Thoughts on Apple Q3 2014 earnings

Note for new readers: I stick to calendar quarters in analyzing earnings, because it makes cross-company comparisons easier. As such, all references to “Q3 2014″ refer to the quarter ending September 2014, not Apple’s fiscal Q3 2014. Once again, this post is part of a series on major tech companies’ earnings (this is the second for the current round of earnings; analysis of Q1 2014 earnings can be found here, and for Q2 2014 can be found here). 

iPad plus Mac is the number to watch

Lots of attention was paid by both Apple and commentators this quarter to both the iPad and Mac numbers, but the key is increasingly to look at the combined results of these two segments, both in unit shipment and revenue terms. For a while there, as the Mac started to shrink, iPad growth offset that decline, but the two have now switched places. Nonetheless, year on year, the two combined continue to operate within a very narrow range:

Mac plus iPad revenues Mac plus iPad shipments

ASPs continue to tell an interesting story

Given the near demise of the iPod, and the declining average selling price (ASP) of the iPad, the iPhone and Mac are actually the best two products for Apple to be selling. Interestingly, they’re also the two products which are most likely to experience substitutional effects with the iPad. Note the ASP trends in the chart below, which shows trailing 4-quarter ASPs to smooth the quarter-to-quarter fluctuations:

Apple ASPs

The iPhone ASP continues to hold up remarkably well, staying within $10 of $600 for the last five quarters, though rather lower than the $640 or so it regularly hit earlier. With the launch of the iPhone 6 Plus it’s likely that ASPs will trend somewhat higher over the next couple of quarters, and this quarter’s ASP was $42 higher than last quarter’s, partly for that reason.

Who’s buying iPads?

I’ve done some analysis previously on iPad replacement cycles and theorized that we’re due for faster sales over the next few quarters as the many iPads sold 2-4 years ago become due for upgrades. I thought I’d revisit some of those numbers in the context of what we heard today to answer the question of who’s buying iPads. Tim Cook has now given several data points as to the percentage of iPad buyers who were first time buyers, and it’s interesting to look at what that data signifies. Using that data, I’ve put together estimates of the breakdown between new buyers and upgrade buyers of iPads, as shown below:

iPad Buyers By Source

If these numbers are correct, they appear to show two trends:

  • The number of people buying upgrades to existing iPads is rising slowly in a cyclical pattern, as would be expected with a growing installed base (I’ll come back to this below)
  • The number of people buying new iPads has been extremely cyclical too, but appears to have slowed somewhat over recent quarters. Though the Q4 peak last year was higher than the one the year before, every quarter since has been off the year-earlier quarter by some margin. Though Tim Cook rightly points out that the market isn’t saturated, the number of new buyers does seem to be falling somewhat.

Let’s look at that upgrade number in the context of the installed base (the caveat here is that we’re working with two sets of estimated data now). My guess is that the percentage of the existing iPad base that upgrades in any given quarter is around 3%, with a higher number in Q4, both because it’s a big buying quarter anyway and because as a result it’s the anniversary of many earlier purchases. I think the rate in those quarters likely spikes to around 4.5%. On that basis, as the base continues to grow by a few million every quarter, if the upgrade rate holds steady, the number of iPads sold to existing owners will continue to grow steadily too. The big question then becomes whether Apple can turn around the new buyers number with the new iPads it launched last week, and the lower prices on older iPads. I suspect it will and we’ll see a really big fourth quarter, perhaps the first in a year that’s higher than the year-ago quarter.

Apple Watch buried among Other Products

One of the more interesting tidbits on the earnings call was not a financial data point in its own right, but an indicator of future reporting changes. Namely, that the Apple Watch will be reported under Other Products along with both the existing Accessories business (including Beats) and the iPod business, which was formerly reported separately but is becoming so small as to be no longer worthwhile reporting in its own right. It’s worth looking at the history of other Apple products here for a precedent:

  • The iPod launched in October 2001, and in the next earnings release Apple reported the number of shipments, but didn’t break the product out in its Data Summary with its Mac shipment and revenue data until two years after launch, in October 2003. The company continued to provide occasional iPod shipment numbers in the interim, however.
  • The iPhone and iPad both received immediate status as segments in their own right immediately after launch, with a full revenue and shipment breakdown (though in both cases muddied by the fact that other related revenue was lumped in with device sales revenue for a time).

