Above Avalon Podcast Episode 153: The Bundler of Bundles
In episode 153, Neil discusses the strategy behind Apple TV+. Additional topics include the Apple TV app, five fundamental issues plaguing the paid video streaming market, Netflix’s business model, and what success in paid video streaming looks like for Apple.
To listen to episode 153, go here.
The complete Above Avalon podcast episode archive is available here.
The Apple TV+ Strategy
There is an opening for Apple to find success in paid video streaming. Letting others wage the content arms race, Apple will look to create a curated feed of compelling visual storytelling. Priced with sustainability in mind, Apple TV+ will be positioned as a way to push Apple’s broader video distribution platform forward. Combining Apple TV+ with other curated collections of content, Apple is developing a different kind of content consumption arm for hundreds of millions of highly engaged and loyal users. Apple TV+ has much higher odds of success than consensus assumes.
Content Distribution Arm
Apple has been in the business of distributing content to its users for decades. However, 2019 is shaping up to be the year of Apple reinvigorating its content distribution arm. To reflect the growing momentum found with subscriptions and to take advantage of certain ideals found with privacy and curation, Apple has been unveiling a revised content distribution arm that provides users access to human curated collections of media and entertainment. This content will be provided by both Apple (video) and third parties (news, video, music, games).
Apple News+ (human editors curating stories from hundreds of paid magazines)
Apple Music (human tastemakers creating playlists consisting of songs)
Apple Arcade (human editors developing a curated collection of games)
Apple TV+ (human producers creating a curated portfolio of visual stories)
Apple TV+ Details
Despite Apple remaining secretive and cagey about Apple TV+ details, we can have confidence in the service having a few key attributes.
Apple TV+ will be a paid service. Apple’s language at its March event implied that Apple TV+ would be tied to a subscription (i.e. not free). Last month, during the company’s 3Q19 earnings call, we received another major clue from Apple CFO Luca Maestri that Apple TV+ would be a paid service. Maestri said Apple TV+ will boost Apple Services revenue. Given that Apple had previously said Apple TV+ would be ad-free, the only way Apple TV+ could boost Services revenue is through paid subscriptions.
Apple TV+ will have a limited amount of content at launch. Apple TV+ will lack a back catalog of content at launch. Obtaining rights to an expensive back catalog would have led to a bidding war and plenty of leaks to the press. While the exact number of Apple TV+ shows that will be available at launch isn’t known, Apple highlighted five at its March event, and there are reportedly another 30 or so projects under development. Apple has shared four trailers for shows said to launch this fall (For All Mankind, Dickinson, The Morning Show, and Snoopy in Space).
Apple TV+ will have a free trial. Maestri disclosed on Apple’s 3Q19 earnings call that Apple TV+ will have a free trial. Such a trial would be unnecessary if Apple TV+ was available for free. In addition, the presence of a free trial may provide some clues as to how Apple plans on releasing new show episodes going forward. Apple has previously said that new series will be released on a monthly basis.
Early Skepticism
Consensus continues to struggle with some basic questions pertaining to Apple TV+. For example, the idea of Apple getting into original video in the first place still makes some people uncomfortable. However, much of the skepticism surrounding the service boils down to one thing: Apple is viewed as not having enough content to justify charging users.
One of the oddest criticisms that has been floating around is that there are now too many paid video bundles for consumers. This is a classic example of “the grass is greener on the other side.” The dream was for consumers to access their favorite TV channels a la carte. That vision is becoming a reality, but not quite in the way we expected. There are now ways to subscribe to individual “channels,” but they are large bundles of content fueled by content budgets in the billions of dollars per year. Nevertheless, some think that subscription fatigue will make it difficult for Apple TV+ to find a seat at the paid streaming table.
Strategy
Consensus thinks that if it wants to have a chance of Apple TV+ competing, Apple needs to dramatically increase its video content budget (likely around $2B per year) while keeping subscription pricing artificially low. The error found in such thinking is that Apple TV+ isn’t like other paid video bundles. Apple will look to fight a different battle.
Instead of competing in a content arms race or grabbing as much user attention as possible (both battles will be brutal), Apple will look to position Apple TV+ as a way to strengthen its broader video distribution platform.
Apple TV+ is positioned as an exclusive curated feed of content only available in the Apple TV app. Instead of paying to access a lot of mediocre video content that won’t be watched, for roughly the same price each month, subscribers will access a handful of exclusive stories that the entire family can watch together.
The Apple TV app, available on hundreds of millions of iPhones, iPads, Macs, Apple TV boxes, and various third-party smart TVs and streaming sticks / boxes, is designed to be a depository for a user’s video consumption. Success for Apple will be measured by the number of subscribers turning to the Apple TV app for video consumption. Similar to how Apple Card is leading users to become familiar with the Wallet app, Apple TV+ is a way to push the Apple TV app forward. As long as subscribers use the Apple TV app, Apple wins even if the subscriber watches content from HBO, Hulu, or Disney (since Apple earns revenue from those third-party subscriptions).
One problem for Apple is that the video streaming leaders, including Netflix, have no interest in playing ball when it comes to the Apple TV app. These companies want users to spend time on their own platforms, not Apple’s. This has resulted in the Apple TV app lacking the kind of deep integration with third-party content bundles that Apple management wanted. However, recent developments in the paid video industry are beginning to raise the question of whether or not the decision to bypass Apple’s home for various third-party video “channels” was the best business decision.
Industry Dynamics
There are five fundamental issues plaguing the paid video streaming market, and each one stands to be taken advantage of by Apple.
Subscription pricing is subsidized. Most companies are subsidizing paid bundle pricing in an effort to grab as many users (and their data) as possible. Given the amount of money being spent on content, a Netflix subscription in the U.S. probably should be more like $20 per month, not $13. Disney could have easily priced Disney+ at $15 to $20 per month rather than $7 given that a subscription includes access to the company’s evergreen library of content. This dynamic ends up helping new entrants like Apple as odds are good that consumers will subscribe to a few inexpensive bundles instead of one large expensive bundle.
User growth is prioritized too much. Companies are making questionable product and business strategy decisions in an effort to grow as quickly as possible. It’s time to start wondering if binge-watching, a development aimed at hooking people onto platforms for as long as possible, has actually been a positive development in the video space. The more bundles that embrace weekly release schedules for new shows, the more a central location such as the Apple TV app (where shows from various bundles appear when available) makes sense.
Mediocre content is becoming a problem. There is a finite amount of time each day. Companies are desperate to fill as much of it as possible with content. This battle for our time will lead to paid video bundles becoming bloated with mediocrity. This will result in users wanting more curating and filtering to focus on just the premium content - another tailwind for relying on something like the Apple TV app.
Data capture is a ticking time bomb. The degree to which video streaming companies are collecting viewer data has not received the attention it deserves. Data capture has been positioned as a selling point under the guise of something leading to better content recommendations. However, the failure found with “smart recommendations” represents a major hole in the claim that such data collection is even needed in the first place. Apple’s data privacy stance with its revised content distribution arm is being underestimated.
Value propositions are lacking. Not enough is being done to truly set paid video bundles apart from the competition. It is likely that churn will become a notable problem in the industry as consumers hop from bundle to bundle depending on which new shows are available. If this occurs, we will likely see more shows released on a weekly or even monthly schedule. While this will be done in an effort to reduce churn, it will likely lead many to crave a central depository for the newest shows.
The Difficult Truth
A harsh reality is unfolding in paid video streaming: There isn’t a sustainable business model for a standalone streaming service looking to compete in a content arms race. Netflix is trying to make a go at being a standalone paid video streaming service while also significantly ramping up content spend. It is noteworthy that Netflix has also taken actions to move away from Apple’s content distribution arm that include bypassing iTunes payment and not wanting much to do with the Apple TV app.
One way of assessing how Netflix’s business model is performing is to look at the company’s free cash flow. The situation doesn’t look good.
Exhibit 1: Netflix Free Cash Flow (Annual Totals on a Trailing Twelve Months Basis)
Netflix is burning through billions of dollars each year, and there is no light at the end of the tunnel. Netflix management will argue that negative free cash flow is merely a consequence of the company placing a huge bet on original content (higher costs up front). However, the company makes no attempt at suggesting free cash flow will turn positive anytime soon. Instead, Netflix plans on continuing to issue debt to fund its ballooning content budgets. This simply isn’t sustainable. Something has to give.
The $140 billion question facing Netflix is whether or not the company will be able to reduce its content spending and raise subscription pricing once it has achieved much of its user growth. There is reason to be skeptical. Competition for engagement is going to be brutal, and most companies playing in the paid video space are looking for other ways to monetize users and the intellectual property (IP) behind paid video streaming bundles. This will pressure Netflix’s ability to raise pricing.
Disney has three viable and profitable ways (movie tickets, theme parks, merchandise) to monetize the IP underpinning Disney+.
Amazon positions Prime Video as an add-on to a Prime subscription.
NBCUniversal is treating its upcoming ad-based video subscription service as another way to keep cable subscribers.
Given how easy it is to switch from paid video bundle to paid video bundle throughout the year, churn has the potential of ravaging the industry. Based on Netflix’s most recent earnings release, the churn effect is real, and we haven’t even seen genuine competition in the paid video streaming space. It is time to start wondering if Netflix would benefit from integrating into the Apple TV app and once again supporting iTunes for payment.
Long Game
Based on Disney’s aggressiveness with Disney+ (a $13 per month bundle consisting of Disney+, Hulu, and ESPN+ is going to make waves) and recent actions on the part of NBCUniversal and WarnerMedia to bring home the most valuable IP, it’s clear that companies are ready to wage war against the first-mover: Netflix.
