Apple Discontinues Apple Pay Later, A Limit to Apple’s Fintech Ambition, Apple’s Predicament
We begin with my thoughts on Apple discontinuing Apple Pay Later. We go over the “why” behind the move. The discussion then turns to Apple’s fintech ambition. We look at where Apple has likely drawn a line in the sand as to what can be done internally in the fintech space versus partnering with existing institutions. The update concludes with a closer look at Apple’s predicament in the space.
Hello everyone. Today’s update will be focused on Apple Pay Later news.
Let’s jump right in.
Apple Discontinues Apple Pay Later
At WWDC 2022, Apple announced it was getting into the Buy Now, Pay Later (BNPL) space with a product called Apple Pay Later.
Apple Pay users in the U.S. would be able to split a purchase into four equal payments across six weeks with zero interest and no fees. Consumer loans are underwritten to facilitate BNPL purchases.
Apple Pay Later saw a limited launch in March 2023 with a broader rollout last October.
Last week, the following was posted to Apple’s Pay Later support page:
“Apple Pay Later is no longer offering new loans. Existing Apple Pay Later loans and purchases are not affected.”
That is another way of saying that Apple Pay Later has been discontinued. In a statement to various publications, Apple provided clarification to 9to5Mac:
“Starting later this year, users across the globe will be able to access installment loans offered through credit and debit cards, as well as lenders, when checking out with Apple Pay. With the introduction of this new global installment loan offering, we will no longer offer Apple Pay Later in the U.S. Our focus continues to be on providing our users with access to easy, secure and private payment options with Apple Pay, and this solution will enable us to bring flexible payments to more users, in more places across the globe, in collaboration with Apple Pay enabled banks and lenders.”
Apple Pay Later discontinuation is timed to coincide
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Apple's WWDC 2022 (Daily Updates Recap)
Earlier this month, I flew out to Cupertino to attend Apple’s in-person WWDC event.
The best way of describing the event at Apple Park was Apple getting back into the swing of hosting in-person events. Excluding the masks and hand sanitizer stations, it felt like a usual in-person Apple event. There was a waiting area for press, hundreds of Apple Retail greeters with an infectiously-positive mood, and a product demo area for the media following the keynote.
My estimate is there were 200 to 250 members of the press and media in attendance, including some international press. That’s a smaller crowd that usual. As for developers, there were approximately 1,000. In terms of Apple employees, my best count was that 2,000, possibly even as many as 2,500, watched the keynote.
The event also served as Apple’s first “open house” for its massive circular ring building at Apple Park. All prior Apple Park events for the press took place at Steve Jobs Theater which is located on the other side of Apple Park. For those events, Apple was careful not to have any visitors stray to other parts of the campus.
The Ring at Apple Park (Above Avalon)
The keynote viewing area, as shown below, was intelligently thought out. Apple opened the giant glass walls found in the employee cafeteria to create an indoor / outdoor venue. This served as an adequate solution for getting a lot of people out of the sun. As for those who were baking in the sun, they were given more comfortable, beach-style chairs in return. For the first time, the best seats in the house at an Apple keynote were in the middle of the audience, seated in the shade.
Inside The Ring at Apple Park (Above Avalon)
Interestingly, Apple began airing the taped keynote three minutes earlier than the public streaming. The delay seemed intentional, possibly as a way to encourage live blogging / tweeting since there didn’t seem to be any other reason for starting it early. The largest screen that Apple relied on to show the presentation was shockingly good – the clearest big screen I have ever come across, while the sound system made it seem like I was in an indoor event.
As for why Apple went through the trouble of having ~1,000 developers come on campus despite having an all-virtual WWDC with labs and sessions occurring online, the company missed the community aspect that had become a WWDC tradition. There are clear benefits found with having a virtual WWDC, such as a significant increase in accessibility. However, the face-to-face interactions and social elements that developers experience have been sorely missed the past two years.
My suspicion is that Apple will rely on the event structure again, including in September with the upcoming product event. Apple likely hopes it will be able to host the event inside Steve Jobs Theater. All-in-all, the format worked well, with meticulous planning and preparation throughout. Apple has gotten really good at putting on these massive events. More importantly, an event structure reminiscent of a movie premiere offers a good combination of virtual benefits such as the well-polished taped presentation with animated transitions that can never be replicated in real time and in-person perks like a product demo area.
An Ecosystem Event
WWDC is all about software updates with new hardware sprinkled in from time to time. As Tim Cook put it when concluding the keynote: “[W]e pushed our software platforms forward in some incredible new ways. Introducing features and capabilities that will enable our developers to do amazing work and provide our users with exciting new experiences."
A different way of thinking about WWDC is that it’s Apple’s annual ecosystem event – the one time each year when Apple shows how it is pushing its entire ecosystem forward.
An Above Avalon membership is required to continue reading this article. Members can read the full article here.
The full article includes the following sections:
Attending the Event
An Ecosystem Event
iOS 16 Takeaways
The New MacBook Air
The iPadOS vs. macOS Debate
The Big Surprise Found With Apple Pay Later
Revisiting Apple’s Credit Kudos Acquisition
CarPlay Mistruths
My Full Notes from the Keynote
Winners and Losers From WWDC 2022
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Apple's Ecosystem Growth Is Accelerating
The two most recent Above Avalon articles took a look at how and why Apple’s ecosystem is giving the company a major advantage against the competition.
With Apple reporting 3Q20 earnings two weeks ago, there is value in quantifying how much Apple’s ecosystem is growing. The data should startle the competition. Apple is seeing a clear acceleration in its ecosystem growth as hundreds of millions of iPhone-only users move deeper into the Apple fold by subscribing to various services and buying additional products.
Measuring Ecosystem Growth
There are a number of ways one can attempt to track or measure Apple’s ecosystem growth.
Number of devices per user
Number of paid subscriptions per user
In covering Apple’s business from a financial perspective, my modeling work includes keeping up-to-date estimates for most of the preceding data points. However, there is one metric missing from the list that may come as a surprise: overall revenue. Considering Apple provides this data point every three months, such an exclusion may seem peculiar. Wouldn’t Apple revenue shed light on how the Apple ecosystem is performing?
Relying on overall revenue for analyzing Apple’s ecosystem growth will lead to faulty conclusions. In Exhibit 1, Apple’s revenue is graphed on a trailing twelve months (TTM) basis. This is done to smooth out the seasonality found in Apple’s business (i.e. sales are concentrated around the holidays). The takeaway from the exhibit is that higher revenue demonstrates Apple’s ecosystem continues to grow although the rate of growth has slowed dramatically.
There is one problem with such a takeaway: It’s wrong.
Exhibit 1: Apple Revenue (TTM)
Click / tap exhibit to enlarge.
Overall revenue trends are masking what is actually occurring with Apple’s ecosystem. In FY2019, the iPhone was responsible for 55% of Apple’s overall revenue. On its own, that’s not an issue for Apple. The iPhone is part of Apple’s ecosystem after all. However, Apple has become increasingly dependent on existing users upgrading their devices to generate iPhone revenue. This has resulted in Apple’s overall revenue being heavily influenced by iPhone upgrading trends.
During periods of robust iPhone upgrading, Apple’s overall revenue shows stronger growth. When iPhone upgrading slows, overall revenue growth also slows to the point that Apple’s ecosystem may appear to be plateauing or even contracting (as seen in Exhibit 1). This was a major issue at the end of 2018 and early 2019 as slowing iPhone upgrades led many to conclude that Apple was in big trouble in China and other geographies.
Since iPhone upgrading trends have little to no direct impact on Apple ecosystem viability or strength, a better approach to get insights on Apple’s ecosystem growth is to divide Apple’s revenue into two categories:
iPhone
non-iPhone (Services, Mac, iPad, Wearables, Home, and Accessories)
As seen in Exhibit 2, breaking Apple’s overall revenue into iPhone and non-iPhone revenue leads to a completely different view of Apple’s growth trajectory. Non-iPhone revenue (the red line) continues to demonstrate very strong momentum while iPhone revenue (the blue line) is trending at the same level that it was in 2015.
Exhibit 2: Revenue (iPhone vs. Non-iPhone) - TTM
Click / tap exhibit to enlarge.
A different way of looking at this data is to consider revenue growth rates. Using the revenue figures from Exhibit 2, we are able to create Exhibit 3, which displays year-over-year change in revenue for both iPhone and non-iPhone.
Non-iPhone revenue growth (the red line) has outpaced iPhone revenue growth (the blue line) for the past seven quarters. The higher growth rates for iPhone revenue in 2018 were due to higher iPhone ASPs caused by Apple unveiling the iPhone X. Excluding those quarters, non-iPhone revenue growth has been trending stronger than iPhone growth since 2016. This is a sign that Apple’s underlying ecosystem strength has been gaining momentum for years - it’s just been masked by people holding on to their iPhones for longer before upgrading.
Exhibit 3: Revenue Growth YOY (iPhone vs. Non-iPhone) - TTM
Click / tap exhibit to enlarge.
What is driving the non-iPhone revenue strength shown in Exhibits 2 and 3? The answer is found in the strong iPhone revenue trends from a few years ago. Years of strong new user growth driven by the iPhone is now contributing to hundreds of millions of iPhone-only users moving deeper into the Apple ecosystem. This trend began in earnest around the beginning of 2017.
The Services Myth
Some may look at the preceding exhibits and say that the data is still incomplete. Apple Services include a number of recurring revenue streams such as iCloud, Apple Music, and various paid subscriptions. Given the recurring nature of something like paid iCloud storage, it ends up being easier for Apple to report year-over-year Services growth. Apple’s Services business accounts for 40% of non-iPhone revenue. There is a different dynamic found with hardware revenue. Since hardware isn’t a recurring revenue stream, year-over-year growth ends up being that much harder to achieve as Apple is in effect needing to replace every dollar of revenue with new sales.
