Neil Cybart 12/22/21 Neil Cybart 12/22/21

Above Avalon Year in Review (2021)

Heading into 2021, Apple had just gone through one of the more tumultuous years in its existence. As discussed in last year’s Year in Review, the pandemic turned 2020 into a steady stream of unexpected challenges for Apple. Expectations that 2021 would be much smoother turned out to be optimistic. While society did largely open up halfway through the year, which allowed Apple’s retail apparatus to return to normal operations, Apple continued to face once-in-a-few-decades challenges when it came to the supply chain, product manufacturing, and navigating its 154,000 employees through a pandemic.

According to my estimate, Apple experienced $10 billion of unmet demand in 2021 as a result of supply chain issues. This total is on top of lingering demand issues associated with wearables that arose from the pandemic.

Despite the challenges, 2021 was a record year for Apple on a number of business fronts:

Apple sold 260M+ iPhones - a record high for a 12-month period.
Apple sold 25M Macs - a record high for a 12-month period.
The Apple Watch installed base surpassed 100 million people.

Articles

In 2021, I published 10 Above Avalon articles. In looking through the articles, which are accessible to all, there was one overarching theme: Apple’s ecosystem continues to gain strength and is ready for the next major product category launch (a mixed reality headset).

Here are a few of my favorite articles published in 2021 (in no particular order):

Apple Has a Decade-Long Lead in Wearables. AssistiveTouch allows one to control an Apple Watch without actually touching the device. A series of hand and finger gestures can be used to control everything from answering a call to ending a workout. The technology is just the latest example of how Apple’s lead in wearables is still being underestimated. The evidence points to Apple having a wearables lead of not just a few years, but more like a decade.

Apple Won the Share Buyback Debate. I receive many questions about Apple from Above Avalon readers, listeners, and members. In previous years, one topic has been far ahead of any other as a source of questions. Everyone wanted to know about Apple’s share buyback program. Something interesting happened in 2020. I received far fewer questions about Apple’s share buyback program. To be precise, I didn’t receive an incoming question about buyback in nine months - from when the stock market put in a bottom in April 2020 to the start of 2021. What explains such a dramatic change? The Apple share buyback debate ended, and Apple was declared the winner.

Apple’s Extremely Quiet Year for M&A. While going through Apple’s 10-K for FY2021, one number jumped out at me. It wasn’t the record iPhone sales, strong margins, or phenomenal free cash flow. Instead, it was the lack of cash spent on M&A. In 2021, Apple spent just $33 million on business acquisitions (M&A). That’s a record low for Apple with Tim Cook as CEO. It’s a number that deserves further investigation as Apple’s M&A strategy and philosophy play a big role in how Apple was able to get to where it is today.

The five most popular Above Avalon articles in 2021, as measured by page views, were:

Podcast Episodes

There were 11 episodes of the Above Avalon podcast recorded and published in 2021, totaling 4.5 hours. The podcast episodes that correspond to my favorite articles are found below:

Charts and Exhibits

The following charts and exhibits found in Above Avalon articles published in 2021 were among my favorites.

Apple Wearables Unit Sales (2017 to 2021) - from Apple Has a Decade-Long Lead in Wearables

According to my estimate, Apple is on track to sell 105 million wearable devices in 2021. That total represents 40% of the number of iPhones sold during the same time period. Unit sales don’t tell the full story, however. On a new-user basis, Apple is seeing more people enter the wearables arena than buy a new iPhone for the first time.

Note: Apple wearables include Apple Watch, AirPods, and select Beats headphones.

Percentage of Apple Revenue Through Direct Distribution Channel - from The Future of Apple Retail

The percentage of sales going through Apple’s direct distribution has gradually increased in recent years. The increase in sales percentage has likely been boosted by services revenue, more sales going through Apple’s website, and more iPhone upgrading taking place through Apple.

Note: Direct distribution channel includes Apple’s website, Apple stores, and direct sales force.

Apple M&A (Cash Payments) - from Apple’s Extremely Quiet Year for M&A

Since 2006, Apple has spent $20.6 billion on M&A with about half of the total tied to “business acquisitions.” The median is $1 billion per year. However, in 2021, Apple spent just $33 million on business acquisitions. That is the lowest amount since 2009 when Steve Jobs was still Apple CEO.