What does it signify that Apple won’t report Apple Watch shipments and revenue in full detail from the outset? I think two things:

  • Apple is exhibiting caution ahead of what is in some ways its most unpredictable new product category in many years, since the iPod. Apple as a company has many times more customers today than it did then, but the Apple Watch is as big a departure from its current product line as the iPod was in its time, and it’s inherently difficult to predict how many it will sell. As such, the lack of reporting in the short term may reflect an abundance of caution about breaking out a nascent category.
  • Apple’s leadership alluded to this on the earnings call, but the Apple Watch will also have a far more diverse set of price points than any of its other products, ranging from $349 to several thousand dollars, and as such the average selling price will be a huge clue as to which models are selling in a way that it has never been for the iPhone, iPad or even the Mac. As such, Apple is keeping this commercially sensitive data out of competitors’ hands, at least for the time being.

However, all that said, within two years of the launch of the iPod Apple was providing a detailed breakout of both shipments and revenues, and I’d very much expect that if the Apple Watch sells at all well we’ll get (a) ad-hoc reporting of key metrics such as shipments right from the start as with the iPod and (b) a full breakout at such a time as the Apple Watch becomes significant enough as a revenue generator to warrant its own segment. With an ASP that’s likely to be in the same ballpark as the iPad or higher, it will only have to sell a few million to become material to Apple’s earnings overall, and I would expect that to happen within the first few quarters. It will be hard for Apple to keep these numbers buried out of sight for very long.

I’ll likely do another post or two this week as I continue digging through the numbers, so that’s it for now.


Quick Thoughts: Apple SIM

Yesterday afternoon, amid a flurry of tweets and articles talking about how revolutionary the Apple SIM is, I posted this:

I wanted to take some time to elaborate on that thought and on the Apple SIM in general.

A revolutionary model

First, let’s give credit where it’s due, to both Apple and the three participating US carriers and the UK’s EE: this is a revolutionary model, and all these companies deserve kudos for being willing to innovate and try something different, despite the risks to the carriers in particular. Why might the carriers be willing to go along with this? Well, for one, they risk being left out if they don’t, as Verizon is here in the US (likely because of its overall skepticism about the new business models for device sales). But secondly, all the US carriers would like to see a much higher proportion of tablets sold come with cellular connectivity. Today, the cellular attach rate is very low, and only part of that is down to the $130 premium Apple charges for LTE devices. The rest is down to the fact that buying one of these devices has meant committing to a particular carrier and potentially a long-term contract before you even know how much use you’ll get out of the device.

This new model means you can go into an Apple store and walk out with a cellular-enabled iPad, and start using the cellular function immediately, without making any sort of commitment to a carrier at all. You can try out their service, switch carriers easily, and determine whether or not you want to continue to use the service, all without ever going near a carrier store. The downside for the carriers, of course, is a lack of lockin, though I suspect once an iPad customer decides which carrier to use they may well end up moving the device onto a family or shared data plan for a better deal than they’ll get otherwise.

Beware of assuming the same model works in phones

Having said all that, I think the clamoring over this revolutionary new model is over-done when it comes to smartphones. There are at least two fundamental differences between smartphones and tablets in this context:

  • The vast majority of people buying a smartphone already have one, running on a specific carrier
  • The vast majority of smartphones are bought with financial assistance from a carrier, either the old subsidy model or the newer financing models. As such, almost no-one pays the full cost of an iPhone up front.

The Apple SIM model works so well in the iPad context precisely because most people aren’t getting financial help from their carrier to buy a device, and because many of these customers don’t have a tablet connected to a carrier yet. They’re in experimentation mode, and the Apple SIM model works perfectly as a result.

The problem with applying this model to iPhones is that the carriers serve this other critical function of helping to reduce either the upfront or total cost of the device, and Apple doesn’t (yet) provide an alternative. As such, the model would only be applicable for people who were willing to pay the full cost of the phone up front, which is an entirely marginal market. However, if Apple were to start offering financing or leasing plans for iPhones as I’ve described elsewhere previously, then the Apple SIM model would make a lot more sense. Oh, and by the way, both of the carriers’ major holds on customers (the contract and network lockin) would be broken at once, which would be enormously disruptive.

