Today’s Apple event was notable for the fact that so much of what was to be announced had leaked ahead of time. On paper, that left very few surprises for the event itself, but of course what the supply chain leaks can never supply are the reasoning and narrative around new product announcements. And so during today’s event in San Francisco, it’s the storytelling around the changes that I was most curious about, and nowhere more so than around the death of the 3.5mm audio jack.
In the end, the way Apple is handling this transition is a mixture of pragmatism and vision. Normally, you’d want the vision first and the details second, but I think Apple made the right call here in getting the practicalities out of the way first.
Pragmatism first
The biggest risk with the elimination of the headphone jack was that for the first time a new iPhone would feel like a downgrade rather than an upgrade. The minimum bar Apple therefore had to clear here was to achieve feature parity between previous iPhones and the iPhone 7. As a practical matter, that meant giving people an option in the box that matched the functionality of what had previously come in the box, and that meant providing both Lightning EarPods and a Lightning-to-3.5mm adapter.
it’ll cost $19 if Apple’s sort of sorry, $29 if it’s not sorry, and if it’s free in the box then Apple’s really afraid of consumer backlash.
Of course, in the end, the adapter is free in the box, but that’s a sign of how much Apple wants (needs) this transition to go smoothly. It’s a transition driven by a vision, but it’s a long-term vision and in the short term Apple doesn’t want to lose any customers over it.
Vision second
So what is the vision here? Both Phil Schiller (in person) and Jony Ive (in disembodied voiceover) helped articulate it at the event. Here’s Schiller:
When you have a vision of how the audio experience can be, you want to get there as fast as you can and make it as great as it can be. And we do have a vision for how audio should work on mobile devices. And that takes us to our next feature: Wireless…it makes no sense to tether ourselves with cables to our mobile devices. But until someone takes on these challenges, that’s what we do. Our team at Apple has worked so hard to create something new that delivers on the opportunity of how good a wireless experience can be. That is why today we are so excited to show you a new product from Apple called Apple AirPods.
Ive encapsulates it even more succinctly:
We believe in a wireless future. A future where all of your devices intuitively connect.
If the iPad Pro is “the clearest expression of [Apple’s] vision of the future of personal computing”, then AirPods are the clearest expression of Apple’s vision of the future of audio on mobile devices. And the way AirPods pair to an iPhone is the best illustration of this future — here’s a tweet I posted with a short demo video from the hands-on area at the Apple event:
As you can see from the number of retweets and likes, that tweet struck a nerve. The pairing UX here is so much better than any Bluetooth pairing experience any of us have ever had before, and is the perfect instantiation of Ive’s comment about a future where all of your devices intuitively connect. It’s also a uniquely Apple experience, marrying hardware and software (and a proprietary wireless protocol) seamlessly in a way that creates a tightly integrated experience. Yes, it breaks the link with standards, but that’s classic Apple too, and it still leaves the door open to standard Bluetooth accessories connecting to the iPhone.
The vision is expensive — for now
The big problem with the vision? The $159 price tag. I’ve said all along that I was hugely skeptical that Apple would ship wireless EarPods in the box, and the biggest reason was that doing wireless right is enormously more expensive than doing wired right. Moreover, if Apple were trying to push a vision of wireless, they’d want to create something that wasn’t just good enough but truly outstanding, and that was never going to be possible at anything like the same margins as bundling EarPods that retail for $29.
In the end, of course, that’s turned out to be right — $29 Lightning EarPods are in the box along with an adapter that costs $9 when purchased separately, but the AirPods are $120 more than their Lightning predecessors. AirPods and wireless may be a vision of the future, but in the here and now they’re a little on the pricey side. This is where the pragmatism comes in — Apple had to use Lightning as a stopgap until such a time as the wireless future comes down significantly in price.
For those that want the future today (or in October, at any rate), there are AirPods and a range of W1-compatible Beats accessories ranging from $149 to $299. For the rest of us there are third party standard Bluetooth options and the Lightning EarPods. But I’m happy to bet that a couple of years down the line the price of headphones and earbuds using the W1 chip comes down signficantly to the point where the Lightning option is no longer necessary.
The context for next week’s Apple event is one of a maturing smartphone market, in two key ways: the devices themselves are becoming more polished, more reliable, and in many ways “good enough” even several years after purchase; and the market in developed economies is becoming saturated. This double-faceted maturity is causing smartphone sales – and especially premium smartphone sales – to slow and even to drop in markets like the US.