Apple finds itself in a different situation as it both produces original video content and distributes third-party video bundles. From Apple’s perspective, competition in the paid video streaming space is a great thing. By having power move from one or two companies to a number of players, Apple’s strategy to become the “bundler of bundles” stands to benefit. It also doesn’t hurt to have an ecosystem of a billion users and 1.5 billion devices.
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.
Above Avalon Podcast Episode 152: Let's Talk Wearables
Apple is the undisputed leader in wearables, and they are pulling away from the competition. In Episode 152, Neil discusses how Apple’s wearables business can be thought of as a train gaining momentum. Competitors face declining odds of being able to stop the train. Additional topics include Apple’s wearables performance in 3Q19, wearables as a percent of overall Apple gadget unit sales, Apple wearables revenue, the factors behind Apple’s wearables success, and why wearables represent a paradigm shift in computing.
To listen to episode 152, go here.
The complete Above Avalon podcast episode archive is available here.
Apple Deserves More Credit for Wearables
The wearables era at Apple began years ago. However, Wall Street and Silicon Valley are only now slowly starting to pay attention to what Apple has been building. Apple is the undisputed leader in wearables, and they are pulling away from the competition. Given how Apple’s wearables strength continues to be underestimated, the company deserves more credit for what it has achieved and where it is headed.
The Data
A takeaway from Apple’s recent 3Q19 earnings was that we are witnessing the wearables era continue to unfold at Apple. Segmenting Apple’s quarterly revenue growth into product categories is one way of highlighting wearables momentum. Both an accurate financial model and close following of Apple clues over the past four years are required to accurately estimate Apple Watch and AirPods unit sales and average selling prices (ASPs). Therefore, this exercise has not been practiced by many.
The preceding totals represent the change in revenue from 3Q18 to 3Q19.
Apple Revenue Growth Drivers (3Q19)
Services: $1.5 billion
Wearables: $1.2 billion
Home / Accessories: $0.6 billion
Mac: $0.6 billion
iPad: $0.4 billion
Note: These totals do not represent revenue totals but instead the change in revenue between 3Q18 and 3Q19.
The revelation from the preceding data is riveting. Wearables nearly exceeded Services in 3Q19 as Apple’s top revenue growth generator when looking at absolute dollars. Consensus was not expecting this to occur as Services was positioned as Apple’s growth engine. It is clear that consensus spent too much time on the Services highway and ended up missing the exit for wearables.
In taking a closer look at wearables revenue growth, it becomes evident that Apple is benefiting from both higher ASPs for Apple Watch and AirPods as well as continued strong unit sales growth. For AirPods, unit sales growth is nothing short of spectacular at 80%.
Speaking of unit sales, one out of five gadgets that Apple sells is now a wearables device. Exhibit 1 highlights the growing share that wearables represent when looking at overall Apple device unit sales.
Exhibit 1: Wearables Share of Apple Device Unit Sales
Exhibit 2 depicts wearables’ growing share of gadget sales relative to Apple’s other product categories. Apple is currently selling approximately 70M wearable devices per year. This includes 30 million Apple Watches and more than 30 million AirPods.
Exhibit 2: Apple Gadget Unit Sales
On a revenue basis, Apple’s wearables business is now at a $16 billion annual run rate growing at 55% to 60%. At the current pace, wearables will surpass both the iPad and Mac near the end of 2020 to become the third largest product category behind iPhone and Services when looking at revenue.
The Wearables Train
One way of thinking about Apple’s wearables business is that it’s a train gaining momentum. Competitors face declining odds of being able to stop the train.
The Apple wearables train is boosted by three items that no other company has the luxury of utilizing or leveraging:
A massive installed base of iPhone users (925M globally).
Core competencies and a company culture built on making technology more personal, intuitive, and easy to use.
A thriving platform of multiple wearables products.
Apple is leveraging its ecosystem of users and devices to give its wearables business an ideal launching pad for success. While there are handful of companies with more than a billion users, no other company has an ecosystem of a billion users and nearly 1.5 billion devices (nearly 90% of which are running the latest software). The lack of a self-sustaining ecosystem is one of the primary factors driving Fitbit’s gradual fade into irrelevancy. This limitation manifests itself in new products like the Fitbit Versa smartwatch failing to catch the needed traction.
Design, or the lack thereof, is proving to be another high barrier for many companies to get over in terms of wearables. Silicon Valley continues to focus too much on technology and not enough on design, or how we actually use technology. Google’s ineptitude when it comes to wearables is partially due to the company not having a clue as to how to get people to wear wearable devices. Management thought consumers would want to wear Pixel earbuds because the devices had real-time translation. In reality, consumers don’t want to be seen in public wearing wireless headphones that don’t reflect aspiration and coolness. A keen understanding of how to play in the luxury and fashion realms while simultaneously appealing to the mass market is tricky.
Flying Under the Radar
In assessing why Apple’s wearables business has received so little attention to date, one doesn’t have to look much further than the iPhone. Preoccupation with trying to find a singular product capable of replacing iPhone made it difficult for many to see how a platform of wearable devices is the answer for what can eventually serve as a viable iPhone alternative.
A cellular Apple Watch paired with AirPods is already able to handle a number of tasks currently given to the iPhone. Add a pair of smart glasses to the mix, and mobile devices like the iPhone and iPad stand to lose even more use cases.
It doesn’t help that new Apple products are also graded on a curve next to iPhone. If a new product is unable to move Apple’s financial meter out of the gate, the product is looked at as a flop, toy, or mere iPhone accessory.
Guardrails
For competitors, the bad news is that there is evidence that Apple is still applying some breaks to its wearables train. In some ways, Apple is holding things back. An iPhone is still required to set up an Apple Watch. A truly independent Apple Watch that doesn’t require an iPhone would grow the device’s addressable market by three times overnight.
In addition, Apple currently only offers wearables devices for two pieces of real estate on the body: our wrists and ears. A compelling argument can be made that the most prized piece of wearables real estate, our eyes, remains untapped.
Looking Ahead
We are witnessing wearables usher in a paradigm shift when it comes to how we use and interact with technology. Apple deserves more credit for not only choosing to ride the wearables wave, but also playing a crucial role in getting wearables off the ground.
Apple is well on its way to having Apple Watch and AirPods installed bases of 100M people each. The company is more than half way there with Apple Watch and is quickly approaching the same level with AirPods despite the product being sold for half the time.
Apple also finds itself in the midst of a major investment phase to expand its wearables platform. There is an opportunity to bring more utility, in addition to clearer vision, to the eyes in the form of smart glasses. Such a product would be a precursor to a pair of AR glasses.
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.
Above Avalon Podcast Episode 151: Apple's Financial Tug-of-War
A different kind of Above Avalon podcast episode - dedicated to discussing why earnings are so intriguing to Neil. After going over the two ways to utilize quarterly earnings, Neil goes over some of his expectations for Apple’s 3Q19 and how Apple is currently facing a financial tug-of-war
To listen to episode 151, go here.
The complete Above Avalon podcast episode archive is available here.
Apple 3Q19 Earnings Expectation Meters
Apple finds itself in a financial tug-of-war as declining iPhone revenue is being offset by growth in every other product category. When Apple reports 3Q19 earnings on Tuesday, we will get the latest snapshot of how this tug-of-war is playing itself out.
While the press remains infatuated with the storyline that slowing iPhone sales are driving Apple to become a services company, which isn’t true, such an intense focus on services is leading to a lack of attention being given to the incredible growth seen with Apple’s wearables platform and the turnaround story underway with the iPad business.
Historically, Apple’s FY3Q (April to June) earnings have proven to be more of a wildcard as FY4Q revenue guidance is heavily dependent on product launch timing in September. This produces a situation in which light guidance can be explained away more easily than in any other quarter.
Ahead of Apple’s 3Q19 earnings release, I am publishing four expectation meters:
iPhone revenue
Non-iPhone revenue
Products vs. Services revenue
4Q19 revenue guidance
Estimates
The following table contains my overall Apple 3Q19 estimates.
A detailed discussion of these estimates, including my methodology and perspective behind the numbers, is found in my Apple 3Q19 earnings preview available here (first half) and here (second half). Above Avalon membership is required to read my earnings preview. To become a member, visit the membership page.
iPhone Revenue
We know that iPhone sell-through demand improved moving from March into April and May. The question is, to what degree was iPhone demand in June impacted by U.S./China trade tensions? Given that roughly two-thirds of 3Q19 iPhone sales were already in the books prior to June and FY3Q is historically Apple’s weakest quarter for iPhone sales, any potential slowdown in demand will have a more modest impact than the sales implosion Apple experienced at the end of 2018. In addition, Apple has undertaken a number of initiatives in an effort to streamline iPhone upgrades, including lowering prices outside of the U.S. to neutralize demand headwinds related to foreign exchange.
My expectation is that Apple will report $25.3B of iPhone revenue, a 14% decline from 3Q18. An iPhone revenue number that exceeds $26.0B would be considered strong while a number less than $25.0B would be on the weak side.
Non-iPhone Revenue
Apple’s non-iPhone business includes revenue from the following line items:
Services
iPad
Mac
Wearables / Home / Accessories
My expectation is that Apple will report $27.7B of non-iPhone revenue. A revenue number north of $28.0B would be considered strong while a number less than $27.0B would be on the weak side.
Products vs. Services
In order to reflect Apple’s revised financial disclosures, the following expectation meter is being introduced for the first time. Apple’s revenue is broken out into two categories: products (i.e. hardware) and services.
4Q19 Revenue Guidance
Consensus expects Apple to report $61B of revenue in 4Q19. This seems on the light side. My estimate is for Apple to announce 4Q19 revenue guidance in the range of $62B to $64B. Light revenue guidance can easily be explained away by a flagship iPhone model or two being delayed into October while strong guidance may reflect an easier year-over-year compare as the iPhone XR launched in 1Q19.