Apple is entirely capable of pursuing this kind of model itself. This could be either the carrier financing model, with the cost of a phone spread over a 12-24 month period, or an “iPhone for life” program under which a customer pays a fee each month to always have the latest iPhone model. Under the latter model, the older device would be handed back to be refurbed and resold when the customer gets a new phone. Apple has the deep pockets to fund such a model, and it would help to smooth out its revenues across the year too even as most of the upgrades continue to happen in the third and fourth quarters.

In short, the Apple SIM is a step in the direction of a new relationship between Apple customers, Apple and the carriers. But in order to reach its full potential in the iPhone context, Apple needs to make another significant change: allowing customers to spread the cost of owning an iPhone over a longer period. Only if it does that will the Apple SIM be truly disruptive.

Further thoughts on iPad sales

On the morning of Apple’s latest iPad event, I wanted to quickly revisit the topic of iPad sales and share an idea that’s come up again and again as I’ve discussed the topic with other analysts and with reporters in the runup to today’s event. I’ve posted the video below to YouTube as a way of illustrating this idea visually, and the text below is largely the transcript of the video, with some of the same images used to illustrate key points. I’d love your feedback on the video format and on the blog post, as always. Feel free to connect with me on Twitter at @jandawson or to email me at

(you may want to watch the video on to see it bigger, and whether you watch it here or there I suggest switching to the highest available resolution.)

I’ve done two blog posts recently which made use of some version of this diagram:

Apple product evolution

The first looked at the Apple Watch as the latest in a long line of increasingly mobile and personal computers Apple has released since the first Apple computers. The second examined the question of how many computers we actually need, and the tension that exists when we end up purchasing several of them to accomplish the same set of tasks in slightly different ways.

I wanted to return to this diagram to illustrate an idea that’s been percolating in my mind since I first drew this diagram, and that’s the iPad’s place in this evolution.

One way to see this diagram is as the technological equivalent of this hackneyed picture of human evolution:


But of course there’s a problem with that. If you play back the Apple version of this evolution there’s a historical quirk – the iPad didn’t arrive at its logical place in the evolutionary chain: it was late:

iPad late

Though Apple started work on the iPad before the iPhone, it came to shelve that project and focus on the iPhone instead, only returning to the iPad later. As such, in a historical quirk that would have been impossible in a true evolutionary progression, the iPhone’s logical progenitor ended up coming later in the evolutionary chain. Steve Jobs explicitly recognized this relationship in introducing the iPad by placing it between the MacBook and the iPhone in Apple’s product lineup.

The problem with that approach is that it’s created a strange set of expectations for what the iPad should do, both as a device to be used and as a member of Apple’s product portfolio. Had it launched first, with the iPhone launching later, it would have been natural to assume that the iPhone would eventually cannibalize it much as it did the iPod. But because the iPad launched after the iPhone, it created this unnatural expectation that it would complement the iPhone and perhaps even exceed its success.

Only when you see the iPad in its natural place in the evolution of Apple products – despite the actual timing – does it start to become clear where the iPad sits and what its future might hold. The iPhone – and not the iPad – is the culmination of this evolution, with the Apple Watch the next evolutionary step (with the potential eventually to become the pinnacle of this evolutionary process, in time replacing the iPhone).

What does this mean in terms of iPad sales? Well, there are two big questions we don’t know the answer to with iPad sales. The first has been well discussed, and was the topic of one of my earlier blog posts, and that’s replacement cycles. With a product that’s just four years old, and which didn’t start to sell in really large numbers until 2011, it’s very hard to calculate what those might be. But it’s easy to imagine that they’re longer than iPhone replacement cycles, perhaps as long as three or four years. As such, I’ve argued that we might see a major upgrade cycle over the next couple of years as that first big wave of iPad purchases in 2011 ages to the point where it needs to be replaced.

The other big question, though, which hasn’t been discussed nearly as much, is the degree to which some iPads won’t be replaced at all, because their owners stop using them entirely. Because of the historical evolution we’ve discussed, and especially because of the launch of larger and larger smartphones, now including the iPhone 6 Plus from Apple itself, there will be many people who no longer feel the need for an iPad at all, especially the only slightly larger iPad Mini. So the real question splits into three parts: firstly, how many of the iPads Apple has sold are still in use? Secondly, what percentage of those will be upgraded or replaced at all? And thirdly, how quickly will those upgrades happen following the initial purchase?

