot 2017-03-23 at 10.05.21 PM

Note that the iPad decline is paired with a steady increase in the Mac. The iPad exhibits a four year decrease in overall volumes. This has, as they say, bad optics.

But what is seen isn’t all that might be,

If we look further we see that the iPad is still a much loved and much used product. Data from the Pew Internet Survey shows that tablet ownership among US adults increased from 45% in April 2015 to 48% in April 2016 and 51% in November 2016. The rise has been steady. Although this counts tablets, the iPad had 85% share of the U.S. market for tablets priced above $200 so it’s a fair assumption that the iPad audience is growing. Similar data exists for the UK.

Screen Shot 2017-03-23 at 10.11.50 PM

In addition, user satisfaction with the product continues to be very high. Apple cited that in November, 451 Research measured a 94% consumer satisfaction rate for iPad Mini, a 97% rate for iPad Air, and 96% for iPad Pro. Finally, browsing, shopping and app usage data also show continuing high utilization for iPads.

Furthermore, iPads are still growing in “non-consuming” markets. iPad posted double-digit growth in both Mainland China and India, it continues to attract a very high percentage of first-time tablet buyers.

Finally, within corporate buyers there is a 96% satisfaction rate with 66% purchase intent. Apps and solutions are continually being developed for the platform.

Taking into account that the iPad has a large, stable, engaged and loyal user base that continues to expand and find new uses the optically bad sales data needs an explanation. The simplest explanation is probably the best: iPads remain in use far longer than phones, and perhaps even longer than some computers.

Anecdotally we can see evidence for this. Few iPads are replaced every two years the way phones are. They are not tied to service contracts or subsidized. They are also less likely to be damaged during usage as phones are dropped and banged-up. iPads are more stationary or carried in protected containers. Phones are in pockets, iPads are in bags.

So iPads are longer-lived products and it’s perfectly reasonable that people who have them keep using them and more people are joining them but slowly. Note also that the decline in sales seems to be flattening out and perhaps might show stabilization.

Further countering of the iPad in decline idea is the continual improvement in the product. The latest is a refresh of the iPad with more battery life, a better screen and support for Pencil.

Perhaps the iPad will not return to rapid growth, or perhaps it will. But the more likely possibility is that the iPad will level out maintaining steady levels and, perhaps, grow slightly. This flat rather than up/down trajectory is unusual in devices but it isn’t when you look at the Mac. And isn’t the goal of the iPad to become a computer?  If so then perhaps Mission Accomplished.

 

Gravity

Apple is doomed. So are you. As mortals we are used to the idea of death. We do not dwell on it even though it’s inevitable. We do know that we’ll die but what we don’t know is when we’ll die. That certainty/uncertainty makes us, more or less, do everything that we do. And so we carry on. But companies die too. And when they die is also a mystery but it’s not at all clear that their inevitable demise determines what they do. If you think you’re immortal you may live dangerously. Perhaps as a result they live shorter lives than we do.

Life expectancy for humans has been rising but for companies it has been declining. Even more curiously, the richer you are the more likely you are to live longer but the wealthier a company, the more likely it is to keel over at any time. The longest lived small businesses live over 1000 years but the longest-lived large business is probably the East India Company that made it to the ripe age of 274. But that was before 1800.

In the modern, industrial era there are very few corporations that survived over a century and the Fortune 500 shows a turnover in inhabitants that resembles that of a plague-infested medieval inner-city. In contrast to their conservative, geriatric organic owners, synthetic companies are more likely to behave like live-fast, die-young punk rockers.

So it’s no surprise that Apple, at age 40, is seen as being well past its sell-by date. And yet it seems to be saying, somewhat faintly, “I’m not dead yet”. By generating more cash than can be comprehended by human observers and by controlling assets that are well beyond the means of many countries, they (it?) is confusing us with its persistence.

The confusion is exhibited in the following graph which shows the crises in confidence by that wonderful reflector of human perception–the stock market. By voting millions of times a day, the market shows us with great precision the totality of human emotion with regard to an asset. That emotion turns rapidly negative on Apple with surprising frequency.

