Category Archives: Apple Watch

Refocusing the Apple Watch

September 9, 2016 Jan Dawson 2 Comments

As part of my media comment on the Apple event, I talked a little about how Apple has rethought the Watch since its initial introduction two years ago. That thought deserves a deeper dive, and although we did discuss it a little on the Beyond Devices Podcast this week, I wanted to elaborate here. The word that I keep using in talking about what has changed is that Apple has refocused the Apple Watch, and it’s done that in two ways:

It’s refocused the feature set of the Watch
It’s refocused the Watch portfolio.

Refocusing the feature set

When it comes to the feature set, Apple famously introduced the Watch with an echo of the original iPhone announcement, with a tripartite identity:

the most advanced timepiece ever created
a revolutionary new way to connect with others
a comprehensive health and fitness companion.

Though the health and fitness companion came last on that list of three, it’s rapidly risen to the top in terms of how Apple talks about the device today. Tim Cook referred to it this week as “the ultimate device for a healthy life.” Meanwhile, the communication aspects (represented in that second bullet point above) have faded into the background, barely mentioned in this week’s keynote.

But the other thing that’s been de-emphasized in the refocusing of the Apple Watch is apps, and that’s because apps just haven’t worked on the Watch. In September 2015, Tim Cook described what I refer to as Apple’s playbook for hardware devices in the iPhone era, with a set of bullet points:

Powerful Hardware
Modern OS
New User Experience
Developer Tools
App Store.

It’s clear that, both at its initial unveiling and a year later, Apple saw the Apple Watch as another product that fit this model, under which developer tools and the App Store would be critical to its success. I argued at the time that it would have been impossible for Apple to introduce a new piece of hardware in 2015 which didn’t tap into the App Store model, and yet I’m no longer sure of that view. Apps have largely flopped on the Watch. The reasons are simple – the hardware has been underpowered, and under watchOS 1 in particular apps were too dependent on the phone. But even in watchOS 2, Watch apps were too slow to load, because they didn’t maintain state and didn’t update in the background.

WatchOS 3 is intended to fix at least some of these issues, and the CPU and GPU upgrades in Series 2 of the Watch are aimed to improve app performance too. But Apple still didn’t make apps much of a focus at this week’s event. In other words, even with these potential enhancements to app performance, Apple is still focusing most of its messaging around the Watch on fitness features. I suspect that, instead of saying “this time we really got it right” after versions 1 and 2 fell short, Apple is going to quietly give developers time to figure this out, and then perhaps next time around we’ll see a renewed emphasis on how apps are adding value to the Watch. Pokemon Go and other high-profile apps may well help with this effort, but Apple is trying very hard not to oversell it this time around, and I think that’s smart. This particular form of crying “Wolf!” is running dangerously close to falling on deaf ears at this point.

The Apple Watch Hourglass

What I think we may see as a result is a sort of hourglass on its side, as in the diagram below:

The Apple Watch started out trying to be another micro computer. But Apple has now narrowed the focus to mostly being a great timepiece and an increasingly capable fitness device. In time, though, as the apps enhancements kick in and Apple works on other areas like Health in more depth, we may well see the purpose and positioning of the Watch become more expansive again.

The near-term implications of that are important to note: this means the addressable market for the Watch for the time being is mostly about a combination high-end fitness tracker and digital watch, rather than the broader “small computer” market which the iPhone and iPad arguably inhabit, and which is enormously larger. This, in turn, means that the Watch is likely destined for modest, incremental growth over time, rather than the sort of explosive growth that characterized both the iPhone and iPad in their early years. But as Apple begins to think about the Watch more expansively again, so the addressable market will begin to expand, and the sales potential of the Watch will grow with it.

Refocusing the portfolio

The original Apple Watch portfolio had three distinct tiers, with the Watch the core tier, the Sport the less expensive aluminum version, and the Edition the high-end luxury version, with prices to match. The price ranges for this original portfolio are shown in the chart below:

Two important things to note: the enormous separation between the Sport and Watch versions on the one hand and the Edition on the other, and the sheer height of the Edition portfolio’s pricing, topping out at $17,000. That’s a 48:1 ratio between the most expensive and least expensive Watches.

Fast forward a little over a year and you have the new portfolio announced this week, with a slimmed-down Apple portfolio and two partner versions of the Watch as well. For comparability with the chart above, here’s a view of the new pricing to the same scale:

And here’s a version with a scale that makes more sense for today’s Watch pricing (note that the axis tops out at exactly a tenth the price of the axes above):

First things first: Apple has basically eliminated its ultra-luxury Watch Edition models. The only model that has this designation now is the white ceramic Watch, but that’s priced at roughly a tenth of the original Editions. The new price ratio, including the Hermès Watches which actually top out slightly higher than the new Edition watch, is roughly 5.5:1 from most to least expensive. It’s also worth noting that the three Apple ranges are still mutually exclusive but now more or less touch each other — there are no more big gaps in the portfolio, even at the high end. The Series 2 aluminum Watches, starting at $369, pick up just above where the Series 1 Watches leave off at $299, while the Edition hits at $1,249, again just a little above where the Watches peak, at $1,099. The Edition branding still connotes exclusivity and premium materials and therefore satisfy the conspicuous consumption angle, but Apple is now targeting the low end of high-end watches rather than true luxury watches.

Apple now also has its two key Watch partners, Hermès and Nike, to fill in gaps in the portfolio. It’s interesting that we’re seeing these partnerships so early, but I suspect this is another sign that Apple recognizes the nature of this market and its growth prospects. What Apple is doing here is diversifying the portfolio by feature and function early in order to better saturate the smaller addressable market.

Beyond Devices Podcast

If you enjoy these posts, you’ll probably enjoy the Beyond Devices Podcast, in which Aaron Miller and I discuss events like this week’s Apple announcements, as well as other topical issues, and also answer questions about trends in technology.

Our most recent episode is embedded below, and you can find all past episodes on our website, on iTunes, on Overcast, and in other podcasting apps.