Daily Updates

In 2021, I published 182 Above Avalon Daily Updates that were available exclusively to Above Avalon members. With each update coming in at approximately 2,000 words, 182 updates are equivalent to five books. This continues to be an industry-leading number when it comes to the amount of Apple business and strategy analysis published.

When looking over the topics discussed in this year’s daily updates, a few sub themes become apparent:

Project Titan Moving Forward

Along with mixed reality and AR, transportation is one of the largest areas of opportunity when thinking of future Apple products and services. The year turned out to be the busiest one yet when it came to Project Titan news as Apple began to seek supply chain and manufacturing partners.

Changes in Paid Video Streaming Land

Given the rush of new players into the paid video streaming space in 2020, there was quite a bit of movement in 2021. AT&T’s decision to spin off WarnerMedia was an industry-shaking event. As the months went on, it became clear that many content distribution services were experiencing something equivalent to a pandemic air pocket as subscriber trends became noisy. Netflix and Roku ran into friction while the true new kid on the block (Apple TV+) regained momentum with new shows and movies coming online in the back half of the year.

The App Store’s Day in U.S. Court

The well-publicized Epic Games vs. Apple trial resulted in a resounding legal victory for Apple. It ended up being difficult to grasp just how poor of a job Epic Games did in trying to paint Apple as a monopoly. While the court did order Apple to change its anti-steering provision in the U.S., Apple won a stay by a court of appeals. The outcome with the highest probability is for the anti-steering provision to remain as is which would signal Apple’s very strong legal footing as it pertains to the App Store.

When looking at my daily updates published in 2021, selecting a few favorites out of 196 updates was not easy. The following updates stood out to me (in no particular order):

Warren Buffett’s Annual Letter, Apple Isn’t Buffett’s Token “Tech” Stock, Apple, Buffett, and Buyback. We kick off today’s update with my thoughts on Warren Buffett’s 2020 letter to Berkshire Hathaway shareholders. Berkshire is Apple’s largest individual shareholder. The discussion then turns to why I don’t agree with those claiming Apple is Buffett’s token tech stock. We conclude by looking at share buyback and how the capital return mechanism leads to a wealth transfer event. (Mar 2, 2021)
Peloton Recalls All of Its Treadmills, The At-Home Fitness Revolution Needs a Reset, Apple, Fitness Machines, and Gyms. Today’s update will be focused on the at-home fitness industry. It’s a market that Apple moved deeper into a few months ago with Apple Fitness+. A good argument can be made that at-home fitness impacts other Apple devices as well especially Apple Watch and Apple TV. We kick things off with my thoughts on Peloton recalling all of its treadmills. The discussion then turns to why I think the at-home fitness industry needs a reset. The update concludes with how fitness equipment safety, or the lack thereof, impacts Apple and why I continue to think there will be a role for gyms to play in the future. (May 6, 2021)
Tesla Buys Bitcoin, Apple and Bitcoin, Apple and Crypto Exchanges. Today’s update will be focused on bitcoin. We begin with news of Tesla buying $1.5B of bitcoin. We then turn to my thoughts on whether or not Apple should follow Tesla into bitcoin. The update concludes with a closer look at RBC Capital Market’s suggestion that Apple should move into cryptocurrency exchanges. We go over why I don’t think the firm’s analysis passes the small test. (Feb 10, 2021)
Apple’s Services Journey, A Different Way of Thinking of Apple One, Apple Services Evolution. For the first time in what feels like a long time, the Apple news cycle is taking a breather. This provides us with an opportunity to pursue some original topics. We kick off today’s update with my thoughts on the narrative surrounding Apple’s Services business. Things are starting to change. The discussion then turns to how I think about Apple’s Apple One bundle and how reframing Apple One leads to some interesting questions and ideas as it pertains to the competition. The update concludes with my thoughts on the future factors determining where Apple Services are headed. (Jul 13, 2021)
Niantic CEO Pours Cold Water on the Metaverse, Meta Buys Within, The Mistake People Are Making With the Metaverse. We kick things off with my thoughts on Niantic CEO John Hanke’s interview with The Verge’s Nilay Patel on his Decoder podcast. Hanke discussed some of the more intriguing topics and concepts found in the AR/VR/metaverse space. The discussion then turns to Meta (Facebook) buying Within. We go over two items that jumped out at me about the acquisition. The update concludes with the mistake that I see consensus making when it comes to metaverse analysis. (Dec 16, 2021)
The Amazon Event, Amazon’s Play for Neighborhoods, Amazon Astro. Today’s update will be focused on Amazon’s product event. We kick things off with my thoughts regarding Amazon’s product strategy involving ambient intelligence. The discussion then turns to Ring’s outsized presence throughout Amazon’s presentation. We go over Amazon’s play for neighborhoods and what is at stake. The update concludes with a closer look at the Amazon Astro. (Sep 29, 2021)