Additional thoughts and perspective on Apple’s earnings and 4Q19 guidance are available in my 3,800-word earnings preview, which includes two parts:
Above Avalon membership is required to read my earnings preview. To access the earnings preview and have my Apple earnings review sent directly to your inbox when published, sign up at the membership page.
Above Avalon Podcast Episode 150: A Larger Apple Machine
The recent Jony Ive and Jeff Williams news has been met with mixed reactions. In episode 150, we discuss why the leadership changes neither signify a company moving away from design or hardware nor suggest that management is facing some kind of growth crisis. Upon closer examination, the Jony Ive and Jeff Williams news are byproducts of Apple evolving into a much larger design company. Additional topics include the various growth narratives facing Apple, the growing Apple installed base, and the Apple machine.
To listen to episode 150, go here.
The complete Above Avalon podcast episode archive is available here.
Jony Ive, Jeff Williams, and a Larger Apple
One question that continues to plague Apple is the company’s ability to grow. Wall Street and Silicon Valley are unsure of the company’s business strategy and ability to foster innovation. The press thinks Apple is turning into a different kind of company in an effort to chase additional profits.
Thrown into this volatile and polarizing cocktail of opinions, the recent Jony Ive and Jeff Williams news has been met with mixed reactions. The leadership changes neither signify a company moving away from design or hardware nor suggest that management is facing some kind of growth crisis. Upon closer examination, the Jony Ive and Jeff Williams news are byproducts of Apple evolving into a much larger design company.
Growth Narratives
There have been three broad narratives regarding Apple’s growth strategy, and each has been distinctly negative.
Wall Street (Unit Sales)
Instead of focusing on Apple’s long-term prospects, Wall Street has historically centered on quarter-to-quarter fluctuations driven by unit sales. This would partially explain the severe pushback Apple management received when it moved away from disclosing unit sales. The decision forced observers to take a longer-term view of the company although many analysts still remain focused on unit sales.
As shown in Exhibit 1, iPhone unit sales clearly plateaued prior to the recent sales troubles in China. The warning signs for this dynamic were apparent as early as 2016 as highlighted in the Above Avalon article, “iPhone Warning Signs.” The combination of a slowing upgrade rate, Apple running out of premium users at the high end of the smartphone market, India challenges, and high smartphone saturation rates led iPhone sales to trade in a range of 180M to 220M units per year.
Exhibit 1: iPhone Unit Sales (TTM)
Silicon Valley (Data)
While Wall Street looks at Apple’s growth story in terms of unit sales, Silicon Valley thinks in terms of user data. The companies collecting the most user data are considered to have the most formidable business models and growth prospects. The list includes not only giants such as Amazon and Google, but also content distribution plays like Spotify and Netflix. Simply put, Silicon Valley’s concern with Apple is that the company will find itself at a major disadvantage due to its privacy stance pertaining to user data.
Press (Internal Drama)
Nearly every news article written about Apple now contains boilerplate language about slowing iPhone sales causing management to become desperate for new growth options. This narrative is characterized by assertions that management is becoming more focused on maximizing profits. At the same time, the picture painted is one of a company suffering from an identity crisis. Countless articles describe Apple as becoming a services company since services are said to represent the company’s only viable growth story going forward.
Enter Jony Ive and Jeff Williams
Three weeks ago, Apple announced that Jony Ive would form his own design company, LoveFrom, with Apple being his first client. As part of the move, Jeff Williams was officially given leadership over the design team.
It should come as little surprise that most reactions to this news reflected existing viewpoints. Those who thought Apple was becoming a services company viewed Jony’s departure as evidence of such a trend. For others, Williams’ expanded role over product development was viewed as a sign of Apple shedding its design skin to become more of an operations-oriented company, whatever that means. People unconvinced of Apple’s ability to innovate looked at the changes as Apple’s latest attempt to try to achieve innovation post Steve Jobs.
The common theme found with the reactions was a narrative that Apple finds itself in trouble and dramatic changes to the Apple machine are needed to reinvigorate growth. There was no better symbol of this than the WSJ’s article on the subject. The article, written in the form of an insider tell all tale, was a narrative-driven attempt to connect a series of unrelated dots, some inaccurate or grossly mischaracterized, to paint a picture of a company on the brink. The article was so off the mark that Tim Cook responded to the article - something that just doesn't happen often.
A Different Perspective
My approach to analyzing the Jony news was to look at his evolving role within Apple over the past eight years beginning with Apple Watch development. Doing so revealed that this latest news wasn’t in planning for years, contrary to popular opinion. Instead, there was evidence of Jony and Apple working to find a more sustainable path forward. (My complete analysis regarding Jony’s evolving role is available for Above Avalon members here and here.)
What drove this search for sustainability?
Apple’s immense growth over the years had become a burden on Jony.
Instead of measuring Apple’s growth using unit sales or revenue, metrics ultimately impacted by a product’s upgrade cycle and average selling price, a better approach is to track the total number of users in the installed base. This ends up reflecting the significant impact the gray market has had on Apple’s growth story in recent years. Apple may not be selling more iPhones each year, but the gray market has led to more people using iPhones.
Exhibit 2: Apple Installed Base
Apple’s installed base looks nothing like it did when Jony began Apple Watch development in late 2011 or even a few years ago when he was promoted to Chief Design Officer in 2015.
2011: 180 million people in the Apple installed base.
2015: 650 million people in the Apple installed base.
Having the Apple installed base grow by more than five times in just eights years contains various implications for Jony and Apple.
There is an undeniable larger thirst for tools capable of changing people’s lives. Instead of selling 170M devices per year in 2011, Apple is on track to sell 320M devices in 2019.
The days of focusing much of the company’s top talent and resources on one major new product initiative are in the rearview mirror. Apple now finds itself having to lead multiple massive teams pursuing different paradigm shifts at the same time.
The leadership changes Apple announced three weeks ago weren’t driven by any one product. Instead, the changes amount to a recognition of how much Apple has grown over the years. Not only has the overall design team grown, but the expectations placed on Jony had continued to increase. For a creative like Jony, having a company with a billion users depend on your every decision ends up being a burden. Expectational debt can be toxic to a creative. We are seeing management make changes to the Apple machine to let it operate as originally intended.
The Apple Machine
The Apple machine describes the process powering the company’s design-led organization that leverages the power found with small groups. By ensuring that collaboration exists between multiple disciplines and viewpoints in this small group structure, Apple is able to keep the user experience the priority during product development.
Jony and Steve didn’t build this machine to be dependent on either one of them. Such a machine would be inadequate and unsustainable. Instead, the machine was designed to take on a certain level of autonomy in order to instill Apple’s values in all employees. Over the past 15 years, most of the leadership changes within Apple have occurred in order to let the machine operate as intended. Any obstacles or perceived threats to the machine have been removed.
Changes to the Machine
Fifteen years ago, Apple did well with a management structure that included having one curator oversee most product decisions. However, Apple was a much smaller company in the early 2000s.
Apple now finds itself doing a whole lot more.
The company is embracing a dramatic change to product strategy in which management is pushing all major product categories forward at the same time. This has never occurred before.
Apple is moving deeper into content distribution services that include coming up with original content. The company thinks it has something to add to the mix in terms of data privacy and curation that other companies don’t have as much of an incentive to uphold.
Apple’s annual R&D expense has grown by nearly seven times in just the last eight years, reflecting a company investigating many more ambitious ideas and technologies.
The takeaway from the Jony and Jeff Williams news, and this is something that I did not fully contemplate up until two weeks ago, is that the Apple machine is operating at such speed and scale, it’s not realistic to think one person can control or run the machine. Instead, we see Apple fine-tuning the machine to allow for greater autonomy.
Simply put, the Apple machine’s ability to automate has been grossly underestimated over the years while the idea of any one individual needing to oversee the machine 24/7 has been overestimated.
An example of this autonomy is seen with the structure involving Jeff Williams and Apple design. At first, giving Williams control over the design team seems like a formidable task based on size and scope. However, the structure makes more sense when considering the degree of autonomy that exists in design and other teams at Apple. It’s not that Williams is moving into some kind of product czar role and that every decision has to be run by the same gatekeeper. Such a structure isn’t sustainable given Apple’s size. Instead, designers of various disciplines have been given greater say over the user experience while Williams works with Evans Hankey and Alan Dye to ensure everyone remains on the same page.
Apple’s Growth Story
The clearest piece of evidence that the latest leadership changes aren’t being driven by some kind of growth crisis is that Apple already has a working growth story.
Position the iPhone and iPad as the strongest sources of new users into the ecosystem.
Position wearables as alternatives to the iPhone and iPad.
Come up with services that add value to Apple hardware and the broader Apple ecosystem.
Apple will likely add approximately 50M people to the iPhone installed base in 2019 despite unit sales being down by about 14%. A large opportunity for Apple is appealing to the 40%+ of its installed base that still only use one Apple device: an iPhone. The iPad installed base will grow by about 30M users in 2019. Apple is unveiling its most aggressive Services rollout to date. Apple’s wearables platform has strong momentum.
The Jony Ive / Jeff Williams news doesn’t amount to Apple building an entirely new machine powering product development. Instead, Apple continues to rely on the existing machine, but modifications are being made to let it operate more efficiently. Additional brackets and supports have been added, and parts have been swapped out for improved components. Apple is betting on its existing machine in an effort to remain a design company focused on coming up with tools that people love.
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.
