Are Share Buybacks a Waste of Money?

Apple has so far returned $761.5 billion to shareholders. 143.3 billion in accumulated dividends and $618.2 billion in share buybacks. These are the gray areas in the graph above. The question that often comes up is: isn’t this capital return program a misallocation? In particular isn’t buying back shares and retiring them a waste of money?

By definition, it cannot be. The mechanism of buying shares and retiring them is a process of returning retained capital to shareholders. The other ways this can be done are through dividends (periodic or one-time) or the sale of the company (liquidation). Ignoring the liquidation option which does not make sense for viable companies, the decision between dividends and buybacks comes down to a tax efficiency question.

The result is, however, roughly the same: retained earnings, which are stored by the company as cash typically (net value for Apple today is $57.2 billion), are an asset balanced by a liability to the shareholder called Total Shareholder Equity (valued today as $60.3 billion.) As such, the retained earnings belong to the shareholders. It’s why they own the company. It’s what their cash share of the value in the company is.

It’s also surplus to the company’s needs. Had the company needed this cash, it would have spent it on building the products and services it sells or operations that maintain or grow the business. Those expenses appear in cost of sales (COS) or cost of goods sold (COGS) or in operating expenses Sales, General and Administrative (SG&A) or Research and Development (R&D). If it’s not spent this way then it drops to the net income line and, crucially, is subject to taxation (about 12% to 15% for Apple). After taxation, once returned, it’s taxed again as either capital gains (in the case of buybacks) or dividend income. These rates vary on the jurisdiction of the owner and the current tax policy.

Note that the spending on R&D includes development of future projects which are not directly related to current products. Engineering of current products is expensed against COGS. R&D for Apple ($29.4 billion in last 12 months) is significant, having grown to 9% of sales, as the graph below shows.

For the company to decide to return capital it really does mean that it has no good ideas on how to spend it given what the company knows it can and cannot do. It’s a judicious decision and one which honors the relationship between owner and manager with fiduciary responsibility to the owner.

Still, doesn’t that mean it’s wasted?

No. Giving it to the shareholder means that the company says “It belongs to you, I don’t know what to do with it on your behalf, so here, you figure out what to do with it.” The shareholder can then make an allocation decision that suits their sense of what is valuable or useful. The return is a deferral of decision to the owner rather than their agent.

To the extent that once returned, the capital is misspent, that is on the spender, not on Apple.

Consider the alternatives. Instead of returning capital, what some managers decide to do is to re-allocate those retained earnings to acquire other companies with the promise of value creation through synergies. However these are often huge wastes of money. The new asset is recorded as “goodwill” on the balance sheet, offsetting the retained shareholder equity. As the synergies fail to materialize, the asset (goodwill) is written off, and shareholder equity decreases accordingly, and so, value evaporates or is transferred to the owners of the acquired company who cash out above market value.

Acquisitions are a process of picking the pocket of shareholders.

The alternative might be to spend heavily on R&D. That is more admirable but the amount involved is enormous and it’s very difficult to find enough people and projects worth pursuing without turning R&D into an academic organization. Remember that with R&D at $7.4 billion per quarter, the company is spending 41 times more than it did in 2006.

And doubling or tripling R&D, even if possible, would impact margins to such an extent that Apple’s profitability would show very poorly indeed. That would collapse share prices and decrease share-based compensation, limiting the possibility of recruiting talented engineers. It would bring quite a lot of negative consequences.

Another exercise to undertake would be to ask what would happen if the mechanism of share buybacks were made illegal. It was not always legal anyway. That is left as an exercise to the reader.

Apple is Doomed, Revisited

Before the iPhone launched in late 2007, Apple was trading consistently at a P/E ratio above 30. Here is a table for the P/E ratio on each Friday’s closing price from May to August, 2007. The iPhone launched on June 29, 2007.

DateP/E Ratio
6/27/0733.6 (2 days before iPhone launch)
Apple’s P/E ratio around the iPhone launch

Apple was not super powerful but it was not doomed either. It was a time when the iPod was dominant and the Mac was still alive. iTunes re-wrote the rules of the music industry and debate was raging whether Apple should be considered a media company. Platforms were not its strength but Steve Jobs showed he was still able to distort reality.

