Apple’s Installed Base Growth, Apple's Paid Subscriptions Growth, A More Effective Apple Growth Narrative for Wall Street

Last Friday’s update kicked off our Apple 1Q24 earnings review. When it comes to Apple’s financial story, trends are tracking close to Neil’s expectations. For today, we will take a closer look at one takeaway from earnings: Apple’s ecosystem growth.

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4Q22 Apple Watch Installed Base, Apple Watch Adoption Figures (Daily Update)

Hello everyone. Happy Wednesday.

One quick follow-up to yesterday’s update regarding the Pixel 7 and 7 Pro.

When it comes to assessing Google’s odds of finding traction with the Pixel 7 and 7 Pro, the following screenshot of AT&T's website highlights a big obstacle:

 
 

AT&T's bet on Apple is nothing new. Instead, the mobile carriers have been placing even bigger bets on iPhone and Apple in recent years. The logic is straightforward. Consumers want iPhones and carriers don't want customers to look elsewhere for the best iPhone deals. The lack of carrier support/promotion leaves Google appealing to die-hard Android users who have become disenchanted with Samsung hardware. At least in the U.S., that's not a huge market.

4Q22 Apple Watch Installed Base

It's been a year since we went over my estimates for the Apple Watch installed base. Given different definitions of user bases and installed bases, my definition of the Apple Watch installed base is the number of people wearing an Apple Watch on any given day.

Unlike the iPad and Mac, we don’t have to worry about shared settings where one Apple Watch is shared among a number of people. We also don’t have to be concerned with the very small number of people who wear or use multiple Apple Watches.

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Above Avalon Membership

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Above Avalon Podcast Episode 180: 100 Million Wrists

According to Neil’s estimate, 100 million people now wear an Apple Watch. This means that approximately 10% of iPhone users wear an Apple Watch. In episode 180, Neil discusses these installed base and adoption figures as part of a larger discussion regarding Apple Watch’s sales momentum, growth potential, and roles in Apple’s ecosystem

To listen to episode 180, go here. 

The complete Above Avalon podcast episode archive is available here. 

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Above Avalon Podcast Episode 174: Apple Watch Is a Runaway Train

While the tech press spent years infatuated with stationary smart speakers and the idea of voice-only interfaces, it was the Apple Watch and utility on the wrist that ushered in a new paradigm shift in computing. In episode 174, Neil discusses how Apple Watch momentum is building. The product category resembles a runaway train as no company is in a position to slow it down. Additional topics include the stationary smart speaker mirage, Neil’s Apple Watch installed base estimates, how Apple Watch derives its momentum, and Apple’s health platform.

To listen to episode 174, go here. 

The complete Above Avalon podcast episode archive is available here. 

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Apple Watch Momentum Is Building

In a few months, the number of people wearing an Apple Watch will surpass 100 million. While the tech press spent years infatuated with stationary smart speakers and the idea of voice-only interfaces, it was the Apple Watch and utility on the wrist that ushered in a new paradigm shift in computing. We are now seeing Apple leverage the growing number of Apple Watch wearers to build a formidable health platform. The Apple Watch is a runaway train with no company in a position to slow it down.

Mirages and Head Fakes

We are coming off of a weird stretch for the tech industry. As smartphone sales growth slowed in the mid-2010s, companies, analysts, and pundits began to search for the next big thing. The search landed on stationary smart speakers and voice interfaces.

Companies who weren’t able to leverage the smartphone revolution with their own hardware placed massive bets on digital voice assistants that would supposedly usher in the end of the smartphone era. These digital voice assistants would be delivered to consumers via cheap stationary speakers placed in the home. Massive PR campaigns were launched that attempted to convince people about this post-smartphone future. Unfortunately for these companies, glowing press coverage cannot hide a product category’s fundamental design shortcomings. 

At nearly every turn, Apple was said to be missing the voice train because of a dependency on iPhone revenue. Management was said to suffer from tunnel vision while the company’s approach to privacy was positioned as a long-term headwind that would lead to inferior results in AI relative to the competition. Simply put, Apple was viewed as losing control of where technology was headed following the mobile revolution.