All of which brings us to Apple’s event today, at which it will launch refreshed iPads. Apple’s job with regard to the iPad during this event is threefold: give the many existing owners a reason to upgrade, give people who haven’t yet tried iPad a reason to buy their first, and give people who may have abandoned an earlier version of the iPad a reason to give it another try. The first of these is in some ways the easiest – the new features (Touch ID, possibly a higher resolution screen) and the requisite spec bumps will increase the gap in performance between the iPads 2 and 3 many people own and the latest device even further, making an upgrade more compelling. And Apple has actually been doing a good job bringing more and more converts to the iPad too, with around 50-70% of buyers being either new to iPads or to tablets as a whole in the last few quarters. It’s the third task that’s the toughest, and I wonder to what extent Apple should even be trying to convince former iPad users to come back. If an iPhone 6 Plus is the right device, and obviates the need for an iPad, should Apple merely embrace the survival of the fittest device here?

This, in my mind, is the most interesting aspect of today’s event, because it will show us how Apple views the iPad in a product portfolio that now includes the forthcoming Apple Watch as well as the much larger iPhones. Again, had the iPad launched before the iPhone as befits its place in the evolutionary chain, we wouldn’t be marveling at the stagnant and even falling sales over the last year or so. It’s only because of the quirk of timing of the original iPhone and iPad launches that we’re even wondering about this at all. I’m looking forward to seeing whether Apple sees it that way too.

iPhone 6 and 6 Plus thoughts

As I’ve mentioned before, I don’t do “reviews” of devices as such, because I think others who focus on those full time do a better job, and I’ll add little value. But I do occasionally post some thoughts on the devices I spend time with, and I thought I’d do that with the iPhone 6 and iPhone 6 Plus which I’ve been using since they came out, thanks to two devices on loan from Apple.

First off, I get review units of lots of devices, including many Android devices, and so I’m already very accustomed to the larger sizes, unlike many regular iPhone users (several of my family members and friends included). I noted on Twitter that John Gruber’s response as detailed in his review was probably much closer to those of many regular iPhone users than those of most reviewers. As such, I was rather looking forward to the larger sizes, since the iPhone 5S I use when not testing something else was coming to feel very small in comparison. However, I’ve never been a fan of the really big devices – those with over 5″ screens, so I was curious to see how I’d respond to the 6 Plus. I first spent a week with the iPhone 6, and then a week with the iPhone 6 Plus, and have been back on the iPhone 6 since then.

iPhone 6 – what the iPhone was meant to be

For me, the iPhone 6 is what the iPhone was always meant to be – it’s the perfect instantiation of iOS on a smartphone. Just the right size, with a really great weight and thinness, which makes it fit wonderfully in the hand. I immediately liked it better than all the other iPhones I’ve tried. I’d been using the first and second generation Moto X devices over the previous few weeks, and had really enjoyed both, though the new version seemed a little large for my taste, and the iPhone 6 does a wonderful job of providing a great screen size without an over-large device, a great in-between experience between the two Moto X devices.

iPhone 6 Plus – great too, just not for me

I forced myself to use the iPhone 6 Plus for a week as well. It is enormously bigger than the 6, and feels so in every way – in your hand, in your pocket, wherever. That makes it fantastic for certain things – I found myself willing to read things I normally would have turned to an iPad for, and playing games optimized for the larger screen was great fun too (I discovered several fun new ones including the Box Trolls movie tie-in game, Beach Buggy Racing and FIFA 15).  Interestingly, my wife, who’s currently using an iPhone 5 and has never liked any of the larger Android phones I’ve shown her, immediately thought this might be a good fit for her. Her reasoning was that she runs her whole life (and our kids’ lives) from her phone most of the time, rarely being in a situation where she can use her laptop, so the bigger screen would make that easier.

As for me, I never did completely get used to the larger sized device, and could never get quite comfortable with it. It is better than most of the Androids I’ve used in this size range, in that it’s narrower, so it’s easier to get your hand around. But it’s not for me. I found taking pictures with it one-handed particularly difficult – I just couldn’t get the device to balance properly when using it in that way, something I don’t have a problem with on the iPhone 6. I was glad to go back to the iPhone 6 after my week with the 6 Plus.