Above Avalon Podcast Episode 149: Letting Go of the Rope
Despite there being no discernible change to the grand vision behind Apple’s product development, there does appear to be a noteworthy change in strategy. Episode 149 is dedicated to discussing how Apple’s product strategy has changed from a pull system to a push system. Additional topics include product-related implications raised by Apple’s revised strategy, the Grand Unified Theory of Apple Products, and why I’m hesitant about some aspects of the change.
To listen to episode 149, go here.
The complete Above Avalon podcast episode archive is available here.
Apple's Product Strategy Is Changing
This year’s WWDC felt different. While every WWDC keynote is filled to the brim with new features, this year’s announcements included highly anticipated items like a new Mac Pro and differentiated iPad software features. In addition, there were some genuine surprises such as SwiftUI (a big deal with wide-ranging implications for Apple’s ecosystem). Despite there being no discernible change to the grand vision behind Apple’s product development, there does appear to be a noteworthy change to strategy.
The Past
Apple had been following a product strategy that can be thought of as a pull system. The company was most aggressive with the products capable of making technology more relevant and personal.
One way of conceptualizing this product strategy is to think of every major Apple product category being attached to a rope. The order in which these products were attached to the rope was determined by the degree to which technology was made more personal via new workflows and processes for getting work done. Accordingly, Apple Watch and iPhone were located on the end of the rope held by Apple management. Meanwhile, Mac desktops were located at the other end of the rope while iPads and Mac portables were somewhere in the middle.
As Apple management pulled on the rope, the Apple Watch and iPhone received much of the attention while the Mac increasingly resembled dead weight.
The preceding exhibit may make it seem like all of Apple’s product categories moved in sync with each other as Apple management pulled on the product “rope.” In reality, the quicker Apple pulled on the rope, the more chaotic the end of the rope moved. The following exhibit does a better job of demonstrating the chaos found at the end of the rope.
The Apple Watch and iPhone were Apple’s clear priorities while the iPad, Mac portables, and Mac desktops ended up facing a battle for management attention. The iPad seemed to have the clear advantage in that battle, at least when it came to capturing mindshare among Apple’s senior ranks. Recall Tim Cook’s comment about the iPad being the clearest expression of Apple’s vision of the future of personal computing.
Today
Over the past two years, we received clues that a major change was beginning to take hold in Apple’s product strategy. This change was on display during this year’s WWDC. Consider the following announcements:
The Apple Watch continues to gradually gain independence from iOS and the iPhone with its own App Store and the ability to create watchOS apps without an iPhone app.
iPadOS is a promise from Apple that iPad will be given unique software features versus iPhone. Features like multitasking and Apple Pencil support give iPad differentiation from its more popular sibling (iPhone).
The new Mac Pro is clear evidence of Apple industrial design, along with the engineering and product design teams, attempting to come up with a long-term solution for the most powerful computer in the product line.
SwiftUI is the kind of foundation Apple needs to properly leverage a thriving iOS developer ecosystem in order to benefit other product categories.
Apple no longer appears to be relying so much on a pull system when it comes to advancing its product line. Instead, a push system is being utilized, and every major product category is being pushed forward simultaneously. The change was designed to reduce the amount of chaos found at the end of the “rope” that Apple was pulling. Accordingly, the primary benefactors arising from this new strategy are the iPad and Mac. This explains why this year’s WWDC announcements felt more overwhelming than those of previous years. Apple was able to move its entire product category forward at the same time.
This revised strategy ends up supporting a core tenet of my Grand Unified Theory of Apple Products - a product category's design is tied to the role it is meant to play relative to other Apple products. (A deep dive into Apple’s product vision and the Grand Unified Theory of Apple Products is available here for Above Avalon members.) By pushing the products geared towards handling the most demanding workflows, Apple has a greater incentive to push the products capable of making technology more personal and relevant.
It’s not that every product category in Apple’s line is now on equal footing in terms of importance and focus. Some products will receive updates every few years while others require more attention due to needing annual updates. In addition, Apple’s revised product strategy likely won’t change the sales ratios between product categories (iPhone outselling iPad by four times while iPad outsells Mac by more than two to one). Instead, the change from a pull to push system manifests itself with each product category being given a defined and unique role to handle within the Apple ecosystem.
Wearables are tasked with handling entirely new workflows in addition to a growing number of workflows that had been given to iPhones and iPads.
The iPhone is the most powerful camera and video player in our lives.
iPads and Macs are content creation tools.
Implications
There are a number of product-related implications arising from Apple’s revised strategy:
Mac Desktops. Despite being in the post-PC era, desktops are experiencing some kind of renaissance. Some of this isn’t entirely surprising given how the desktop has always been viewed as an antidote to some of the ideals found with mobile. However, what is new is the realization of the desktop’s role in the AR era. Mac desktops are niche in terms of the number of users relative to other Apple product categories, albeit a very powerful and crucial niche.
Mac Portables. It is time to take Apple management at its word when it says the Mac is important to Apple’s future. Mac portables will likely retain a place in Apple’s product line for the foreseeable future. A few years ago, low-end Mac portables seemed to be on a dead-end path thanks to iPads. There is no longer any evidence that such thinking is widely held in Apple’s senior ranks. An ARM-based Mac portable seems inevitable at this point.
iPad. Just a few years ago, some in the tech pundit world thought the iPad lacked a future. Such thinking was due to slowing iPad sales combined with larger iPhones being able to handle many of the use cases originally given to iPad. While the iPad has always been viewed as the future of computing within Apple, we are starting to see that vision materialize. iPad sales are now routinely surprising to the upside as Apple adds a “pro” layer to the iPad category in terms of powerful hardware and software.
iPhone. The iPhone as a product category continues to mature, as seen with a longer upgrade cycle. Going forward, the iPhone will primarily be known as the most powerful camera in our lives and a video consumption device. Many of the less intensive use cases and workflows currently given to the iPhone will naturally flow to wearables over time.
Wearables. Apple is the wearables leader. Fitbit would arguably be the closest from the perspective of unit sales but even then, the company is quickly losing momentum. Lessons that Apple learned with iPhone and iPad are now giving the company a wearables advantage that is likely at least five years. An independent Apple Watch not requiring an iPhone to set up is inevitable. The move would increase Apple Watch’s addressable market by three times overnight. In addition, Apple is well on its way to establishing a wearables platform as it competes for prime real estate on our wrists, in our ears, and in front of our eyes.
Will It Work?
Is Apple making the right product strategy decision moving from a pull to push system? It’s too early to tell. At first, the revised strategy may seem like a no brainer as each product category ends up benefitting from more attention. However, it’s not a given that such a dynamic is in Apple’s best long-term interests.
The source of my hesitation in Apple’s new product strategy is that the company’s long-term success is dependent on one item: making technology more personal. Anything that takes away from that goal ends up being a hurdle. Is Apple supporting legacy workflows to the detriment of Apple’s long-standing mission of making technology more personal and relevant?
One reason Apple decided to change product strategies in the first place was to avoid an all-out uprising among the 1% of the user base creating content consumed by the other 99%. The mistake Apple made over the past few years was pulling the product “rope” too fast and in the process, leaving many of its pro users, defined by the workflows needed to be supported, behind.
For a company that is resource constrained when it comes to time and attention, there is no guarantee that Apple’s functional organizational structure and design-led culture can realistically scale to push an endless number of product categories at the same time. This was the key benefit found with Apple’s pull system. The focus was to advance the products capable of making technology more personal and relevant while trying to bring as much of the broader product portfolio along for the ride. The move to a push system is inherently more complex. Apple finds itself doing a whole lot more that it did just a few years ago.
Some will push back at the claim that Apple is resource constrained considering the company has $113 billion of net cash on the balance sheet. However, such a view doesn’t take into account how Apple functions. Apple could have thrown together some components in a big box and shipped a new Mac Pro shortly after realizing that the previous Mac Pro design was a dead end. Instead, Apple’s industrial designers, working in close collaboration with various teams, took a little over two and a half years to come up with what is marketed as a long-term solution for handling the most demanding content creation workflows. Similar questions now plague Apple pertaining to its approach to “pro” Mac portables.
My concerns regarding Apple’s revised product strategy would be alleviated if Apple came up with a plan to push legacy platforms forward by doubling down on future initiatives involving making technology more personal. This is why SwiftUI is intriguing. Apple is positioning SwiftUI as a way to improve a developer's productivity by requiring less code, resulting in better code. What if that is only scratching the surface as to Apple’s ultimate objective? What if the Mac is being repositioned as an AR creation platform while iOS is gradually positioned as a platform for developing wearables apps? Using a billion iPhones to develop apps consumed on billions of wearable devices is the type of goal that would require years of work, foundation building, and periodic changes to product strategy.
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.
Above Avalon Podcast Episode 148: Apple's Billion Users
Apple has reached a level of ecosystem strength that still hasn’t been fully digested by the marketplace. In episode 148, we discuss Apple’s ecosystem ahead of the company’s developers conference. Additional topics include how I estimated the total number of Apple users, various revenue per user figures for different parts of Apple’s user base, the difference between Apple in 2019 and the 1990s, and how wearables represent one of Apple’s key growth opportunities.
To listen to episode 148, go here.
The complete Above Avalon podcast episode archive is available here.
Apple's Billion Users
Apple’s ecosystem is massive. Approximately a billion people are using more than 1.4 billion Apple devices. Even as iPhone sales decline, Apple is bringing tens of millions of new people into its ecosystem each year. However, we are getting to a point where it is prudent to begin thinking about what user growth actually means to Apple.
Number of Users
Estimating the total number of Apple users is a relatively straightforward exercise. This past January, Apple disclosed that there were more than 900 million iPhones in the wild. Given that iPhones are not typically shared, Apple’s disclosure implied that there were approximately 900 million people using iPhones. Since the exact number of iPhones in the wild likely now exceeds 925 million, there is some wiggle room in that 900 million user total for the rare instances of people using more than one iPhone.