Here are the five most popular daily updates published in 2021 based on page views to AboveAvalon.com. There is naturally a tendency for updates published earlier in the year to outrank more recent updates.

Just 13% of the daily updates published in 2021 are highlighted in this article. The full archive consisting of all 182 daily updates is available here. Above Avalon membership is required to access the updates.

Daily Podcast

This was the first full year for the Above Avalon Daily podcast, the private podcast available to members who attached the podcast add-on to their membership. A total of 182 episodes were published, totaling nearly 40 hours of audio. The podcast allows members to consume the daily updates in new and different ways while around the house, on a walk, or in the car. Since launch, reception of the daily podcast has exceeded my expectations with very positive listener feedback. More information on the daily podcast, including a few sample episodes, is found here. Once an Above Avalon member signs up for the daily podcast, all prior episodes become available for listening in podcast players that support private podcasts.

Inside Orchard (Launched in 2021)

In March, I launched InsideOrchard.com as a home to my unique perspective on technology and its impact on society. Over the past nine months, 40 essays and corresponding podcast episodes were published. Although distinct from the analysis and discussion found with Above Avalon, the two sites can be thought of as siblings. A bundle consisting of both an Above Avalon membership and Inside Orchard subscription, with an accompanying price discount, was purchased by a good percentage of the Above Avalon member base.

Here’s to 2022

A big thank you goes out to readers, listeners, and members for making 2021 another successful year for Above Avalon. Have a safe and relaxing Christmas, holiday season, and New Year. See you in 2022. - Neil

Neil Cybart 12/23/20 Neil Cybart 12/23/20

Above Avalon Year in Review (2020)

Heading into 2020, the big question facing Apple was found with growth. Apple had reached a billion users. Would Apple be able to reach two billion users in the 2020s by continuing to do what it had been doing or would more in the way of strategy shifts be needed?

As it did with every company, the pandemic turned 2020 into a steady stream of unexpected challenges for Apple. The company needed to figure out a way to continue product development on a global scale with little to no employee travel. Apple retail needed to be completely rethought as social distancing initiatives ruled out the usual crowded Apple stores. Apple events (both WWDC and product unveilings) needed to go virtual.

According to my estimate, Apple saw approximately $20 billion of delayed demand in FY2020 as a result of the pandemic. Approximately 15 million iPhone upgrades were delayed while wearables sales faced pressure due to retail stores being closed. Partially offsetting those headwinds, iPad and Mac results have been stellar as consumers upgrade older machines and look for larger displays to support working at home and distance learning.

Articles

In 2020, I published 15 Above Avalon articles. In looking through the articles, which are accessible to all, there was one overarching theme: Apple’s improving competitiveness in comparison to that of its peers and the steps the company is taking to position itself for continued ecosystem growth in the 2020s.