Screen Shot 2017-03-16 at 2.32.03 PM

There have been over 8 bouts of collapsing confidence (exhibited by 40% drops in value) for Apple’s shares. Consider the latest where we’ve seen a 40% drop followed by 57% increase in share price over the last 12 months. 57% might not seem extraordinary for a small company but for the world’s largest market capitalization with the corresponding colossus of cash that it straddles, the robustness of brand and the loyalty of customers, the mind boggles.

The same thing happened in 2012 and 2008 and as far as I can tell the company has not changed one iota during that time. The same people, mostly, are in charge. With the same mission statement, and even the same product line. The resources, processes and priorities–the only determinants of the essential value of a firm–have not shifted.

One could try to suggest that even if Apple is unchanged, the world around it has changed. But if anything the world has come to match Apple’s own view: more mobile vs. fixed, more design vs. generic, more integrated experiences vs. more modular DIY.

The ethos of Apple is rigid so why is perception about the company so fickle?

If the graph above reflects perception about a constant entity then perhaps it charts how the world has changed rather than how Apple has. Perhaps perception revolves around a center of gravity far heavier and permanent. Perhaps the tug-of-war between fear and greed reflects more upon us that it does upon the object being observed.

The First Trillion Dollars is Always the Hardest

In its first 10 years, the iPhone will have sold at least 1.2 billion units,1 making it the most successful product of all time. The iPhone also enabled the iOS empire which includes the iPod touch, the iPad, the Apple Watch and Apple TV whose combined total unit sales will reach 1.75 billion units over 10 years. This total is likely to top 2 billion units by the end of 2018.

Screen Shot 2017-01-11 at 10.15.00 PM

The revenues from iOS product sales will reach $980 billion by middle of this year. In addition to hardware Apple also books iOS services revenues (including content) which have totaled more than $100 billion to date.

This means that iOS will have generated over $1 trillion in revenues for Apple sometime this year.

In addition, developers building apps for iOS have been paid $60 billion. The rate of payments has now reached $20 billion/yr.

screen-shot-2017-01-11-at-9-41-29-pm

Not included in this payment total are “mobile-first” or “mobile mainly” businesses such as FaceBook, Twitter, Linkedin, Tencent, YouTube, Yahoo, NetEase, Pandora Radio, Google Search, Baidu, Google Maps, Gmail, Instagram, Amazon, eBay, JD.com, Alibaba, Priceline, Expedia, Salesforce and Other Enterprise Software, Ride Sharing Apps, AirBnB and many other services which monetize independently of the App Store.

I estimate that the cumulative revenues enabled by iOS across these businesses have exceeded $500 billion, with a rate of revenue soon to reach $300 billion/yr.

The revenue numbers can only hint at the change in behavior among users. An iPhone is unlocked 80 times a day. Assuming 600 million devices in use there are 48 billion sessions on iPhones every day. 17.5 trillion sessions every year. It is these instances of interaction and engagement which are desired by all businesses built on top of the ecosystem.

These instances of engagement must be multiplied by the quality of the customers which Apple captures. iOS users spend more and are more loyal than those on alternative platform thus qualifying the platform as “premium” and thus adding to its value in the eyes of developers, content producers and service providers.

As the install base of iOS increases and as users hire the devices to do more and spend more time with them the virtuous cycle of value creation will continue and accelerate.

There is a temptation to think that such a business is fragile and will be disrupted. Challengers appear daily and the number of iPhone “killers” is not measurable. One can cite the billion users of Nokia phones which defected. One can cite the loyalty of BlackBerry users that evaporated. One can even cite the juggernaut of Windows and how it became impotent. One can cite the vast number of Android devices offered at low prices.

But there are reasons to believe that the iOS empire is far stronger and resilient.

Unlike Nokia’s phones, Apple’s product is an ecosystem with network effects and dependencies on software and services. It’s also a monolithic product with a singular interface and form factor.

