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.”
AAPL Orchard's AAPL 4Q11 Estimate
Overall Quarter Metrics
I expect iPad and iPhone to represent nearly 70% of Apple’s quarterly revenue. Remarkable.
Apple’s margin in 2011 has ranged from 38.5% to 41.7%. Management explained the 41.7% margin experienced in 3Q11 included some one-time warranty benefits and guidance of 38% for 4Q11 is primarily driven by the product mix. I don’t buy it. I don’t see many reasons for Apple’s margin to set a new low for 2011 in 4Q due to more iPhones (mostly iPhone 4 and 3GS) and iPads being sold. I expect attractive component pricing trends will offset any modest impact from back-to-school promotions (Macs and certain iPods are discounted). Timing issues surrounding the next iPhone may very well push margin pressure out to 1Q12. I would expect more bullish estimates to have GM closer to 41.5%.
I expect Apple to report 82% yoy earnings growth. While 82% growth is down from 122% yoy growth seen in 3Q11, I would not make much of this decline. Most of the difference is related to the ramp up in iPhone unit sales in 2010.
Product Unit Sales and Commentary
I expect MacBook Air and Mac mini updates to contribute to another solid Mac quarter. Apple will continue to take market share from Windows (early stages of 5-10+ year trend). As the PC market struggles to grow (thanks in part to the proliferation of smartphones and iPad), I view Mac growth greater than a range of 10%-15% as very respectable.
With iPad supply/demand still out of balance in a number of countries, I expect Apple to continue to expand the iPad channel during the quarter. While it remains to be seen if back-to-school purchases will include iPad, I don’t see many hiccups to stellar iPad demand during 4Q. Rumors of a possible iPad Pro have been very sporadic and I don’t expect such rumors to impact mainstream consumer purchasing habits. As seen with 3Q iPad growth of 183%, Apple has expanded iPad production nicely and is capable of greater than 100% year-over-year unit shipment growth.
I expect strong iPod touch sales to be offset by the continued decline in Apple’s other iPod models. Going by historical trends, Apple will refresh the iPod line up near the end of 4Q11, possibly at the same time as the expected iPhone refresh. I would not necessarily expect a large move in iPod shipments one way or another because of this refresh event, unless Apple moves forward with a plan for a low cost iPhone that includes changes to the iPod touch.
I expect Apple to unveil the new iPhone in September. Traditionally, I would include a significant supply drawdown of the old iPhone model, followed by a slow ramp up of the new iPhone model to go along with an iPhone refresh, but last quarter’s amazing iPhone sales lead me to believe Apple will continue to post sequential quarterly iPhone unit growth. I expect Apple will continue to sell iPhone 4 (and possibly iPhone 3GS) into 2012, therefore I am not expecting a significant drawdown in iPhone shipments in the weeks leading up to the iPhone refresh as iPhone 4 roll-out continues to new carriers and countries. Additionally, I would expect pent-up iPhone (4s or 5) demand will continue to grow during the quarter. Similar to the iPad 2 supply debacle, I expect the next iPhone to experience the same craziness and supply shortages in its first few months of sale, which will only help Apple’s 1Q12 iPhone numbers.
Similar to other sell-side analysts, I will most likely be revisiting my estimates following the end of the quarter. At this point, I would attribute any significant differences to my EPS estimate to differences in iPhone unit shipments. Questions can be addressed to me through twitter.
Apple CEO Succession 101
Daring Fireball’s thoughts on Apple’s CEO succession: click here.
My thoughts?
Issues like Apple CEO succession show how little people understand Apple.
This is Apple’s next CEO: Tim Cook
From Apple:
"Cook is responsible for all of the company’s worldwide sales and operations, including end-to-end management of Apple’s supply chain, sales activities, and service and support in all markets and countries. He also heads Apple’s Macintosh division and plays a key role in the continued development of strategic reseller and supplier relationships, ensuring flexibility in response to an increasingly demanding marketplace."