As such, it’s interesting that the three major threads in reporting about the new iPhones Apple will announce next week are:
Keeping the same general design as the iPhone 6 and 6s
Eliminating the 3.5mm headphone jack
Introducing new cameras, with the best only available on the larger device.
Of these three threads, two may be considered inhibitors to upgrades – however it’s positioned, the removal of the audio jack is likely to give some people pause, and the lack of a new design is also likely to make some people want to wait until the form factor changes next year. Among these three, only the camera improvements are a clear potential driver of upgrades, but the impact may be muted when it comes to the smaller device, and again those preferring that size may decide to pass this time around.
That seems like the obvious conclusion to draw from the reporting so far about next week’s event, if you focus on the likely hardware changes this time around. For context, here’s a table showing past annual iPhone hardware and software upgrades (you might need to click to enlarge it):
Note that I’ve necessarily simplified the lists of upgrades to focus on a few – the actual laundry list of big and small features would be much longer for each year. The point is, though, that each new iPhone comes out of the box with both new hardware features and new software features relative to the previous version. The software features are, of course, also available to those who keep their devices of recent vintage through iOS updates.
What Apple observers – especially in the press – tend to focus on is the annual hardware upgrade. That makes perfect sense – it’s what’s new, and it’s also what’s unique to the experience of buying that device over keeping last year’s. But of course the default upgrade cycle isn’t annual but biannual – the most common timeframe for upgrading an iPhone in the US and many other markets is every two years, not every year. Certainly there are those who upgrade every year, and those who upgrade on a longer cycle, but in terms of averages the mode duration is two years, and the mean is in that ballpark too.
That rather changes the picture in terms of thinking about the hardware upgrade cycle, so let me introduce a second chart that illustrates how this makes a difference:
Apple doesn’t generally talk about specs like processor speed or RAM, but I’ve included them because they’re the simplest illustration of the behind the scenes improvements made in each new iPhone. The key column in that table is the last one, because it is a much better indication of the hardware upgrades iPhone users upgrading every two years will see when the buy a new phone. This column combines the hardware improvements made in both the subsequent devices, all of which are present in the new phone.
Let’s go back to next week’s event. Apple will introduce what we presume will be the iPhone 7 and 7 Plus, with camera improvements, behind the scenes speed upgrades, and possibly some surprise features that simply haven’t leaked. But even excluding all of that, anyone upgrading from an iPhone 6 from two years ago will get:
3D Touch
Live Photos
4K video recording
Faster Touch ID
Noticeable speed improvements.
That’s already quite a bit – now add in camera improvements and whatever else is new in the iPhone 7, and it suddenly becomes a pretty compelling upgrade. This is the way to think about the iPhone upgrade cycle and what Apple announces next week. Apple tends not to talk about this, and it doesn’t tend to recap all the new features that were already in last year’s phones, but all that absolutely matters to the typical customer upgrading on a two-year cycle. And that’s why I suspect Apple may be able to get away with this departure from its normal upgrade cycle and the risks it’s taking with keeping the form factor from the iPhone 6 and 6s and ditching the headphone jack.
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’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: 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.
On Tuesday, Apple is due to report its results for the March 2016 quarter (Q1 2016 according to the consistent calendar labeling I use for these things on this blog). A major focal point in the earnings report will be iPhone sales, which Apple has already guided will be down year on year. I’ve been contacted by quite a few reporters to ask – in various ways – whether this is bad news for Apple. The thought I’ve tried to articulate in response is that the current quarter is best seen in the context of what you might call the iPhone 6 blip.
What I mean by this is that, if you look at iPhone sales growth over the several years before the introduction of the iPhone 6, there was a fairly clear pattern emerging – one of slowing year on year growth. Growth declined from an average of around 100% in 2011 to around 50% in 2012 to just 15% in 2013, and over the three quarters before the iPhone 6 was introduced, growth rates slowed by roughly 1 to 1.5% quarter on quarter, for an average of 15%. All of this was a sign of the increasing maturity of both the overall smartphone market and the iPhone in particular. Following a rapid expansion into new markets over the years from 2007-2011, Apple was approaching saturation of the available distribution channels, and many of those already in the smartphone market who could afford to buy an iPhone had one or one of its high-end Android competitors. Absent significant switching from Android to iPhone driven by a major change in the addressable market, that’s how things would have likely progressed.