These good times did not last. The first year of the iPhone was a period of minimal contribution from the new category with Apple still largely valued on the basis of the iPod. The predictions of failure for the new communications product, especially given its high price, were legendary. It wasn’t until 2008 that the iPhone began accelerating and making a meaningful contribution to the bottom line.

It was then, in late 2008, that Apple’s valuation broke. The P/E ratio fell from above 30 to nearly 10. The following graph shows the catastrophic 53% share price collapse coupled to the triple digit surge in earnings which led to the P/E ratio tanking.

[The graph shows earnings per share for the trailing 12 months (blue line) and 10x, 15x, 20x, 30x and 40x that value (colored lines). The share price is the black line. The share prices are sampled every Friday. The graph is notably logarithmic. The grey shaded areas are periods of significant contraction. The percent drops/increases during these periods of contraction/expansion are shown in the annotation arrows near the bottom.]

The valuation remained broken for 12 years, between late 2008 and late 2020. This period being, arguably, the most remarkable wealth creation event in history of business. For evidence see the following graph showing the amount of retained earnings returned to shareholders building inexorably toward one trillion dollars. This is not share price appreciation but cash returns. [If you have evidence of a larger wealth-creation event do let me know.]

The creation of $800 billion of shareholder wealth at fire-sale share pricing.

As I explained throughout this period, motivation to dispose of shares which create immense wealth is explained by the fable The Goose That Laid the Golden Eggs but the question some are asking now is whether more wealth can still be created, and if so, can we expect Apple’s valuation to collapse accordingly?

I should note that during the long, dark years of wealth creation, other technology companies such as FaceBook, Amazon and Netflix, Google (so-called FAANG) and Microsoft enjoyed far higher multiples than Apple, sometimes 3x higher. This was not seen as abnormal by analysts because those companies were always assumed to have higher growth potential, with a diverse portfolio of opportunities while Apple’s growth was perpetually in its past, based on one product.

Paradoxically perhaps, since the Covid-19 pandemic Apple shares have enjoyed P/E ratio roughly equivalent to the other tech companies. For instance, peaking at 42 in January 2021, the P/E ratio has averaged about 27.5 since then. Simultaneously, diversified companies such as FaceBook (now Meta) and Netflix collapsed due to serious business model flaws (based on single sources of income) and Google (now Alphabet) and Amazon have slowed growth and are facing anti-trust scrutiny. Having lost any presence in mobile computing Microsoft has become entrenched in enterprise, finding new businesses in cloud and (possibly) generative AI. As a result of these reversals, the contrast between Apple and the mega-cap cohort has become fuzzy.

So back to the question: does it make sense to price Apple in the 30x P/E or should it go back in the gutter at 10 to 20?

I would argue that the big change in perception hasn’t been the surge in earnings during Covid (see graph below). The big change is the realization that Apple is no longer about to go out of business.

How could Apple not be going out of business?

Remember that a P/E ratio in the teens is a clear signal from the market that the company is a questionable “going concern”. This is parlance indicating doubt that the company will continue in its present form..

What has changed since 2020 is that even though there were a multitude of crises—from war to pestilence—the eggs kept coming. Perhaps, perhaps, Apple was not doomed after all. In that time it managed to create 1 billion customers. Perhaps having 1 billion customers was a positive outcome. Perhaps counting iPhones during a single quarter was not the only way to value the company. Perhaps having 1 billion satisfied customers made it viable. Perhaps having 1 billion satisfied and loyal customers returning every year was interesting. Perhaps having 1 billion satisfied wealthy customers meant the end is not around the corner. Perhaps having 2 billion active devices in use was sustainable. Perhaps providing services to 1 billion customers using 2 billion devices delivered through 1 billion subscriptions made some sense. Perhaps having all this data in a linear graph made it predictable?