Here are some of my favorite articles published in 2020 (in no particular order):

Apple Is Pulling Away from the Competition. Relying on an obsession with the user experience, Apple is removing oxygen from every market that it plays in. At the same time, the tech landscape is riddled with increasingly bad bets, indifference, and a lack of vision. Apple is pulling away from the competition to a degree that we haven’t ever seen before.
The Secret to Apple's Ecosystem. Apple’s ecosystem remains misunderstood. There is still much unknown as to what makes the ecosystem tick. From what does Apple’s ecosystem derive its power? Why do loyalty and satisfaction rates increase as customers move deeper into the ecosystem? Apple’s ecosystem ends up being about more than just a collection of devices or services. Apple has been quietly building something much larger, and it’s still flying under the radar.
A Billion iPhone Users. A billion people now have iPhones. According to my estimate, Apple surpassed the billion iPhone users milestone last month. Apple’s top priorities for the iPhone include finding ways to keep the device at the center of people’s lives while at the same time recognizing the paradigm shift ushered in by wearables.
Apple’s $460 Billion Stock Buyback. Share buybacks came under fire earlier this year. Some companies that were recent buyers of their shares found themselves in financial distress and seeking bailouts due to economic fallout from the pandemic. A very good argument can be made that Apple has become the poster child of responsible share repurchases. The company has relied on its stellar free cash flow to fund share repurchases over the years.
Apple Watch and a Paradigm Shift in Computing. Despite being only four years old, the Apple Watch has fundamentally changed the way we use technology. Many tech analysts and pundits continue to look at the Apple Watch as nothing more than an iPhone accessory - an extension of the smartphone that will never have the means or capability of being revolutionary. Such a view is misplaced as it ignores how the Apple Watch has already ushered in a paradigm shift in computing.

The five most popular Above Avalon articles in 2020, as measured by page views, were identical to my favorites list.

Podcast Episodes

There were 16 episodes of the Above Avalon podcast recorded and published in 2020, totaling seven hours. The podcast episodes that correspond to my favorite articles are found below:

Charts

The following charts found in Above Avalon articles were among my favorite published in 2020.

Number of Users

While Apple new user growth rates have slowed, the company is still bringing tens of millions of users into the fold. Due to Apple’s views regarding innovation and its focus on the user experience, once someone enters the Apple ecosystem, odds are good that customer will remain in the ecosystem.

Apple Installed Base (Number of Users)

Apple Non-iPhone Revenue Growth

Apple 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 double digits in the back half of 2020 on a TTM basis, which is higher than growth rates seen in the mid-2010s.

Apple Non-iPhone Revenue Growth Projection

The Apple Innovation Feedback Loop

With Apple Silicon, Apple took lessons learned from personal devices such as Apple Watches, iPhones, and iPads to help push less personal devices, like the Mac, forward.

Daily Updates

In 2020, I published 196 Above Avalon Daily Updates that were available exclusively to Above Avalon members. With each update coming in at approximately 2,000 words, 196 updates are equivalent to seven books. This continues to be an industry-leading number when it comes to the amount of Apple business and strategy analysis published.

When looking over the topics discussed in this year’s daily updates, a few sub themes become apparent:

Apple and the Pandemic

When the pandemic began during the first half of the year, there was much unknown as to how a company like Apple would be impacted. It eventually became clear that Apple and its peers were positioned to do OK during the pandemic although new ways of thinking would be needed to navigate working from home and travel restrictions.

The Paid Video Streaming Battle

With Disney+ and Apple TV+ launching in late 2019 and HBO Max and Peacock launching this past May and July, respectively, 2020 turned out to be the legitimate start of the paid video streaming battle. As the true new kid on the block, Apple learned quite a bit about being more than just a distributor of other people’s content.

Pushback Against the App Store

Apple is pulling away from the competition, and the App Store is considered the best (and last) chance for competitors to reshape the mobile industry to their liking. A series of legal and PR battles were waged against the App Store by a handful of smaller app developers and larger Apple competitors.

Tech CEOs Testify in Front of Congress, Congress’s Concern Regarding Apple, Apple’s Trouble Area (Jul 30, 2020)

When looking at my daily updates published in 2020, selecting a handful of favorites out of 196 updates was not an easy task. The following updates stood out to me (in no particular order):