Unlike BlackBerry, the iPhone does many jobs–too many to count. Indeed the iPhone evolves and changes its core value over time.

Although different in many ways from Windows there are strong similarities in terms of loyalty and persistence of users. iOS even developed a dominant position in enterprises. Microsoft’s attempt to become a hardware company is a testament to the confluence of the two business models.

And whereas Android was originally seen as the “good enough” iPhone, potentially disrupting it, it turns out to be the ersatz iPhone. Chances are higher that users will switch from Android to iPhone and not the other way. Again, the reasons have more to do with the ecosystem and quality of users (which are hard to measure) than with the hardware (which is easy to measure.)

As we look toward the second decade of the iPhone, the expectation isn’t one of another “big bang” but a process of continuous improvement. The market is nearing saturation so the goals must be to capture more switchers from Android. Apple has achieved this with the Mac: survival, persistence and eventual redemption.

More exciting is the apparent expansion of a network of ancillary “smart” accessories. The Apple Watch, the AirPods, Pencil and possible new wearables point toward a future where the iPhone is a hub to a mesh of personal devices. The seamless integration of such devices is what has always set Apple apart.

 

  1. Includes forecast for first six months of 2017 [↩]

The Genealogy of the MacBook Pro

I was an early user of the first MacBook Air. When that product was launched I saw in it something different: a dedication to a new measure of performance: thinness and conformability. The key image used to launch the Air was the laptop sliding neatly into an inter-office envelope. The implication was that the laptop does not need to have its own special “laptop bag”. It could fit into any bag. Users would be able to slip it into all manner of new contexts. It sought to compete with computing non-consumption.

The Air was launched by Steve Jobs in 2008 and was almost universally panned. It was considered underpowered and the dedication to thinness was seen as irrelevant to what consumers wanted. The stock price fell.

The product went on to become Apple’s most popular laptop. It still is. It grew the base of Mac users to over 100 million today.

For the same reason, I was an early adopter of the newest MacBook Retina. The even thinner new MacBook was spectacularly thin. It was smaller than an iPad. It had no ports except one USB-C and a headphone jack. It required dongles for physical connections. It had a new keyboard that barely registered movement and it had a new trackpad that did not move at all but played mind tricks to make you think it did.

As I used it over the last year, I became used to it. It was not my only laptop. I had an older 15 inch Pro, but over time I came to use the MacBook Retina exclusively. I thought I could not do “real work” with it but I managed. I got used to the keyboard. I got used to the trackpad. I got used to the need for a dongle to connect a display. But these challenges were more than offset by delightful improvements. I was delighted by the small power brick and the ability to use any USB power to charge it. I was delighted at the all-day battery life which meant I would charge it the way I charged my Phone: at night.  I was delighted that I could use it in places where I could not use a laptop: on any airplane tray, stowing it in the seat back pocket. And I no longer cared what bag I had for my computer. It did not make me productive by completing tasks more quickly. It made me more productive by letting me be do things when and where I otherwise couldn’t. I love my MacBook.

Now Apple launched a new Pro Mac laptop.The new Pro laptop has the same (slightly improved) keyboard as my MacBook. It has the same (larger) trackpad as my MacBook. It has the same (but more of) USB-C port.  It has something new called a Touch Bar which puts function keys into a touch screen but mainly it feels like a grown-up version of my MacBook Retina. It’s faster too.

Overall, the new MacBook Pro feels to me like an evolution of the MacBook of 2015. I remember at the time thinking that this baby MacBook is probably the wave of the future: the new keyboard, new trackpad, new thinness, new USB-C, deprecation of other ports. These required enormous engineering efforts and it would be silly to leave them on only one model. In any case, from where I was standing all these were “better”. Not along the previous definition of goodness but along a new definition: making the computer more conformable and easier to put into use in more places. The very ideas that drove the development of the Air of 2008. Indeed the very idea that drove the development of laptops since the 1990s.