But all this just highlights something that’s never been the case before with Apple’s iPhone line: it’s always been obvious which device you should get (and which I should recommend) with the iPhones before, but it’s not obvious anymore. The iPhone 6 Plus is absolutely right for some people, including apparently my wife, while the iPhone 6 is a better fit for others. Just as the iPad Air and iPad Mini are better fits for different people, and just as has always been the case with MacBooks and so on too.


I’ve been running iOS 8 since it first became available to developers on my iPhone 5S, so the software here wasn’t that new. But by the time it was released on the iPhone 6es, I found it to be relatively bug-free, with only occasional issues, mostly triggered by apps that hadn’t been upgraded rather than the OS itself. I’ve enjoyed some of the enhancements and upgrades, including improvements to Siri, Spotlight search and so on. I haven’t yet made use of some of the Continuity and Handoff features although they are working on some iPads also running iOS 8. Calls and messages come through on those, but I simply don’t find myself using those features at all. I’ve been running Yosemite on a Mac Pro for a while, but it doesn’t have Bluetooth LE and so doesn’t support Handoff, and I’m looking forward to trying Handoff on a MacBook Air that does support BLE when Yosemite ships.


One of the areas where the iPhone has always led is photography, and I’ve found that the improvements here keep the iPhone above and beyond every other device I’ve tested in this department. I haven’t spent inordinate amounts of time deliberately testing the camera but I do take quite a few pictures in the normal course of events. A gallery of photos from the two devices (most of them raw, with a few edited in Snapseed and/or Instagram) can be found on my Flickr page here. I live in Utah, which is a picturesque place (indeed, Apple shot the test footage for the iPhone 6 launch there), so that helps!


One of the first questions almost everyone has asked when they see or hear that I have the iPhone 6 Plus is “does it bend?” This has been true for friends and family members, the teenagers I work with at Church, and a workman who was installing something at our new house this week. “Bendgate” certainly seems to have captured the popular attention and has unfortunately become one of the first things people think about when confronted with the 6 Plus. I doubt it has stopped many people from buying one, but it’s still striking how often it comes up. For my own part, I haven’t seen any sort of bending with the 6 Plus review unit I have. I haven’t tried extremely hard to bend it, but it was in a front jeans pocket for much of the week I tested it, and it simply wasn’t an issue. I suspect it won’t be for all but the unluckiest users either.


In my mind, the iPhone remains the phone to beat. I test lots of devices, and I really enjoy the better Android phones too (I particularly enjoyed the Moto X I tried recently). But the iPhone is my personal device of choice, and the one I always come back to. The one sacrifice lately has been screen size, and one of my other pet peeves (the lack of a swiping keyboard) has also been resolved with iOS 8’s third-party keyboard support. Interestingly, I haven’t used the swiping keyboards much – I’ve found them too error-prone, and found the built-in predictive keyboard to be pretty good. SwiftKey has just updated its app, and it seems better now, so I may try it some more. But overall, the iPhone 6 and 6 Plus just reinforce the iPhone’s place in my mind as the top phone, and especially when it comes to the camera. There really isn’t anything meaningful you can do with an Android phone now that you can’t do on the iPhone 6 or 6 Plus, and that’s really saying something.

Smartphone margins and Samsung

Since I’ve been talking to a few journalists about Samsung’s fairly dismal Q3 earnings forecast, and pointing people back to my previous pieces on Samsung, one thing that’s been coming up a lot is profitability and margins in smartphones. I thought I’d quickly jot down a couple of thoughts on this point in particular, as there seems to be a poor understanding of this topic in general.

The key here is that there are at least two components to profitability in smartphones, though they’re often conflated or one ignored entirely:

  • Gross margin, i.e. the difference between the cost of manufacturing a device (cost of sales or cost of goods sold) and its selling price.
  • Operating margins, i.e. gross margins minus all the shared costs of running the business that sells the smartphones, including all non-manufacturing employees, advertising, general and administrative costs, depreciation and amortization and so on.