Of course, what happened in late 2014 was that Apple introduced the iPhone 6 and 6 Plus, which did dramatically increase the addressable market for iPhones and drive significant Android switching. The result? A massive increase in the iPhone growth rate, to 46% in Q4 2014, 40% in Q1 2015, and 35% in Q2 2015. For some, this was the new normal for Apple, driving sky-high growth rates in a product that had appeared headed for only modest growth in a saturating smartphone market. Now that the iPhone 6 year is past, however, we’ve seen the first flat year-on-year quarter for the iPhone, and are about to witness the first year on year decline. Hence all the calls from reporters about whether we’re witnessing some sort of crisis.
The reality is that the iPhone 6 line really just caused a blip in the long-term trajectory of the iPhone. It’s impossible to know what iPhone sales would have done absent the introduction of the iPhone 6, but we can at least have a go at projecting sales on the basis of the prior trajectory. Given that growth rates were slowing by roughly 1-1.5% per quarter before the iPhone 6 launch, that provides a good starting point for such an exercise. The chart below shows the actual year on year growth rate (using 51m as a consensus from the professional Apple analysts) and the two projected rates based on 1% and 1.5% quarter on quarter slowing in growth. You can see the blip extremely clearly here:Now, if you apply those growth rates to iPhone sales to project what would have happened if Apple had continued as before without the massive bump from the larger iPhone 6 phones, you get this second chart. It shows actual sales (in blue), as well as projected sales using those slowing growth rates in gray and yellow:It’s a bit hard to tell exactly what’s going on in a chart with so much history, but I’ll zoom in a little bit in the next version, so you can see the last few quarters better:In this chart, you can hopefully see that that consensus point of 51 million falls right between the two projected data points for Q1 2016. In other words, it’s very much in keeping with the long-term trajectory in iPhone sales. The iPhone 6 blip is over, but if iPhone sales land roughly where the analysts expect them to, they’ll be right back on track with where they were headed before the iPhone 6 launched. That’s a big “if” – sales could come in above or below that number, which would suggest either that underlying growth had slowed more dramatically in the past, or that Apple has successfully pushed to a slightly higher long-term growth rate off the back of the iPhone 6 and 6S.
The other big question is what happens in the next few quarters, and whether Apple is able to stay on or above that long-term trend line. Remember that the trend line calls for a 1-1.5% reduction in year on year growth per quarter – on that basis, growth would slow to 6%, 5%, and 4% over the remaining quarters of 2016 with 1% shrinkage, or drop as low as a 1% decline by the end of the year. This is obviously far too precise for a real-world projection, but it gives you some sense of that trajectory if it does continue. It’ll be very interesting to see Apple’s guidance for the June quarter – on the basis of the trajectory, Apple would sell between 39 and 41 million iPhones next quarter. But of course, it’s just launched the iPhone SE, which could change things. Anything below 40 million iPhones (or $40 billion in revenue guidance) is a sign that Apple is dropping below its long-term trajectory, and would be bad news. Anything above that is cause for optimism, at least in the short term.
This, then, is the real answer to the question those reporters have been asking, in the form of another question: Does iPhone growth revert to its long-term trajectory, dip below it, or bounce back above it, in the reported numbers for Q1 and guidance for Q2? The answer to that question tells you what you need to know – at least in the short term – about how you should feel about iPhone sales.
“In the first 24 hours Model 3 received over 180,000 reservations, setting the record for the highest single-day sales of any product of any kind ever in world history.”
That is, of course, pure hyperbole, and there are two specific reasons why. The first is that the preorder process doesn’t represent sales at all. On Tesla’s own site, the process is referred to as reservations and not sales, and that’s all the $1,000 deposit represents – a place in a long line to have the right to buy a car 18 months or longer from now. Those who made a reservation in this way have no specific timeframe for delivery of their purchase, haven’t committed to any specific purchase, and have the right to a refund of their money at any time between now and whenever their car might finally be available. There is no sense in which this is a sale in any sort of traditional sense.
But even if you concede that the $1,000 represents a sale of some kind, the total revenue implied by that still falls far short of single-day sales for the most recent iPhone, for example, which likely does hold the record for largest single-day sales of any product. At just $180 million, Tesla’s Model 3 revenue is around 6% of single-day iPhone 6s sales. The only way the claim makes any sense at all is if you do what Elon Musk did in a tweet at the end of the first day of preorders, and apply some sort of anticipated average selling price to the 180,000 preorders. That’s even more disingenuous than the claim that these are sales at all, but it does lead to a far higher number. The comparison between these two different Tesla Model 3 numbers and assumed single-day sales for iPhone 6s is shown in the chart below:
Again,though, no-one has committed to actually buy a car from Tesla at this point, the process is entirely refundable, and Tesla won’t see even the majority of that revenue for a couple of years at least. This isn’t, in reality, any kind of sales record at all.