(One can argue something like the iPhone Upgrade Program is a recurring revenue stream for hardware. However, that ends up being a stretch. The Upgrade Program is a loan with a built-in upgrade optionality after the 12th payment. That is very different than something like an iCloud or Apple Music subscription.)
To address this issue, non-iPhone revenue can be broken out into Services and Products (excluding iPhone). In what will come as a shock to many people, Exhibits 4 and 5 show how Products revenue excluding iPhone (i.e. iPad, Mac, Wearables, Home, and Accessories) is now growing at nearly the same pace as Services. This represents a major narrative violation as consensus spent years positioning Services as Apple’s growth engine.
Exhibit 4: Revenue (Apple Services vs. Apple Products Excluding iPhone) - TTM
Click / tap exhibit to enlarge.
Exhibit 5: Revenue Growth YOY (Apple Services vs. Apple Products Excluding iPhone) - TTM
Click / tap exhibit to enlarge.
Based on Apple management commentary, we know that upgrading is not impacting the iPad, Mac, and wearables as much as the iPhone. Approximately half of people buying iPads and Macs are new to the product categories. For Apple Watch, the percentage is more than 75%. The new user percentage for iPhone sales is a fraction of those percentages. This tells us that iPad, Mac, and wearables sales are a very good indicator of Apple ecosystem strength.
Tying It All Together
One way of thinking about the Apple ecosystem is to view it as a pie. There are two ways for Apple to expand the pie: Bring in more customers and have existing customers spend more on services and products in the ecosystem (higher ARPU).
New users entering the ecosystem - The iPhone SE should not be underestimated as a successful tool for bringing Android users into the Apple fold.
Existing users moving deeper into the ecosystem - iPhone users are buying iPads, Macs, and wearables as well as subscribing to various Apple services.
Apple currently finds itself in an ecosystem expansion phase. Hundreds of millions of people with only one Apple device - an iPhone - are embarking on a search for more Apple experiences. We see this with non-iPhone revenue growing by 14% in 3Q20 on a TTM basis, which is higher than growth rates seen in the mid-2010s, as seen in Exhibit 6.
Exhibit 6: Apple Non-iPhone Revenue Growth Projection
Click / tap exhibit to enlarge.
Looking ahead, my estimates have non-iPhone revenue accelerating from 14% growth to 20% growth in the coming quarters. iPad, Mac, and wearables are a major source of that growth acceleration. Considering how Apple is working off of a much larger revenue base, for revenue growth percentages to actually increase this far along in the process is intriguing. The takeaway is that Apple’s ecosystem is gaining momentum at a pace that should frighten the competition.
Hundreds of millions of people will be buying their first Apple wearable device in the coming years. Given the inherent nature of wearable devices - new form factors designed to make technology more personal - it is very likely that one Apple wearable purchase will eventually lead to additional Apple wearable purchases. Apple can then leverage high-margin Services to run with more aggressive pricing on wearables (and other Apple devices) which only ends up boosting demand.
Listen to the corresponding Above Avalon podcast episode for this article here.
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For additional discussion on this topic, check out the Above Avalon daily update from August 13th.
Don't Feel Bad for the iPad
Last month marked the tenth anniversary of Apple unveiling the iPad. The occasion took on a somber feel as the most common reaction in tech circles ended up being sadness and disappointment for what the iPad had failed to become. While some are convinced that the iPad is in some way a victim of neglect, mismanagement, or even worse, such feelings are misplaced. We don’t need to feel bad for the iPad.
Anniversary Reactions
Apple unveiled the iPad on January 27th, 2010. To mark the tenth anniversary of the unveiling, a few publications had articles recapping the iPad’s first decade. Some of the reactions were complicated, to put it gently.
Here’s John Gruber, over at Daring Fireball, in a post titled, “The iPad Awkwardly Turns 10”:
“[Steve] Jobs’s on-stage pitch was exactly right. The iPad was a new class of device, sitting between a phone and a laptop. To succeed, it needed not only to be better at some things than either a phone or laptop, it needed to be much better. It was and is.
Ten years later, though, I don’t think the iPad has come close to living up to its potential. By the time the Mac turned 10, it had redefined multiple industries. In 1984 almost no graphic designers or illustrators were using computers for work. By 1994 almost all graphic designers and illustrators were using computers for work. The Mac was a revolution. The iPhone was a revolution. The iPad has been a spectacular success, and to tens of millions it is a beloved part of their daily lives, but it has, to date, fallen short of revolutionary.”
Ben Thompson, over at Stratechery, agreed with Gruber and went further in his own article, “The Tragic iPad”:
“It’s tempting to dwell on the [Steve] Jobs point — I really do think the iPad is the product that misses him the most — but the truth is that the long-term sustainable source of innovation on the iPad should have come from 3rd-party developers. Look at [John] Gruber’s example for the Mac of graphic designers and illustrators: while MacPaint showed what was possible, the revolution was led by software from Aldus (PageMaker), Quark (QuarkXPress), and Adobe (Illustrator, Photoshop, Acrobat). By the time the Mac turned 10, Apple was a $2 billion company, while Adobe was worth $1 billion.
There are, needless to say, no companies built on the iPad that are worth anything approaching $1 billion in 2020 dollars, much less in 1994 dollars, even as the total addressable market has exploded, and one big reason is that $4.99 price point. Apple set the standard that highly complex, innovative software that was only possible on the iPad could only ever earn 5 bucks from a customer forever (updates, of course, were free).”
There were then tweets (lots of tweets), regarding the current state of iPad. Here are two:
Riccardo Mori: “What I believe is that the iPad and its OS could have been so much more than a reinvention of the computing wheel adapted for a touch interface.”
Loren Brichter: “[T]he App Store is what killed the iPad.”
You get the point. There was no shortage of writers, pundits, and industry analysts using the iPad’s 10th anniversary to give eulogies for the product in terms of its inability to be revolutionary, grab momentum, or even just meet expectations.
A handful of people talked highly of iPad on its anniversary. However, such perspectives were few and far between. Interestingly, the articles that were published still ended up including noteworthy disclaimers and qualifiers. For example, here’s Om Malik in “iPad at 10. An affair forever”:
“A decade after its introduction, I think the iPad is still an underappreciated step in the storied history of computing. If anything, it has been let down by the limited imagination of application developers, who have failed to harness the capabilities of this device.”
My Reaction
I hold a very different view of the iPad at 10 years old. In recapping the 2010s, I went so far as to position the iPad as one of two most important tech products of the decade (the iPhone being the other one). The iPad has become ubiquitous in various industries and sectors, and in the process, it has altered modern computing.
How can there be such a dramatic difference in opinion when it comes to iPad?
Different perspectives.
To see how important perspective becomes in this discussion, we need to go back to the iPad unveiling in January 2010.
Selling a Problem
A closer look at the iPad unveiling reveals it wasn’t that Steve successfully made the sales pitch for a new product category. Instead, Steve successfully sold consumers on a problem they weren’t even aware they faced.
A few daily tasks like email, web browsing, video watching, and mobile games could be better handled on a large piece of glass with multi-touch than on a small piece of glass with multi-touch (iPhones) or a non-multi touch device (MacBooks). Such juxtaposition elevated the iPad at the expense of the iPhone and Mac. The iPhone was positioned as a tiny device designed for portability while the Mac was positioned as a heavy beast blown out of the water by iPad when it comes to handling simple tasks.
Consumers agreed with Steve that there was an indeed a problem and that the iPad was a genuine solution to the problem. The iPad became Apple’s best-selling product out of the gate with the company selling 22 million devices in just the first 12 months. Ten years later, it is difficult to envision a new Apple product that will be able to grab that kind of adoption so quickly.
The iPhone
In January 2010, the iPhone was more of an idea and a promise than anything else. When the iPad was unveiled, there were only about 30 million people using an iPhone. Apple now sells that many iPhones in about two months. In 2010, it was the iPad, not the iPhone, that was considered to be the more important product in the future.
Given such lofty expectations, maybe it shouldn't have come as a surprise that the iPad’s tenth anniversary was met with awkwardness, sorrow, and even sadness as some look at the product as a promise that wasn’t kept. However, the early promises found with the initial iPad were met. There was just an unexpected twist.
The iPhone ended up carrying the vision found with a larger piece of glass supporting multi-touch that Steve unveiled on stage in January 2010. As iPhone screens became larger over the years, the product leveraged the inspiration found with the initial iPad and turned it into something consumed by nearly a billion people. There are 32x more iPhone users in the world today than there were when the iPad was unveiled in 2010. The iPhone became an iPad that fit in one’s pocket. Based on the iPhone’s resounding success, it is fair to say that those early calls that the iPad would turn into something very big ended up being true.
A Pivot
Instead of raising the white flag and letting the iPad set sail into the sunset after being replaced by the iPhone, Apple pivoted the product category to accomplish two things:
Serve as a content creation machine (Apple Pencil for drawing / keyboard accessories for typing).
Represent a low-cost entry point into the Apple ecosystem ($329 starting price).
Those two changes gave the iPad a very successful second chapter. Unit sales have stabilized at 45 million per year with approximately 20 million new people entering the iPad installed base each year.
The iPad is currently shaping industries far more than some people are giving the product credit for. There are at least 350 million people using an iPad in some capacity. The iPad has indirectly added billions of dollars of market cap to companies ranging from Slack and Microsoft to Square when considering the product’s widespread adoption and influence in enterprise settings.
A Line in the Sand
The iPad has become a line in the sand between those who grew up on laptops and desktops and those who never felt comfortable with such devices. Apple finds itself walking a thin line when it comes to adding functionality to the iPad for some users while keeping the device’s simplicity and intuitiveness front and center for other users.
Multi-tasking is a great example of this battle. For instance, some Mac users are not pleased with Apple’s implementation of multi-tasking on the iPad. These users find multi-tasking on an iPad to be a mental exercise. Meanwhile, a portion of iPad users have no need or desire for multi-tasking on iPad. These users are also likely to view multi-tasking on a laptop or desktop as not intuitive. Going a week with no laptop or desktop usage will do interesting things to one’s perception about computing and intuitiveness. When returning to a laptop or desktop, the machines feel like taking a step back. Our brain has to be rewired to handle something that is inherently less intuitive.