It is entirely possible for a company to make a positive gross margin on each phone sold (even a significant one) and yet be hideously loss-making because its advertising, general and other costs are greater than the gross margin on the device. Motorola, for example, claims that it makes money on each device it sells, but that’s a reference to gross margins, and the business unit itself continues to be unprofitable as part of Google, because the other costs are greater than the modest gross margin it makes on its device sales.

This is important in the context of Samsung’s earnings forecast for a couple of specific reasons. Firstly, Samsung’s overall margins have benefited from two key factors:

  • Firstly, it has achieved significant share of the premium smartphone market, and an extremely high share of the premium Android market. Gross margins are much higher at the premium end than at the low end, and this is a major component of Samsung’s overall high margins relative to every competitor except Apple.
  • Secondly, it has massive scale, as easily the largest smartphone vendor in the world over the last couple of years. Scale is important because it spreads shared costs such as advertising, general employee costs and so on over a much greater number of devices. In other words, if Samsung spent a billion dollars on advertising and sold a hundred million phones, advertising costs per device would be $10, but if it sold two hundred million phones, advertising costs per device would be $5. The more devices over which you can spread these shared costs, the bigger the impact on operating margins. There are also some scale benefits to gross margins, of course.

Both this quarter and in previous quarters, Samsung’s earnings have taken a hit because of reduced scale (affecting mostly operating costs per device) and reduced prices (affecting gross margins), so both parts of the profitability equation are suffering at once. Some have suggested that Samsung should go harder after the low end of the market, while others have said that would be stupid because there are no margins there. This is where the above understanding of profitability becomes relevant: yes, the gross margins are lower at the low end, but there’s massively more scale there, which can help operating margins. So it’s not as simple as saying that Samsung should steer clear of the low end because the margins are poor.

Having said that, Samsung does face increasing pressure at the high end, especially since Apple has closed a major competitive window with the new iPhones launched a few weeks ago. So it may be increasingly important for Samsung to focus on the low end. However, that’s easier said than done too: the low end is arguably the main focus of many of the most aggressive moves in the industry at present, with Microsoft providing reference designs for cheap Windows Phones and Google launching the Android One initiative, along with the Moto G and other low-cost smartphones. It’s not necessarily going to be any easier for Samsung to compete at the low end than at the high end, especially if it wants to generate the kinds of margins it has in the past in smartphones. But there’s not really anywhere else to go: the mid-market is rapidly disappearing as the market bifurcates between premium and low-cost, with very little in-between.

Hence, perhaps, Samsung’s renewed investment in the chip business, as a potential supplier to other players. There’s far less competition in that business than in smartphones, and Samsung already has a very strong role in this business as a supplier to Apple and itself. Even as Apple’s reliance on Samsung chips wanes, there are plenty of other opportunities for Samsung to go after here. But of course the average selling price of a chip is far lower than the average selling price of smartphones. Even if the margins are good, it’s extremely unlikely that Samsung will be able to make up the difference on chips alone. Which means it has to continue to go after the smartphone market aggressively too, even though it faces falling margins and shipments going forward.

BlackBerry earnings: progress on several fronts

Having not written about BlackBerry for months, I’m now doing two posts in one week! Normal service will resume shortly. But I did want to quickly cover BlackBerry’s earnings today, because as usual many of the people covering them are misunderstanding what’s happening and focusing on the headlines instead of the underlying trends.

First off, BlackBerry’s results look horrible on the face of them. It’s losing money, it’s shrinking, it’s hardly selling any devices, and so on and so forth. If you compare them to almost any other handset vendor out there, they come off looking pretty bad. But looking at BlackBerry as just another handset vendor is making the very mistake I warned against in my post earlier in the week. BlackBerry’s future involves devices, to be sure, but it goes well beyond them. So here’s a quick take on what I see by way of underlying trends at BlackBerry.