The stupid thing here is that the Model 3 preorder process is still a phenomenally impressive achievement. That so many of those placing reservations had never even seen the car is a testament to the power of Tesla’s brand and what it has achieved, and this likely is a record in the auto industry. But the hyperbole attached to the claim on Tesla’s site just detracts from all of that without having any real basis in fact. Tesla already has the world’s admiration and respect – engaging in this kind of behavior detracts from rather than adds to that mystique.
For reference, this page lists all prior Apple posts, with a little context. Subscribers to the Jackdaw Research Quarterly Decks Service will be getting a preliminary Apple deck tomorrow, with a final deck to follow once Apple files its 10-Q.
This is a post I’ve been meaning to write for a while now, but it seems particularly apt given Apple’s results announced today. My key point is this: even as Apple continues to diversify its revenue streams beyond the iPhone, the size of the installed base of iPhones becomes ever more important to its revenue growth.
The context here is that I’ve been talking to lots of reporters over recent weeks in the run-up to Apple’s earnings, and I’ve heard this question (or variations on the theme) a lot: “is Apple’s increasing dependence on the iPhone a problem?” The reason for the question is twofold: on the one hand, Apple’s revenues and margins have been increasingly dominated by the iPhone, and on the other it’s become increasingly clear that iPhone growth would slow following its stellar year off the back of the iPhone 6.
My answer usually goes something like this, and this gets to the heart of the paradox here. On the one hand, yes, Apple has been increasingly dependent on the iPhone for revenue and margin growth, but it’s been working hard to introduce new products and services to the market which can help to contribute meaningfully to growth and profitability. The Apple Watch, Apple TV, Apple Music, and iPad Pro were all introduced in 2015, and could over time provide significant additional revenue and margin. So Apple has the potential to lessen its dependence on the iPhone over time in this way.
However, the other side of the paradox is that almost all of these new products and services are tied to the iPhone in some way, and benefit greatly from the installed base of a half billion iPhone users. The iPad Pro has the weakest tie here, but obviously benefits from its use of iOS and the App Store, and with features like Handoff and iCloud works better with the iPhone than it does independently. The rest have much closer ties to the iPhone: the Apple Watch is (for today at least) strictly an iPhone accessory, the new Apple TV runs apps, most of which were originally developed for the iPhone, Apple Music will be used on iPhones far more than on any other devices, and so on. Even if iPhone growth slows or goes negative (as it will now certainly do in the March quarter), that massive base of iPhone users will keep many other contributors to Apple’s financial success ticking over nicely.
Interestingly, Apple seems to have latched on to this idea as a key talking point for its earnings today, with an emphasis on Services revenue tied to the overall installed base of devices, which it pegs at 1 billion users. (My estimate for the end of December for iOS devices plus Macs was 996 million, so adding in Apple Watch and Apple TV should certainly push it over that billion user threshold). This base of devices, and the rather smaller number of unique users it represents, is Apple’s single greatest asset, and one it will increasingly leverage both as it continues to grow the product and service lines it announced in 2015 and as it adds to them going forward. As such, even as the iPhone itself as a product contributes less to Apple’s overall performance, it’s going to become ever more central to Apple’s future growth.
All the major publications which were given review units of the new iPhones ahead of the launch came out last week. I got my review unit last Friday (along with many Apple customers), but since I’ve now been able to spend a few days with it, I wanted to share a few thoughts. I’m going to try very hard not to rehash everything everyone else has said, and also to add a bit more insight in areas I haven’t seen others write about yet. I’m also going to spend a bit more time on the cameras than most of the other reviews – I’m not the world’s greatest photographer, but I do enjoy taking pictures and my phone is by far the camera I use the most to take pictures of my kids, so it has to be good. As such, I’ve spent a good chunk of time over the last few days taking pictures and videos of various things to test the camera specifically and I’ll share some examples below.
The Hardware
The new devices are nominally virtually unchanged on the outside from the previous versions, and that’s certainly the first impression they give too. They are a hair thicker and a tiny bit heavier than their predecessors, but if I hadn’t known that I might well not have noticed. Along with the iPhone 6 Plus I’m using, Apple also sent one of its new leather cases (I have the saddle brown one) and I’ve been using that for the last few days, which has made comparisons between this phone and the iPhone 6 Plus less relevant.