Apple, Apple Watch, Earnings, iPad, iPhone, Mac, Q2 2016

Apple June 2016 Quarter Chart Review

July 26, 2016 Jan Dawson

I’m on vacation this week in Europe, but I took a quick break to cover Apple and Twitter’s earnings this evening before heading to bed. I’ve tweeted quite a few charts tonight, but thought I’d pull some of the key ones together with some commentary for readers. A full deck of quarterly charts will go out to subscribers to the Jackdaw Research Quarterly Decks Service in the next few days as Apple releases its full data in an SEC filing, so look out for that if you’re a subscriber, and sign up here if you’re not.

Note: in this post, as in all my posts, I use calendar quarters for ease of comparisons with other companies and easy intelligibility by those not familiar with quirky fiscal years. As such, the labels and my commentary does not align with Apple’s fiscal calendar.

iPad returns to revenue (but not shipment) growth)

Last quarter, Tim Cook promised that the iPad would have its best year on year “compare” in over two years, which by my calculations meant something better than an 8% decline. Turns out iPad revenues actually returned to positive growth this quarter, though shipments still dropped, thanks to a really strong boost in ASPs:That iPad ASP growth seems to have been driven by the launch of the iPad Pro, which in turn was likely designed in large part to drive higher ASPs as shipment growth has stalled. In other words, the strategy seems to be working. It’s also interesting that Apple reported that half iPad Pro sales went to people buying them for work, which is another validation of Apple’s strategy, but also points to a big opportunity for Apple, which is selling more devices into the enterprise, both to individual and corporate buyers. That’s something I first talked about in the context of Apple’s IBM deal, but it goes much further than that (as evidenced by subsequent Cisco and SAP deals).

iPhone sales and ASPs down – the iPhone SE effect

Unsurprisingly, iPhone sales were down again, though perhaps not as badly as they seemed to be given the changes in inventory. But the most notable thing was the drop in average selling prices – the opposite of what happened with the iPad in the quarter:Just as the positive change in iPad ASPs was due to the successful launch of a new product (the 9.7″ iPad Pro), so is the larger than usual quarterly drop in iPhone ASPs due at least in part to the launch of a new product – the iPhone SE. It’s not all that – there was some impact from the inventory changes, as mentioned on the earnings call – but the magnitude of the drop is an indication that the iPhone SE has also had a successful launch, and has been something of a hit. That’s a good thing, in that these sales have filled something of a hole in iPhone sales in the quarter – which was arguably the purpose – while proving that Apple can tap into a market for iPhones at a lower price point with slightly lower specs and feature functionality.

Apple Watch and Other Products

One last interesting point with regard to a specific product: the Apple Watch. It’s buried in Other Products, but perhaps a better way to look at it is that it now leads the Other Products category, which otherwise features a number of other smaller products. That’s been a double-edged sword for the reporting category over the past 18 months or so, as Apple Watch has first driven higher growth and now is driving negative growth for the category again:This is, to some extent, a temporary anomaly due to the launch of a brand new product and the subsequent (presumed) shift to a different time of year for the follow-up product as the second version of the Apple Watch launches in the fall. But it’s an indication of just how important the Watch is to that Other Products category.

Short-term versus long-term

In concluding, I’m going to link back to my post last quarter, in which I both reviewed the good news and bad news in the results and looked forward to the rest of the year. The point remains the same: with Apple there are two current pictures, which are very different. On the one hand, there’s the short-term picture, characterized by the anniversary of massive growth in iPhone sales driven by the iPhone 6, and also an unusually long lull in the Mac upgrade cycle driven by delays in getting new chips from Intel. That short-term picture hasn’t changed, and is so far fairly predictable.

The bigger question, though, is what happens later this year as some of the unpleasant short-term factors start to go away. As I said last quarter, with the iPad performing better, that’s the first of those positive levers coming into effect, and if that higher ASP trend continues, that will be more grist to the mill. However, the far bigger effect obviously comes from the iPhone, which I still believe might return to revenue growth later this year or early next year. Lastly, the other major product lines – Mac and Apple Watch – have potential to contribute further to that growth. We should finally see new Macs in the fall if not before, which will unleash significant pent-up demand, while new Apple Watches combined with a much more capable watchOS 3 could drive more sales there. In other words, over the long term I remain very bullish about Apple’s prospects, and we could start to see signs of that in the September quarter, but especially in the December quarter and beyond.

Apple, Apple Watch, Earnings, iPad, iPhone, iPhone 6, Mac, Q1 2016

Apple Earnings: Bad News and Good News

April 27, 2016 Jan Dawson 1 Comment

Apple’s earnings for its fiscal second quarter (which I will refer to from here out as Q1 2016, as is my custom) were rocky. As Tim Cook said, it was a challenging quarter. There was bad news not just in iPhone, where Apple had already suggested there would be, but in other areas too. It’s worth enumerating exactly what those sources of bad news are to understand what’s going on at Apple. But there was also some good news in the earnings, which is particularly important when looking at the longer term. This post outlines both, starting with the bad news.

All three major product lines shrinking

Yes, iPhone shipments and revenues dipped year on year for the first time, and that was a major cause of the overall problems. But what compounded it was that Apple’s other two major product lines were shrinking too in the quarter:The iPhone decline was new, but the trend line in Mac sales has been worsening consistently over the past year, and has now been below zero for the past two quarters. That’s significant, because for a time the Mac was offsetting shrinkage from the iPad, such that combined revenues from the two were rising or steady. Now that this aggregate number is also in the red, the declining iPhone sales just exacerbate the problem.

iPhone ASPs falling

Besides the stellar growth in iPhone sales the iPhone 6 prompted, it (and the iPhone 6s) also helped drive significantly higher average selling prices. The chart below shows ASPs on a cyclical basis, so you can see the trend over the past several years and where Q1 2016 should have landed, and where it did land: iPhone ASPs As you can see, at the end of 2014 ASPs dramatically increased as a result of larger, more expensive phones, and higher storage tiers. The 2015 ASPs were above 2014 ASPs for the entire year, but Q1 2016 saw ASPs dip, below the previous year’s number (and below even 2011, which was next highest for Q1). All of this suggests a combination of mix shift toward lower-tier and older iPhones, as well as possible discounting in some markets. Since ASPs have a direct impact on margins, that’s not good news. Worse still, Apple is projecting even lower ASPs in Q2 driven by a combination of inventory changes and sales of the iPhone SE.