Device shipments

Since so many people are fixated on device shipments, let’s start there. The headline here is that shipments fell significantly year on year, which is usually the best comparison to make to avoid focusing on seasonal trends. However, when a company is in turnaround mode, it’s worth looking at quarter on quarter trends too. In addition, the real number to focus on is sell through and not shipments, because that reflects what the company is actually selling without the effect of reductions in inventory. The chart below shows three key metrics related to the company’s device sales for the last few quarters:

BlackBerry device salesTaking each of those lines in turn: Continue reading

BlackBerry’s unhappy valley

Today, BlackBerry officially launched its latest handset, the BlackBerry Passport. I attended the launch event, because I was keen to see the new, John Chen-led BlackBerry up close and hear what they had to say first hand. So many of the people who read my work are entirely focused on the devices business, and have long since written BlackBerry off as a company because of the performance of its handset business. But my own view is more nuanced. I’ve written about BlackBerry extensively in the past, mostly while with my former employer, Ovum, although one of my earliest posts on this blog was about BlackBerry. But it’s been quite a while, so I thought I’d give an update on my thoughts on the company, using today’s event as a jumping-off point.

BlackBerry was never just about devices

There’s no doubt that BlackBerry has fallen a long way from its peak.  Beating up on the company on this point is fruitless – it’s a fact that it’s a shadow of its former self when it comes to its handset sales, which formed the core of the company’s business for many years. Revenue from devices made up the majority of the company’s revenues very consistently from 2003 to 2013, and for much of that time it made up well over 70% (and sometimes over 80%) of the company’s revenues. Thus, in many people’s minds, BlackBerry is first and foremost a handset company, and given the decline in its fortunes in that area, they assume that it’s done for. The company’s device revenues peaked at around $16.5 billion annually in 2013 but have fallen to under $2 billion annually.

Were BlackBerry to have been simply a handset sales company like HTC or Kyocera, this decline would have been terminal (no pun intended). But BlackBerry has always been more than just a devices company. Even when its revenues were dominated by handsets, it derived a significant proportion from service fees associated with BlackBerry subscriptions. Those were directly tied to the number of BlackBerry devices sold, in that both revenue streams derived from the same source. So, to the extent that the number of BlackBerry devices has plummeted, its service revenues have fallen too, from a peak of over $4 billion per year to under $2.5 billion – not quite as dramatic, but still a fairly sharp decline. However, that business, and BlackBerry’s broader foothold in the enterprise, has been its salvation even as device sales have fallen off a cliff. Continue reading

Quick Thoughts: Apple and shutting down Beats

There are reports today that Apple is planning to “shutter” the Beats Music service, which seem to be causing consternation, surprise, and comparisons to Google’s acquisition and subsequent dumping of Motorola. As I see it, there are a couple of different ways of interpreting the news, and although one of them would indeed be shocking, the other is entirely predictable, and that’s the way we should be interpreting this.

Two ways to interpret the news – one is clearly wrong

The first way to interpret this is that Apple is shuttering the Beats Music service as it currently exists in order to replace it with an Apple and/or iTunes-branded replacement using Apple’s delivery technology, label relationships and so on rather than those developed by Beats. This was an entirely predictable development and one which everyone should have been expecting from the beginning. Why would Apple acquire a product like this and simply let it continue as it is without either wrapping it into the Apple fold, slapping an Apple brand on it and integrating it with the broader Apple ecosystem? Especially when Beats Music wasn’t a massive hit with consumers in its current form? The Beats Music service only makes sense as an acquisition in the context of the broader iTunes service, which lacks an on-demand subscription option without it.

The second way to interpret this news is that Apple is shutting down the service entirely without any plans to replace or integrate it into iTunes, and that seems to be how many people are interpreting it. The reports from Re/code and others seem to be refuting this interpretation, though without much detail behind the refutation. But under this interpretation of events you’d see the Beats Music service shuttered at midnight one night, never to be seen again, and with no replacement lined up from Apple. That’s patently incredibly unlikely, especially given Apple’s assurances at the time of the acquisition.

What does the Beats replacement look like?

What, then, is likely to replace Beats when it is wound down and/or wrapped into iTunes proper? I see several elements:

  • it fills the on-demand subscription service hole in iTunes, possibly with subscription and ad-supported elements (though I think the latter is unlikely given both Apple and Iovine’s insistence that music command a proper price)
  • it incorporates some recommendation and curation elements from Beats Music
  • it introduces a new format, as alluded to in U2’s recent interviews, which adds more to the classic album format than just the music.

There will almost certainly be some sort of migration path and/or grandfathering in of the smallish number of existing Beats Music customers.

Timing – “one more thing” in October?