Perhaps. Though Apple provided updates on these figures regularly, the questions everyone asked were still on unit shipments (which Apple stopped providing.) While Services grew at double digits and 70% margins the questions from analysts on conference calls persist on the iPhone and currency or production “headwinds”. Perceptions take time to change. They are still changing.

Maybe at this point it’s time to agree that Apple’s end will not come through being easily replaced by the competition (first Windows then Android, etc.) but by having access to its markets restricted. Being the only American company to have cracked the China puzzle, it’s surely vulnerable there. And please don’t mention India.

Apple is no longer doomed because it’s too weak. It’s doomed because it’s too strong.

It seems that it’s not too hard to believe the end is still near.

The Poetry of Pricing

iPhone 15 has just been released and, as usual, all the products in the iPhone line-up have received new prices. The following graph shows the current product line-up (US prices before tax) and the historic price points for all the previous versions of iPhones since inception.

It was amusing before the launch to see reports that the iPhone 15 would see a price increase. If I were a betting man I would have bet against it. The reason is that, as the graph shows, pricing changes are regularly made every three years and the last one was in 2021, two years ago. It would be an extraordinary claim to expect a price increase this year.

Also, as you can see, price increases only occur when there is a new “top-of-the-line” model introduced. This new highest spec, usually, but not only, in memory, justifies the new top of the range. For instance, the top of the range in 2015 was the 6S Plus with 128GB of storage. Three years later is was the Xs Max 512GB. Three years later it was 14 Pro Max 1 TB. In nine years the top memory increased by an order of magnitude but the top size also increased as did the number of cameras. Naturally, the price increased by about $650.

Therefore we can predict with some comfort that the next “highest price” point will be $1699 for the iPhone 16 Pro Max 2TB, or equivalent. The possibility exists that the iPhone 16 Pro will also include a leap higher in optics and have more technological tie-ins with Spatial Computing.

But this highest price point is not necessarily the most common price point. Indeed, we can guess that the most common point is visible in our graph above. The density of product choices increases toward the middle of the range. The highest and lowest price points are populated with one product. The middle price points from $800 to $1,100 are populated with\ three products each. Therefore a good guess is that the $900 is likely most popular and that the average selling price is also very near there.

Note that the average sales price (ASP) has not been available from Apple since 2018. At that time the ASP was $790 (holiday quarter of 2017). A gradual increase to $900 over five years is not unreasonable. In fact, it probably should be higher given inflationary pressures. We can only guess.

We have to understand that Apple does not set pricing in response to competitive pressures, commodity pricing, inflation, currency exchange rates or internal sales or margin targets.

Pricing is sacred and is a decision made based on consumer understanding.

The anecdotes of Steve Jobs preferring certain price points because of their poetic value are legendary. 99c for a song sounds right and looks good. The iPod was priced in lovely, alliterative $100 increments. Same logic applies to services.

Pricing is an art and when you see the spectrum above you also see how the increments nudge the decision process. Pricing is a signal. It’s a conversation between seller and buyer containing information that both parties will exchange. On the part of the seller it suggests both the cost of the offering and the value it provides. Buyers are inclined to see if they can stretch to the next higher increment given the increased value proposition. Once their decisions in the collective are tallied, the seller knows well what buyers prefer.

Apple has been having this conversation for decades and it shows.

Brief Comments on the iPhone 15 Event

After the Apple iPhone 15 launch event of September 12, 2023 I was a guest on the Claman Countdown show on FOX Business News (FBN) and here is the video.

In advance of the event I was asked for a few thoughts that might be topics I would like to discuss.

My answer was:

Apple has been pushing hard on imaging in their iPhone evolution. It has also released the Vision Pro that offers so-called Spatial Photos and Video. There is speculation that there will be some linkage at some level with Vision Pro and iPhone imaging. I do wonder if we’ll get hints of possible new optics that can support the Spatial Photography

Remember that Apple hinted at Spatial capabilities with its iPhone Lidar sensor some time ago. Apart from better focus at night, there was little purpose for laser distance measurements in a 2D photo device.

Additional Apple Watch health features are also always interesting. Apple’s efforts in health are hiding in plain sight and point to major value proposition to a large audience that skews older.”