The iPad’s Problem
Apple doesn't sell perfect products. There will always be room for improvement, refinement, and new thinking. In some ways, the lack of perfection is what serves as motivation for Apple to keep pushing. When defining the problems now facing the iPad, my criticism is a bit unconventional.
The iPad’s primary problem is that it is viewed by some as needing to be a laptop replacement in order to have any value. This unrealistic viewpoint has resulted in a type of expectational debt being placed on the device. The iPad is expected to become more like the Mac and macOS over time. This is problematic as the iPad is not a laptop replacement.
MacOS should not be positioned as inspiration for where to bring the iPad or iPadOS. This isn’t meant to belittle macOS. Instead, touch-based computing has blurred the line between consumer and professional devices. When debating content consumption versus content creation and the broader definition of work, there is a habit in tech circles to not consider how such terms have dramatically different meanings for hundreds of millions of people.
The takeaway is that the iPad has become a different kind of product, and it should be allowed to stand apart from the iPhone without being forced to replace macOS. Hence, there is iPadOS and things like Apple Pencil support. Instead of asking how best to handle multitasking on an iPad, a better question is to wonder what multi-tasking should even mean on an iPad. Such questions present new challenges regarding user interfaces and design.
Being Itself
Apple’s product strategy is to push all of its major product categories forward at the same time. This is different from pushing the iPhone forward and trying to have the iPad and Mac come along for the ride. Positioning the iPad as a content creation platform for the masses, designed to handle some tasks given to laptops and desktops while also handling completely new tasks, is a winning strategy. It allows the iPad to be itself while not forcing the product into a corner in order to satisfy certain segments of the Apple installed base.
A lot has changed during the iPad’s first 10 years. Some may be disappointed with how the iPad has evolved, even to the point of thinking Apple lost a great opportunity. However, I wouldn’t feel bad for a device that revealed the iPhone’s true potential and then became a different kind of content creation tool now used by more than 350 million people.
Listen to the corresponding Above Avalon podcast episode for this article here.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.
For additional discussion on this topic, check out the Above Avalon daily update from March 2nd: The iPad’s First Decade, The iPad’s Second Decade.
The Big Question Now Facing Apple
Predictions are nothing more than attempts at manufacturing clarity for what is inherently a sea of unknown. With New Year predictions, two things need to happen. The person issuing the prediction needs to come up with what may happen, and the predicted event has to occur within an arbitrary time period. The probability of finding value in such an exercise is low.
Instead of coming up with predictions for Apple at the start of a new year, there is value found in embracing the unknown and looking at questions facing the company. This has led to my annual tradition of coming up with a set of questions facing Apple at the start of a new year. The irony found with questions is that asking the right ones is equivalent to coming up with a surf board for successfully catching waves in the sea of unknown.
Previous year’s questions are found below:
Questions for Apple in 2020
The topics that serve as source material for Apple questions in 2020 can be grouped into two buckets: growth initiatives and asset base optimization.
Growth Initiatives
iPhone Business. The narrative facing the iPhone business has been off the mark for years. Skepticism and cynicism has continued to mask what has been a resilient business. There is now too much talk of 5G kicking off some kind of mega upgrade iPhone cycle. Such a focus ignores what is ultimately taking place with the iPhone: The business is maturing. This presents a set of challenges that will require a fine-tuning of strategy. This involves changes to the device lineup, release schedule, pricing, and feature set.
Paid Content Distribution. Following a very busy 2019 for Apple’s content distribution arm, all eyes are on whether or not Apple will bundle its new paid content services. Ultimately, bundling is a tool that Apple has at its disposal to support a weaker service while increasing the stickiness found with its services.
Wearables. Apple’s wearables business is a runaway train with the company selling approximately 65M wearable devices in FY2019. Based on my Apple Watch installed base estimate (available here), just 7% of iPhone users own an Apple Watch. Similar ownership percentages are found with AirPods despite the product having been in the market for less time. The question isn’t if Apple wearables momentum will continue but instead how fast will adoption grow.
Margins. Apple follows a “revenue and gross margin optimization” pricing strategy. This has led to Apple’s products gross margin percentage declining by 10% over the past two years while products gross margin dollars have declined by only 2%. Apple is willing to let products gross margin percentages decline (via lower product prices and higher cost of goods sold relative to revenue) if it results in stronger customer demand for those products. Attention will be placed at determining the level at which Apple product pricing is too low in order to maximize gross profit dollars.
R&D. There have been two general themes found with Project Titan and Apple’s efforts related to developing a pair of AR glasses: 1) Continued progress and 2) Extended timelines.
Asset Base Optimization
Leadership. With Jeff Williams officially serving as the link between Apple’s design team and the rest of Tim Cook’s inner circle, it will be interesting to see if Apple makes any refinements to its leadership structure.
China. The boogeyman known as U.S. / China trade has been put to bed, for now. With rhetoric having been dialed back in a very big way, attention will shift to the various decisions Apple still has to make regarding its long-term approach to China. The company can continue to rely heavily on China for its supply chain and manufacturing apparatus, accelerate a diversification strategy away from the country, or follow more of a status quo approach that recognizes the benefits (and weaknesses) of being so dependent on one country.
Capex. In FY2019, Apple reported just $7.6 billion of capital expenditures (capex). This was a significant drop from the $16.7 billion of capex in 2018. The most likely reason for the decline in capex was a decline in tooling and manufacturing machinery. The company also slowed spending on corporate facilities. By not providing capex guidance for FY2020, the variable is accompanied by a greater level of intrigue as to what it means about Apple’s near-term product pipeline.
Capital Return. Apple shares were up 89% in 2019, exceeding the S&P 500’s 31% gain. For the first time with Tim Cook as CEO, Apple shares now trade at a premium to the overall market when looking at forward price-to-earnings multiples. This has led some financial writers to call for Apple to slow the pace of buyback and instead push a larger increase in the quarterly cash dividend. In the event that Apple’s market value exceeds intrinsic value, it’s not clear how Apple would remove tens of billions of dollars of excess cash still on the balance sheet in addition to nearly $60 billion of free cash flow generated per year. Special dividends aren’t great from a tax perspective while there are limitations found with simply funneling all of the excess cash into quarterly cash dividends.
The Big Question
Taking a closer look at the preceding list of unknowns facing Apple, the product categories that have served as the primary engines for Apple’s new user growth are quickly maturing while new product categories have been more ARPU (average revenue per user) drivers. There are more than 500 million people who own just one Apple product: an iPhone. This group represents a prime target market for Apple when selling additional tools. Apple is ending one growth phase and is about to enter into a new one.
Exhibit 1 shows the growth trajectory for the number of Apple users, also referred to as Apple’s installed base, over the past 10 years. Based on my estimates, the Apple installed base grew from approximately 90 million people at the end of 2009 to a little more than a billion people at the end of 2019. Apple’s new user growth has slowed dramatically. Thanks primarily to the iPhone, Apple saw spectacular new user growth in the range of 25% to 60% in the early to mid-2010s. More recently, new user growth has been trending in the mid single-digit range.
Exhibit 1: Apple Installed Base (Number of Users)
The methodology and math used to reach my estimate for the number of Apple users is available for Above Avalon members here.
Reaching a billion users is quite the accomplishment for Apple considering how the company doesn’t give away its products for free. It’s one thing to reach a billion users with a “free” service. However, to get a billion people to pay directly for a service or tool is an entirely different thing.
When thinking about Apple’s future, the big question facing the company isn’t about how it will sell additional tools to its existing user base. Instead, the major unknown facing Apple is found with management’s ability to continue expanding its installed base. This raises one overarching question that covers Apple’s largest challenge and opportunity:
How will Apple find its next billion users?
It may be tempting to classify Apple’s first billion users as the “easy” growth or low-hanging fruit. In reality, those billion users primarily came from the premium segments of the various industries that Apple competes in. This means that to find the next billion users, Apple will inevitably need some strategy adjustments.
The Strategy for the Next Billion
The major building blocks for Apple’s plan to find its next billion users are already in place. Apple will come up with tools capable of making technology more personal. This pursuit will involve new user interfaces and inputs that allow people to get more out of technology without having technology take over people’s lives.
Taking a look at the geographical makeup of Apple’s current installed base, developed markets still contain plenty of new users for Apple to target. However, the potential found with emerging markets is a completely different story. Indonesia, Brazil, the Philippines, and Vietnam have a total population that is twice that of the U.S. Meanwhile, there are more people in China and India (2.6 billion) than the next 20 most populated countries combined.
It may be easy to think that Apple can just cut product pricing in order to grab its next billion users. However, the situation ends up being more complicated. Socio-economic trends will contribute to tens of millions of people moving into Apple’s addressable market each year. In addition, relying on the gray market for allowing gently-used Apple products to flow to lower price segments is a more effective strategy for Apple. Not only does the gray market reduce the need for Apple to come up with low priced products lacking in features, but Apple can also benefit from continued product focus in terms of its supply chain and manufacturing apparatus.
As for some of the granular initiatives that stand to promote continued growth in Apple’s installed base:
A truly independent Apple Watch. Advancements such as a truly independent Apple Watch that doesn’t require another Apple device to activate and use will expand the device’s addressable market by nearly four times overnight.
Continuing to run forward with wearables. New product categories that allow Apple to break down the barriers between users and technology will allow the company to target a wider audience. New form factors such as glasses will be designed to make technology even more personal than what is possible with Apple Watch and AirPods.
Longer device longevity. By giving Apple devices longer lifespans via more durable hardware and additional years of software updates, devices will be able to have more owners over time. This will have a direct benefit on the gray market for Apple devices as more devices are recirculated and eventually able to reach customers in lower price segments.