Softness in China

China has been a major driver of Apple’s growth over the past couple of years. The relationship with China Mobile, expansion of better cellular networks in China combined with expansion in Apple’s distribution, and then the launch of larger phones all contributed to outsized growth there. Over the last couple of quarters, though, things have changed dramatically:Whereas China accounted for half or more of the company’s revenue growth for several quarters, it’s now accounting for half its year on year shrinkage. One of Apple’s biggest drivers of growth has become a driver of decline. Again, the biggest culprit is iPhone sales and the massive iPhone 6 year, and the underlying decline in Mainland China is much less dramatic than reported results for the Greater China region, which includes Hong Kong. But for the time being, this is more bad news.

What you have overall, between the three major declining product lines, falling iPhone ASPs, and softness in Greater China, is a perfect storm of sorts that’s driving the current problems for Apple. What, then, is the good news in all this?

iPhone decline is temporary and cyclical

As I wrote earlier this week, the most important thing to understand about iPhone growth is that it’s temporary and cyclical. That is, the massive growth Apple experienced over the last 18 months or so was entirely down to the introduction of larger phones, and demand is now simply returning to its prior trajectory. The iPhone shipments number Apple reported was bang on with the projections I shared earlier this week and therefore also absolutely in line with the pre-iPhone 6 trend. That suggests (and Apple’s guidance for next quarter confirms) that iPhone growth should be back on track later this year, at high single digits or low double digits. The iPhone SE will depress margins, especially because it’s going to sell best during the annual trough in high-end sales, but for the same reasons, ASPs should recover by the end of the year when a new flagship phone launches. In the meantime, it should help fill that usual trough in sales a little, boosting sales above where they would otherwise be.

The other thing to bear in mind is that, though the iPhone 6 upgrade cycle was itself something of a one-off, all those who bought phones during that cycle will want to upgrade at some point. What was notable about this down quarter in iPhone sales was that Tim Cook said the last six months were the highest ever for Android switching. That implies that what fell short during that period was upgrades. That, in turn, suggests that when this base of iPhone 6 buyers finally does upgrade in large numbers – likely between 2-3 years from their purchase – we could see another big bump in sales, an aftershock of sorts. The biggest impact would hit in a roughly eighteen month period from this September through the following March, which provides more reason for optimism about longer term iPhone growth.

Signs of iPad recovery

It’s easy to focus on the decline in iPad sales, which has been problematic for Apple over the last several years, especially as the Mac has stopped growing. But the reality is that there are signs of recovery in iPad, albeit not growth just yet. But the rate of year on year decline has been slowing steadily, and on the earnings call Apple took the unusual step of signaling where it thinks they’ll come in next quarter, at least directionally. Here’s the trend line for the past couple of years:That rate of decline has improved for three of the last four quarters. Apple’s guidance for Q2 2016 was that this would be the best year on year compare in two years. That suggests a shrinkage of less than 14% (since Q3 2014 was the previous low within that period, at 14% – I’m assuming the 8% it achieved in Q2 2014 is out of the 2-year window). (Update: I’m told by Jason Snell that it was “over two years” and the transcript confirms that, so the 8% might well be within the window after all). That’s obviously not stellar, but it continues and even improves the trend over the past year or so of slowing declines. As this decline slows, that puts Apple in less of a hole that it has to dig out of.

Reasons to believe the Mac will recover

There isn’t anything in the recent Mac results that provides reasons for optimism – as I said above, the results show a steadily worsening trend in the case of the Mac. However, I believe at least part of the reason for the decline is that as of the end of the quarter, Apple hadn’t updated most of its Mac lineup in a long time. The Macrumors Buyer’s Guide listed the whole lineup as “don’t buy” because of the length of time since the last upgrade. Obviously, the MacBook has since been updated, but the rest of the lineup hasn’t. As with iPhones, the evidence is that new customers aren’t the problem here – Cook made much of the high “new to Mac” numbers this quarter. The issue is once again upgrades, and there we should see better numbers later this year as Apple upgrades the product line with new Intel Skylake chips. The timing of that change is hard to predict, but it should help the Mac revenue growth line turn positive again, helping to offset the smaller iPad decline.

Other new products driving growth

The Apple Watch isn’t broken out in Apple’s results explicitly, but it has contributed meaningfully to the overall revenue line over the past twelve months. The Other Products line where it sits includes both the iPod and accessories, which had been declining fairly significantly, but that segment’s revenues have been growing year on year since the Apple Watch launch. In the first part of this year, that growth is likely to be modest, but once again come the fall things should look better as Apple updates the hardware and drives new sales.

Another interesting new product that’s driving growth is Apple Music, which now has 13 million paying customers. That’s good for a run-rate of a little over $1.5 billion on an annualized basis, and the growth rate (around 25-30k new subscribers per day) should see Apple get close to 20 million by the end of the year, which in turn would drive annualized revenue of $2.3 billion. Given that iTunes Music generated around $4 billion at its peak, and is now generating much less, this new service is on track to begin driving meaningful growth for Apple in the music category again. More broadly, Services continues to be one of the drivers of growth at Apple, driven not just by Apple Music but to a great extent by the App Store too. The good thing about that growth is that it is driven by the growing base rather than sales of new devices, so to the extent that Apple is still adding new iPhone customers, it should continue to grow even as iPhone shipments slow down for a period.

All signs point to a return to growth in the fall

All of this taken together points to another couple of tough quarters for Apple as the perfect storm of declines across its three major product areas, its second most important region, and iPhone ASPs hits home. But it also points to reasons for optimism come the fall, when the iPhone should start to rebound, Mac sales should be stronger, a new Watch should drive sales there, and iPad shrinkage will be lower. The narrative Apple needs to be spinning is less about Services, though those are an important component of future growth, and more about the fact that the current dip in revenues is temporary. There were some references to that in the earnings call yesterday – Tim Cook used the phrase “pause in our growth,” suggesting that he believes this. But of course Apple doesn’t provide guidance beyond a single quarter. That may need to change if it wants to get investors back on board.

Apple, Apple TV, Apple Watch, Apps, iOS, iPad, iPhone, Mac, Operating Systems, OS X, Strategy

Apple’s Playbook

September 10, 2015 Jan Dawson 6 Comments

One of the most interesting slides at yesterday’s Apple event was one that Tim Cook used in the context of introducing the new Apple TV:What I found striking about this slide was that it was a great summation of Apple’s playbook for its tightly integrated approach to hardware and software:

Powerful Hardware
Modern OS
New User Experience
Developer Tools
App Store.