Apple also disclosed that there were 1.4 billion active devices in the installed base as of January 2019. The total was up by 100 million devices over the preceding 12 months and up by 400 million devices over the preceding three years. This tells us that there are 500 million Apple devices being used that aren’t iPhones. A majority of those 500 million devices are iPads. The Mac represents another 110 million devices, and a collection of wearables and home accessories make up the remaining devices. Given my Mac and iPad installed base estimates, a conservative estimate is that there are at least 100 million people who use either an iPad or Mac but not an iPhone. Adding these 100 million users to the 900 million people with iPhones leads to a billion Apple users.
A billion users is quite the accomplishment for Apple considering how the company does not give away or subsidize hardware. For context, Amazon has approximately 100 million Prime users. Twitter sells a “free” product and has 125 million daily users. A “free” Google service is widely considered a success once it surpasses a billion users. WeChat recently surpassed a billion daily users. Facebook sells a “free” product and has 1.6 billion daily users.
Revenue Per User
Using Apple’s current revenue run rate and my estimate for the total number of users, the company earns on average $258 from every user per year. There are limitations found with relying on averages. Apple’s ecosystem strength is dependent on geography. In addition, other factors like the gray market distort averages. Accordingly, it makes sense to segment Apple’s user base to gain additional insight into revenue per user figures.
There are approximately 200 million Apple users who have never purchased a new product from Apple or a retailer. Instead, these users rely on Apple products acquired or obtained via the gray market. The overall contribution to Apple’s revenue from these users is likely not too great - a few dollars per month, if that.
On the other end of the spectrum, the U.S. represents Apple’s stronghold when it comes to ecosystem strength. Add to hardware revenue various subscriptions such as Apple Music, paid iCloud, and various third-party subscriptions through the App Store. It is not unreasonable to assume that approximately 50 million to 75 million users spend an average $500 per year on Apple products and services. There are then other pockets of “core” Apple users in various countries including China, Japan, the U.K., and Australia.
Based on Apple’s installed base disclosure, we know there are at least 400 million Apple users who use only one Apple device: an iPhone. The actual number could be much higher. Given an iPhone upgrade cycle of four years and an iPhone ASP of approximately $750, this tells us that at least 400 million people are likely spending somewhere around $200 per year.
Accordingly, Apple’s billion users can be broken into the following groupings:
200 million people spending an average of $25 per year (people in the gray market).
620 million people spending an average $260 per year (includes 400M iPhone-only users upgrading every four years).
180 million people spending an average $500 per year (Apple’s core users in the U.S. and a handful of other countries buying a number of Apple products and paying for various services and subscriptions).
Growth Driver
The iPhone has been Apple’s primary vehicle for bringing people into the ecosystem. No other Apple product has come close to the iPhone in this respect. Exhibit 1 includes my estimates for the number of users purchasing their first new iPhone directly from Apple or a third-party retailer. This serves as a rough proxy for the number of people entering Apple’s ecosystem.
Exhibit 1: Number of Users Buying Their First New iPhone
More information and discussion behind how I derived the preceding estimates is available here.
Based on recent iPhone sales trends, there is evidence of fewer users buying their first new iPhone. For example, my expectation is for 52 million people to buy their first new iPhone in 2019. This total is 60% less than the peak number seen in 2016.
After the iPhone, the iPad has been the second-largest driver bringing new users into the Apple ecosystem. However, given that the iPad installed base is a third of the size of the iPhone installed base, the new user totals just don’t compare to those of iPhone.
Putting all of the pieces together, Exhibit 2 includes my estimates for how Apple’s overall ecosystem has grown in terms of the number of users.
Exhibit 2: Number of Apple Users
Slowing New User Growth
There is no question that Apple’s user growth is slowing. Much of this is due to Apple running out of premium smartphone users in key markets like China and India.
Some people are convinced slowing user growth represents a warning sign for Apple. The concern is that Apple will once again look to milk existing users with higher-priced products and services in an effort to offset slowing hardware sales. Much of this fear is based on how lack of new user growth nearly killed Apple in the 1990s. Instead of focusing on new user growth, Apple milked existing Mac users for as much money as possible. The end result was a complicated product line that lacked focus and vision.
In my view, this is an incorrect way of thinking about today’s situation.
Much has changed with Apple over the past 25 years. During the mid-1990s, Apple’s user base was a fraction of the size of today’s user base. Apple had around 25 million users in the mid-1990s. Simply put, Apple’s user base wasn’t large enough to reach sustainability. Instead of focusing on bringing in new users, Apple took the easy route and simply kept selling to existing users. Today, Apple has 40 times the number of users and is bringing in 25 million new users roughly every six months. Apple’s billion users comprise a self-sufficient ecosystem. The company is in a strong position to sell additional devices and services to these billion users without jeopardizing the long-term health of the ecosystem.
New User Plateau
While new user growth is slowing, it’s not a given that Apple will reach some type of user plateau. As Apple continues to move into more personal devices such as wearables, the company’s addressable market will expand, especially in emerging markets. In countries like India and Brazil, products like iPhones, iPads, and Macs may not be the best tools for bringing new users into the ecosystem. Instead, lower-priced wearables may eventually open the doors to tens, if not hundreds, of millions of new Apple users in markets that up to now have been largely out of reach.
Opportunity
Apple is a design company tasked with developing tools capable of improving people’s lives. Such a mission plays a critical role when figuring out how best to judge Apple.
Apple doesn’t think about financial items such as revenue or profit margins when developing products. The same principle applies to new user growth. Jony Ive and the industrial design group don’t sit around a table and come up with products for the purpose of bringing new users into the ecosystem or increasing revenue per user. Such motivation would have manifested itself in a less focused product line over time.
However, Apple does consider and think about how new products may fit within the existing product line. For example, Apple Watch was launched out of the gate as an iPhone accessory. A pair of smart glasses will likely be similarly positioned as an accessory out of the gate as well. These considerations are part of Apple’s long-standing goal of making technology more personal and having new products serve as simpler alternatives to existing products.
The implication found with this product strategy is that one of Apple’s key opportunities going forward is found with developing and then selling new tools to existing Apple users. A feedback loop can then be created as new tools and services drive higher user loyalty and engagement and subsequently even higher tools and services adoption. This will likely manifest itself in higher revenue per user over time as Apple users rely on additional Apple tools in their lives. As Jony has said in the past, financial items like revenue and profit end up being byproducts of a successful product strategy.
This brings us back to the Apple revenue per user calculations from up above.
200 million people spending an average of $25 per year (people in the gray market).
620 million people spending an average $260 per year (includes 400M iPhone-only users upgrading every four years).
180 million people spending an average $500 per year (Apple’s core users in the U.S. and a handful of other countries buying a number of Apple products and paying for various services and subscriptions).
With wearables, Apple is in a good position to drive a portion of the 400 million users who likely only have an iPhone to begin using another Apple device. One way of measuring this opportunity is that if 200 million people spend more like $350 per year versus $260 per year, Apple could see an additional $18 billion of revenue per year. Another opportunity is found with the 200 million users who are part of the Apple ecosystem via the gray market. Assuming Apple can sell additional tools to a portion of those users, Apple would see something in the neighborhood of $12 billion of additional revenue per year (100 million people spend more like $150 per year versus just $25 per year). These are huge numbers that speak to how much room the company has for existing Apple users to become more engaged with the ecosystem. In the mid-1990s Apple simply tried to milk its limited number of users of more money. Apple is now engaged in expanding its users’ tool arsenal while continuing to add new users to the ecosystem.
While Apple will continue to face various risks when it comes to maintaining user loyalty and engagement, especially when it comes to factors outside of its control like economic and geopolitical developments, the big picture is that Apple’s billion users is a game changer. The company has reached a level of ecosystem strength that still hasn’t been fully digested by the marketplace.
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.
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.
Tech's Tectonic Plates Are Starting to Shift
For the past decade, the giants (Amazon, Apple, Facebook, Google, and Microsoft) have been able to grow while staying out of each other’s lanes. This dynamic has been nothing short of remarkable. However, things are starting to change.
We are seeing the early signs of a new competitive landscape take hold in the tech space. Facebook and Google find themselves increasingly getting squeezed. Meanwhile, Amazon, Apple, and Microsoft are gaining competitive strength. Each is building stronger customer bonds while also expanding its respective ecosystem.
Bumper Cars
One of the best and easiest ways to visualize this changing competitive landscape is to think of the giants as bumper cars. In the beginning, the bumper cars were on a track with a guardrail in the middle preventing head-on collisions. All of the cars moved safely around the loop in the same direction. Despite a few bumps here and there, each company (car) was able to largely do what it wanted without running into too many competitive hiccups.
This dynamic has changed. The guardrail found in the middle of the track has been removed. Head-on collisions are becoming more common as there is no longer a right or wrong direction. Where did the guardrail go? Apple and Amazon tore it apart in their quests to strengthen their respective ecosystems. Apple now finds itself in a league of its own with wearables. In addition, Apple is reaching far beyond its core competency in terms of building out a content distribution arm based on curation. Similarly, Amazon’s Whole Foods, Ring, and Eero acquisitions are byproducts of a company following a singular goal of removing as many friction points as possible when it comes to online commerce. Amazon wants to know more about its customers in order to then be in a better position to sell products.
Sticking with the bumper car analogy, the companies with the slower cars fueled by ad revenue (Google and Facebook) are no longer able to hide within the traffic. Instead, they are increasingly vulnerable, getting hit from multiple directions by faster, more nimble cars fueled by non-ad revenue (Amazon, Apple, and Microsoft). In addition, those faster cars have become much more strategic in deciding when and how to go after the slower cars.