Expanding device repair and support networks. Apple’s current retail store footprint is not capable of handing the additional product servicing and support associated with having another billion users in its ecosystem. This is especially true in developing markets. By building out a device repair and support network to include authorized third-parties, Apple will go a long way in ensuring the next billion users have access to many of the same experiences that are valued by Apple’s current users.
The path to two billion users won’t be easy for Apple. The trajectory may very well end up looking quite different than the path to a billion users. However, there is nothing found with Apple’s long-standing mission to create products that can change people’s lives that limits its reach to a billion people.
Listen to the corresponding Above Avalon podcast episode for this article here.
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Above Avalon Podcast Episode 161: Apple's Spectacular Year on Wall Street
Something has clearly changed when it comes to the way Wall Street is treating AAPL. For the first time with Tim Cook as CEO, Apple shares are trading at a premium to the overall market. In episode 161, Neil discusses how changing behavior as it relates to passive versus active investing may be creating a type of perfect storm for AAPL shares. Additional discussion topics include Apple’s valuation, free cash flow, momentum shifting to passive investing, and Warren Buffett.
To listen to episode 161, go here.
The complete Above Avalon podcast episode archive is available here.
Above Avalon Podcast Episode 158: Forced to Sell
How did Fitbit go from being considered the wearables leader to viewing a $2.1B acquisition as its best hope for shareholders to recoup any value? What led Fitbit to run out of options as an independent company? In episode 158, Neil discusses how Apple Watch forced Fitbit to sell itself. Additional topics include Google’s acquisition offer for Fitbit, how Apple Watch redefined the wrist wearables industry, and the most damning evidence of Fitbit’s demise.
To listen to episode 158, go here.
The complete Above Avalon podcast episode archive is available here.
Above Avalon Podcast Episode 147: A Faster Bumper Car
In episode 147, we take a look at the changing competitive landscape facing the giants (Amazon, Apple, Facebook, Google, and Microsoft). Comparing the situation to bumper cars, we discuss why Google and Facebook have the slower cars that are no longer able to hide within the traffic. Additional topics include deep dives into three competitive battles in particular: Apple vs. Google, Apple vs. Facebook, and Amazon vs. Facebook vs. Google.
To listen to episode 147, go here.
The complete Above Avalon podcast episode archive is available here.
What the Beats is Going on? Thoughts on Apple Acquiring Beats
Apple is reportedly interested in acquiring Beats for $3.2 billion.
Here’s what I’m thinking:
1) Separate the rumored deal price from the transaction. It’s a lot of money for Apple and in many ways focusing too much on the money will make it difficult to focus on the underlining acquisition target.
2) What is Beats? While everyone seems to have a different answer, to me Beats is a start-up music company that is after one thing: music mind share. Think of music and Beats comes to mind, right? No? Well give it a few more years and the growing popularity of those “obnoxiously large” headphones may change things. Co-founded by intelligent musicians (and businessmen) who “get” music, Beats knows what it is doing and more importantly what it’s after. Headphones, stereo equipment, music streaming service, and the list goes on. Beats wants to own music.
3) Apple is Afraid. I suspect Apple feels threatened as its mind share for music is declining. The iPod died on behalf of its older sibling, the iPhone, and following its death, the grip Apple had on music has started to slip. Think of digital music, and Pandora or Spotify may come to mind. Beats could very well be on the same path of music stardom. This past holiday shopping season, Beats headphones were everywhere (and people were buying them in droves). Walk down the street and you could tell when someone was wearing Beats. For the first time, the white EarPod was being threatened. Who knows what things would look like in a few years. Apple would be looking to change that with this acquisition. I suspect Apple is interested in buying Beats to gain music mind share.
4) Similar Cultures. Beats and Apple share similar cultures where passion is the ultimate driver. While there would undoubtedly be segments or pieces of Beats that Apple will shutter, Beats could very easily represent a decently sized (fewer than 200 people) division within the Apple system. Sure, this would mark a departure from the way things have been, but judging from Disney’s success, sometimes you have to let the past go and embrace the future.
5) Let’s go back to price. I think Apple is overpaying for Beats. Recent valuations pegged the music streaming service at around $100 million with the entire company worth a reportedly $1 billion last year. While additional details may come out in the coming days I suspect Apple is overpaying to avoid others from coming in and competing over price. It’s a lot of money for any company, and regardless of how much cash Apple has in its bank account, it’s still a lot of money. To me this means Apple is serious about this bet.
6) Lots of unanswered questions.
- Will Apple actually promote the Beats brand post acquisition? Such an idea is still hard to grasp, but maybe they would have to in order to maintain a gripe on the music mind share they are acquiring. Is the reason Beats headphones are popular because they aren’t Apple branded? If I had to bet I would say Apple walks a thin line introducing new Apple-branded music product, while also keeping the Beats brand around. Such an idea is still hard to swallow though…
- Will there be a Beats brain drain (employees leave) and does it even matter?
- How will this impact future Apple products? I suspect we are going to see Apple attempt a very significant push at a true music streaming service where I can have any song, when I want it (NOT RADIO), wherever I want it…and it would be free for iOS users signed up for Apple’s new mobile payment system.
- Will this open the floodgates to additional Apple acquisitions? If the answer is yes, then we may be entering a new era in tech M&A as the biggest tech company in existence is officially an acquirer (I don’t think this is the case though).
Acquiring Beats would be a new type of transaction for Apple. While there are similarities to previous acquisitions, there are just as many differences and for the first time we may be seeing Apple “doing what is right” - fighting for its survival. Apple wants to own music.
14 hour update: After plenty of Twitter discussions and thought, the only additional comments I have include:
1) Jimmy Iovine may play a big role. If the $3.2 billion price tag holds up, it becomes obvious that Apple is paying for intangibles (branding, music industry relationships) and not current products or services. In essence, Apple would be buying the music industry - something that Apple would not be able to do organically. Iovine has been critical of iTunes and it’s possible Apple wants him to revamp iTunes and bring the service into a new era (with the full support of the music industry).
2) Would Apple replace the iTunes brand with Beats? Is it possible for a declining consumer electronics brand (iTunes) to turn around and regain its strength? Maybe the only way for Apple to regain its grip on music is to update its branding from iTunes to Beats (among other things). In such a case, a $3 billion price tag doesn’t seem as crazy.
Samsung’s Crisis of Design 2.0
Samsung unveiled its second attempt at wearables, along with its latest flagship phone, earlier this week at MWC. I was not impressed and I am growing more confident that Samsung not only has another “crisis of design”, but will also soon face major headaches from competing Android OEMs. I think we are on the verge of a new phase in mobile phone hardware: Samsung competitors will finally be able to find a footing and begin to attack the giant. Meanwhile, I suspect Apple has already placed Samsung in the same drawer as Microsoft; irrelevant. Tim Cook and company is marching to a completely different beat.
1) The Galaxy Fit looks awful. A curved AMOLED touch screen with a huge piece of plastic on its underside attached to a Modern Glam (plastic) watch strap. I’m having a hard time seeing what is so “beautiful” or “pretty” about Samsung’s new fitness device, to quote a few easily amused tech bloggers. The company’s business model is not dependent on good design and few would suggest otherwise, but I struggle to understand how people can look at the Galaxy Fit and be even mildly impressed by such a horrendous product. One tech blog went so far as to say the Galaxy Fit is a “smartly designed fitness band”. It’s a piece of curved glass set on top of a bunch of plastic with an extremely awkward user experience and interface. Smartly designed?
2) Samsung Galaxy S5. Samsung’s flagship phone now comes in gold and has a fingerprint scanner. While the joke would typically stop there and many would say “copying a good artist is a pretty good strategy”, Samsung didn’t even copy well. The gold color is the wrong shade of gold (Modern Glam gold?) and the fingerprint scanner doesn’t work. I really don’t think I need to say much more about Samsung’s new flagship phone. I suspect Samsung will unveil the real Galaxy S5 this May? Interestingly, Apple was very quiet this week versus last year’s PR push leading up to the Galaxy S4 launch. I wonder why…
3) Samsung is a fish out of water without new Apple inspiration. Samsung is struggling. The easy smart phone growth achieved by simply shipping an alternative to iPhone (bigger screen) is drying up and with no clear path to additional revenue or earnings growth, the company amusingly jumped into wearables. The Galaxy Gear was downright disgusting, while the Galaxy Fit isn’t far behind. Samsung likes to throw around the “we give consumers what they want” meme and I am left wondering who was asking for something like the Galaxy Gear or Galaxy Fit? Samsung is throwing a lot of poop against the wall and desperately hoping something sticks. While some may label such a business strategy as acceptable, I have my doubts that consumers are going to stand by a company that is willing to ship products that merely represent different batches of wall poop.
4) Samsung’s credibility is taking a hit. Last year I noticed a few of my acquaintances made the switch from iPhone to Samsung. The usual reason given for such a move involved wanting a change or simply being bored by iPhone. Interestingly, on follow-up discussions in recent weeks, these switchers are now regretting their move away from iPhone due to Samsung’s plastic and subpar build quality. More than a few people on Twitter tell me the same thing about friends or family being disappointed with their Samsung phones. The amount of negative feedback caught me by surprise. Interestingly, only a few hours after introducing the Galaxy S5, Samsung rumor blogs were talking about a new Samsung phone coming out in May that actually wasn’t made of cheap plastic. Have we reached a point where even Samsung realizes the “not an iPhone” plastic gold Urban Glam option probably isn’t going to do much in terms of winning converts from competing platforms? Consumers are starting to notice what Samsung is actually shipping and the grumblings are getting louder.