Based on this, I’m rather happy to see the support for Spatial Photos and Videos in iPhone 15 Pro. The surprise on the watch was not a new Health feature per se but the Double Tap interaction mode.

Also of interest to me was the Roadside Assistance via Satellite. This will be a very well received feature and many news stories will be written about it.

The Value of a Customer

As I remember it, at least 10 years ago, I began to hear anecdotes from developers who built apps for both iOS and Android about their economics. The story is that they tended to have twice as many users using Android but that iPhone App Store revenues were roughly twice those of Google Play Store. From that I devised a rule of thumb that an iPhone user was about 4 times more valuable than an Android user. Half the users, paying 4 times as much means double the income.

Over the years I came across a lot more data about market development (the diffusion of innovations) and market creation (the innovation process) and applied it to transportation. Along the way I also became more aware that figures of consumption and spending are not normally distributed. That it turns out that the governing function of much of human behavior is log-normal. That is, it is skewed rather than balanced or symmetric around an average. Classic examples are income distribution and the distribution of travel distances.

Consider the following diagrams: Trip Distances vs. Trip Speeds for New York Citi Bike travelers (n=42.7 million.)

The different lines represent different time periods spanning the months of the year.

The top graph shows that most trips are short, and the average distance is not the most common distance. The bottom graph shows that the average speed is the most common speed. The top graph is very accurately modeled with the log-normal function. The bottom graph is the classic bell curve of the normal or Gaussian function.

Income is log-normally distributed and so it has to be with services revenues. There must be a definite skew where there is a disproportionate spend by those who have more income. Thus segmenting or, to put it less kindly, discriminating customers properly is super important. Customer quality is just as important, perhaps more so, than quantity.

So let’s revisit the question of user quality for online services.

Unlike 10 years ago, there is a lot more data. The EU, for instance requires a report of the number of users on each platform.

The figures I want to focus on are those of Apple App Store and Google Play Store: 123 million and 284.6 million respectively. These are strikingly similar to the ratio of 2x between iOS and Android from my old anecdotes. However, if we look at global data, Apple claims 650 million active App Store users while Google claims 2.5 billion active users. That makes the global ratio closer to 4x Android. However, if we look at the US, the ratio is 167 million iPhone users vs. 144 million Android. In the US, iOS is a majority.

This is explained by income. The wealthier the user base the more iOS seems to be in use.

Now let’s look at revenues for the platform stores.

On the right side is the history of retail revenues by year from 2016 to 2022 and split between Apple App Store and Google Play Store. Mirrored on the left is the number of users, also split by store but also by region, but only for 2022. [App Store revenues are my own analysis (with validation against other sources) and include billings not just Apple’s own cut. Play Store revenues are from Business of Apps.]

The ratio between revenues has kept remarkably steady, with 2016 revenues at a Apple:Google ratio of 29:15 (1.93) and 2022 at a ratio of 81:42 (1.93).

The global user numbers are, as mentioned, 3.8 to 1.

[Aside: One sanity check on the data is that the 650 million App Store users is about half of my estimate of iPhones in use (1.2 billion). That might be alarming. Why are only 54% of iPhones in use paired with App Store use? However, if we take the sum of both App Store and Play store users (3.15 billion) and compare it with the total number of global smartphone users (6.92 billion), we discover that 45.5% of all smartphone users use some store. Adding Chinese Android stores we can see that the ratio of 54% for iOS is somewhat consistent.]

Thus we can compare the app revenue per user of the two platforms by dividing global revenue number by the global user numbers. The results are shown below:

I scaled the spending to a per-month basis.

So the picture becomes clearer. The iPhone customer is 7.4 times more valuable than the Android customer. This is more impressive than the 4x rule I had 10 years ago. The reasons are mainly that my anecdotes were from developers who sold products in the US or EU whereas expansion of smartphones to 7 billion global users has drawn in more lower spending customers.

But Apple’s base has also grown to over 1 billion users (650 million store users). This highlights that Apple has effectively grown and discriminated customers effectively. It obtained not just 1 billion customers but the best 1 billion customers.