This playbook was first introduced with the iPhone, although arguably it wasn’t fully fleshed out until 2008, when the developer tools and App Store elements arrived. This approach was then applied again both to the iPod Touch when that launched, and when the iPad launched in early 2010, using the same “modern OS” – now called iOS. Later in 2010, Apple began applying some of these elements back to the Mac (announcing these changes at an event called “Back to the Mac”), starting with the Mac App Store, and continuing since then with a variety of elements borrowed from iOS.

With this as background, it’s no surprise that Apple felt bound to include an App Store in the first version of the Apple Watch, but out of an abundance of caution and a sense of urgency, it was a diluted version of the App Store concept. Only with the launch of WatchOS 2 this month will Apple fully embrace its own playbook for devices when it comes to the Apple Watch. And as of yesterday, we now know that Apple is applying this same playbook to the Apple TV too, something that’s seemed inevitable for quite some time now.

With the release of WatchOS and the announcement of the new Apple TV, Apple now has the same strategy for hardware and operating systems for every element of its portfolio for the first time. The question now becomes which new categories Apple might apply this strategy to in future, and one obvious possibility is cars. Look at that list of bullet points that make up the Apple playbook – is there any element of this that doesn’t apply to cars?

The other thing that’s interesting about all this is that this strategy puts developers at the heart of Apple’s formula for success. Three of the bullet points are about what Apple brings to the table for end users – the hardware, the software, and the user experience these two elements tightly integrated create. The fourth and fifth bullet points are about what Apple provides for developers – the tools to create the apps, and the channel to get these apps in front of customers and make money from them. I think this is a reflection of a genuine understanding on Apple’s part that its devices would be far less meaningful without these third party apps.

Given what’s happening now with Apple Watch and Apple TV, I’m expecting to see a ton of innovation from developers in creating new experiences that are hard to imagine today. We’re about to see the same sort of flourishing of new apps and business models around these devices that we’ve already seen around the iPhone and iPad. And that in turn will reinforce the value of these devices for end users, while creating significant new revenue opportunities for developers.

Apple, Apple TV, Apple Watch, Apps, iPad, iPad Pro, iPhone, iPhone 6S, Keynotes

Apple September 2015 event quick take

September 9, 2015 Jan Dawson 13 Comments

Note: I’m cross-posting this piece from the Jackdaw Research website, where it went out earlier today as a media comment on Apple’s event. I should have more in-depth analysis on the event here and on Techpinions in the next few days. My preview piece from Tuesday is here.

Apple’s September event always sets the tone for its entire year – new iPhones are announced, and the iPhone makes up the majority of Apple’s revenue and profits, and the performance of the iPhone business largely determines overall growth rates, at least for now. But today’s event, like last year’s, added another new product category that should drive significant new revenue for Apple and for developers, and arguably the new Apple TV was one of the biggest and most important things announced today.

iPhone

The new iPhones have enough new features to make them an interesting upgrade for those who always have to have the latest device from Apple, with 3D Touch the biggest new feature. The name of Force Touch badly needed to change, since it always sounded a little like a form of assault. I’m no convinced 3D Touch is the right name, but it conveys the concept reasonably well, in that the functionality is about a more layered interaction. 3D Touch itself should make navigation and interaction much quicker and easier, but it will mean something of a learning curve for users, because there won’t be any visual cues indicating what a 3D Touch might do, a problem the Apple Watch suffers from as well. For anyone with a two-year old iPhone, which includes the vast majority of iPhone users who will upgrade in the next year, this will be a significant upgrade. For all the concerns about a down year for iPhones, I believe Apple will have another year of year on year growth, though likely significantly slower year on year than in the iPhone 6 cycle.

I’ve been saying since early last year that Apple should launch its own device installment plan for iPhones, and now it’s launching one, with the iPhone Upgrade Program. This is a huge opportunity for Apple to take control of the customer relationship away from the carriers, and that in turn is a big risk factor for carriers, which will now cede some of that relationship to Apple. Arguably, only Apple has the infrastructure in place to offer this kind of plan to customers, so this will also be a further differentiator against competitors.

Apple TV

The Apple TV has been described as a hobby at Apple for too long, and today the transition to a product worthy to sit alongside Apple’s other products begins. The new SDK will create a huge new opportunity for both existing and new developers, both in gaming and content, and in the process it’ll make the device more compelling for end users too. But what will really change the Apple TV is the launch of the Apple TV service a few months from now, because only then will the Apple TV be capable of becoming the only device you need to plug into your TV. In the meantime, Apple is going to bring casual gaming and a much broader range of apps to the platform, and especially for cord cutters, the Apple TV might well become the only device they need.

One interesting wrinkle is that Apple is giving developers less than two months to create apps for the Apple TV, which is by far the shortest time it’s ever given developers for a completely new SDK. The iPad, which leveraged what had been known as iPhone OS, gave developers 66 days, while the original iPhone gave them 127 days and the Apple Watch debuted 157 days after the SDK was released. That doesn’t give developers a lot of time, but it likely reflects the shared elements in tvOS compared with iOS on iPhones and iPads.

Apple Watch

Though a minor announcement at the event this week, Apple Watch OS 2 is going to be enormously important for the Apple Watch and for Apple. An Apple Watch running OS 2 is best thought of as the version of the Watch Apple would have wanted to launch right off the bat, if it could have. The first version of the Watch software was good, but the reality is that the apps are sorely lacking, in large part because of the heavy dependence on the iPhone for functionality. With Watch OS 2, that all changes, and apps should be snappier, more functional, and far more varied in their capabilities. I believe this new phase of its history will change the Watch as much as iPhone OS 2 changed the iPhone, and make it a much more compelling device, while creating big new opportunities for developers. The new watch and band options should also help diversify the appeal of the Apple Watch in both the premium and low-end segments, with both the Hermes watches and the new colors for the Sport option. This, coupled with the holiday season, should make for a really big calendar Q4 for Watch sales.

iPad

The iPad Pro has obvious similarities to Microsoft’s Surface, with its detachable keyboard and stylus. But the big difference is that the iPad is designed first and foremost as a standalone tablet, and the keyboard and stylus are optional extras. The Surface has always felt compromised as a pure tablet, because everything is geared around the use as a quasi-laptop. The Smart Keyboard and Pencil will add a lot of value for certain kinds of users, but the iPad Pro could easily be a replacement for a family PC for gaming or TV viewing. But with the keyboard, multi-tasking, and new apps and functionality from Microsoft and Adobe among others, it could also become a fairly compelling option in the enterprise. At a minimum of $1000 including the Keyboard and Pencil, the iPad won’t be all that price competitive against a basic PC, but with the new internals, it’s actually quite a powerful computer in its own right.