5) Samsung competitors are foaming at the mouth. The long-standing joke is that the best Android phones available in the market (never a phone made by Samsung) don’t sell well because no one cares about anything other than Apple and Samsung. I think that may change. After this week, I am becoming confident that consumers are going to stop being passive and begin seeking out alternatives to Samsung in the form of HTC, Sony, Nokia, Lenovo, or countless of other Asian OEMs, all of which are making significant progress in shipping attractive phones at attractive prices (I would include Nexus, but Tony needs to help Google rework distribution). In terms of hardware specs, most of these phones are already at parity and with several Samsung competitors now focusing on hardware design; consumers will simply have fewer reasons to instantly turn to Samsung. Whereas in the past, Samsung might have been the default choice for Android, I suspect that lead will start to slip. In addition, Samsung recently announced that they will reduce their advertising and marketing budget as mobile phone profits decline (not exactly the best timing for such a move). While smaller mobile hardware companies individually lack the ability to compete against Samsung, and just the thought of going up against Samsung can scare many executives into a cold chill, I think each competitor can take a bite out of the giant which can collectively create serious damage. To succeed against Samsung: 1) Focus on branding 2) Save or raise as much capital as you can and throw it into marketing 3) Narrow your distribution focus 4) Figure out why someone should buy your phone. The challenge is significant and Samsung will not stand still, but 2014 is the year. Wait any longer and limited resources may not allow another fight in the future.
Bonus - iWatch Implications from Galaxy Fit. The iWatch will not look like the Galaxy Fit and the iWatch will certainly not operate like the Galaxy Fit. The best way to think about this would be envisioning a small table in Jony’s design lab with various iWatch prototypes. The Galaxy Fit version (simple rectangular curved piece of glass positioned on a plastic watch strap) would be instantly cast off as a no, if it even would be positioned as a possible prototype in the first place. I highly doubt the iWatch will include a strap/buckle or a thick piece of bulging glass. The device won’t depend on an awkward user experience where you have to rotate your head and arm just to look at the device. In summary: Look at the Galaxy Fit and you now know what the iWatch won’t be.
I Like Apple's iPhone Strategy
I felt Apple did a good job today. For the first time Apple will be selling two brand new phones, including one for under $100 in the U.S. A brand new iPhone for under $100. I wouldn’t underestimate the impact of such a feat.
While there were some interesting technologies introduced, including a fingerprint scanner and a motion coprocessor, I have learned to control my long-term predictions on what such technologies may mean for Apple’s product line. Time will tell if such innovations become major cornerstones in future Apple products.
The most controversial aspect of today’s event was iPhone pricing. I see a schism developing among the tech punditry. On one hand, there is the belief that market share is king and Apple must address the bottom of the market because developers will begin to focus on Android’s sheer numbers instead of iOS. On the other side, where I stand, market share is not created equal. It is okay if Apple doesn’t address the lower end of the market since five consumers who don’t buy mobile apps or content is not equal to one who does. Looking at today’s events, I think Apple is doing the right thing gradually moving down market (iPhone 4 and 4S have not been discontinued). This strategy will only expand in coming years. With approximately 400M-500M (and growing) active iOS users with credit cards, I view the iOS ecosystem as now self-sustaining, capable of app innovation as long as the hardware and software back developers up. If I changed sides and instead only looked at market share, I’m sure I would have been championing Symbian, then Blackberry, and now Android. Market share is not everything.
Moving to more minor topics, Apple is still addicted to case money, now selling iPhone 5s and 5c cases. Selling cases is a good and easy business decision and judging from the popularity of iPhone cases, Apple will make a decent amount of profit (and margin) from going down that road. Apple also announced it will give away $40 of software with new iPhone and iPad purchases. While I am not a big user of Apple’s mobile productivity apps, quite a few people are and I suspect there will be many happy iOS users.
There are still plenty of questions remaining about Apple and strategy.
Did Apple’s keynote contain a bit too much of tech jargon? Maybe.
Will mainstream consumers accept iOS 7 without any major complaints? Maybe.
Will Apple’s margin actually benefit from the new iPhone line? Maybe.
Nevertheless, with a new flagship phone that has enough differentiation to stand out from competitors, a more value-oriented option for consumers with slightly different priorities, and the desire to maintain older iPhone models in order to address the mid-tier phone market, I like where Apple is sitting and the outlook for the iPhone business over the next 6-12 months.
Apple 1Q13 Review; Thoughts on Guidance and AAPL
1Q13 Review
Apple’s 1Q13 results were largely in-line with my expectations.
- Revenues beat ($54.5 billion vs. my $53.1 billion)
- Margin beat (38.6% vs. my 37.9%)
- EPS beat ($13.81 vs. my $12.75)
- iPhone was an exact match (47.8 million - equal to my estimate)
- iPad was slightly stronger than expected (22.9 million vs. my 22.4 million)
While I was pleased with the quarter, my estimates were considered somewhat bearish compared to the crowd; so needless to say, there were more disappointed faces than smiles. Apple reported healthy growth metrics for iPhone and iPad, while iPhone ASP remained strong and iPad ASP declined due to the iPad mini.
2Q13 Guidance
Management altered the way guidance is presented. While the reasoning was not disclosed, I don’t think its much of a stretch to assume its management’s way of ending analysts’ nasty habit of severely overestimating guidance. When Apple’s earnings report was initially released, the stock was trading in the $490-$495 range. Guidance seemed to be of Apple’s conservative nature - in that case, guidance was O.K. When Apple clarified that it would no longer give EPS guidance, but instead release ranges (including upper limits) for several line-items used to reach EPS, the stock quickly fell to the $460-$465 range as guidance was considered NOT O.K. (it can be debated what management meant by guidance ranges, but I am assuming Apple’s actual results will fall within these ranges).
I didn’t find Apple’s 2Q13 guidance (with the new ranges) to be overly concerning. Going into the quarter, I knew 2Q13 was going to be tough due to difficult year-over-year comparisons to 2Q12. Judging from the stock’s decline, I guess I was in the minority.
Did Anything Actually Change?
Taking a step back from all of the earnings noise, I didn’t learn much new about Apple. Both iPhone and iPad unit growth is slowing, margin remains pressured due to newer products, and EPS growth will be difficult to achieve in 2013. Minor details such as the iPhone 4 remaining supply-constrained (most likely due to limited resources and parts allocated to iPhone 4 production), iPad mini coming into supply/demand balance by the end of this quarter, and the mix between new and old iPhones remaining constant weren’t exactly market-moving data points.
AAPL
It is interesting to read the differing opinions on Apple’s quarter between the Valley’s reaction and that of Wall Street. In the Valley’s eyes, Apple did great and is firing on all cylinders, but according to Wall Street, AAPL stock is broken as growth is slowing. I think reality is somewhere in the middle of those two extremes.
AAPL has now been in a 4-month tailspin, including widespread shareholder rotation (meaning many of Apple’s shareholders as of the end of September are selling and being replaced by new shareholders). Such a rotation is often quite volatile, resulting in lower stock prices as the new shareholder base has different priorities and expectations for Apple (often of a lesser nature).
Back in January 2012, the consensus view on Apple was that EPS from iPhone and iPad would plateau around $60. An additional premium for Apple optionality (i.e. new products) may push EPS to $70. P/E multiple and dividend payout ratios were then calculated accordingly. Things certainly have changed. The consensus view is now of Apple EPS topping out around $40. It’s tough for a stock labeled as *the* momentum tech growth story to keep its luster when EPS expectations are cut by 30%. Of course, investors and traders love to panic and overreact, so not only is Apple’s EPS problematic, but Apple’s business model is apparently broken, management is clueless, and the company is the new Microsoft. It is what it is and I don’t see a reason to fight it.
Investors buying AAPL today (or for that matter - the past year) should not be buying it on iPhone and iPad predictions, but rather Apple’s ability to disrupt itself and introduce new product categories. Not surprisingly, when things are good and AAPL is up, everyone assumes Apple is in great shape. When AAPL is down, management is assumed to be inept; unable to innovate and remain relevant.
Looking ahead, I think it will be difficult for Apple to report EPS growth in 2Q13 and 3Q13, due to tough year-over-year comparisons related to margins. Modest growth should come back in 4Q13 and moving into 2014. I am assuming anyone with an earnings model is well aware of these trends, but judging from today’s stock price action, I may be too generous in my assumptions. Catalysts such as China Mobile selling the iPhone (not in my model) or new products are most likely not being contemplated by Wall Street and one can argue even if catalysts come to fruition, many will simply brush them off as a non-event. Just as funds had to own AAPL last year to beat certain performance benchmarks, many funds now have to sell AAPL because the stock is down.
Many are trying to find rational answers with AAPL’s price action, but since the following statements are often true, I’m not sure how many answers are actually out there:
A stock often goes up because it has been going up.
A stock often goes down because it has been going down.
A stock’s valuation matters only when valuations start to matter.
Fundamentals are important only when fundamentals become important.
Walmart Discounting Apple Products: Gloom or Boom?
This past Friday, Walmart announced on its Facebook page that it was rolling back its iPhone and iPad pricing for a limited time. Within minutes, the announcement flew around tech blog circles, quickly reaching mainstream publications such as ABC and CNN.
The discussion soon took a new direction as bloggers began to wonder if Walmart’s discounted pricing actually meant Apple was imploding; unable to sell supply due to lackluster demand. One blogger summed up that attitude well, writing:
"Apple has finally thrown in the towel on pretending there is a supply shortage and admitted there is simply not enough demand at the given price point, by proceeding to sell the margin flagship iPhone 5 at a third off the original price, at the bargain basement commodity expert Wal-Mart of all places….And just like that, the “niche premium” magic of the once uber-cool gizmo is gone, not to mention AAPL’s profit margins, very much as the stock price has been sensing over the past two months…”
The blog known as Reuters added additional fuel and mystery to the Apple bear argument, in their usual naive style:
"Apple has focused on high-priced, premium gadgets for many years and has strictly enforced its prices with retailers and other distributors. However, a Wal-Mart spokeswoman said on Friday that the discounts were arranged with Apple.
'We worked together with them on this,' the spokeswoman, Sarah Spencer, said. 'They are a great partner.'
Why is Walmart Discounting Apple Products?
