Arm Based Macs and Mac Growth, Apple Updates 10-K Risk Factors for Services

Arm Based Macs and Mac Growth
Apple yesterday announced the news of their November event, where Arm-based Macs are likely to debut. My conviction is Apple has multiple agenda’s in moving from Intel to their own Arm-based Apple Silicon, but one of those agenda items is to grow the Macs share of the premium PC market. Proprietary estimates I’ve seen from IDC and Morgan Stanley have pegged the premium PC (defined as $1000+) at approximately 20-25% of WW notebook and desktop shipments. That equates to around 55-65m units a year annually. Apple averages about 20m Mac sales annually for reference or 33% of the premium PC market.

If my assumption is correct, and Apple believes there is share to gain for Macs in premium, then how much growth is realistic for Apple? The first thing we have to recognize is Mac share is unlikely to grow if current price points stay the same. Most financial analyst notes categorize Mac as ex-growth, and up to this point, that has been true. What’s fascinating, in my opinion, is how Apple can sell hundreds of millions of iPhones priced above $800 but only 20m Macs priced above ~$800. I don’t believe Apple will all of a sudden sell a hundred million Macs, but this point goes to show you that a product, when valued appropriately, even if expensive, can still move in volume.

This is why I think Tim Cook’s commentary about how the work-from-home trend gives them optimism for Mac and iPad is based on a potential reassessment of the value of notebook, desktop, and iPad form-factor. For this reason, I do believe Apple has share to gain for Mac in the premium price notebook and desktop segment, but again the question is how much room to grow.

Apple’s Annual Mac sales are in the 20m range and that is with current premium pricing and ASPs of well over $1000. So with the assumption Apple will at some point, bring an Arm-based Mac into the $799-$899 price range, I think Apple has the potential to grow Mac sales somwhere between 8-10m units a year. The unit growth may not seem like much but that is a nice bump in revenue for the Mac category.

In some talks with investors on the subject of Arm-based Macs I was asked if there are scenarios where Apple’s could grab even more share of the PC market, and the premium category specifically. In all honesty, consumers relationships with PCs would have to dramatically change for that to happen. Sure it is possible that Arm-based Macs with industry leading battery life, security/FaceID, incredible power, a new and thriving app ecosystem, and luxurious industrial design could do this, but it is not the scenario I’m betting on primarily.

I’m personally excited about Arm-based Macs and Apple’s likelihood to shake up the PC market. If anything, I’m predicting an interesting battle between Intel and Apple as Intel is likely going to go on the offensive with benchmarks to try and downplay any performance advantage Apple’s touts with Arm-based Macs. I anticipate a fierce battle that may get ugly but it will be fun to watch.

Apple Updates Risk Factors For Services
I wanted to briefly touch on the observation that Apple has updated their 10-K filing to include some new risk factors relevant to the potential regulatory issues around App store and their services business.

Regarding App Store, Apple notes the potential risk of reduced, narrowed or eliminated App Store take rates, which could have material adverse impacts on Apple’s financial condition and operating results. This seems to be alluding to either a mandated lower rate of commission for Apple or the forcing of alternate payment methods in which case Apple would get nothing. Interestingly, the prior risk factor, which was replaced by this one, was developers not using the App Store.

For services, a risk was updated related to gross margins varying and changing over time. The belief is this is alluding to the Google search deal, which if regulations impact, could materially hurt Apple’s services business as this deal with Google is estimated to be 15-20% of Apple’s annual services revenue. The Google deal falls under the licensing and other category and the belief is the Google payment represents the majority of this line item which has been 22% of services revenue over the last three years.

There is debate if this payment if fixed or variable. The argument that it is variable seems to hold water due to the fluctuation and weakness of the segment revenue which closely followed weakness in Google ad revenue. If a variable payment is likely the bulk of the deal’s revenue then that is a normal and fair business deal which should not be impacted. However, if the deal is largely a fixed sum, then it could come under any impact of regulations brought on Google.

The search angle, and revenue from a Google licensing deal is interesting in light of the recent rumors of Apple working on a search engine. While this could simply be Apple improving search as a whole on their devices related to Siri, some speculate Apple is looking to replace Google as a whole like they did with Apple Maps. From their privacy angle, this would make a lot of sense, and while the revenue from Google is hefty, it is certainly not something Apple truly needs or relies on.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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