How to discriminate effectively is the holy grail of marketing. The naïve approach is to keep prices high. But that usually only results in a “luxury” branding and a small base that tends not to grow. The alternative “premium” approach is to offer functionality and multiple tiers and distribution options and financing and merchandising. There is no simple formula.

The bottom line is that Apple’s approach is attracting 650 million $10/month app spenders. When we factor in additional subscription services, we get to the juggernaut that is Apple Services. This analysis has shown how difficult it is for anyone to come close to this quality of revenue.

As we look forward to Spatial Computing, the idea of increasing that spend from $10/month for a small glass rectangle in your palm to perhaps $100/month for an immersive 360-degree 3D experience does not sound too crazy.

But only if you can find those customers. I suspect Apple already knows who they are.

If you want to learn more and hear an in-depth discussion on this topic make sure you subscribe to the Asymetric Podcast on Supercast and Apple Podcasts.

The $2 Trillion Economy

The App Store ecosystem crossed $1 Trillion in 2022.

To be precise, in a report published in May 2023 by the Analysis Group the ecosystem is estimated to have exceeded $1.1 trillion. This ecosystem is defined as the total transactional value of the sale or distribution of digital and physical goods and services through apps. It also includes in-app advertising. The analysts relied on a variety of data sources, including data from Apple, app analytics companies, market research firms, and individual companies.

Note that this includes Apple’s own services as well as App Store developers. Unlike Apple’s own reporting of payments to developers (and thus partially revealing its own App Store revenues) this data includes payments which are not captured by Apple directly. In the words of the authors, “More than 90% of this figure originated from transactions that did not happen through the App Store, meaning that these amounts accrued solely to developers and other third parties, and that Apple collected no commission on them.”

This $1.1 trillion figure is almost double the value from 2019. Ecosystem estimates were first provided in 2019 at $519 billion, with $643 billion in 2020, $868 billion in 2021 and $1,123 billion in 2023. These correspond to growth rates of 24% in 2020, 35% in 2021 and 29% in 2022. The compound growth rate has been 29.4% since 2019.

It would be ambitious to expect this CAGR to continue after the Covid boom but at the same time, it’s worth noting that this growth out-paces Apple’s own services growth rate. Services (reported) revenues grew at 18%, 27% and 10%. The actual figures and growth rates are shown below.

This Analysis Group report is very much worth reading and adds an important new metric of resilience and scope and scale of the platform and ecosystem that Apple has created.

However it is also not the complete picture. I strive to see the larger picture of what I call the Apple Economy. This includes the ecosystem as well as the direct revenues Apple obtains from products and services. [Of these revenues, roughly 60% is then passed on to Apple’s suppliers, with less than 20% retained as earnings].

Therefore, the combination of ecosystem and revenues is shown in the following diagram.

Note that the “Economy” size was over $1.4 trillion when the ecosystem alone was $1.1 trillion. Note also that I’m also suggesting that it’s likely to be $1.6 Trillion this year. This diagram shows the story since 2019 but also makes a forecast to 2025.

I’m expecting the ecosystem to grow more modestly at 18% in 2023 (down from 29%) and 16% in 2024 and 15% in 2025. Apple’s own product and services sales are also subject to estimation error.

Nevertheless, it’s not unreasonable to believe the forecast above where the Apple Economy expands to over $2 Trillion by 2025. This is an acceleration from previous forecasts.

It’s difficult to write about the implications of this. Any value in the trillions is hard to put in context. Certainly, Apple’s market capitalization is in the trillions. For fun, we can calculate that Apple is trading at a multiple of 1.74 of its economy.

But rather than trying to assess valuation directly, Apple’s Economy is more like a GDP figure: I think it’s helps to understand the overall scale and resilience. You might even ask what would happen if it were to cease to exist. The number of people who are employed in a $2 trillion economy is in the millions; perhaps 10s of millions of people.

In 2023, global GDP is expected to reach $105 trillion. It’s nice to think that Apple could soon be about 2% of the world.