Third-party retailer discounts are nothing new. Best Buy and RadioShack routinely sell entry-level iPhone 5 units for less than $199 (Best Buy is currently selling the 16 GB iPhone 5 for $149.99). Apple’s wholesale pricing and margins remain intact as these third-party retailers eat the discount (ignoring differences between wholesale and retail prices). Similar campaigns are seen with iTunes gift card promotions, where retailers offer free iTunes gift cards when purchasing Apple products. Best Buy is also well known for promotions similar to “Buy $100 of iTunes gift cards for $75” - where Best Buy (not Apple) is responsible for the discount.
Diving into Walmart’s latest iPhone and iPad price discount campaign sheds additional light.
1) The promotion is only valid in-store. For brick and mortar retailers, store traffic and same-store sales metrics are important. One of Walmart’s ultimate goals in discounting iPhones and iPads is having customers travel to a Walmart and make their way through the store before finally reaching the iPhones and iPads (conveniently not located near the store entrance). Walmart feels confident that it will be able to sell additional items to these customers, similar to placing milk and eggs at the back of a supermarket so that a customer has to walk through the entire store just to buy a few essentials. In addition, many consumers will narrow their holiday shopping destinations to a few stores over the next week and Walmart wouldn’t mind making that exclusive list - using discounted iPhones and iPads as the carrot for getting people into the stores.
2) The promotion is only good while supplies last. Many consumers have flocked to Walmart’s Facebook wall to point out that quite a few Walmart locations don’t have iPhones or iPads in stock. Walmart receives good press coverage from discounting popular items, while not losing much money as product supply limits sales; sneaky, but efficient.
3) Brand awareness. By advertising discounted iPhones and iPads, Walmart is using the promotion as a marketing campaign to strengthen consumer’s association between Walmart and Apple. Many consumers don’t think of Walmart as the first place to visit for iPhones and iPads. I can only imagine how many people now have Walmart at the top of their destination list in search of that perfect Apple gift for the holidays.
What about that little gem from Reuters indicating Apple was working with Walmart on this discount? On the surface, it sounds somewhat damning for Apple, but in reality, it doesn’t mean much; only that Apple is okay with Walmart eating iPhone and iPad price discounts. Sounds like an iPhone and iPad boom to me.
Thoughts on Apple's 6.4% Stock Drop
Everyone wants to create a story for why Apple’s stock dropped more than 6% today. While daily stock fluctuations are hardly worth mentioning, a 6% drop on seemingly no news does stand out as an outlier.
I have difficulty believing that a stock moves up or down on a specific news item because I am unable to verify why everyone is selling (and buying) a particular stock. Those selling shares at 9:30 AM may have a completely different motive compared to those selling at 3:59 PM. The same philosophy applies for a stock on the rise.
As Apple’s stock collapsed throughout the day, news sites were fumbling over each other trying to guess what could possibly cause Apple shares to fall. Several reasons floated around the web included:
1) A DigiTimes Article. I assume this article talked about all iPhone production coming to a halt, because I have a hard time thinking of any other topic that can cut $30 billion of Apple market cap in a few hours.
2) Tax Selling. This one just won’t die. Are investors selling their Apple shares today (25% off the high) only to avoid paying 5% more taxes on dividends and maybe 5-10% more for long-term capital gains?
3) China Mobile Approves a Nokia Phone. So Apple loses $30 billion of market cap in a few hours because China Mobile announces it will sell a Windows Phone made by Nokia? Really?
4) Samsung is Crushing Apple. Let me guess. Teens are ditching their iPhones and iPads and switching to Samsung phones because they are just that cool. Surely that would cause Apple to lose $30 billion of market cap in a few hours.
5) Some rumor about retail margin requirements being increased for only one stock; Apple. At first glance, this one at least sounds somewhat plausible, until one realizes most individual investors highly levered with margin already faced tough times a few weeks ago when the stock crashed to $505. Even if this rumor was true, individual investors would be unable to account for $30 billion of Apple value vanishing in a day.
6) Apple Maps. If all else fails, blame Apple Maps (ok…maybe I was the one to tweet this one as an excuse for Apple’s drop).
All of these possible explanations for today’s stock drop are nothing more than attempts of adding context to mystery; creating a story out of the unknown. Unfortunately, many are missing the big picture.
There are very few news items that are even capable of moving Apple’s stock price by 6% in a day (the worst daily decline in years). Such a move is typically left for monumental events such as a CEO departure or natural disaster impacting production or distribution, and even then those events would often be met with a rush of buyers willing to support the stock.
Is there anything we know for sure about today’s price action? Yes.
For every trade, the marketplace needs a buyer and seller. A stock price is the equilibrium where a buyer and seller are willing to exchange a share. Today, sellers were outnumbering buyers at $569 (Apple’s stock price at 9:31 AM), so the marketplace had to lower the price until sellers and buyers were in equilibrium. At 3:59 PM, the equilibrium for Apple’s shares was down to $538. Selling pressure remained elevated for most of the day, and as the share price declined further, additional selling pressure came in, forcing the shares to fall even more. Apple shares haven’t seen this type of price action in years (the typical retracement was only around 15%, which would take a few weeks to occur). Buyers would typical come in and support the stock (the Flash Crash of 2010 stands out as another notable exception).
The next question is what caused all of this selling? Unfortunately, we are forced to think of possible reasons for the selling to create a story because we hate the unknown. I could end this post right here and call it a day, but what’s the fun in that? Sometimes even I need a story or two.
I’m skeptical that any rumored (or even factual) news story was capable of causing the world’s most valuable company to drop 6% in a few hours. Instead, I think the intense selling pressure was caused by several mid-sized hedge funds forced to sell Apple positions because their computer models were programmed to sell Apple. In an effort to remove emotion from trading, some funds program models to buy and sell stock given certain market conditions (most likely momentum characteristics). By removing the human from the equation, one is unable to avoid selling a stock on no news (in many ways, for the model to be successful, all decisions have to be followed). I think a rather large fund (or a few) were forced to liquidate or reduce their Apple positions simply because the stock was in collapse mode. Add in differing degrees of leverage (money borrowing) and you can see how things can snowball out of control very quickly. I also believe a similar thing happened last month when Apple shares fell 8% in only two days. The harder Apple fell, the faster the models said sell. Meanwhile, buyers were simply unable to outnumber the sellers, causing the equilibrium price to remain under pressure. Of course, I’m sure there were plenty of retail investors selling Apple shares for completely different reasons, which supports my skepticism for labeling specific news items as stock price drivers.
Looking at the long-term, Apple is facing several headwinds that may give buyers pause. I have a difficult time modeling much in the way of EPS growth in 2013 given tough year-over-year margin comparisons. In addition, recent Apple management changes have not been tested in the marketplace. I’m sure one can also come up with a few other things that would elicit fear about Apple’s future, but at a certain price and after a set amount of time, these fears are fully realized and digested by the market. I suppose one can also come up with good scenarios for Apple, but what’s the fun in that? When Apple’s stock plunges on heavy volume, skepticism should take hold, helping to usher in clear thoughts. Short-term stock trading is a fool’s game and I would love to be proven wrong.
Marketing a Smaller iPad
Marketing is an art, not a science. We were fortunate to see this art first-hand on January 27, 2010 as Apple unveiled the iPad. Technological and engineering marvels aside, Apple faced the daunting task of marketing a disruptive product that had to grow into its role of replacing the modern-day PC. Jump ahead 33 months and it appears Apple has had some initial success, selling 84 million iPads. Within weeks, the world will see Apple’s second test marketing iPad, but this time it will be a new form factor, a smaller iPad.
Marketing; Portraying the Product
The most important aspect of marketing is the product; the look, feel, and sound (fortunately iPad’s smell and taste aren’t a major factor in this discussion). Apple eloquently marketed the iPad as a sexy device that could do a few things extremely well, all the while feeling great in your hand. The consumer was left focusing on iPad’s strengths, and not its short-comings, or mysteries, such as if its weight becomes an issue after extended use. In subsequent years, Apple began the task of marketing the iPad as a device capable of content creation, in an effort to begin cementing its path to replacing the modern-day PC. When unveiling a smaller iPad (7.85-inch screen) in October, Apple will be given 60 minutes to tell a story; why a smaller iPad should exist.
Apple may take two paths:
1) Positioning a smaller iPad as a replacement to the current 9.7-inch iPad. Apple’s presentation will include all of the features a smaller iPad could do well, such as web surfing, content consumption and creation, but in a smaller form factor and at a lower price point. Consumers will have to decide between a small or large iPad.
2) Positioning a smaller iPad as a companion to the current 9.7-inch iPad. Apple’s story will include the few things a smaller iPad could do extremely well, such as content consumption, in a more convenient form factor for extended passive use, such as reading or watching movies. Consumers will understand the differences between a small and large iPad and come away from the event wanting both, not one or the other.
Apple will most likely choose the second path, positioning the smaller iPad as a companion device to the current iPad line-up, and in doing so will not only sell a lot of small iPads, but keep the large 9.7-inch iPad as the powerhouse in the tablet market.
The Tablet Story
On January 27, 2010, Apple could have unveiled an iPad with a 7-inch screen, or 8 inches, or maybe even 12 inches, but settled on 9.7 inches. Apple knew there would be plenty of television commercials marketing iPad, but the biggest marketing ploy would be the product itself, a device capable of eventually replacing the modern-day PC as the primary form of computing. Apple wanted (or needed) consumers to begin thinking of an iPad as a possible laptop replacement from the start. The “iPad as your new laptop” thought didn’t need to be completely formed on Day 1, or even by Year 3, but Apple needed to plant the seed on Day 1 and a 9.7-inch device was an easier sell than a smaller 7-inch device.
Fast forward a few years, and the tablet market is now flooded with smaller 7-inch tablets. Besides not being given an adequate reason for their existence, consumers are confused by these 7-inch tablets labeled as a “full tablet” despite failing in comparison to a laptop’s immense feature list.