When might we see this new service make its debut? I’d argue pretty soon, especially given today’s reports. It might make a good “one more thing” at Apple’s October event, if that happens. It would also nicely reintroduce a music theme to Apple’s fall events which has been missing since the iPod began playing second fiddle to the iPhone and iPad.

Beats was never about one thing

As I wrote in my original Apple/Beats post, the Beats acquisition was never about just one thing. Rather, it combined the headphones business, the music subscription business and the relationships and expertise of Jimmy Iovine and Dr Dre in one package. As such, the comparison to Google’s acquisition of Motorola may perhaps be apt in that Google got significantly more than just Motorola’s handset business when it bought it (including patents and the set-top-box business sold shortly after the acquisition). The Beats Music service in its broadest sense – the customers, the service, the technology and expertise behind it – was just one part of that acquisition. Of that, only the service as it currently stands, arguably the least-valuable part of that package, will go away. All the rest – inasmuch as it’s valuable – will be incorporated into what Apple ends up launching off the back of it. And then there’s the headphone business, which is both a lucrative business in its own right and potentially a jumping-off point for new products from Apple under both the Beats and Apple brands. As such, these reports – even if true – are the furthest thing from an admission of failure of the Beats acquisition imaginable.

Quick Thoughts – Apple’s different audiences

I’ve already written three posts about Apple’s announcements from last week, but there was one topic I had intended to squeeze into one of the others but which never actually made it in. So here it is, in brief.

I originally planned to title this post “Who Apple keynotes are for” as an echo of my piece on what the Apple Watch is for, but in the last couple of days we’ve seen more news that turns this into a broader theme. Specifically, Apple launched a new section on its site about privacy, with a letter from Tim Cook to Apple customers about how Apple treats their data, and more broadly Apple’s attitude towards data collection. On top of all the discussion about the keynote last week, this has got me thinking about the different audiences Apple addresses in different ways with different communications:

  • Launch events: these are watched by at least three separate audiences: the press, the Apple faithful and gadget lovers more broadly. Apple has different objectives for each of these three groups.
  • Website communications, such as the privacy letter: the letter is linked to from the front page of, but only down in the bottom right corner, where many users visiting the site to learn about or order a new iPhone won’t even notice it. Those visiting the Apple site are going to be people with some interest in Apple products, many of them already customers.
  • Advertising: this is the only Apple communication that really gets broad play among the population as a whole, including those with no existing interest in Apple. TV ads, billboards, bus shelter posters and the like all generate broader awareness of and interest in Apple products, and its TV ads are particularly crucial.

Of those three sets of communications, only the third is mass-market in nature. Apple doesn’t typically say how many people watch its keynotes, but I would guess it’s 10 million or fewer in most cases. Even if it was double that, it’s a tiny fraction of its customer base (which numbers in the hundreds of millions) let alone the total addressable market. Website communications are likely read by far fewer people, though they also get some pickup in the press, as Tim Cook’s letter has this week. But advertising is where Apple not only talks to the total addressable market, but also where it provides specific triggers to buy, rather than just generating interest. Launch events are held before products are even on sale, and in the case of the original iPhone, iPad and Watch events, well before customers could even place a pre-order. Website communications like the privacy letter are about educating both existing customers and potential switchers, but again aren’t a call to action. Only advertising is a call to action: a specific invitation to buy an Apple product.

As such, the nature of these communications will be different. Just as the emphasis, tone and content of the iPhone introduction event was different from those of the ads that followed when the product went on sale, so I would expect the Apple Watch commercials to be very different in their tone and focus from the launch event. The launch event was about seeding interest and intrigue (with a significant element of mystery, especially around pricing), while the commercials will be far more specific, focused and with a specific aim in mind: getting people to buy one.

Techpinions post: Google and Microsoft’s platform problems

My post on Techpinions today is about Google and Microsoft’s platform challenges, which appear very different on the face of it, but actually have a lot in common. Microsoft increasingly wants its third-party services to succeed on platforms owned by (arguably) its two main competitors, Google and Apple. While Google is struggling to compete on a platform it theoretically owns (Android), which has been increasingly co-opted by both official Android licensees and users of the AOSP version of Android such as Chinese OEMs and Amazon. Microsoft’s challenges are particularly stark, and stem in part from the business models it and its competitors employ for key services:

Microsoft competing against freeHead over to Techpinions to read the full post.