As with previous iPhones, the hardware feels very solid, well balanced, and high quality. Nothing’s changed there. The aluminum and glass are both supposed to be more durable than last year’s, but I can’t think of a way to test either of those that doesn’t involve trying to break the phone, so I haven’t tested either.
The new vibration engine (apparently now one and the same as the taptic engine) is very nice, too – I don’t use vibrating alerts much anymore since I started wearing the Apple Watch, but on the odd occasions when I still get them (mostly for phone calls), they’re more substantial than they used to be. It’s hard to know for sure, but I feel like the phone speaker has got better too – calls sound clearer and louder than before.
3D Touch
3D Touch is arguably the headline feature on the new iPhones, and from the moment I got to use it in person at Apple’s September event I’ve said I thought it was going to be important.
Just tried 3D Touch on the new iPhones. This is going to be huge. Both on home screen and in apps including third party apps
Having now used it for more than just a few minutes in a tightly-controlled demo environment, I have a few additional thoughts:
This is a big deal, but for now it’s mostly used by Apple’s own apps and just a handful of third-party apps. That has two implications. One, if you tend to use third-party replacements for key things like Mail, Calendar, and so on, you’ll find 3D Touch a lot less useful, at least for now. Two, that may mean you migrate back to Apple’s own apps in some cases, to make use of this feature. I’m curious to see how quickly most third-party app-makers add support – if I were them, I’d do it quickly, especially the Quick Actions functionality. I suspect this will be like the Apple Watch, in that apps that fail to support it will find users replacing them with ones that do.
Especially on the 6S Plus, which is the one I’m testing, 3D Touch makes apps on the top half of your home screen less useful than those on the bottom. Yes, you can use the Reachability feature to bring those higher-up apps within easier reach of your thumb, but that adds friction in the use of a feature that’s all about reducing friction. I haven’t done this yet, but I can see myself rearranging the icons on my main home screen based on which I’m likely to use Quick Actions with.
Speaking of which, I’ve always kept the Camera app in the top right of my first home screen, because I do want access to it when the phone is unlocked, but I most often trigger it when the phone is unlocked, and therefore use the camera button on the lower right of the lock screen. However, the introduction of 3D Touch and the much-faster Touch ID sensor (on which more below) means I rarely see the lock screen anymore, and even when I do using that lock-screen camera button is less flexible than the app icon for the camera on the home screen. I wish I could use 3D Touch in some way on the lock screen – that’s something Austin Mann predicted Apple would do, but it didn’t. I suspect that’s because the lock screen is becoming less relevant, but it also means I likely need to put my Camera app icon somewhere closer to the bottom of the screen, and maybe even on my home row.
For now, I’ve been using 3D Touch more in apps than on the home screen, and that’s partly because I tend to use third-party apps more than Apple’s own. I‘ve used it most in Instagram and the Photos app, where I’m using it both to view Live Photos and to quickly review recently-taken pictures when I’m still in camera mode. The latter is a really great addition, and I think third party developers will likely come up with lots of cool ideas for using this feature.
One thing I think developers should be thinking about is making Quick Actions user-customizable. Instagram, for example, chose to make access to the Direct inbox, Search, and View Activity the three additional Quick Actions beyond the obvious New Post option. If I had my way, I’d probably choose other aspects of the app to get quick access to, and I’m betting I’m not alone in that. Launch Center Pro does a great job of this as a key feature, and I think it’s brilliant (h/t @rjonesy).
Related to this, the order in which functions appear in Quick Actions is interesting too – I think we’re accustomed to reading menu-type lists (along with everything else we read) from top to bottom, but depending on where an app sits on your home screen, the menu items may appear in what seems to be reverse order (I think the rule of thumb is that the thing you’re most likely to want to use is closest to the app icon itself, for easy thumb access, but that may mean it’s at the bottom of the list). That means something of a learning curve for users, but is probably also something developers should think about in designing the order of items (and any icons they use alongside the labels).
Lastly, I’ve noticed some of the negative side effects of the introduction of 3D Touch. One of the things that’s happened to me several times is tapping on web links without any result. I think what’s happening is that I’m tapping just hard enough to trigger 3D Touch, but not holding it at all, which leaves me in a sort of limbo where I don’t get either the desired result or any visual signal that I’ve accidentally activated 3D Touch either. John Gruber has talked about the problem of trying to delete apps, a function I suspect we’ve all kind of activated by pressing down fairly hard on the screen to trigger the wobbling icons. I’ve had this problem too, and there are several other places where I’ve previously pressed fairly hard for the “long press” but now have to get used to pressing only gently. No doubt the mental and physical adjustments involved will come in time.