This is Apple’s backup CEO: Jeff Williams
From Apple:
"Jeff Williams is Apple’s senior vice president of Operations, reporting to COO Tim Cook. Jeff leads a team of people around the world responsible for end-to-end supply chain management and dedicated to ensuring that Apple products meet the highest standards of quality.
Jeff joined Apple in 1998 as head of worldwide procurement and in 2004 he was named vice president of Operations. In 2007, Jeff played a significant role in Apple’s entry into the mobile phone market with the launch of the iPhone, and he has led worldwide operations for iPod and iPhone since that time.”
I have my reasons supporting this Apple CEO succession hypothesis. Stay tuned to AAPL Orchard for more commentary on this issue in the future.
I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe.
A New AAPL Era
Apple reported its most recent quarterly earnings this evening. Impressive would be an understatement.
Here are some talking points:
1) Emerging Market Growth. Skewed perspective is making it hard to understand how fast Apple is growing. Many tech analysts are situated in developed countries and economies where the Apple brand is well established, and accordingly have a harder time conceptualizing how Apple can maintain dramatic growth rates. The combination of rising standards of living and the increasing availability of lower-priced Apple products is a new trend for emerging markets, and it is reasonable to expect this scenario to drive Apple’s growth in the future.
2) Product Line Diversification. Similar to the iPod, we are seeing the emergence of the iPhone product line: a series of iPhones with a sliding scale of features and capabilities. By the end of 2011, iPhone 3GS, iPhone 4, and iPhone (4S or 5) will most likely round out Apple’s iPhone line. Importantly, each iPhone utilizes iOS apps and has access to the iTunes store. I see the same trend happening with the iPad in due time; multiple versions sold simultaneous at different price points. Apple will rely on this product line diversification to cater to different market segments using price as a key differentiator. Emerging markets will have iPhone 3GS, mainstream will be content with iPhone 4, and early adopters will go crazy over iPhone (4s or 5). In addition, Apple’s overall margin benefits from the continued sale of “older” products as component pricing generally declines over time.
3) Big Losers and Winners. Apple management was very clear on the earnings conference call: iPads are eating away at Windows PC sales and iPhone continues to grow like a wild weed. Companies focused on selling consumer hardware (Dell, HP, RIMM, Motorola, and Samsung) are in a very difficult position as each is starting to understand that having good software is just as important as selling sexy hardware. Big winners (besides Apple) include companies who luckily aren’t competing in the consumer market, and are instead focusing on selling enterprise services or infrastructure needed to foster commerce and further innovation (IBM and Oracle come to mind). It is no coincidence that Dell, HP, RIMM, Motorola, and Samsung have indicated (or will indicate) an interest in entering the enterprise services market.
Random Bytes:
-) Look for Android activation numbers to become less relevant as time goes on. I have this growing feeling that Google is nervous that Android is becoming nothing more than a large void, taking up mobile space, and is relying on activation numbers to impress app developers to dedicate resources to the platform. It’s not working. iOS reached critical mass a few quarters ago and Android will not stop iOS momentum.
-) While I will keep AAPL stock thoughts to myself (at this time), it is important to remember that the large institutional holders control Apple stock and many of these entities are not interested in quick 5-10% stock moves, but instead the attractiveness of AAPL 5-10 years out. Potential AAPL dividend payout ratios, cash flows, and cash holdings will begin to matter just as much as iOS market share, iOS user statistics, or other random Apple product data points. The big boys will continue to support AAPL as long as they feel confident they will receive an annual return that beats other asset classes (fixed income, real estate, etc.) over an extended period of time.
Facebook Gets It
While Facebook’s presentation skills were lacking during today’s new features event, I thought there were some interesting tidbits that came out of Zuckerberg’s ramblings.
1) Facebook gets it. Over the past few years, Facebook has unveiled incremental design changes and new features, which by themselves aren’t earth-shaking, but collectively have served to move the platform forward and give Facebook the freshness users demand. Doesn’t this strategy sound familiar? I was also pleased to hear Facebook’s goal to make the Skype integration and video calling “stupidly easy”. As seen with Apple’s current success, if your business is built around scale, new features and products must be easy enough to use that even people who don’t like dealing with technology will have a blast using your product. Facebook gets it.