Competition
A number of interesting battles have been unfolding in the tech landscape:
Google is being attacked by Amazon, Apple, and Facebook across a number of segments and industries ranging from AI and digital voice assistants to digital mapping and hardware.
Facebook is being attacked by Apple in the areas of content delivery and private communication.
Apple continues to face modest skirmishes with Amazon, Microsoft, Facebook, and Google when it comes to hardware.
Amazon and Microsoft have their own unique battle forming when it comes to providing tools for businesses.
While these battles have been around for some time, Amazon and Apple are beginning to land some serious punches. For example, Apple shocked everyone when it came to finding success in the area of written content distribution with Apple News. At the same time, iMessage and FaceTime continue to gain momentum and now represent legitimate competition for traditional social networks. Amazon is increasingly becoming a thorn in Google’s side in terms of user data collection via subsidized services.
Three battles in particular stand out to me:
Apple vs. Google
Apple vs. Facebook
Amazon vs. Facebook vs. Google
Apple vs. Google
Google is a services company focused on offering free, data-capturing tools to as many people as possible. The necessity found with such a mission is having access to as many users as possible. This is where Google finds itself in growing trouble. Apple is gaining power as a gatekeeper between Google and the most valuable customers that Google needs for its services: Apple users.
Apple is a design company tasked with coming up with tools capable of changing people’s lives. These tools include a portfolio of hardware, software, and services. Apple is showing increased interest in stepping into Google’s turf and launching its own services where it feels it has something different to bring to the table. Such unique attributes can range from having a much-needed layer of design (i.e. a focus on the user experience) that Google struggles to add to its services, to data privacy and security.
Five years ago, the discussion was about Apple facing the risk of Google turning off its services to Apple users. Today, the reverse is true. Apple is now in the position of power. Google would find itself in deep trouble if its arrangement regarding default search on iPhones and iPads was put into jeopardy.
What changed?
Apple has been leveraging its hardware and software expertise to create a stronger ecosystem of products. This has given Apple the ability to strengthen its customer relationships while still attracting new customers. Said another way, the Apple ecosystem is gaining strength, and that strength is now beginning to extend to the adoption of Apple services.
Set within this changing dynamic, this year’s Google I/O keynote left me completely underwhelmed. Aside from a few flashy yet unmemorable demos, Google found itself relying on what it knows best: data collection and elevating technology over the user experience - neither of which is a winning strategy on its own.
The numbers speak for themselves. According to Apple, the iPhone installed base grew by almost 75M people in 2018. According to my estimates, approximately 40M of those users switched from Android. Google continues to lose its grip on the premium segment of the mobile market.
Apple vs. Facebook
The Apple versus Facebook battle has been the most surprising given how few people saw Apple having any overlap with Facebook. While some were busy suggesting that Apple needed to buy its way into social networking with a flashy acquisition, Apple was quietly putting together the foundation of a different kind of social network. iMessage and FaceTime comprise Apple’s identity network. As Facebook evolved to offer a curated version of the web via News Feed, Apple bet on the relationships that actually matter to people: family and close friends.
Given Facebook’s recently announced pivot to a privacy-focused social platform built around messaging, there is no question that Apple had the right strategy while Facebook went down the wrong path. Messenger and WhatsApp will now be increasingly positioned against iMessage and FaceTime.
With Apple News, Apple was able to crack content distribution in a way that Facebook failed at miserably. The secret ended up being human curation instead of machine learning. Apple continues to work on expanding Apple News to other countries with Canada being the most recent addition. Apple News may just be one of the best new services Apple launched from scratch in recent years.
Facebook vs. Google vs. Amazon
In the battle for commerce, Google, Facebook, and Amazon are increasingly becoming competitors and the battle for ad revenue is only the tip of the iceberg. At a fundamental level, Amazon is trying to systemically remove Google and Facebook from a customer’s memory when it comes to buying products online.
Given Facebook’s renewed push to position Instagram and Facebook as commerce platforms, it’s safe to say things are going to get dicey in the race for users’ attention. In fact, all three companies are targeting the home with hardware devices (speakers, screens, and other smart home devices) given how the home has become an e-commerce engine. In addition, our home is the delivery point for all of those goods.
We are moving to the point where a consumer will have the opportunity to go all-in on an “Amazon home” in which Echo speakers, microphones, locks, a security system, a Wi-Fi router, and various third-party smart appliances with Alexa built in are all connected to Amazon.
What About Data?
One potential area of pushback to my comments would come from tech proponents who argue that Google is building an insurmountable advantage against peers given its data-capturing services. Such a view could best be described as the “data is everything” school of thought.
For example, voice first and autonomous driving advocates would likely take issue with the claim that Google is losing power in mobile. The fundamental issue that advocates of specialized tech verticals suffer from is not thinking enough about the user experience.
More people are switching from Android to iOS rather than the other way around. That sure doesn’t support the view that consumers are clamoring to use Google services given the company’s data superiority. Meanwhile, other clues such as Pixel smartphone sales being lackluster and smart speakers being used primarily for music consumption and not much more speak to the broader disconnect that has developed between “data is everything” proponents and how people actually use technology.
Changing Landscape
Up to now, many people would position Amazon, Apple, Facebook, Google, and Microsoft as equals when it comes to ecosystem strength and fundamentals. I don't think that is correct. Instead, two tiers have formed. Amazon, Apple, and Microsoft are in the top tier while Google and Facebook make up the bottom tier. Google is gradually losing its power in mobile as Apple and Amazon consolidate power within their own realms. Similarly, Facebook’s business model is coming under fire on all sides. Is it a coincidence that the two companies that originate the vast majority of their revenue from ads appear to be in the toughest positions going forward?
The much more interesting developments will be found not with the rivalry between Amazon, Apple, and Microsoft, but with the competition between the two tiers. As Amazon, Apple, and Microsoft continue to strengthen their ecosystems, a byproduct will be each company wanting to control more of the key attributes powering those ecosystems. This will leave Google and Facebook increasingly on the outside, looking in.
Apple’s licensing relationship with Google will likely be put in a brighter spotlight going forward. According to my estimate, Apple is receiving approximately $9B per year of licensing revenue from Google to be the default search provider on iPhones, iPads, and for Siri. This is a few billion dollars less than the amount of revenue Apple is taking in from the App Store each year.
Apple is increasingly being called a hypocrite in some circles for talking extensively about having a culture based on privacy while at the same time taking billions of dollars from Google to literally get in front of Apple users’ eyes. In my view, the issue isn’t so cut and dry. There is a critical angle to this topic that is often not discussed. Apple users do have the option to choose their own default for search. Apple’s licensing arrangement with Google is also likely tied to the number of users who actually use Google for search.
It’s fair to begin wondering about the long-term viability of Apple’s licensing relationship with Google. It is in Apple’s best interest to continue moving users off of Google services rather than to cancel or end the arrangement. The amount of money Google is paying Apple to be the default search provider will likely still increase. Google has little or no choice but to continue paying more to access what would be a declining portion of the Apple installed base.
Instead of looking for a company to implode as a result of tech’s competitive tectonic plates starting to shift, the equivalent of an earthquake or volcano are found with companies like Facebook and Google pivoting to privacy. While pivots, like earthquakes and volcanoes, are natural and essential, value is found in assessing how such pivots will change the overall landscape. We may never return to an environment in which the five giants were able to thrive next to each other peacefully.
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.
Apple 2Q19 Earnings Expectation Meters
Based on Apple’s revised financial disclosure, the Above Avalon expectation meters have received a makeover for 2Q19 earnings. Unit sales meters have been retired and replaced with revenue meters. In addition, an entirely new expectation meter is being included to reflect Apple’s changing business as non-iPhone revenue now plays a larger part in Apple’s growth story.
Estimates
The following table contains my Apple 2Q19 estimates.
The methodology and perspective behind the preceding estimates are found in my 3,400-word Apple 2Q19 earnings preview available here exclusively for Above Avalon members. (To become a member and access my full earnings preview, visit the membership page.)
I am publishing three expectation meters for Apple's 2Q19:
iPhone revenue
Non-iPhone revenue
3Q19 revenue guidance
iPhone Revenue
My expectation is for Apple to report continued weak iPhone revenue growth in 2Q19 as the company spent much of the quarter working through an iPhone channel inventory build that took place in 1Q19. This channel inventory headwind was partially offset by Apple’s move to cut iPhone pricing outside the U.S. and more attractive offers for iPhone upgrades in the U.S.
While Apple is no longer disclosing iPhone unit sales, the company will continue reporting iPhone revenue. Accordingly, in order to estimate revenue, one will have to derive estimates for iPhone unit sales and average selling price (ASP).
Apple provided some clues regarding iPhone sales mix in order to reach more reliable estimates for ASP. In addition, the company’s not-so-secret strategy of cutting iPhone pricing outside the U.S. will impact ASP. Refined modeling work when it comes to iPhone channel inventory changes will lead to more accurate estimates for iPhone unit sales. Given the moving parts, there will likely be a wider-than-usual discrepancy when it comes to iPhone revenue estimates as analysts with less robust Apple earnings models struggle to adapt to changes in disclosure.
iPhone revenue that exceeds $33B would be considered strong as it bodes well for Apple to report improved iPhone sell-through (i.e. customer) demand in the second half of 2019. However, iPhone revenue of less than $30B would point to continued problematic iPhone sell-through demand.
Non-iPhone Revenue
For the first time, non-iPhone revenue is receiving its own Above Avalon expectation meter. Apple’s non-iPhone revenue includes the following line items:
Services
Mac
Wearables / Home / Accessories
iPad
One of the major themes from Apple’s 1Q19 earnings is that despite weak iPhone sales, the company’s non-iPhone side of the business performed well with 19% revenue growth, driven by robust wearables and Services growth. In addition, the Mac and iPad product categories demonstrated stabilization. Much attention will be given to monitoring whether or not this trend continued in 2Q19.