Touch ID
I won’t spend lots of time on this, as it’s been well-covered elsewhere, but the Touch ID sensor is dramatically faster now, and frequently completes authentication before the lock screen even pops up fully. That’s wonderful for quick access to functionality, but as others have pointed out (and as I alluded to in the context of the camera above) it does mean the lock screen becomes a lot less useful, unless you trigger the home button with a finger not registered for Touch ID, or use the side button to turn on the phone. Training the Touch ID sensor is also much quicker now – not something you have to do a lot, but I’ve added several fingers to the new phone more or less immediately, whereas it took me a long time to bother doing so on the iPhone 6 Plus because it took more time to do.
Live Photos
My initial reaction to the Live Photos demo was that this reminded me of something out of Harry Potter (it may have helped that my daughter has recently been reading the books and seeing the films for the first time).
Apple brings Harry Potter technology to the iPhone – Live Photos — Jan Dawson (@jandawson) September 9, 2015
Again, I got a brief demo of the feature at the September event, but it’s very different to be working with your own limited skills as a photographer rather than with carefully chosen images pre-installed on a demo phone. I’m glad I read some of the reviews last week ahead of trying to use it, because it meant I was immediately aware that I needed to change my past behavior slightly and hold the phone steady both before and after taking the still image (though the software on the phone now knows to cut off the video if the phone is lowered prematurely). That probably shortened the learning curve somewhat, but it’s still an interesting process to figure out how best to use Live Photos. Apple’s demo photos were an interesting mix of moving objects and people, and I’ve definitely had more luck with the latter than the former in terms of getting compelling Live Photos out of the process.
Below are some examples of Live Photos from the last few days – they’re a mix of objects and people/animals, and you’ll see how variable the results can be. For what it’s worth, sharing these anywhere other than in iOS is still difficult – I connected my phone to my Mac and used QuickTime to record the screen of my iPhone as I used 3D Touch to interact with them, which resulted in this series of 7-second videos you see below. In each case, the video starts with the still image, then shifts to the video, and returns to the still (you may hear background noise from my home office on the audio on some of them – no idea why QuickTime records microphone noise when capturing the iPhone screen).
Overall, I’m really enjoying Live Photos, and there are some interesting things to note:
Even when in Live Photo mode, you can capture multiple pictures in quick succession – at first, I was waiting for the yellow Live indicator to disappear before taking the next picture, but I found that it works just fine even when the pictures are taken close together. The video still attaches itself to each picture in the same way, which means you get an interesting effect when scrolling through pictures quickly and playing the Live Photo – you’ll hear almost the same background noise on each, with the beginning and end shifting a fraction of a second each time. This is very clever stuff on Apple’s part.
I kind of wish Apple had made these Live Photos auto-play as you scroll through your camera roll (or gave users the option of selecting this) – it would make your camera roll come alive in a completely different way, whereas for now your camera roll looks entirely static until you decide to engage with an individual picture. Maybe it’s the Harry Potter thing again, but I like the idea of these pictures looking alive from the get-go, rather than having to be prodded into action. I’m sure the team at Apple responsible for the feature spent at least some time discussing this decision, and ultimately came down on the side of having them be still by default – perhaps because scrolling through moving photos was too distracting visually, perhaps because of the impact on battery life, or for some other reason. Perhaps it’ll change in time or become a user option.
Related to this, the blurry transition between the still and the video isn’t my favorite element here. I can see why the engineers thought it needed a clear visual transition from one mode to the other, but when you’re reviewing a bunch of pictures it’s an unnecessary visual obstacle and delay that adds little once you’re used to how the feature works. At the very least, it feels like it should be quicker.
The Camera
The cameras have always been one of my favorite features of the iPhone, and I continue to find the cameras on the iPhone better than any other smartphone camera out there, at least for general use. The new cameras offer improvements over last year’s, which were already very good (see my review from last year here and this Flickr set for lots of pictures from last year’s phones).
My wife and I went to pick up my kids from her parents’ farm on Saturday, and I had a chance to take some pictures and video while we were there. We then went on a drive up the canyon near our home on Sunday afternoon, and I went on a brief hike with my son this morning too, so I’ve taken pictures and video in a few different settings over the last few days. Overall, I’ve been very impressed by the camera, both for photos and videos.