There were glaring signs that narratives surrounding smart speakers and Apple lacking a coherent strategy for the future were off the mark. In November 2017, I wrote the following in an article titled, “A Stationary Smart Speaker Mirage”:

“On the surface, Amazon Echo sales point to a burgeoning product category. A 15M+ annual sales pace for a product category that is only three years old is quite the accomplishment. This has led to prognostications of stationary smart speakers representing a new paradigm in technology. However, relying too much on Echo sales will lead to incomplete or faulty conclusions. The image portrayed by Echo sales isn't what it seems. In fact, it is only a matter of time before it becomes clear the stationary home speaker is shaping up to be one of the largest head fakes in tech. We are already starting to see early signs of disappointment begin to appear…

I don’t think stationary smart speakers represent the future of computing. Instead, companies are using smart speakers to take advantage of an awkward phase of technology in which there doesn’t seem to be any clear direction as to where things are headed. Consumers are buying cheap smart speakers powered by digital voice assistants without having any strong convictions regarding how such voice assistants should or can be used. The major takeaway from customer surveys regarding smart speaker usage is that there isn’t any clear trend. If anything, smart speakers are being used for rudimentary tasks that can just as easily be done with digital voice assistants found on smartwatches or smartphones. This environment paints a very different picture of the current health of the smart speaker market. The narrative in the press is simply too rosy and optimistic.

Ultimately, smart speakers end up competing with a seemingly unlikely product category: wearables.”

Three years later, I wouldn’t change one thing found in the preceding three paragraphs. The smart speaker bubble popped less than 12 months after publishing that article. The product category no longer has a buzz factor, and despite the hopes of Amazon and Google, people are not using stationary speakers for much else besides listening to music and rudimentary tasks like setting kitchen timers.

The primary problem found with voice is that it’s not a great medium for transferring a lot of data, information, and context. As a result, companies like Amazon have needed to dial back their grandiose vision for voice-first and voice-only paradigms. Last week’s Amazon hardware event highlighted a growing bet on screens – a complete reversal from the second half of the 2010s. 

Betting on the Wrist 

As companies who missed the smartphone boat were placing bets on stationary speakers, Apple was placing a dramatically different bet on a small device with a screen. This device wouldn’t be stationary but instead push the definition of mobile by being worn on the wrist.

Jony Ive, who is credited with leading Apple’s push into wrist wearables, referred to the wrist as “the obvious and right place” for a different kind of computer. 

When Apple unveiled the Apple Watch in 2014, wearable computing on the wrist was more of a promise than anything else. Apple created an entirely new industry – something that isn’t found much in the traditional Apple playbook. 

After years of deep skepticism and cynicism, consensus reaction towards Apple Watch has changed and is now positive. Much of this is due to the fact that it’s impossible to miss Apple Watches appearing on wrists around the world. According to my estimates, approximately 35% of iPhone users in the U.S. now wear an Apple Watch. This is a shockingly high percentage for a five-year-old product category, and it says a lot about how Apple’s intuition about the wrist was right.

Apple Watch Installed Base 

The number of people wearing an Apple Watch continues to steadily increase. According to my estimate, there were 81 million people wearing an Apple Watch as of the end of June. According to Apple, 75% of Apple Watch sales are going to first-time customers. This means that 23 million people will have bought their first Apple Watch in 2020. To put that number in context, there are about 25 million people wearing a Fitbit. The Apple Watch installed base is increasing by the size of Fitbit’s overall installed base every 12 months. Exhibit 1 highlights the change in the Apple Watch installed base over the years. 

Exhibit 1: Apple Watch Installed Base (number of people wearing an Apple Watch)

(The calculations and methodology used to reach my Apple Watch installed base estimates is available here for Above Avalon members.)

Deriving Power

From where is Apple Watch deriving its momentum? The answer is found in The Grand Unified Theory of Apple Products. 

 
 

One of the core tenets of my theory is that an Apple product category's design is tied to the role it is meant to play relative to other Apple products. The Apple Watch is designed to handle a growing number of tasks once given to the iPhone. Meanwhile, the iPhone is designed to handle a growing number of tasks given to the iPad. One can continue this exercise to cover all of Apple's major product categories.