How Vision Services Subscriptions Reach $3000/yr

One of the biggest puzzles of my adult life was this question: Why do people pay to attend live events when broadcasts and/or recorded versions are free? Not only do people tend to pay for live events, the costs are extraordinarily high. Earlier this year, 32% of planned concertgoers expected to spend $500 or more attending events, a LendingTree survey found. The survey also revealed 38% of concertgoers were willing to pay more for better seats, up to $328 for their favorite artists. The average price for a Drake concert is $600 and for Taylor Swift it’s $2,424(!) Adding travel, accommodations, opportunity costs and transactions costs, the live event costs can easily run in the thousands per event.

And it does not end there. Live events offer an inferior experience. The seat location can be far from the action, acoustics can be poor and there is usually a lack of multiple angles or replays (in the case of sports) to see the details of the action. Often, spectators have to watch large screens in order to actually see what is going on. In other words, they pay a great deal to watch the event on TV even if they are at the event.

This puzzle came back to me also when attending the Apple Vision Pro launch at this year’s WWDC. Those of us watching it in person basically watched what everyone at home saw, but in a degraded outdoor screen experience complete with sun glare and wind noise. Of course, we also got to see the device up-close and some even got demos. But this was the exception. Most spectators at live events do not obtain access to the talent. They may get to chat with friends or meet new ones but that is entirely haphazard.

Now I know all the arguments about “presence” and the feeling of being a part of the event itself and the sense of occasion and shared experience that it generates. It’s something movie theater operates are trying to also convey even while they are screening recorded content. Clearly there is some value to this. But $3000 of value?

Let’s then assume that, since the market is always right, there is $3000 of value in a premium live event. Consider a season pass to top sports leagues. Consider concerts, night clubs and band gigs. Then there is the line of business that I happen to also offer: live talks and conferences. How does technology affect this particular form of content?

Well, I believe Apple has an idea. Apple, after all, invented the product-release-as-an-event. That is, Apple created event marketing–and everyone followed. Apple was first to know the value of the technology show business and in particular live show business.

But delivering such businesses is not reliably profitable. The more reliable business is ticketing–an annoying racket. Putting on the show is touch-and-go. It might be sustainable until costs rise due to the talent asking for a greater share, or other service providers following suit. It’s also difficult to stay on top as crowds are fickle and tastes change.

This is why I think Apple’s Vision Pro is at least partly aimed at “performance conveyance,” rather than the more crude “recorded media playback” job to be done. If this is so, then the business model that makes sense is to license rights to performances and deliver them. The same way that licensing rights to recorded content and delivery was the business model of screen-based devices.

So what does Performance Conveyance mean? Well, we have to look at performer quality, brand and the experience itself. If they come together well then Apple can say they deliver on the job of “live”. And if so, then they can charge accordingly. Hence, whereas Apple Music is $10/mo. or Apple TV is $10/mo. or a bundle of services is $30/mo., then why wouldn’t Apple Live be $300/mo?

If not subscription then perhaps à la carte payment for events: sports, concerts, et. al. In combination it’s not unreasonable that Apple with Spatial Computing and Vision will offer a new tier of service bundle pricing with an average revenue per user of $3000/yr.

That would certainly solve my puzzle.

[Edit: I forgot to mention the value of theme parks and (ersatz) tourism in general. Clearly this is such a powerful idea that industries have been created around it.]

Predicting Apple Services

The data is finally out. Apple Services and perhaps Apple itself can be quantified and predicted as never before. As we shall see this data changes almost everything we know.

It is even more shocking that this most important data set has been released by Apple itself. (Though it did so in order to comply with regulation, Apple did offer a bit more detail than was required.)

I am speaking of course of the European DSA Recipients of Services Report publication for the European Digital Services Act. Available in all the languages of the European Union, and thanks to Ireland and Malta, we can even read it in English.

What the data shows is the number of average monthly active recipients in the EU of Apple-provided data services, calculated as an average over the period of the six months to 31 July 2023. This number is 123 million.

In addition, if you follow the link, you can see the number of recipients broken down by Member States. I summarize this data below.