Below is a panorama I took this morning – it won’t look all that impressive below, because I’ve reduced it to fit here, but if you click on it, it’ll open the full-size image in a new tab or window.
The full image is over 13,000 by 3,600 pixels, and I think it looks fantastic (not my composition, but the various different levels of light and shade and how they’ve come out so well, while retaining a lot of detail). This is one of the huge strengths of the new cameras – the combination of high resolution and retention of detail, which will allow for much more usable cropping of pictures.
The two images below are a virtually complete crop and a partial crop of the same picture, both of which I’ve edited using Snapseed. I’m including them because of the detail that remains in the cropped version.
I’ve amped up the color in these pics a little, but I’ve included some other unedited shots below so you can get a sense of how these come out of the camera. In both cases, you can click on the picture and it’ll show full-size. For more photos, mostly unedited, see this Flickr set.
As for video, the iPhone continues to have a great slo-mo camera, but of course it now also has 4K video. I haven’t spent a ton of time using this, but one of the most striking things with video on the iPhone 6S Plus is how good the image stabilization is getting. I’m including below a few YouTube embeds which show off this capability – apologies for the slightly dizzying cinematography on some of the videos, but I was trying to test the camera’s ability to adjust to changes in lighting.
4K video – pan across mountain landscape:
This one was shot by one of my kids out the car window while driving on a bumpy, windy road through the canyon – it’s 1080p only:
This is another 1080 rather than 4K video, but it shows off the image stabilization quite well, as well as the quality of the video capture:
Speed
Other than the specific features I’ve reviewed, the one overarching theme with the new iPhone is speed. Touch ID is faster, as I’ve already mentioned, but everything else is noticeably faster too, as a result of the new chip, more RAM, and a variety of other improvements. There’s almost no lag now for a number of tasks which used to take time. And the overwhelming impression you’re left with is that you and your clumsy fingers are now the biggest source of latency for a lot of what you’re doing. I find myself more drawn to Siri and to voice dictation for text entry than before, simply because it now feels like I’m slowing everything down when I type things in.
All part of the pattern
In conclusion, the iPhone 6S range feels like a continuation of the pattern for Apple. In a piece I wrote on Techpinions a while back, I talked about the fact that Apple often builds new features and functionality incrementally over time, and it’s often not clear where a particular feature is heading until several years after its original launch. The iPhone 6Ss feature examples of both the outgrowth of earlier features (e.g. Force Touch on the Watch maturing into 3D Touch on the phone, the Touch ID sensor getting enormously faster), but also likely the beginning of new things that aren’t yet apparent. 3D Touch in particular feels like it’s just getting started, and could spread both to other parts of Apple’s product line and to other parts of iOS (count how many of Apple’s own apps don’t yet support it, for starters). But I’m sure there’s far more here, too, though it will probably only become clear as Apple launches future devices.
I wrote a piece Thursday on Techpinions about Apple’s iPhone Upgrade Program which proved quite popular, hitting Techmeme and being retweeted by some of the bigger names on Twitter, and so I thought I’d do a quick follow-up post with some additional thoughts on the subject, in part based on my additional research and in part based on things that were too detailed to go in that original post.
The impact on carrier revenues
One thing I didn’t really go into in my Techpinions piece was the impact all this could have on carrier revenues. The context here is a bit complex, but I’ll try to keep things simple: in the old days, the carrier charged you the same for service whether or not it was subsidizing a device for you (and no matter how big the subsidy was). Under the new equipment installment and leasing plans, the service fees are substantially lower than they were, but the carrier makes up the difference from your monthly device payment. For example, under the old model for a two year iPhone contract, the carrier charged you around $200 up front and $70 per month in service fees, but under a two-year equipment installment plan it now charges you nothing up front, $50 per month in service fees, and $27 a month in device payments. Its total revenue over the two year period is pretty similar, but of course only if you’re still getting your device through them. The other thing is that certain spending has now moved from the service revenue bucket to the equipment revenue bucket, and as such a long-standing carrier metric – ARPU (average revenue per user) – has become less relevant, because it’s based only on service revenue and doesn’t include those installment payments. As a result, carriers have begun reporting another metric, ABPU (average billings per user), which does capture these device payments. You can see an illustrative example of what’s been happening to these two payments for AT&T over the past few quarters below:What you see with AT&T is that ARPU has fallen pretty steeply over the past couple of years as the shift to installment billing has kicked in, but ABPU is now back where it was two years ago, and rising nicely. The same pattern applies for the other carriers, which are all at slightly different stages in this transition. However, for customers who buy their phones through Apple rather than the carrier, ABPU drops right back down to being the same as ARPU, because there are no device payments. If this happens in large numbers, it will have a significant impact on carrier revenues. The good news is that this will be profit neutral, since the revenue is basically just pass-through revenue anyway and all goes on equipment costs, and as such should actually boost reported margins, but revenues will be hit hard. Interestingly, T-Mobile’s “adjusted EBITDA” metric is already based just on service revenues, so it would be unaffected by this shift.