Apple Watch is not an iPhone replacement because there are things done on an iPhone that can't be done on an Apple Watch. This ends up being a feature, not a bug. The Apple Watch’s design then allows the product to handle entirely new tasks that can’t be handled on an iPhone. This latter attribute goes a long way in explaining how Apple Watch has helped usher in a new paradigm shift in computing. Apple Watch wearers are able to interact with technology differently.

(More on The Grand Unified Theory of Apple Products is found in the Above Avalon Report, “Product Vision: How Apple Thinks About the World,” available here for Above Avalon members.)

A Health Platform

In January 2019, Tim Cook surprised many by saying Apple will be remembered more for its contributions to health than for any other reason. Here’s Cook: 

“I believe, if you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind?’ it will be about health.”

Many assumed that Cook’s comment hinted at Apple unveiling a portfolio of medical-grade devices that would go through the FDA approval process. Such thinking was based on a fundamental misunderstanding of Apple’s ambition and approach to product development. 

Apple’s health strategy is based on leveraging hardware, software, and services to rethink the way we approach health. This means Apple wasn’t going to just launch a depository for our health data – something that is needed but which ultimately falls short of being truly revolutionary. In addition, Apple wasn’t going to just offer health and fitness services that amount to counting steps or keeping track of miles run. 

By the time Cook gave his bullish comment about health, Apple had already placed its big bet on health four years earlier by unveiling the Apple Watch. In what ended up being one of Apple’s best decisions, the company avoided going the route of medical-grade devices requiring government agency approval to reach consumers. Instead, Apple framed its health platform as a new-age computer that ultimately is an iPhone alternative.

Health monitoring is one of the key new tasks that the Apple Watch, not iPhone, handles. To be more precise, Apple Watch is handling the following four health-related items: 

  1. Proactive monitoring (i.e. heart rate and blood oxygen)

  2. Well-being assistance (i.e. sleep monitoring including the runup to sleep)

  3. Fitness and activity tracking (i.e. Activity and Workout apps)

  4. Fitness and health activity (i.e. Apple Fitness+)

With Apple Fitness+, Apple didn’t just release a virtual fitness class service. Instead, Apple Fitness+ is an Apple Watch service.  In some ways, Apple Fitness+ reminds me of Apple TV+. A future in which Fitness+ workouts are available on third-party gym equipment displays including on treadmills and stationary bikes is not a stretch. In addition, classes from other companies such as Nike could further elevate Apple Fitness+. 

Competition

If the Apple Watch is a runaway train, there is no obvious candidate in a position to stop or even slow the train. While other companies are slowly waking up and seeing the momentum found with Apple Watch, there is still much indifference, mystery, and misunderstanding as to why people are buying wearables. Too many companies still think of wearables as glorified smartphone accessories. Such thinking makes it impossible for competitors to see how Apple Watch is ushering in a paradigm shift in computing by making technology more personal in a way that other devices have failed to accomplish or replicate.

One of the main takeaways from Apple’s product event earlier this month is how Apple is its own toughest competitor. The Apple Watch’s most legitimate competition is found with older Apple Watches and non-consumption (i.e. empty wrists). While this introduces its own set of risks and challenges, there is still no genuine Apple Watch competition from other companies after six years. This is an indication of the power found in controlling your own hardware, software, and services in order to get more out of technology without having technology take over people’s lives. 

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 in both written and audio forms. 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 October 1st.

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. Due to the sheer number of Apple Watches now seen in the wild, those claiming the device is unpopular have been silenced. However, there continues to be a good amount of cynicism thrown at the computer found on 65 million wrists around the world.

Many tech analysts and pundits continue to look at the Apple Watch as nothing more than an iPhone accessory - an extension to 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.

Paradigm Shifts

The idea of paradigm shifts was born in the sciences to describe a scenario requiring a new way of thinking in order to explain the world. One of the more fascinating aspects of paradigm shifts is the accompanying social component. Due to the discomfort found with letting go of legacy thinking, society has a built-in aversion to acknowledging when a paradigm shift has occurred due to the discomfort found with letting go of legacy thinking. This makes it likely that paradigm shifts will often be born wrapped in skepticism and doubt.