The key for the iPad is that Apple is now engaged in what you might call salami tactics here; in other words, Apple is seeking to add to the iPad opportunity incrementally with a number of smaller moves, and I see the iPad Pro in this context, along with Apple’s partnerships with IBM and Cisco. The iPad Pro by itself won’t dramatically change iPad sales, but should provide a good boost for sales, especially in conjunction with the advancements in multitasking and split-screen functionality in iOS 9. I’m still skeptical that iPad sales will start growing again over the longer term, but I think they might stabilize, and that will happen in large part due to increasing education and enterprise sales rather than renewed growth in the consumer market.

Apple, Apple Watch, iPhone, iPod, Studying Apple

The future of Apple Watch will be more like the iPod’s than the iPhone’s

July 22, 2015 Aaron Miller 2 Comments

Note: this is the second post from Aaron Miller, who is now authoring occasional posts on Beyond Devices under the Studying Apple banner. Aaron is on Twitter at @aaronmiller.

When Apple announced its earnings this week, they were as reticent as they promised to be about the number of Apple Watches sold. Still, some details did leak out giving us a sense of Watch’s first quarter. (Be sure to read Jan’s post where he estimated sales based on what we know.) Here they are, summarized:

The Other category, where they include Apple Watch revenue, grew sequentially by nearly $1 billion.
Apple Watch customer satisfaction is higher than for the iPhone and iPad.
Apple sold more Watches in its first quarter than in the first quarter of iPhone or iPad sales.

The last detail is probably the most interesting one. Comparing the Apple Watch to the iPhone implies a story about a massive future product, if not necessarily about a current one.

But the Apple Watch is hugely different from the iPhone. In fact, it’s much more like the iPod, a product now relegated to Apple’s history despite the recent updates. With iPhone at the top of everyone’s mind, we’re too quick to forget the iPod story and how similar it might be to the one playing out with the Apple Watch.

An Ecosystem Product

First, and most importantly, the Apple Watch is an ecosystem product. Right now, the Watch only works as an extension of the iPhone. Its upper boundary is the total number of iPhones in the world.

This makes the Watch much more like the iPod than the iPhone. From the time the iPod first launched, it was a product tied to a computer, first to Macs then eventually to Windows computers as well. ¹ (Remember the Digital Hub strategy?) Just as the iPod existed to enhance the Personal Computer + iTunes ecosystem, the Watch exists to enhance the iPhone ecosystem. The iPhone, even if tied to iTunes early on, was never merely an ecosystem enhancement—nor designed to be one, like the iPod or Apple Watch have been.

Naturally, we expect the Watch’s reliance on iPhones to change over time. LTE and GPS seem like inevitable Apple Watch additions, for example, as does a Watch-native App Store. With true third-party apps coming soon, reliance on the iPhone will diminish even more. But there’s one limitation that may always tie Apple Watches to iPhones: the screen. Absent new technology to overcome how limiting such a small screen can be, the Watch will continue to be a capable iPhone enhancement more than a standalone product. The iPod’s limitations—most prominently, no native way to get music on it—similarly tied it to computers.

An Unsubsidized Product

The iPhone spent its first year not subsidized in the traditional way by AT&T, reflecting Apple’s intent to turn the mobile market on its head. Clearly this stood in the way of sales, because Apple changed tack just a year later with the iPhone 3G and created a much lower entry price for customers.

There are no carriers to subsidize Apple Watch purchases, and it’s hard to imagine such a subsidy ever materializing. (Perhaps we’ll all have wrist-phones someday, but taking calls on an Apple Watch is a current feature and people aren’t going nuts about it.) Without a subsidy, Apple’s profit margin has to come directly from customer’s wallets instead of indirectly through carriers.

The iPod hoed that row, and did just fine. It did sell less total units than the iPhone and had a slower upgrade cycle, but it was a record-breaking product nevertheless.

A Category-Defining Product

It amazes me how easily people forget what MP3 players looked like before the iPod. They were clunky and difficult to use. They were full of deal-killing trade-offs between physical size, capacity, battery life, and user interfaces. Some of the products were especially weird as companies tried to find niches. The iPod eliminated the majority of those trade-offs for a higher, but manageable, price.

To be clear, the Apple Watch category is not just smartwatches. The correct category is wearables, and wearables right now, at the birth of the Apple Watch, are very similar to the early MP3-player market. Some are huge and multi-functional. Some are svelte and limited. Some are banking on unique features trying to find a niche.

Because of the Android ecosystem, the Apple Watch may never wholly dominate the market like the iPod did, but it will define the category. Of course, most of Apple’s products shape their categories. But the iPod defined the category. It organized and crystalized the MP3 market. Back then, people weren’t sure what to make of MP3 players and their future. The same is true of wearables, especially smartwatches, today.

What the Future of Apple Watch May Hold

If the Apple Watch story does end up similar to the iPod story, we may see the following things play out:

The Watch will grow the iPhone ecosystem by driving switchers. The famous iPod halo effect gave people a reason to consider a Mac where they never had before. (This was helped in no small part by Apple Stores, where people would go in to buy an iPod and walk out with a new computer.) This effect is not trivial. PC sales as a multiple of Mac sales have been in steady decline since the iPod. It might be a coincidence that Apple reported the highest ever level of Android switchers this quarter, but expect to see even more.
The Watch will define and dominate the wearables category. If the Watch moves like the iPod did, you’ll see niche players like FitBit disappear. You’ll see some large competitors play copycat on features and design, but they won’t reach comparable market- or profit-share. Eventually, all wearables will be measured by the Apple Watch, just as all competing music players were measured by the iPod.
The Watch will get differentiated in more than just size and build materials. At its peak, the iPod branched into everything from the Shuffle to the Classic to the Nano in order to fit multiple budgets and preferences. It’s reasonable to see Apple doing something similar with the Watch. If I were to guess, I think the fitness tracking will be a core feature across all Apple wearables. (Imagine in three years the inexpensive Apple Fit, where Apple reinvokes the old FitBit-style devices killed off by the Watch. People will laugh at it. When they do, remember the iPod Shuffle.) Being an ecosystem product that can rely on iPhones, the Watch gives Apple the flexibility for slimmer features to get lower price points.
The Watch will see slower customer upgrade cycles. In this regard, the Watch will be like everything Apple sells except for the iPhone. ² iPods continued working for many years beyond their purchase date. (My son is using a sixth-gen Nano that’s now over five years old.) As a result, iPod sales flattened before the iPhone entered on the scene, mostly because Apple had saturated the market and upgrades weren’t moving quickly. Just like with the iPod, expect Watch buyers to be much slower upgrading than they are with their iPhones.
The Apple Watch could eventually work with Android phones. I’m not at all confident on last this point because the history lines up much less reliably. Mac market share at the launch of the iPod was a small fraction compared to iPhone market share today. Apple had to get the iPod out to Windows to have any kind of customer base for it. Obviously, there’s no comparison between the 25 million Mac users in 2002 and the nearly 500 million iPhone users today. Ultimately, this decision will depend on whether Apple feels the Watch serves better as an exclusive feature of the iPhone ecosystem or that it needs to sell to a larger market, followed by a halo effect to drive switchers after they’ve bought an Apple Watch. ³

Certainly, the Apple Watch won’t follow the iPod in every detail. But if the Watch does approximate the iPod’s history, Apple should be incredibly happy. It will be a historic product, and people will forget what life was like before it launched.

Notes:

Only the iPod Touch, which owes its DNA to the iPhone, could eventually operate entirely without a computer. But consumers see it essentially as a less capable iPhone, not a dramatically better iPod. Not coincidentally, it’s been a footnote to the iPhone’s success more than a dramatic culmination to the iPod line. ↩
A recent example: when iPad sales began flattening, some writers declared failure, because they were expecting iPhone-like growth. Smarter analysis recognized that 1) the market for tablets is smaller, and 2) without subsidies, the upgrade cycle is longer. ↩
Obviously, an Android-capable Apple Watch would mean a different Watch than we have now, including a native App Store. Such a feat, though, is not out of the question. ↩

Apple, Apple Watch, Earnings, Q2 2015

Apple Watch sales

July 21, 2015 Jan Dawson

So, after yesterday’s preview post on Apple Watch sales, I thought I’d have a stab at interpreting today’s earnings report and call on this specific point. Yesterday’s post highlighted the challenges and pitfalls inherent in such an exercise, so I’ll walk you through all my assumptions so you can follow along and decide whether or not you agree on the way.

Other Products revenue

As I said yesterday, the starting point for this analysis is revenue from “Other Products”, the Apple segment which includes all hardware products but the big three, along with both Apple’s own and third party accessories. That category has been in decline, but not a very consistent rate of decline. Revenues this quarter were $2.641 billion in this segment, compared to $1.767 billion a year ago (on the restated basis Apple provided in January, which includes Beats headphones). That means growth of $874 year on year, and $952 sequentially. I always find annual growth a more useful measure, so we’ll focus on that. I’m going to assume that Other Products revenue excluding Apple Watch declined by 10%, to around $1.6 billion.

This is based on the recent rate of decline, and you could argue that we might put this number as low as $1.4 billion, but I’m not necessarily ready to go quite that low. Cook confirmed on the earnings call that both iPod and accessories shrank year on year, but didn’t say how much. If we take $1.6 billion as our number, that gives us just over $1 billion in revenue for Apple Watch, which is obviously a lot lower than I talked about yesterday.

Average selling prices and unit sales

The next challenge is to set an average selling price (ASP) to divide this revenue figure by to get a unit shipment number. My assumption for average selling price had been that it was likely somewhere around $500, which is a nice sort of midpoint between the lowest and highest prices for the two mainstream models, the Watch Sport and Watch, implying that the two had sold in roughly equal proportions, and/or that Edition sales helped push ASP up a little if Sport sales outweighed Watch sales.

However, there are a couple of things that suggest we should moderate this: one is some survey data that suggests a heavy skew towards Watch Sport sales, and therefore a lower ASP. But the stronger signal came today from Apple itself. On the earnings call and in conversations with various reporters, Apple’s executives have suggested that sell-through for the first nine weeks for Apple Watch were ahead of the same period for the iPad. That’s a very specific thing to say, and deliberately doesn’t give us a specific number to work with either, since the iPad was on sale for 12 weeks when its first quarter of sales was reported. So we don’t have a 9-week number for iPads. The first reported quarter number was 3.27m iPads shipped (not necessarily sold through), so perhaps we apply a 75% figure to that, which assumes a somewhat straight-line trajectory, which may or may not be realistic. 75% of 3.27m is 2.45m. If we want, we can also make an adjustment for the fact that this is shipments, not sell-through, and perhaps reduce it a tad more. But on this basis Apple might have sold 2.5 million Apple Watches by the end of the quarter.

So let’s take that number and figure out what it implies about average selling prices. $1 billion in revenue divided by 2.5m shipments suggests an ASP of exactly $400, which is quite a bit lower than my original $500 figure. But if sales did indeed skew heavily towards the Watch Sport, and if most buyers didn’t buy extra straps and so on, it’s just about realistic.

Moving to a range

That gives us a very specific set of numbers:

$1 billion in revenue
2.5 million shipments
$400 ASP.

But that’s a lot of false precision, because it’s based on all kinds of assumptions. The revenue might have been as high as $1.2 billion, for example. ASPs might have been higher – perhaps as much as $450. Applying these numbers gives us more of a range:

$1-1.2 billion in revenue
2-3 million shipments
$400-450 ASP.

That seems like a reasonable set of numbers to me, and I’m pretty happy with those. I’m curious to see what numbers others come up with.

Looking forward

I ended yesterday’s piece with a bit on looking forward, and I feel really comfortable with the qualitative side of that, even if less comfortable with the quantitative side. Apple execs on the call today certainly hit many of the points I mentioned in that section. But one thing that I found interesting on today’s call was that sales are still ramping at this point, from April to May to June, contrary to my assumption that things might slow down a little in Q3 and then pick up again in Q4. I’m very curious to see how this actually plays out now that the Apple Watch is on sale in all but one of the countries where Apple has stores, and certainly all of its major markets.