Competition shifts to iPhone pricing
One of the interesting things we’ve already seen over the last couple of months is a new dimension to the competition between US wireless carriers, especially the two smallest among the big four, Sprint and T-Mobile. Whereas the wireless carriers have in the past only competed on wireless service pricing, and charged virtually identical prices for devices, they’re now falling over themselves to offer the best deal on devices. More precisely, on iPhones specifically. With Apple’s entry to the iPhone financing business, we’re likely to see this competition increase – indeed, T-Mobile announced after Apple’s announcement a more aggressive plan of its own.
What’s fascinating about this is that it comes such a short time after the carriers finally began to abandon the “subsidy” model for phones. In reality, of course, this wasn’t a true subsidy, but merely an obfuscation of the true cost of the device, and a recouping of that true cost through inflated service fees. However, now that they’ve finally abandoned those “subsidies”, the irony is that they’re about to embark on truly subsidizing these devices – the new leasing plans some of the carriers are beginning to offer are going to make it extremely tough to break even on the hardware purchase itself.
Changes in the secondary market
We all know that the secondary market in smartphones (and, once again, in iPhones specifically) has been booming in recent years. Gazelle and others have been buying these devices to sell on in various ways for some time now, but the carriers got in on the act a while back, and Apple has been increasingly getting involved itself. All these players have incentives to recapture devices which can be sold at significantly lower prices even than the older devices Apple keeps in market as new phones, because this expands the addressable market for iPhones without risking general price deflation. The prepaid market in the US is one obvious destination, since the absence of both subsidies and installment plans there means customers pay full price for devices. But there’s always been the risk that the secondary market eventually saturates. There’s an inevitable ceiling in the secondary market – I don’t know how far away it is, but I’m sure all the carriers and Apple are already thinking about this.
However, with increasing numbers of spectrum bands in US devices, these iPhones are potentially sold in other markets too. AT&T is specifically looking at its Mexican wireless operations as a possible destination (something reported in the press and repeated to me by AT&T Mobility CEO Glenn Lurie on Thursday). But Apple, too, could readily repurpose many of the devices it gets back secondhand in the US for other markets, allowing it to address price points it hasn’t been able to so far.
Apple is serious about this business
Lest anyone think Apple is merely dabbling or testing the waters here, it’s clear that it’s actually quite serious about it. It’s bought the top spot in Google’s ad rankings for searches including the obvious one – iPhone Upgrade Program – but also “iPhone upgrade” and “iPhone installment plan”. There may well be others, too – I haven’t had time to check. Apple isn’t just going to wait for people to discover its new plan accidentally – it’s actively out there promoting it in the very places where customers would normally only have found carriers’ service plans or generic Apple pages about the iPhone. The carriers are shrugging all this off – I asked Glenn Lurie about it in a meeting on Thursday and he was blasé about it, while John Legere also nominally welcomed it while somehow seeking to suggest it was simultaneously a real risk for AT&T. But I continue to believe that this may be a far greater risk for the carriers, for all the reasons I outline in this piece and the reasons I gave in my original piece. And I haven’t even begun to talk about where Apple might go next with all this.
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.
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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.
What you see with AT&T is that ARPU has fallen pretty steeply over the past couple of years as the shift to installment billing has kicked in, but ABPU is now back where it was two years ago, and rising nicely. The same pattern applies for the other carriers, which are all at slightly different stages in this transition. However, for customers who buy their phones through Apple rather than the carrier, ABPU drops right back down to being the same as ARPU, because there are no device payments. If this happens in large numbers, it will have a significant impact on carrier revenues. The good news is that this will be profit neutral, since the revenue is basically just pass-through revenue anyway and all goes on equipment costs, and as such should actually boost reported margins, but revenues will be hit hard. Interestingly, T-Mobile’s “adjusted EBITDA” metric is already based just on service revenues, so it would be unaffected by this shift.