2) Facebook wants to redefine how we use the web. Zuckerberg is a believer of apps and while a ton of people at Apple HQ agree with him that apps are the way to go over the next 3-5 years, Zuckerberg wants those apps to run on the Facebook OS, whereas Apple wants to keep the curated app garden on Apple soil. While Facebook’s primary goal has been to increase its user base (and I suspect this will remain a top priority until 1-1.5 billion people are on Facebook), eventually Facebook will shift its attention on third party apps and webpage connectivity (and I am not just talking about Zynga games). Down the road, the Facebook OS can be expanded outward, with the help of mobile devices, so that Facebook serves as a bridge between our daily lives and our always changing social network (re: how your social network may impact the way you perform mundane chores around town, shop for birthday gifts, or even get a new haircut). We will look at the web in a much different light.
3) I doubt Facebook cares about competitive pressures from Google+ (if there are any), Twitter, or any other social networking platform. Facebook’s biggest competitor isn’t another company, but instead user’s quest for privacy. Facebook’s success depends on people sharing information, privacy be damned. Twitter and other social features are helping people get use to the idea of sharing ideas and thoughts. If Google+ catches on in some way or form, Facebook would hope users will become only more willing to loosen their privacy setting because “everyone else is doing it”, or “it’s becoming the norm”. Only a few years ago, it was taboo to have a public Facebook profile due to concerns over employers or family peeking into one’s life. Now its common to share mundane photos or interesting posts from the web with strangers. As time goes on, people will continue to lower their privacy walls and not even realize it.
Facebook is quietly hovering over its targets, not yet ready to attack. Showing little outward aggression and more secrecy and obscurity than clarity and straight forwardness, Facebook is content with expanding its reach and building its army. Eventually, the time will come for Facebook to attack with its foot soldiers being you and me (assuming you are on Facebook). With a current valuation in the neighborhood of $50-$75 billion, investors are betting Facebook has its sights on quite the large battle.
Will Your Mom Love Google+?
Normal consumers are more likely to try out a new product if they hear their children raving about it, or watch Diane Sawyer report on it during the evening news. Normal consumers are more likely to try out a new product when they feel left out by their reluctance to “join the movement”. Grandparents and parents are joining Facebook because all they hear from their children and grandchildren is “it’s on Facebook” or “go on Facebook to see it”.
I suspect Google realizes how popular Facebook has become with the masses and will rely on what it does best to get people to use Google+; force users (Gmail, YouTube, search) into interacting with Google+ in one form or another.
Force is the wrong word. I mean coerce.
Snapshots
While surfing the web this morning, I could only laugh at the amount of optimism given to Windows 8. Posts on how Windows 8 will truly revolutionize Microsoft (they said the same thing about Windows 7) were the cherry on top. Commenters rushed in with Microsoft support throwing around such figures as 350 million Windows 7 licenses sold to date or some other funny math that supports their claims. If I wanted to live like it was still 2004, I could go along with these individuals and drink the Microsoft kool-aid, but its time to wake up.
People are making a fundamental error. Rather than looking at tech trends, many are looking at snapshots of the current technology landscape and then extrapolating what they see into the future. Snapshots do nothing but reinforce the dying status quo.
June 2011 technology snapshots would show:
1) Nokia is still selling plenty of phones.
2) Microsoft is crushing it with Windows 7 licenses.
3) Research in Motion is still selling a boatload of blackberries.
All snapshots; singular moments in time that won’t show:
1) Mac sales are gaining market share every quarter and will soon surpass 15% of the consumer computer market.
2) iOS is becoming ever-more vibrant as a growing number of developers are now earning a honest living from iOS app revenue.
3) iPad power.
4) Android is largely becoming the non-Apple destination for anything mobile.
While Windows 8 may have its attractive points, interesting features don’t change consumer technology trends. Instead, years of successful product launches and value-added services help turn a loyal consumer base into an army of brand enthusiasts. The tech industry is still in the early stages of working through the death of a monopoly. Industries take years, if not decades, to work though such an industry-changing event. Certain brands are dying a slow death, while at the same time, being replaced by up and coming brands. Taking snapshots will never give the true picture.