Apple, Apple Watch, Earnings, Q2 2015

Evaluating Apple Watch sales

July 20, 2015 Jan Dawson

There’s going to be tons of noise this week about Apple’s earnings, with a particular focus on the sales of the Apple Watch. However, there are two key problems with all of this, and they are:

Apple almost certainly won’t give us the number of Watches sold, and estimating that number requires making a series of assumptions, which taken together make the resulting number pretty imprecise
Whatever the number various people come up with, we’ll be deluged with articles saying that the Watch has somehow flopped, that sales have fallen short of expectations, and so on, because it’s enormously difficult to know how to evaluate the number.

The rest of this post fleshes out these two points, with a view to providing some context for tomorrow’s earnings call.

The difficulty of estimating Apple Watch sales

As a quick reminder (for a longer primer, listen to this week’s episode of the Beyond Devices podcast), Apple Watch revenues will be reported under the “Other Products” segment, one of Apple’s five product segments, as of earlier this year. And in that Other Products category, you’ll also find revenues from the iPod (until recently broken out separately), third-party accessories, Apple’s own accessories (including Beats headphones), and Apple TV. Last quarter, that was a $1.7 billion revenue bucket, which was down about 10% year on year, but the rate of growth or decline has been fairly unpredictable. So the first thing you have to do if you want to calculate Apple Watch revenues is to make a set of assumptions about the rest of this segment and what results would have looked like without the Apple Watch. Perhaps you decide that revenues would have been around $1.6 billion based on that same 10% year on year decline, though in reality the range is likely anywhere from $1.4 billion to $2 billion based on the trends from the past two years. That, by itself, gives you around 1 million units’ worth of softness in your estimate between the two extremes.

At that point, you have your Apple Watch revenue number, and you’re ready to move on to the next step, which is figuring out how that revenue number translates to unit shipments. The challenge here, of course, is that this is easily the widest price spread of any Apple product: from $349 all the way up to $17,000 (and that’s just the US dollar pricing). The assumptions you make about the mix between the various models are going to make a huge difference to the unit shipment number you come up with. In the grand scheme of things, Edition sales are likely to be tiny, but at that price point (around 20 times that of the midpoint of the other models), small differences in your assumptions will make big differences in your outputs. For the sake of illustration, I’ve presented in the table below three possible scenarios, which all give roughly the same total revenue figure of around $4 billion for the quarter:

However, what you’ll see is that, depending on how you flex the mix between the three models, you’ll get a very different number of shipments – under these three scenarios, anything from 3.15 million to 7.8 million. And one of the biggest variables is the number of Edition sales you assume, as you can see from the third column. However, as the third scenario shows, if you shift the mix between the other two models radically, you get a similarly significant effect. So much depends on your assumptions. For what it’s worth, none of the three scenarios above represents the mix I’m expecting to see – they’re purely illustrative. I would think we might see around 5 million sales, at around $3-4 billion in revenue, but along with everyone else, I’m guessing now, and I’ll be guessing to an only slightly smaller extent after the results are out.

(Note: an early version of this post had an error in the spreadsheet above, which has now been corrected – the core point remains unchanged).

What constitutes success?

Now that we’ve established the pitfalls associated with estimating actual numbers, we move on to the other big question: how we should evaluate those numbers. This also goes to the heart of the question of why Apple likely won’t give us any numbers, which comes down to two things:

Early in a product cycle, the actual numbers are as much a function of supply as of demand, and so they don’t reflect actual demand accurately
Apple has barely started to sell the Watch, there are significant updates coming later in the year, and the word-of-mouth marketing which I still expect to be a big component of how sales grow has barely got off the ground, because there simply aren’t that many Watches out there.

You could make a strong argument that, whatever the actual numbers are, the Watch launch has already been a huge success, for two reasons: firstly, demand continues to outstrip supply, which (assuming supply isn’t being artificially constrained to create the illusion of shortages) is always a good sign; secondly, Apple is now catching up to demand across 18 SKUs and many variants behind those, which is logistically an enormous achievement by itself. With previous major product launches, there was essentially one SKU – one iPod, one iPhone – or slight variations by storage capacity. One of the biggest challenges from a supply chain and logistics perspective for the Watch has been the sheer variety of the individual models and the difficulty of predicting which would be most popular.

Another way to look at sales is in the context of past Apple product launches and there, too, the Apple Watch likely comes out ahead. The iPod sold 125,000 in its first quarter, the iPhone sold 270,000, and the iPad sold 3.3 million. Watch sales might be close to the iPad launch, but I suspect they’ll be higher. However, unlike the iPad, which was a standalone device from the beginning, the Watch is a companion device to the iPhone, so its addressable market is arguably narrower. Compare Apple Watch sales to the sales of any other smart watch or even fitness device, though, and they again come out on top. Fitbit sold 3.9 million devices of all kinds in Q1, so Apple Watch might again be close to that this quarter, but probably slightly above it, and Fitbit is by far the market leader in this category, with smartwatches a much smaller category (and a small subset of Fitbit’s device sales).

What next?

Is there any sense in which the Apple Watch can be considered not to have been a success, assuming the numbers come in roughly where I think they will? I think so, but it’s mostly a matter of timing. What I mean by that is that I suspect the Apple Watch will quickly get to the point where it’s Apple’s second-highest selling product, behind the iPhone but ahead of the iPad, probably either in Q4 this year or sometime next year. But for now, it’s quite a bit smaller than Apple’s other products. It doesn’t seem to be hitting the same mainstream consciousness as other recent Apple devices as quickly.

I regularly meet people for whom my Apple Watch is the first one they’ve seen in the wild, as it were. And I continue to believe that word of mouth marketing is the most effective form of marketing for the Apple Watch, as a new product in the market, and as a product that’s distinct even from other entrants in the category. My wife and I both have Watches, and when people spot them, they often ask, “How is it?” or “Do you like it?” And we both respond, “It’s great” or words to that effect, but I continue to struggle to articulate the reason why they’d be great for everyone, or even for most people. My Watch is enormously useful to me because of the notifications especially, though I also enjoy the at-a-glance information on the screen at all times, and the fitness tracking is a nice bonus.