What’s fascinating to me from a product management point of view is that the groundbreaking new features which re-define the product’s direction are not designed to trickle-down from the top-of-the-line to the bottom, but rather that they trickle-up. The low-end product gets the updates first and the the Pro products adopt them later.

And we can even trace this genealogy of features through to an even “lower-end” product: the iPhone. The iPhone “ethos” of usability and conformability has permeated through to the Macs, starting from the lowly and advancing to the top of the range. The question of where Apple’s design direction comes from can be answered: the bottom.

All this is consistent with a strategy of “low-end evolution”. A way to defend the low-end rather than abandon it in pursuit of what the most demanding customers are asking for. Rather, Apple seeks to incubate a new performance measure. Re-defining goodness.

So is this new MacBook Pro a worthy successor to the MacBook Retina? My attention is riveted by the Touch Bar. It seems a completely new way of interacting but requires discovery and practice. What Apple has to achieve is allow the product to work well without it but also to allow users to evolve their experience with it. Over time we got used to trackpads instead of mice (many resisted the change). We got used to a different, small travel keyboard. We got used to new ports (HDMI vs. VGA) and we got used to wireless everything (it may seem easier, but remember having to always enter credentials vs. plugging in a cable).

The touch bar is a new UI metaphor. It will take time but it is looking at me right now, winking.

Wherefore art thou Macintosh?

Managing the Mac product line must be one of the most challenging problems at Apple. That may not be obvious given the product’s success. Consider what it has achieved:

  • The product is in its 32nd year of market presence. A longevity that in unmatched by any other PC maker.
  • Apple reached a top five position in the ranking of PC vendors. This was achieved for the first time only this year, far along in the evolution of the market.
  • With about $23 billion in revenues per year, Apple places among the top four PC vendors in terms of revenue.
  • With an estimated $5.5 billion in operating margin Apple is the most profitable PC vendor, capturing over 60% of the available PC hardware profits.
  • The product has retained an average selling price of over $1200 for at least a decade. At the same time the average pricing of Personal Computers has more than halved.
  • Although volumes have fallen for three quarters, the product grew volumes and sales for 22 out of 29 quarters. As a result, volumes almost doubled in eight years.1

The contribution of the Mac to Apple’s revenues is shown in the following graph.

screen-shot-2016-11-02-at-2-22-23-pm

It’s attractive and convenient to contrast the Mac with the rest of the PC industry. A David vs. Goliath tale of redemption. The classic comeback story. But the split between the two old rivals (Windows/MacOS) focuses the mind into a limited view of the computing market. The big change in computing has not been a growing Mac vs. declining PC. It has been a huge surge in mobile device use vs. a decline in PC use overall.

This data is visible in many ways. Browsing data shows mobile overtook PC use this year. Shopping data around Black Friday points in the same direction. Data on user interaction captured by comScore is shown below2

screen-shot-2016-11-02-at-3-45-49-pm

PC use went from half to a third of time while mobile went the other way: from a third to half of time within only four years. All the data is consistent: mobile use has swept PC use aside.

Continue reading “Wherefore art thou Macintosh?”

  1. The unit volumes in third quarter 2008 were 2.6 million. Eight years later they are 4.9 million and could easily be over 5 million in the holiday quarter. [↩]
  2. Although US only, the global picture is likely to be even more skewed toward mobile as PC didn’t saturated global markets before the smartphone swept to power. [↩]

Post-keynote Apple event San Francisco – September 8

 

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.

sustain-title-white

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.

Mini Me

Horace and Henri go for a drive.

The Critical Path is sponsored by Wealthfront, the automated investment service that makes it easy to invest your money the right way. Get your first $15,000 managed for free when you visit Wealthfront.com/5by5.

Support also comes from Braintree, code for easy online payments. If you’re building a mobile app and searching for a simple payments solution, check out BraintreePayments.com/criticalpath.

Source: The Critical Path #186

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. [↩]

Asymco

Asymmetric Competition

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