You Want iPad 2?
1) You head to your local Apple store.
2) Although you see a queue line outside, you walk in and ask an Apple store employee if they have any iPad 2s? Answer is no.
3) After walking around aimlessly for 10 minutes, you head outside and get in-line. You are #14.
4) After talking with #4, #8, and #12, you realize that this store hasn’t received any iPad 2 shipments for two days.
5) You start to think that you can be in line for days. You have no chair, little food, and already skipped this morning’s shower. Your Apple dedication begins to wane.
6) Apple store employee walks out and says there will be no iPad 2s sold today, but an iPad shipment might arrive tomorrow morning. Queue line doesn’t seem too upset. Inside, you are torn. You think, it’s just a stupid big iPod touch.
7) Apple store is now closed. It’s dark and somewhat cold outside. Queue line is now 30 long. You wonder if anyone in line has anything else to do. Your question will go unanswered.
8) You fall asleep while laying on some gum and leaves.
9) You wake up with the sun. Two hours later, an Apple store employee comes out and says they received a limited number of iPad 2s. Numbers will be passed out shortly.
10) Line is downright giddy.
11) Apple store employee reaches you and asks which iPad 2 model you want. You say 16GB Black Wi-fi. The response: “Sorry, we didn’t receive any of those.” In a moment of desperation you then say 32GB Black Wi-fi. The response: “Sorry, we didn’t receive any of those either. We do have 64GB White Wi-fi.” You know you don’t want white and you know you don’t need 64GB, but you have waited in line for half a day. You say okay. You now own one 64GB White Wi-fi iPad 2.
12) You head home and log-on to eBay. You realize you can make $40-$50 selling your new white iPad 2.
13) Eight hours later, and after a long nap, you head back to your local Apple store (this time with a sleeping bag).
14) Although you see a line outside the Apple store, you walk in and ask an Apple store employee if they have any available extension cords. Your Macbook Air only gets 10 hours of battery life and the nearest outside power outlet is near queue line #4. You are now queue line #18.
I love these vintage photos (if you can call a photo from the 1990s and the original iPhone introduction as vintage). You should be able to name at least two people from these photos - most likely three. If you can name all four: congrats, you are a true Apple believer. Sometimes we forget what Apple is really about. #TrueApple
Clue: First photo: H A T J Second Photo: J H A
My Ping
Apple - this is what I want you to do with Ping:
1) Don’t make Ping into another traditional social network. I already use Facebook. I don’t need another one.
2) Make Ping all about content discovery. I am still having an awful time finding new music. Yes, I know you have genius playlists, but a lot of times it is just so impersonal and cold. I just want to “follow” my favorite music artists and see what projects they are working on, or cool songs that they are recommending. (I don’t care what kind of music my friends are listening to - I use Facebook for this)
3) Have more music artists debut new songs exclusively on Ping for a day or two. I really enjoyed listening to the new Michael Jackson songs. It’s an excellent way to let fans listen and buy new music.
4) Bring Ping to the iOS app store. I want to “follow” my favorite iOS apps and app developers. Ping could be a great way for app developers to brand themselves. Imagine an app developer having a follower list of 25,000 iOS users on Ping. Talk about easy marketing. I can already see myself following Angry Birds or Rovio Mobile and seeing what apps they recommend, if they got inspiration from other apps, or if they will be introducing Angry Birds updates. I can’t get this type of stuff from Twitter or Facebook.
5) Please do all of this in 2011. If you wait any longer, music artists and other content creators are only going to be strengthening their Twitter and Facebook presences. If I was a content creator, I would give iTunes and Ping (and all of those credit cards attached to Ping profiles) some attention.
Thanks
(P.S. Apple - I already know you are doing all of this, but just make believe I am the first one telling you)
Apple iPod Event - 2001
Always fun to look back at prior technology unveilings - especially those put on by Apple.
How many people thought this was a big deal back in 2001? And to think…the iPod Touch is a direct descendent of the iPod unveiled by Steve in this video.