So why should Apple introduce a smaller 7.85-inch tablet now? It is time because the 9.7-inch iPad is a success.
A Smaller iPad; Companion to the Current iPad
The iPad is now well established as a successful tablet and cornerstone to Apple’s product line-up. While many have fallen in love with iPad, the device does have some minor drawbacks, namely form factor for extended use and price. The device tends to feel heavy in hand after extended use, such as reading or movie watching, while the $499 entry price is still unattainable for a large swath of the population, including education and business, leaving wiggle room for competitors to try something at the bottom-end of the price ladder. Are these two factors (heavy form factor and price) enough for Apple to introduce a smaller iPad?
In October, Apple will address the space between an iPhone and a 9.7-inch iPad and most likely market a 7.85-inch iPad as a companion to the 9.7-inch iPad. Books, movies, TV shows, podcasts, and games will be shown as more enjoyable given a smaller iPad form factor. Apple will need to walk a delicate line though positioning a smaller iPad as the best way to consume content, as many will continue to enjoy content on their large iPads (as well as on their iPhones).
More importantly, Apple needs to portray a small iPad not as a 9.7-inch iPad replacement, but as an iPad companion. If consumers begin to think of a smaller 7 to 8 inch device-great at content consumption but not so great at other aspects-as an iPad replacement, the effort of positioning iPad as the disruptive force will be in jeopardy since wide-spread adoption would come under pressure and laptops would continue to appear superior to the average 7-inch tablet.
For those who would buy a smaller iPad due to price, proper marketing will position the smaller iPad as a gateway drug to a larger iPad. If a consumer enjoys content on a small iPad, the thought of not only consuming the same content, but also creating content on a larger iPad will only be enhanced.
Other Musings
Price. If given three $5 casino chips and told to guess the small iPad’s price, the $199, $249, and $299 squares would be occupied with a chip. If given one $15 casino chip, the $249 price point would be occupied. Not only is the product itself a form of marketing, but a device’s price can say a lot. Priced too low, a small iPad may have a hard time losing the “just a content consumption” tagline, while priced too high and the small iPad becomes an iPad competitor as consumers assume the two devices must be similar in compatibility. A $249 price point would be the best of both worlds; a device $150 less expensive than the entry-level iPad 2, but still more expensive than other 7-inch tablets.
Future iPads. One could replace any mention of “small iPad” in this piece with “larger iPad” and the same overall thesis would apply. A larger iPad (greater than 9.7 inches) for content creators (movie makers, artists, designers, etc.) would certainly make an interesting proposition.
iPod touch. The updated 5th generation iPod touch (and all of its amazing features) is sold for just $299, which could very well be more expensive than a 7.8-inch iPad. Apple is positioning the iPod touch as that powerful guard, awake all night, preventing any Trojan horse from causing havoc.
Product Quality. It says a lot that throughout this entire discussion, the idea of Apple selling a small iPad with superior quality and craftsmanship is simply assumed to occur. Anything else would be a disappointment. High expectations can be both a blessing and curse.
Microsoft’s Interesting Week
With WWDC winding down in San Francisco and chatter concerning next week’s Google I/O picking up, few would have expected this week to be dominated by Microsoft news. Late Monday evening, after the East Coast had largely gone to sleep, at an event that was oddly so secretive that the press was not made aware of the venue until a few hours prior to start time, Microsoft announced its revamped Surface tablet and I felt somewhat duped. A team of executives got on stage in Los Angeles and put on a scripted show, only I was led to think it was reality. Microsoft faces an uphill battle and while consumers are now talking about the company and Surface, I have little confidence that Microsoft’s ultimate destiny was altered this week.
Surface Event Lacked Direction and Message, but Microsoft Accomplished Goal
At Apple’s iPad unveiling in 2010, Steve carefully crafted his sales pitch to show why the iPad should exist and be worthy of consumer’s precious dollars (pundits still questioned iPad’s purpose for the weeks, months, and years following the event). On Monday, Microsoft lacked a similar sales pitch, instead relying on teleprompters, and hobbling through failed demos, in an attempt to show that the lights were still on in Redmond. Microsoft’s event actually reminded me of HP’s TouchPad event in early 2011, where HP showed a general lack of direction and enthusiasm for the device. Reading off of teleprompters can really kill the passion. It has been four days since the Surface was unveiled, and with more questions than answers, I think Microsoft’s primary goal was accomplished; being mentioned in tablet (and phone) discussions between WWDC and Google I/O.
The Big Question
The Surface discussion can be reduced to one question: Is the Surface a proof of concept device meant to spur OEMs into action or is the Surface a sign that Microsoft is entering the tablet hardware space in response to changing market dynamics? It is easier for one to assume that Microsoft intends for OEMs to remain in the game, announcing the Surface as a means to drum up support and give OEMs confidence that there is interest for devices running Windows. However, if MSFT is looking to change strategies and develop the entire Surface device alone, I will give Steve Ballmer a pat on the back as that is one daunting move given the sheer difficulty in manufacturing desirable hardware.
Prototyping
The lack of available Surface devices for journalists to play with (unattended) and horrid onstage demos leads to me think that the Surface is very far from a shippable state. While working prototypes are common place in Silicon Valley, it is incorrect to assume mass production is only a few short months away as the task of figuring out how to turn a prototype into a mass-produced product at a particular price point (not discussed by Microsoft) by a specific deadline (also not discussed by Microsoft) may end up being just as difficult as building the original prototype.
Hardware Delicacy
Tablet hardware is tricky. From my initial iPad 2 review: “After a few minutes of using iPad 2, I found myself forgetting that I was using iPad 2. My entire thought process was given to the app that I was using. While iPad looks and feels amazing, the iPad dissolves away when in use, exactly how Apple planned it. Remove the intermediary and let users interact directly with innovation. I don’t care what is or isn’t inside iPad 2, as long as iPad 2 has the ability to run the highest quality apps possible.” After 15 months, I am unsure if the iPad’s software or hardware is more intriguing. Apple, a company built on the seamless integration of software and hardware, spent years mastering the art of making iPads. Does Microsoft, a company built on software, have the capabilities of designing and producing an intriguing tablet offering in a few months? While some point to Xbox and Zune as examples of Microsoft’s hardware success, the world is now a different place with substantially higher barriers of entry for hardware makers. HP, a company built on hardware, was forced to manufacture the TouchPad with parts deemed unworthy of the iPad since Apple had procured all available resources through long-term contracts. Meanwhile, PC OEMs are seeing their sales decline as their designs are falling flat with changing consumer preferences. I enjoy iPad because the hardware melts away. Is Microsoft capable of beating Windows OEMs and produce tablet hardware that is truly revolutionary, but still let app interaction resonate? Daunting would be an understatement.
Expectations
Microsoft faces an uphill battle with tablets, regardless if they intend OEMs to help out or they go it alone. The most likely scenario is that Microsoft will try to have one’s cake and eat it too; bring the Surface to market while keeping OEMs in the loop about broadening the Windows mobile platform. Microsoft will likely face an increasing number of manufacturing difficulties leading to certain things being left out, or altered, in order to stay near competitive prices. I would look at HP TouchPad and RIMM PlayBook hardware and price points as goals that Microsoft will try to meet, let alone beat (the TouchPad and PlayBook failed in the marketplace). I expect subpar Surface hardware, wrong price points, and limited distribution to become major headwinds for Microsoft. In order to beat iPad 2’s $399 price point, the Surface needs to come in at least $100 lower given Apple’s superior brand – a price I don’t think Microsoft will be able to meet without reporting huge losses. Instead, Microsoft will talk up the increased functionality of Surface (to validate a higher price) and the message will go in one ear and out the other as consumers realize laptops already fill that spot of the market. The Surface’s software, which many have continued to give praise for, will probably be up to Microsoft’s standards, however hardware limitations may spoil the treat, and as the iPad demonstrates (along with every other tablet), hardware cannot be ignored, regardless of how great the software is. Microsoft faces an uphill battle. Arriving at the baseball game in the 4th inning can make winning the game somewhat of a challenge.
Transferable Traits
A: Proof that the Apple Way is a transferable trait.
Q: What is Former Apple SVP Ron Johnson’s new JCP Sunday circular?
- Let the product do the talking
- Less is more
- Spend more timing looking ahead than behind
- Know when to place a big bet, and then go all in.
Final Thoughts on Apple's 4Q11
iPhone. We Still Don’t Know How People Buy Phones.
While everyone has been quick to blame unrealistic expectations for Apple’s 4Q11 “miss”, I think the rare earnings disappointment was partially due to a lack of understanding on how iPhone demand fluctuates and how people buy phones. Apple just became a much harder company to model.
It is incorrect to say that analysts never considered people waiting to buy iPhones ahead of a rumored iPhone refresh. Almost every analyst note published in the past three months mentioned an iPhone refresh and the tendency for pent-up demand to build as consumers wait on iPhone purchases. Apple management forewarned the same scenario on Apple’s 3Q11 earnings call. People were expecting it. Even my analysis was based on the idea that a slowdown in iPhone 4 sales in countries that typically get the new iPhone on launch would be offset by continued strong iPhone 4 sales in countries where the new iPhone would take months to reach. That didn’t happen.
Instead, the world pretty much stopped buying iPhones in September. I don’t think it’s much of an exaggeration to say that iPhone sales almost came to a screeching halt towards the end of September. Apple specifically mentioned that sales slowed further in the second half of the quarter. Running rough calculations, I estimate iPhone sales may have been tracking down 20-40% yoy in the U.S. towards the end of September. Pretty remarkable. I wonder if Apple retail stores saw this noticeable decline in demand? Analysts underestimated how many people were aware of iPhone rumors and were waiting to buy. Apple was surprised too, with both Tim Cook and Peter Oppenheimer mentioning “rumors” as one cause for weak iPhone sales. Anecdotally, I talked with quite a few BlackBerry and Android users over the summer, all of whom were well aware of a new iPhone coming out sometime in the fall. I assumed there were other people still buying iPhones.