In terms of computing, no one now questions the shift that took place from desktops and laptops to mobile devices. However, reality was messier as it took nearly a decade for consensus to view the smartphone as a laptop or desktop alternative. For years, smartphones were viewed as merely laptop and desktop extensions. What was initially viewed as a superior email machine for executives marked the start of a paradigm shift in the making.

We are seeing a similar dynamic take place with Apple Watch. Legacy thinking is masking Apple Watch’s transformational attributes. The product is misunderstood as Apple competitors are unsure of the answers to basic questions such as, why are consumers buying Apple Watches?

A Wrist Revolution

While pundits and analysts question what an Apple Watch is for, tens of millions of consumers around the world have recognized how the device can improve their lives. The product category is a sales success.

Apple has sold more than 90 million Apple Watches to date with 29 million sold in calendar year 2019. With an average selling price of more than $400, the Apple Watch is bringing in $12 billion of revenue per year, and that total is growing by 30% per year. After taking into account upgrade trends, the number of people wearing an Apple Watch has crossed 65 million. Based on my forward projections, the Apple Watch installed base will surpass 100 million people in 2021.

The preceding numbers are my estimates obtained by utilizing more than four years of financial clues and insights provided by Apple management in earnings calls, interviews, and presentations. More information on my methodology and the math behind these numbers is found in the Above Avalon daily update from December 11th. Above Avalon membership is required to read my daily updates.

Apple Watch and Paradigm Shifts

In addition to being a sales success, the Apple Watch has ushered in a paradigm shift in computing by making technology more personal in a way that other devices have failed to accomplish or replicate. The Apple Watch allows people to get more out of technology without having technology take over people’s lives. The device is able to accomplish this in three ways:

  1. Seamless tracking and monitoring. The Apple Watch tracks one’s fitness and more importantly, health, in a nonintrusive and intuitive way that isn’t possible with non-wearable devices.

  2. Intelligent assisting. Wearing a computer on the wrist has shown the value found in having a digital assistant push small amounts of information and data to the user throughout the day instead of having the user pull data from pieces of glass (smartphones and tablets).

  3. Contextual awareness. A device that is always on us can enhance our surroundings by utilizing our location and activity to deliver contextual experiences. This is a valuable proposition when developing new experiences.

These three items combined allow Apple Watch to handle some tasks that we already give to existing devices like smartphones and tablets as well as jobs and work that cannot be supported by mobile devices.

Apple Watch Connected

Apple Watch’s ability to usher in a paradigm shift in computing isn’t about what ifs or hypotheticals. It's something that is already taking place. We have a growing list of ways Apple Watch is a different kind of computer, the likes of which we have never seen. The latest example is an initiative Apple soft launched two weeks ago with four fitness brands called Apple Watch Connected.

The initiative originated out of feedback shared with Apple from health and fitness clubs looking to better connect the Apple Watch with their own customer experiences.

There are four requirements for a health club or gym to be part of Apple Watch Connected (which is free for both the health club and Apple Watch wearer):

  1. Support Apple Pay. Apple Watch wearers must be able to purchase items like water, classes, or even personal training on the wrist with Apple Pay.

  2. iOS and watchOS Apps. Businesses must have apps that allow for things like signing up for classes.

  3. Earn with Watch. Businesses must offer rewards and incentives to Apple Watch wearers for remaining active. Such incentives have proven to be an effective way to motivate Apple Watch wearers.

  4. Support GymKit (if applicable).

Apple Watch Connected ends up being a tool that enables third-party gyms and health clubs to build stronger relationships with customers. This is accomplished when businesses leverage seamless activity and fitness tracking on the wrist to reward their customers for staying active.

The key ingredient for getting this initiative off the ground is having people wear an Apple Watch throughout the day. Trying to recreate this type of comprehensive experience on a dedicated fitness tracker used only during workouts, or even on a smartphone or tablet, would be the equivalent of trying to use a laptop or desktop to accomplish tasks that are simpler and more intuitive on an iPhone. There is no good or easy way to track our daily activity with a large piece of glass that may sometimes be in our pocket or strapped to our arm. Having to grab and hold this piece of glass when using mobile payments or checking location-based notifications and reminders would lead to an overall experience that is subpar.