Note that my summary is not that of the absolute numbers of recipients but the percent of population that these numbers represent. Note further that for some of the states with less than 1 million total recipients, estimates had to be generated. These were done in order to complete a total of 123 million. You’ll have to trust me that these estimates make sense.

This release of data might be amusing for the ranking we obtain, showing which countries’ citizens are more likely Apple fans than others. Seeing, for example, that the nordic countries show more affinity for Apple than the balkans; whatever that implies.

But a geographic categorization is banal. What would be more interesting is to look for a proxy for Apple adoption that is predictive. I know what you’re thinking: it’s obvious, look at income. More precisely GDP per capita. The data yields the following.

Please keep in mind that some countries might have missing or outdated data, and the values presented here are based on information available up to 2021. Note that there is one outlier. That data point around $90,000 and 40% adoption is Ireland. It’s an outlier because the GDP income for Ireland includes the large number of multinational firms based there. That includes Apple, Facebook, Google and LinkedIn, etc. which pull GDP above what would be assumed by GNP.

With Ireland the data fits with the coefficient r-squared of 0.77. Without Ireland it’s 0.85. This seems good enough to me to estimate the relationship of Apple Adoption ~= (National Income – 4247)/116,358. The trend line in the graph above shows this relationship.

What are the implications?

First, the ends of the line need to be finessed. 100% Apple Adoption is suggested at income of $116,358/yr/capita. Also, 0% Apple Adoption happens below an income of $4,247/yr/capita. Now both of these are problematic as there are known adopters in countries with income below $4,247/yr (more about this later) and there are countries with income above $116,358 which cannot therefore have more than 100% adoption (or can they? This makes a good trivia question.)

These anomalies should encourage us to look further. What if we apply this formula for countries outside the EU? To answer this, I generated a country set with about 190 entries and applied the pattern seen within the EU country set (n = 27.)

Knowing the GDP per capita for all countries as well as population size, we can estimate the global total of Apple services subscribers to be 560 million individuals. Note that Apple reports 1,010 million total subscriptions but that includes multiple subscriptions per subscriber and subscriptions to services which for Apple only acts as guarantor through the Apple App Store. Overall data on Apple Subscriptions (and other details) is provided below:

Note that we know the total active devices to be over 2 billion and the active iPhones to be about 1.2 billion. This implies that about half of iPhone users have an Apple-owned subscription and that over half of the subscriptions Apple manages are for its own services.

What’s more, we can obtain a detailed list of expected Apple Services users for each country. An example would be 5.8 million users in Mexico or 1.7 million in New Zealand. [I could furnish this on a country-level in a newsletter, if anybody is interested please let me know.]

It also allows us to understand the potential for countries which currently are below the model’s threshold of income. That list consists of 88 countries with a combined population of over 4 billion. They will join the Apple ecosystem, it’s only a matter of time. Can we predict this? I believe so. Stay tuned.

The story of Apple Services is only getting more important but also more detailed in terms of data and analysis. Readers of this blog have been well prepared for what happened and Apple has followed through with gross margin data and now with some limited country-level data.

As we move into the era of spatial computing, services will only matter more and it’s imperative that observers of the company stay on top of the data with solid modeling.

Movies and the Internet

Almost a year ago, on March 1st, 2021, I tweeted a snapshot of the “FAANG” P/E ratios. They were:

  • Netflix: 88.63
  • Amazon: 73.94
  • Microsoft: 34.65
  • Google: 34.75
  • Apple: 32.89
  • Facebook: 25.53

Today same companies have the following ratios:

  • Netflix: 19.34
  • Amazon: 46.08
  • Microsoft: 30.17
  • Google: 22.35
  • Apple: 27.79
  • Facebook: 13.67

What a difference 13 months makes. Microsoft and Apple saw modest falls 13% to 16%. Amazon, Google and Facebook saw large falls in their ratios: 38%, 36% and 48%. Facebook (now renamed pitifully as “Meta”) in particular saw its valuation collapse by half! This is largely because in February the company forecasted lower than expected revenue growth in the next quarter, blaming privacy changes in iOS, macroeconomic challenges, and the market finally realizing that it’s an evil and despicable company.