The iPhone miss (and let me be clear, the iPhone number was pretty negative at only 21% yoy growth) came as a huge surprise with analysts and the investment community thinking the iPhone demand cycle had become independent of product transitions. We thought that sequential quarterly iPhone growth is the new normal, regardless of how a new iPhone impacts deferred sales. Apple’s significant 3Q11 iPhone beat cemented the idea of sequential quarterly growth. Ironically, many analysts thought the new iPhone was going to be unveiled at WWDC and had modeled for declining iPhone sales in 3Q11 due to deferred sales (people waiting). Instead, Apple beat everyone’s iPhone estimate by a mile as iPhone rumors really didn’t grow until August. Independent Apple analysts (including myself) concluded it would be unlikely that Apple would report a sequential quarterly decline in iPhone shipments in 4Q, which meant Apple would sell more than 20.3 million iPhones (their 3Q11 total). We weren’t necessary making a call on growth assumptions, or at least I wasn’t. Some analysts did get it right. Goldman Sachs modeled 16.9 million iPhones – essentially spot on. Still wondering why Goldman was picked first for Apple’s earnings Q&A?
I don’t think our iPhone expectations were overly optimistic though as our previous demand forecasts have now shifted to 1Q12. Our annual iPhone sales estimates remain largely unchanged. Instead, our timing was wrong. I think iPhone’s increasing demand complexity was the main culprit for the iPhone miss. Even Apple management thought they would sell more iPhones in 4Q11.* We still don’t understand how consumers buy phones. For many, buying a phone is categorized as “the big purchase” even though the actual cost of the phone is spread over 2 years. A $110 monthly cell phone bill 17 months from now is not as important as the difference between a free subsidized phone and a $199 subsidized phone today. People wait to buy phones until their contract is up and - this is key - they are willing to wait after their contract is up to take advantage of the carrier’s subsidy and buy a phone that they really want, even if it means holding off on a new cellphone for an extra 4 or 5 months. This trend will only grow as smart phones flourish.
Reports of record iPhone 4 sales over opening weekend (including positive commentary from AT&T, Verizon, and Sprint) are evidence that iPhone demand is back. Going forward, analysts should model a slowdown in iPhone sales during product transitions. If a new iPhone is rumored for October 2012, one should assume people will stop buying iPhones in September. Seems obvious now, but many got it wrong. In addition, a new form factor will also lead to difficultly in meeting initial supply, which could hurt early sales.
iPad. The Wild West.
Apple sold 11.1 million iPads in 4Q11. I expected 11.7 million and I had originally expected 11.1 million, so iPad is performing near my expectations. Unfortunately, many independent analysts have been running with extremely aggressive iPad expectations. I do think these expectations need to come down. Apple noted iPad supply and demand is now in balance. Apple sold every iPad that consumers desired; 11.1 million/quarter. I still get nervous with iPad because it is such a young product. What if demand really isn’t as good as we think? It doesn’t mean the product is a failure, instead maybe people just haven’t yet become comfortable with tablet computing. Sales fluctuations will occur and people need to plan for it. I found it interesting that Tim Cook made the claim that iPad could turn out to be larger than the PC market. In the past, Apple’s remarks were more vague and general. Apple wants to set the tone for iPad. This is the bet. This is the future.
Mac. Steady as She Goes.
Apple’s forgotten child (at least in many investor’s eyes) continues to do well, taking market share from Windows with both hands. Strong 37% yoy growth in portables (thank you Macbook Air) speaks well of Apple’s growing brand in the traditional PC market. Yet compared to iPad and iPhone, Mac’s influence is just too small to impact earnings to any large degree.
iPod. Out to Pasture.
Declining iPod sales are now normal and to be expected. In fact, iPod declines are accelerating. Sure, the “newer” iPods might change this trend a bit in the near term, but when excluding iPod Touch, the iPod is only a fraction of its former self.
Guidance. Strong.
Apple’s 1Q12 guidance was very strong, near current consensus (which is very rare). Management indicated they will sell a record number of iPhones and iPads during the holiday quarter (not that shocking). Since Apple “missed” earnings, analysts will be more conservative with their forward expectations, unsure of how much cushion Apple built into its guidance. Many analysts were already running with conservative assumptions so the 4Q11 “miss” should not weigh much on forward EPS estimates.
Thoughts on Apple. Quarterly Results Rarely Matter For Superior Management Teams
Earnings misses are not the end of the world. They can be healthy, serving as a foundation for further gains. Misses act as a reset for increasingly lofty expectations. Problems arise though when people look for answers to an earnings miss and are quick to make incorrect assumptions. A prime example is Apple’s retail store trends. Same store sales were down approximately 10% (which means that your local Apple store reported 10% less revenue, on average, this past quarter vs. last year – a pretty sizable decline). Well, hello, iPhone sales were miserable. With an ASP of over $600 and a concentration of Apple retail stores in the U.S., a slowdown in iPhone sales (maybe as much as 30-40% in September in the U.S.) will have an impact on total retail store revenue. It doesn’t take a genius to figure that out.
Apple will get penalized in the near-term because of its earnings “miss”. People will remain more cautious on iPhone and iPad growth. Expectations are being reduced (especially among the independents). Apple bears are getting louder. People are wondering. People are asking. Earlier this week, the biggest question was how high the stock would gap up after earnings. Now people are thinking of the “what ifs”, what if people stop buying iPhones, what if iPad sales slow down. While such questions might seem silly to think given the technicalities of Apple’s “miss”, its nevertheless happening.
Good companies sometimes have “bad” earnings reports (who would have thought 50% EPS growth would be considered bad). In such circumstances, time is your friend. For long-term investors, quarterly results shouldn’t even matter much, instead attention should be given to the current management team and its ability to innovate.
*UPDATE: Thanks to @adamthompson32 for pointing out that Apple actually said 4Q11 iPhone sales were better than expected. Tim Cook: “And as we have predicted…(iPhone) sell-through decline did occur in the quarter, but not nearly to the extent that we thought and therefore, we significantly beat our guidance.”
My Idol, Steve
Steve was one my idols, not because he helped build Apple Inc., but rather for his ability to turn Apple into a set of beliefs.
That technology is too powerful of a force to enjoy without acquired perception and natural intelligence.
That product design has the power to momentarily satisfy the never-ending search for order and reason.
Many are asking themselves why they feel so much sadness over Steve’s death even though they never knew him on a personal level. Steve became a symbol for many of us, representing how technology can push society forward. Edison advanced society in the late 19th and early 20th century, Disney in the early and mid-20th century, and Steve in the late 20th and early 21st century. Many tears are being shed over Steve’s death because deep down we know it’s unlikely we will see another visionary like Steve in our lifetime.
Tim Cook. The Architect.
While some have responded to Steve’s resignation as Apple CEO by recalling personal stories involving Steve or Apple, others have focused on how Apple’s culture will handle a different leader. Let’s take a step back and reassess Apple’s current situation.
Current Products
I have extreme confidence that Apple will successfully update its flagship products in the near-term. As I previously wrote, Apple’s start-up structure assures resources are allocated to a product in the months leading up to a refresh; breaking down the “walls” between executives and workers - the same walls that often destroy other technology companies. Having executives involved in seemingly detailed and mundane aspects of a product is the difference between having a product be “magical” or “good”. Tim Cook will continue to hash out aggressive business contracts with Apple friends and foes. Apple’s expanding supply and distribution channels will continue to be run with the dedication and intelligence that have put competitors to shame. As a prime example of how much confidence I have in Apple’s ability to execute in the near-term, I have no intention in lowering my forecasts for Mac, iPod, iPhone, or iPad sales in my AAPL earnings model following Steve’s resignation.
Future Products
Apple will continue to innovate and brainstorm ideas that will change the world. While it is difficult to pinpoint why the iPod, iPhone, and iPad have been so successful, it is important for Apple to continue to make similar industry-changing strides. I think this is where Apple will face its first significant challenge with Steve no longer at the helm. What makes Apple so great is its willingness to take abnormally large risks and essentially bet the farm on those risks. Apple is able to translate a big idea (big bet) into reality with very little friction and inefficiency. The biggest risk enters the equation on the demand side - whether consumers want the product. Steve made bets. Big ones. Will Tim be able, or willing, to take similar big risks?
At this time, I do think Tim is capable of such responsibility. Tim isn’t some young gun who has been thrown into the game. Observing how the world has changed (and where it will go) is an art not a science, and while Steve mastered that art so successfully, Tim was in a perfect position to watch the master perfect his art, giving him a significant advantage over everyone else in Silicon Valley. Apple will lose on some bets, but will still be able to strive to new heights if more is wagered on winning bets.
Face of Apple
Apple is Steve and Steve is Apple and that will not change. However, there is now a debate as to who will become the new face of Apple or if Apple even needs a singular public representative given Apple’s size and power. I do think the entire Apple executive team will gain more exposure with some SVPs acquiring new affiliations with consumers. Forstall as Mr. iPhone and iPad, Jony as Mr. Apple Design, Schiller as Mr. Apple Brand, while Tim remains the “Big Dad”. Great brands create emotional connections between users and products. People will want to connect with Apple and its leadership in new ways. When Apple is ready to unveil its next big thing, we will most likely have a few members of the Apple team explain why the world needs this new product, whereas up to now, only Steve has had the honor.
AAPL
Concerning financials and other AAPL stock decisions, I would expect no significant changes or speed bumps with Tim as CEO. In addition, an internal CEO promotion often results in minimal changes to prevailing capital philosophies concerning dividends and share buybacks.
The Architect
At the end of the day, Steve built the foundation for a magnificent castle and Tim is a great architect. As I wrote back in December: "As long as most of the risk variables are monitored and marginalized to a certain extent by upper management (and Steve Tim) - the consumer is left as the biggest risks. Apple can then rely on its brand power to turn the odds in its favor.”