I suspect that what will really start to change this is the emergence of a really strong set of third party apps, and that will have to wait for WatchOS 2 in a few months’ time. Apps were critical to the success of the iPhone and iPad, and I think they’ll be even more critical to the success of the Watch, and I’ve said this from the start. It’s only when you get innovation happening among third party developers about what’s really possible when you have a wrist-worn, always-present supercomputer that you’ll really start to see the potential in this category. And allowing those developers to run their apps on the Watch itself, and to make use of both the hardware and software features that Apple’s own apps already have access to will be a huge step forward.

As such, I’m expecting that Q3 may be a quieter quarter for the Watch, in which Apple may well sell fewer devices than in Q2, but Q4 will be absolutely huge, both because of the impact of WatchOS and native apps, but also because of holiday buying, at a time when many more people will know someone who has a Watch and loves it.

Apple, Apple Watch, Notifications, Reviews, Smartwatches

A week with the Apple Watch

May 1, 2015 Jan Dawson 2 Comments

I’ve now spent a week with a couple of Apple Watches. The first of my pre-orders to arrive was the one I ordered with my wife in mind, a 38mm Sport with a white sport band, which arrived on the 24th itself. The one I ordered for myself arrived this week, and that’s a 42mm Watch with stainless steel case and black sport band. I’ve worn that for the past two days, but wore the other for several days first. I don’t normally do reviews here, and goodness knows there are plenty out there from people who do, so this isn’t a review in the “should you buy it?” sense, but rather a set of observations from my use of the Watch.

This is going to be a significantly longer post than I’m used to writing here, so bear with me, and feel free to skim through using the headings as a guide to what’s in each section. Continue reading →

Apple, Apple Watch, Reviews, Smartwatches

What to look for in the Apple Watch reviews

April 6, 2015 Jan Dawson

With the Apple Watch becoming available for pre-order on Friday, it’s likely that we’ll see reviews of the device from a handful of people who’ve been given early access to the Watch at some point this week. I am not among them, but I wanted to share what I’m looking out for in these reviews when they do land, and which I think will make a big difference in how the Watch sells.

Notifications

I wrote a piece about Apple Watch and notifications a few weeks ago, and I think how the Watch handles notifications is critical, both because I think it’s an essential part of Apple’s position around intimate computing, but also because other smartwatches have handled notifications so badly. There are two ways to solve this notification problem:

Pass fewer notifications to the wrist – i.e., allow users to filter those notifications they want to receive on their Watch compared with their phone, either by app or ideally even more granularly
Deal with notifications better – allow users to manage these notifications more effectively when they do arrive. For example, notifications might arrive more discreetly, the user can dismiss them more easily, and/or the user can act on them effectively on the device. There are early indications that the Watch checks at least two of these boxes.

Battery life

I was tempted to put this first, because I think battery life on the Watch could put a huge damper on the success of the device if it’s not adequate. Given the reports we saw earlier this year, and Apple’s own public statements at the recent event about battery life, it’s still somewhat up in the air whether the broader group of users who now have their hands on the device will find it adequate. It’s clear it won’t last more than a single day for most users, but the question is whether it can effectively get through a whole day, especially for users with lots of notifications and other usage on the device. Related to all this is the experience of having to remove the Watch for charging nightly – does this end up being annoying, or is it something the user quickly gets used to?

Complexity / richness

These are two sides of the same coin. Following the Spring Forward event, a number of reporters worried that the Apple Watch was overly complex. That wasn’t my own experience, but I do think that the Apple Watch does far more at inception than the iPhone did, because it’s launching into a very different world. That could come across in two ways, however: as complexity, or simply as a rich experience. Complexity would manifest itself in user confusion, frustration, a sense of not being able to get things done. Richness would manifest itself in a sense of ease of use paired with a sense that there’s more to be discovered – in other words, the basic experiences work well and intuitively, but there’s more to the device than just those. It’s a tricky balance to strike, and so I’ll be looking out for how the early reviewers evaluate the Watch’s performance on this axis. The how-to videos on Apple’s Watch site suggest that there is a learning curve, but none of the interactions there look overly complex.

New interaction models

Closely tied to that, but also broader, is the introduction of new interaction models, both between the user and the Watch and between users wearing the Watch. The Digital Crown, Force Touch, and Digital Touch are all new on the Watch, and they need to work really well for users to embrace them and for interaction with the Watch to be both pleasant and engaging. But Force Touch is particularly interesting because it’s the only one of these three that’s likely to have applicability beyond the Watch. The new MacBook has a new touchpad which uses a similar concept and haptic feedback to simulate a click, which I found amazingly convincing. But there are also rumors (including new ones today) about future iPhones incorporating similar technology. If Force Touch works well on the Watch, it could be critical to future interactions on the iPhone and iPad as well, so it’s important that it works well.

Third-party Apps

It seems like every time I update my iPhone apps recently there’s a new update for an app that I use which adds Apple Watch compatibility. That’s a good sign, and suggests that there should be a pretty robust group of third-party apps available for the Watch both while reviews are happening and especially at launch. But it’s impossible for me to judge whether any of these apps are any good, and whether they add significantly to the experience I already enjoy with these apps on my phone. I’m curious to see whether there are enough of these apps, and whether they’re good enough to really give reviewers a sense of how much value they’ll add to the Watch. I think third-party apps will be a big part of what makes the Watch compelling, just as they have been for the iPhone and iPad, and so this is another key thing to look out for.

When the novelty wears off

The hardest thing for reviewers to gauge will likely be one of the most important factors in its ultimate success or failure – whether the Watch is compelling enough as an addition to the iPhone that its appeal lasts beyond the initial period when the novelty wears off. I don’t know how long reviewers will have had the Watch by the time they do their reviews, but it may well not be long enough to draw a conclusion on this. The Watch, like the iPad, lacks a single compelling selling point. Rather, I think each user will have to discover their own reasons why wearing one makes sense. I believe that the Watch’s success in the first year will depend heavily on the experience early adopters have with it, and how they communicate about this experience with their friends and family. If they find it compelling, they’ll be able to articulate the value proposition far better (and more convincingly) than any Apple ad or store associate could. And that will be key to Apple’s ability to go beyond the early adopters into the mainstream base of iPhone users.