Microsoft and Apple grew their businesses nicely and have been resilient post-Covid. They are now revenue-reliable “blue chip” tech companies with large user bases that encompass high value, loyal customers. Google and Amazon are a bit more precarious given exposure to macro conditions and unclear new market opportunities but Amazon is still sporting a very healthy 46 ratio which is largely due to its investment-heavy approach to cash flow.

But the star of the show, the real blockbuster, is Netflix. It fell from P/E of 88 to P/E of 19. Even six months ago the P/E was close to 70. What happened?

Remember that P/E is an indication of growth potential. A P/E of 19 implies that the equity should be priced at 19 times last year’s earnings, which are roughly indicative of profit in a year and thus P/E is a time horizon: how many years would I wait before I got my investment capital back (and thus break-even).

Well, one could say that a P/E of 13 or 19 (FB or NFLX) is pretty reasonable. It’s reasonable to pay that many years’ profit for a company. The large ratios only make sense if a company is growing rapidly. 20% to 30% growth can justify P/E of above 20. But what would justify a P/E of 88?

The market has always given Netflix high valuation because it was growing and when the growth stopped the P/E fell to a more reasonable level. Unfortunately that means the share price had to fall over 70% from its peak. More than 40% in two days. Tragic.

The stock peaked at $700 in October and is $221 now. Why were investors betting on high growth, just a few months ago?

I think it was because investors like movies. And the Internet. Investors like movies and the Internet.

Netflix was never a great business. The logic evolved from sending movies as DVDs by email, ordered through an online catalog, to having the same selection available for download (streaming). Everything was subscription-based so bundling gave movies a “binging” consumption option.

But this depended on the having access to good titles. The access was easy at first since Netflix was a new channel and it was a bonus for the movie publisher. Pure margin. But over time the movie publishers saw the new channel eating into existing distribution and they thought they could deliver it themselves, increasing margins. The catalogs were suddenly cut off.

Netflix responded bravely: they would make their own movies. Out came the checkbooks and the distributor became the producer.


But is that really a good business? You have to make movies which are very expensive. Some will be hits, some won’t. You thus have to make a lot of them. And then you have diverse demand. People want to have all kinds of genres. So you have to make them all. And what’s more you can’t really market them as events because they are so numerous. It sounds really hit-and-miss with a huge risk.

At this point you have to raise pricing. And then came the competition who, like Disney, said “we have better, more targeted family content”. Or Apple TV+ which simply said “we have better quality.” Many other streamers offered alternatives like Amazon Prime with a smorgasbord approach. Sure, households could subscribe to all these services, but the bill would start to be painful. Not much savings over the cable bundle. Netflix increasing price sends many for the exits.

The company then drops a bomb: they feel they can’t grow subscribers because they are “near saturation” and the families which are not yet paying are probably using “shared” passwords. It can only grow if it converts the non-payers.

That all happened rather quickly. The market loves movies and the internet and who doesn’t. It’s just that movies and the internet don’t make a great business.

Movies look to be more of a feature of an internet service bundle. That’s Apple’s approach. They don’t see video as a business but as hygiene: must-have something to put in a bundle.

So Netflix, who first unbundled the neighborhood video store, then bundled production and distribution was itself not much more than a substitutable piece of a bigger bundle.

For this reason I always wondered why there was an “N” in FAANG. Netflix always seemed more a transient idea: yes people like movies, as they like music and books and magazines. And producing and distributing media has undergone dramatic change with computing and internet. But a business that only produces and distributes a single media type may be an ok business but should it be put on the same level as platform companies with billions of users?

Netflix has 200 million subs but that is not a big number. Apple distributes 785 million subscriptions to over 1 billion customers. Google has at least 2 billion users, Microsoft about 1.5 billion and Meta is over 3 billion. Netflix says it can’t get many more and indeed they forecast losing 2 million next quarter.

It’s a bit sad, but reminiscent of the games industry: it has its limits and the limits mean that it can’t be seen as a ubiquitous and hence maximally valuable asset.