Apple’s Organizational Structure, Apple’s Leadership Structure, An Autonomous Apple. We first go over my thoughts on Apple’s functional organizational structure and the difference between a functional and multidivisional structure. The discussion then turns to Apple leadership and the ideas of “discretionary leadership” and “experts leading experts.” The update concludes with a revisiting of my Above Avalon article, “Jony Ive, Jeff Williams, and a Larger Apple” and a discussion of how Apple has been able to become a larger design company. (Oct 26, 2020)
Nike Earnings, The Similarity Between Nike and Apple, A Stronger Apple and Nike Partnership. We kick off this update with my thoughts on Nike’s earnings. After going over three structural tailwinds facing Nike, we discuss why I think Nike is pulling away from the competition. The discussion then turns to how Nike is the company most like Apple. The update concludes with a look at how Apple and Nike are both interested in health. We go over the competitive dynamic between the two companies and why it’s premature to conclude that Apple and Nike will become fierce competitors in the future. (Sept 24, 2020)
iPhone Momentum Building in Europe, Apple's Good Timing with iPhone SE, Selling Utility on the Wrist. We begin this update with my thoughts on the iPhone gaining momentum in Europe. The discussion includes new iPhone sales share data and what looks to be some kind of inflection point in the region. We also discuss the possible factors behind the inflection point. The update then turns to how Apple ended up launching the updated iPhone SE at just the right time. We then take a closer look at wearables competition on the wrist. In particular, we go over Fitbit’s latest earnings and compare fitness tracker and smartwatch demand. The discussion concludes with why Amazon Halo faces an uphill battle for wrist real estate. (Sep 3, 2020)
Valuing Big Tech on Free Cash Flow, AAPL vs. Free Cash Flow, AAPL vs. Low Interest Rates. This update begins with my thoughts on the idea that Wall Street has changed the way it is valuing Apple - one away from focusing on P/E ratios (price-to-earnings) and more towards free cash flow valuation. After going over the free cash flow yields for the tech giants, we look specifically at Apple’s declining free cash flow yield and what it tells us about how the market is approaching the company. The update concludes with a discussion of interest rates, inflation, and the U.S. Fed looking to embrace elevated inflation before seeing the need for higher rates. There are various AAPL-related implications associated with that development. (Aug 25, 2020)
Apple Acquires NextVR, Apple Glasses in 2022?, A Wearables Platform for the Face. We begin this update with my thoughts on Apple acquiring NextVR. The discussion includes the reasons why I think Apple acquired NextVR and how the company can play a role in Apple’s product strategy. The update then turns to new rumors about Apple Glasses launch dates. Simply put, the Apple AR / VR rumor mill is getting out of hand. We go over two factors that I think are driving the varied rumors regarding Apple Glasses. The discussion concludes with a different way of thinking about AR / VR and Apple. (May 18, 2020)
Warren Buffett’s Annual Letter, The Power of Apple Retained Earnings, Imploding Demand for Fitbit. We kick off this update by examining Warren Buffett’s annual letter to Berkshire Hathaway shareholders. Berkshire Hathaway is Apple’s largest individual shareholder. Accordingly, there is value in keeping on top of Berkshire and Warren Buffett (Berkshire’s CEO and Chairman of the Board). The discussion then turns to retained earnings and why Apple’s retained earnings are such a powerful tool. We conclude with a look at Fitbit’s awful 4Q19 earnings and why the company represents such a problem for Google. (Feb 24, 2020)

Here are the five most popular daily updates published in 2020 based on page views:

Just 11% of the daily updates published in 2020 are highlighted above. The full archive consisting of all 196 daily updates is available here. Membership is required to access the updates.

Daily Podcast (Launched in 2020)

In 2020, Above Avalon Daily Updates became available in audio for the first time via a private podcast called Above Avalon Daily. Reception to the daily podcast continues to exceed my expectations with very positive listener feedback. The podcast has allowed members to consume the daily updates in new and different ways while around the house, on a walk, or in the car. More information on the daily podcast, including a few sample episodes, is found here. Above Avalon Daily was launched in August, and 66 episodes were published in 2020, totaling nearly 17 hours of audio. Once a member signs up for the daily podcast, all prior episodes become available for listening in podcast players that support private podcasts.

Here’s to 2021

Without question, 2020 ended up being the busiest year for Apple since Above Avalon was launched in 2014. There was no shortage of newsworthy stories, and all indicators point to the fast pace continuing into 2021. A big thank you goes out to Above Avalon readers, listeners, and members for making 2020 another successful year for Above Avalon.