The most intriguing aspect of Apple Watch Connected is how entrepreneurs can use Apple Watches to launch new business models. With legacy gyms, the idea was to have people pay for monthly memberships but then not show up so that fewer workout machines would be needed. Apple Watch Connected turns that idea on its head by allowing a gym or health club to establish a new kind of long-term relationship with customers that encourages continued workouts and activity. This kind of business model shift is an example of the new paradigm shift unleashed by Apple Watch.

Instead of simply taking the existing app model and applying it to the wrist, a new way of consuming “apps” has developed. Subscriptions are naturally more applicable to something like an Apple Watch as customers find value in long-term targeting, monitoring, and data curation.

A New Framework

I’m introducing a new framework for recognizing paradigm shifts in computing. This theory borrows heavily from my Grand Unified Theory of Apple Products which positions a product category's design as tied to the role it is meant to play relative to other Apple products.

More information on the Grand Unified Theory is found in the Above Avalon Report Product Vision: How Apple Thinks About the World. Reports are available to Above Avalon members at no additional cost.

 
 

Paradigm shifts in computing can be determined by monitoring the degree to which products are able to make technology more personal. This framework positions design (i.e. how we use products) as the catalyst for paradigm shifts in computing.

Over the past few decades, we have seen two such primary paradigm shifts in computing:

  1. Laptops/desktops to smartphones.

  2. Smartphones to wearables.

Neither shift was about a new product replacing an older product. Laptops and desktops are still used by hundreds of millions of people in a mobile world. Similarly, there will be billions of smartphones found in a wearables world.

Instead, the move from desktops and laptops to smartphones and tablets was ultimately about using design to remove barriers that existed between the user and technology. One way this was accomplished was using multitouch as a new way to interact with a device. However, mobile devices are not able to remove all barriers. Increased smartphone and tablet usage has revealed an entirely new set of barriers that we never knew existed. A device like Apple Watch relies on design to remove some of those recently discovered barriers.

One reason this new computing shift has not been universally accepted is because the Apple Watch still uses “training wheels” in the form of requiring an iPhone to set up. This iPhone reliance has led some to view Apple Watch as nothing more than an extension to the iPhone. However, such a claim focuses too much on the technology and not enough on how design is leveraged to alter the way we use technology.

As for an example of a genuine extension of the smartphone, stationary smart speakers are at the top of the list. Grand prognostications of stationary smart speakers ushering in a new era of computing have faded (which doesn't come as a surprise). The primary value found with a stationary smart speaker is being able to take up the physical space needed to house speakers for delivering better sound. In this way, the speaker ends up being a smartphone amplifier that comes in handy for consuming sound as a group activity.

Nearly every other task or role given to a stationary smart speaker could be given to an Apple Watch. The wrist ends up being a better solution given the presence of a screen. In addition, whereas stationary speakers are confined to a finite area (the inside of a room), Apple Watch has greater mobility than even smartphones and tablets as it is literally strapped to our wrist at all times.

Voice in and of itself is not a paradigm shift as the medium is incredibly inefficient for transferring large amounts of data and information. It also creates a massive wall that prevents us from getting more out of technology without having technology take over our lives. Meanwhile, the Apple Watch has become a bridge to the future by containing a screen.

Apple Watch in a Wearables World

Apple Watch isn’t alone in ushering in this new era of computing. Other wearable devices designed to leverage the unique attributes of the body (wrists, ears, and eyes) have a role to play. The attributes that have allowed the Apple Watch to flourish on the wrist are being translated to allow AirPods to become a platform for bringing augmented hearing to the masses. In the future, a pair of eyeglasses will be able to add visual context to our surroundings.

In each example, we have a fundamental rethink of how people use computers to improve their lives. The “training wheels,” or early technological bonds that may exist in the early reiterations of these devices should not be taken or viewed as permanent chains. Rather, they are early support systems designed to give wearables the power to change the way we use technology.

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 article, check out the daily update from February 6th: A Paradigm Shift on the Wrist. The update goes over an example of how the Apple Watch isn't just addressing tech barriers that have been around for years, but also newer barriers that only recently became visible.

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.

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.

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