My expectation is for Apple to report $27B of non-iPhone revenue. A revenue number north of $29B would be considered strong while a number less than $26B would be on the weak side.
Guidance
Consensus is calling for Apple to report $52B of revenue in 3Q19. My estimate is for Apple to announce 3Q19 revenue guidance in the range of $52B to $55B. There are two possible explanations for the difference: Wearables revenue expectations and different estimates for iPhone sell-through demand.
Additional information on my perspective and thoughts heading into Apple’s 2Q19 earnings are available in my full earnings preview, which contains three parts:
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Above Avalon Podcast Episode 146: Tackling Apple's Excess Cash
In what has become an annual trend, Apple uses FY2Q earnings to also update its share buyback authorization and quarterly cash dividend. In episode 146, we preview the changes Apple will likely announce to its capital return program. The discussion begins by going over how Apple has adjusted its buyback pace following U.S. tax reform and why the company will eventually have to cut back on buyback. We then go over my expectations for what Apple’s board will approve in terms of increases to the buyback authorization and quarterly cash dividend. Additional topics include the debate surrounding Apple capital return and why the company has so few viable options for spending excess cash.
To listen to episode 146, go here.
The complete Above Avalon podcast episode archive is available here.
Apple's $400 Billion Buyback Program
One of the more certain items found with Apple’s upcoming 2Q19 earnings is that the board will approve increases to the company’s share buyback authorization and the quarterly cash dividend. The two capital return initiatives continue to be polarizing topics as Apple holds more than $100 billion of excess cash on the balance sheet. A closer look at Apple’s buyback and dividend trends suggests the company’s board still has a strong incentive to increase Apple buyback authorization in a big way next week.
Capital Return Trajectory
Exhibit 1 highlights the amount of cash Apple has spent on capital return (buyback, cash dividends, and net share settlement) on an annual basis since 2012:
Exhibit 1: Apple’s Capital Return (Annual)
Prior to U.S. tax reform, Apple had been spending approximately $50 billion annually on capital return initiatives. The total was funded by a mixture of free cash flow and debt issuance. Once Apple was able to bring its foreign cash back to the U.S. at a favorable tax rate, the pace of capital return increased materially. Last year, Apple spent $90 billion on share buyback, cash dividends, and net share settlement.
Assuming Apple doesn’t spend a significant amount of its excess cash on M&A, the company has enough cash to continue spending nearly $100 billion on capital return annually for at least the next two years. Kicking off between $50 billion and $60 billion of free cash flow annually, Apple ends up utilizing approximately $40 billion to $50 billion of its excess cash on capital return initiatives each year. Over the long run, Apple’s current business footprint supports an annual capital return budget of closer to $50 billion.
Share Buyback
Next week, Apple’s board will approve the seventh consecutive increase to the company’s share buyback authorization. Here are the changes to Apple’s share buyback authorization since the program launched in 2012:
2012: $10 billion buyback authorization
2013: $60 billion (increase of $50 billion)
2014: $90 billion (increase of $30 billion)
2015: $140 billion (increase of $50 billion)
2016: $175 billion (increase of $35 billion)
2017: $210 billion (increase of $35 billion)
2018: $310 billion (increase of $100 billion)
Last year, Apple’s board approved a substantial $100 billion increase in share buyback authorization. This was double the amount of the previous record increase in buyback authorization.
At the end of December, Apple had $63 billion of share repurchase authorization remaining. This is another way of saying that Apple had worked through $247 billion of its $310 billion share repurchase authorization. Assuming Apple bought back $20 billion of shares in FY2Q19 (January to March 2019), the company likely had closer to $43 billion of authorization remaining at the end of March.
When estimating the potential increase in Apple’s share buyback authorization, one has to look at the company’s intended buyback pace. Following U.S. tax reform, which opened the floodgates for Apple’s foreign cash being used to fund capital return initiatives, Apple had been on pace to buy back approximately $80 billion worth of shares annually. This elevated buyback pace was interrupted in FY1Q19 following the sudden and dramatic drop in product demand in China. In December 2018, Apple didn’t buy back any shares. However, based on Apple’s 1Q19 10-Q, it looked like Apple had begun buying back shares in January.
Assuming Apple continues to target a share buyback pace of approximately $80 billion per year, the implication is that Apple’s board will need to approve another substantial increase in share buyback authorization next week. An increase of less than $50 billion in additional share buyback authorization would imply a potential slowdown in Apple’s buyback pace. This would be a surprising move considering the significant amount of excess cash that remains on Apple’s balance sheet. In addition, management continues to reiterate its intention of reaching net cash neutral over time, which means the amount of cash on Apple’s balance sheet equals the amount of debt.
Accordingly, my expectation is that Apple’s board will approve an increase in buyback authorization in the range of $75 billion to $100 billion. This will bring Apple’s overall buyback authorization to approximately $400 billion. There isn’t much of a difference between a $75 billion and $100 billion increase in authorization. Both totals would give Apple plenty of flexibility to pursue an aggressive share buyback strategy. A $75 billion increase in authorization would provide Apple approximately $115 billion of available authorization for buyback while a $100 billion would equal more like $140 billion of available authorization. Both of those totals assume Apple repurchased $20 billion of shares in FY2Q19.
Quarterly Cash Dividend
Given how much press and attention is given to Apple’s share buyback, the company’s cash dividend story continues to fly under the radar. Apple’s board has approved six consecutive increases to the quarterly cash dividend. Next week, the company will announce its seventh consecutive increase.
Here is Apple’s dividend history since reinitiating the dividend in 2012:
2012: $0.38 per share
2013: $0.44 (15% increase)
2014: $0.47 (8% increase)
2015: $0.52 (11% increase)
2016: $0.57 (10% increase)
2017: $0.63 (11% increase)
2018: $0.73 (16% increase)
When gauging the magnitude of the upcoming quarterly cash dividend increase, a 10% increase likely represents a floor. There are two reasons behind such an assertion:
Dividend strategy. Apple follows a stable dividend policy characterized by a steady dividend payout that reflects its long-term earnings potential. Instead of dividends closely following near-term earnings swings, the two variables align when looking at long-term trends.
Apple’s share buyback pace. As Apple buys back shares, the company pays out less in the way of cash dividends. This is made possible because repurchased shares are retired, reducing the number of outstanding shares. For every 100 million shares that Apple repurchases, the company saves approximately $300 million on cash dividends per year. Since reinstating the dividend, the amount of cash that Apple has spent on dividends has increased by 30% while the quarterly cash dividend has increased by 92%. As long as Apple continues to buy back significant amounts of stock, the company will be able to increase the quarterly cash dividend by 10% and not actually incur additional dividend expense.
(For an in-depth examination into Apple’s dividend strategy, check out the Above Avalon Report: Apple Dividends: A Deep Dive into Apple’s Cash Dividend Strategy. The report is available exclusively to Above Avalon members. To read the report, become a member here.)
With the preceding two variables in mind, my expectation is that Apple’s board will approve a 14% increase in Apple’s quarterly cash dividend to $0.83 per share, up from $0.73 per share.
Cash Spend
With more than $100 billion of excess cash on the balance sheet, there continues to be a vocal group advocating that Apple spend the cash on something other than capital return. However, the item that is often ignored by those advocating that Apple cut back on buyback and dividends is that management is already spending tens of billions of dollars each year funding organic growth opportunities.
In FY2018, Apple funded the following items:
R&D: $14.2 billion
Capital expenditures: $13.3 billion
M&A: $0.7 billion
Total: $28.2 billion
After taking into account the preceding organic growth investments and expenditures, Apple was still left with approximately $50 billion of free cash flow. It is this free cash flow, in addition to the excess cash already on the balance sheet, that is funding the company’s capital return initiatives:
Buyback: $73.0 billion (in FY2018)
Cash Dividends: $13.7 billion
Net share settlement: $2.6 billion
Total: $89.3 billion
Piling additional cash into R&D simply as a means of spending excess cash doesn’t make any sense. The same philosophy applies to capex. Apple’s business model is capex light. There is no logic found in Apple moving away from this model just to spend more cash. Even if Apple doubled R&D and capex overnight, which isn’t going to happen, the company would still have tens of billions of dollars piling up on the balance sheet each year.
This leaves M&A as the only other way for Apple to spend the excess cash. While Apple is certainly in a position to fund additional M&A activity, including acquisitions with larger price tags, there is no logic in the company changing its M&A philosophy because it has excess cash. Acquisitions don’t suddenly become more rational simply because the acquirer has excess cash that it wants to remove from the balance sheet. Instead, Apple continues to look at M&A as a tool for acquiring technology and talent in order to plug crucial holes in its asset base.
Given the lack of attractive alternatives, Apple’s board still has the incentive to continue approving substantial increases to share buyback authorization and quarterly cash dividends.
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.
Above Avalon Podcast Episode 145: It's All About Curation
At Apple’s recent event at Steve Jobs Theater, the company unveiled its revamped content distribution arm. Episode 145 is dedicated to discussing Apple’s new content distribution services: Apple News+, Apple Arcade, and Apple TV+. Instead of just announcing services for consuming more content, Apple unveiled a strategy for curating content for its user base of a billion people, something that I am calling “Curation for Casual.” The discussion also goes over how curation explains Apple’s move into original content. Additional topics include a few surprises unveiled at Apple’s Services event, the history behind Apple’s video distribution strategy, the changing content consumption landscape, and Apple’s content distribution arm eventually being considered a core technology powering Apple devices.
To listen to episode 145, go here.
The complete Above Avalon podcast episode archive is available here.
Why Apple Is Getting Into Original Content
In what has become something of a trend, Apple uses an opening film to kick off its product unveilings. The video shown at the start of Apple’s Services event two weeks ago at Steve Jobs Theater stood out to me.
Apple relied on a retro opening credits film theme to give a pretty clear hint of what was to come: a Hollywood-heavy event with nearly a third of the stage time given to celebrities talking about Apple’s upcoming video streaming service, Apple TV+.
The video served a few other functions as well. The “A Think Different Production” was telling the world that Apple was about to enter original video content in a very big way. The video was also meant to show how Apple now has a growing number of cast members (hardware, software, and services) that come together to create the film (user experience).
Event Surprises
Apple’s Services event contained a number of surprises when it came to its revamped content distribution arm:
Apple is directly funding iOS game development for Apple Arcade. While third-party game developers will retain ownership of the games that will begin as Apple Arcade exclusives, Apple isn’t too far from playing in the realm of producing its own iOS gaming content.
With Apple News and News+, Apple may be as close as it gets to doing original written content. Apple continues to move down the path of having its team of editors curate news and investigate reporting. The only way for Apple to move further into original written content would be to hire a team of reporters and journalists for actually reporting and breaking news. This isn’t likely to occur for a number of reasons.
Apple TV+ represents Apple’s first comprehensive move into original video content. There were plenty of questions as to how Apple would position its original video content within its broader TV strategy. We know Apple TV+ will be an ad-free subscription service, the implication being that it will be some kind of paid service that lives within the Apple TV app. This app will then be available in more than 100 countries via iPhones, iPads, Macs, Apple TVs, most of the leading smart television set platforms, and Roku and Amazon Fire TV.
My full Apple Services event review is available for Above Avalon members here (major themes) and here (full notes).
History
One of the more crucial questions found with Apple’s event involves why the company is moving into original content in the first place. The answer speaks volumes as to how the content consumption landscape has changed in just a few short years.
In order to answer the “why” behind an initiative like Apple TV+ and Apple’s move into original video content, one has to go back to the late 1990s. Apple has long held a desire to distribute content through its devices. Part of this desire is rooted in Apple’s content creation ambitions via Mac software such as iMovie. Apple introduced iMovie in 1999. As told in ‘Becoming Steve Jobs’ by Brent Schlender and Rick Tetzeli, Steve Jobs handed out Sony digital camcorders to six Apple executives for shooting and editing four-minute home movies. The clips were then shown at Macworld 2000.
Jump ahead a few years, and Apple’s iTunes empire played a major role in expanding the Apple user base and eventually setting the stage for iOS and the App Store. In 2018, Apple earned an estimated $20B of revenue from selling digital goods.
As Apple grew its content distribution arm, the thought of Apple producing its own content remained a pipe dream. While there has been a continuous stream of suggestions from analysts and pundits that Apple buy video content companies such as Disney or Time Warner (HBO), the rationale behind such acquisitions never made much sense from Apple’s perspective. The content libraries that would be purchased in a deal were already available to Apple users (and likely weren’t going away), each target company contained too much corporate baggage regarding other business segments, and there would surely be significant culture clashes.
The first signs of Apple genuinely starting to open up to the idea of original content appeared after the Beats acquisition in 2014 and Apple’s subsequent entry into music streaming with Apple Music in 2015. Jimmy Iovine looked at original video as a way to have an Apple music streaming service stand out from Spotify. In addition to various music-related video projects, including documentaries, Apple’s Beats 1 put the company firmly into original audio content territory.
Shows like ‘Carpool Karaoke’ and ‘Planet of the Apps’ served as an original video test run for Apple. The biggest takeaway was that management needed to hire outside talent and place a much larger bet on original content if it wanted to develop a coherent video strategy and stand out from the competition.
In terms of the broader video landscape, Apple’s video distribution strategy is entering a third phase:
Offer video creation tools to users
Offer video creation tools to users + distribute paid third-party content
Offer video creation tools to users + distribute paid third-party content + distribute original video content
Too Much Content
Many people correctly predicted the slow death, or unbundling, of the large cable bundle. However, very few people projected the flood of new content from entirely new players including Netflix and Amazon. These new players are now forcing the old guard to double down on even more original content. Both Disney and WarnerMedia (formerly Time Warner) are placing big bets on ramping up original content budgets to support their respective new direct-to-consumer streaming services. Add YouTube into the mix, and it’s easy to see why Netflix says sleep is its biggest competitor. There has never been as much video content to consume than there is today. With a finite amount of time each day, there is only so much content that we can consume.
This dynamic drove recent comments from Warren Buffett, one of Apple’s largest shareholders, about how the digital entertainment space isn’t something he would be interested in competing in, although he is indirectly doing so with his $50 billion Apple stake. Here’s Buffett:
“You’ve got some very very very big players that are going to fight over those eyeballs…You have very smart people with lots of resources trying to figure out how to grab another half hour of your time. I would not want to play in that game myself.”
Buffett wasn’t alone in his stance. Many analysts and pundits looked at Apple’s event two weeks ago with bewilderment. On the surface, it seemed like Apple had simply announced new revenue-generating services to deliver even more content to its user base.
Not reading enough magazines or news? Subscribe to Apple News+ and get $650 worth of magazines per month for just $10 per month.
Not playing enough iOS games? Pay for Apple Arcade and play 100 games with no content stuck behind in-app purchases.
Not watching enough video content? Use the Apple TV app and watch video from your favorite sources as well as an entirely new slate of video content with Apple TV+.
Some were stumped as to how Apple could possibly compete with Netflix by just announcing a handful of original shows. Such a question demonstrated a complete misread of what Apple had actually announced on stage.
Curation for Casual
Instead of just announcing services for consuming more content, Apple unveiled a strategy for curating content for its user base of a billion people. This curation involves everything from picking out which news stories and iOS games Apple users may enjoy to taking an active role in protecting users’ content consumption habits in terms of privacy and security.
One way of describing this revised strategy is curation for the casual.
Apple Arcade appeals to the casual gamer who may be interested in playing a few minutes of an iOS game here or there. Such a user values Apple’s curation in terms of selecting what will be an always fresh lineup of approximately 100 titles.
Apple News+ is for the casual magazine reader who may not be interested in subscribing to any one particular magazine but enjoys reading an article here or there. Such a user values Apples’ curation in terms of picking out stories from hundreds of magazines.
This leaves the question: Why is Apple getting into original video content? Apple could have curated video content from third parties to those looking for a handful of interesting shows and movies.
TV+ Strategy
Heading into Apple’s event last week, my thinking was that Apple would position original video content as a way of getting people to spend time within the Apple TV app. More time spent in the Apple TV app would also likely mean more third-party video bundles being subscribed to from directly within the app. However, Apple’s very deliberate original content lineup, including the partnerships with Steven Spielberg and Oprah, told me that Apple’s original content video strategy boils down to something more.
Tim Cook, Oprah Winfrey, and Steven Spielberg at Apple Park.
Apple is using its own slate of original video content to develop a differentiated curation experience that won’t be found anywhere other than in the Apple TV app. Apple isn’t just developing shows and movies that will then be curated to its viewers. Instead, the shows themselves have already been curated. This explains Apple’s decision to bet on brands (Oprah, Spielberg, Sesame Workshop, J.J. Abrams, etc.) and star power.
Apple’s original video strategy is nothing like that held by Netflix or Hulu (quantity over quality). The strategy also ends up being quite different from Amazon’s play for third-party bundles and some original content (which has been quite bumpy). Apple appears to be taking a different path from HBO too (quality over quantity).
The Apple TV+ equation doesn’t boil down to Apple betting on either video quality or quantity. Instead, the TV+ equation is about selling video curation on a global scale. Apple’s form of curation extends to ensuring privacy and security when it comes to content consumption behavior, something that has received little to no attention up to now in the world of direct-to-consumer paid video streaming.
Turning back to the idea of users having a finite amount of time to consume video content, why is something like TV+ needed in the marketplace? The bet Apple is placing is that curation will gain value as the amount of video content available across various bundles and streaming services continues to increase. Apple’s video strategy isn’t based on grabbing as much time as possible from users. Such a battle will be a brutal one to fight. Instead, Apple is interested in offering its users a truly curated (and private) viewing experience on all their devices. No other company offers such a service.
A Core Technology
Content distribution has become commoditized. Most companies are merely interested in checking off the video streaming box on the list of platform requisites. The same can be said for music streaming, gaming, etc. Apple thinks the resulting flood of content is now opening the door for content distribution to once again turn into a competitive advantage.
It's possible that Apple’s content distribution arm, and the company’s underlying curation for casual strategy, will eventually be considered a core technology powering Apple devices. Notice how Apple News+, Apple Arcade, and Apple TV+ are not going to be available on Android smartphones.
As Apple has been working to control other core technologies powering its devices, all signs point to Apple slowly wanting to reduce its dependency on others when it comes to its content distribution arm. Apple’s move into original video content lays the groundwork for Apple to eventually move into original content in other genres as well.
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.
Above Avalon Podcast Episode 144: Checking Up on iPad
In recent years, the iPad line has undergone transformational changes. In episode 144, we look at Apple’s broader iPad strategy to add context to the newest updates involving the iPad mini and iPad Air. The episode kicks off with my thoughts on the new devices. The discussion then turns to the three sales phases that have come to define the iPad business over the years. Additional topics include Peak iPad mini, how Apple is following an iPhone / Mac hybrid approach when it comes to iPad updates, whether the iPad line is too complex or complicated, and observations on the current iPad line.
To listen to episode 144, go here.
The complete Above Avalon podcast episode archive is available here.