ARTICLE OUTLINE

This is part 7 of 7 in a series of articles that explores Innovation at Apple.

1. Who is Apple innovating for?
2. Where should Apple’s innovation be focused?
3. How does Apple innovate?
4. When should Apple introduce its innovations?
5. What does innovation inside of Apple look like to someone outside of Apple?
6. Why does Apple do what it does?
7. Why not be Apple?

Why Not

Why Not Be Apple?

 

Critics of Apple remind me of a joke:

A shepherd is herding his flock in a remote pasture when suddenly a brand new Tesla advances out of a dust cloud towards him. The driver, a young professional in a Hugo Boss suit, Gucci shoes, Ray Ban sunglasses and a YSL tie leans out of the window and says, ‘Tell you what, I’ll bet you $100 against one of your sheep that I can tell you the exact number in that flock.’

The shepherd thinks for a moment. It is a big mob and he can’t see how anyone could guess correctly so he says, ‘OK. You’re on.’

The newcomer parks the car, whips out his laptop, connects it to a mobile phone, surfs to a NASA page on the internet where he calls up a GPS satellite navigation system, scans the area, opens up a database and 60 Excel spreadsheets with complex formulas. Finally he prints out a 150 page report on his hi-tech miniaturized printer, turns to the shepherd and says, ‘You have here exactly 1586 sheep.’

The shepherd nods his head and says, ‘That is correct. A bet’s a bet. Take any sheep.’

The man picks up an animal and is about to walk off when the shepherd says, ‘Hang on. Bet you double or nothing that I can guess your occupation.’

The man thinks, ‘How would he know, he’s never met me before’ and says ‘Righto. You’re on’.

The shepherd says, ‘You’re a Wall Street analyst who specializes in critiquing Apple.’

The man whistles . ‘How the heck did you know that?’

‘Easy,’ answers the shepherd. ‘You turn up here although nobody invited you, you want to be compensated for an answer to a question no one asked you, you provided information that was already known…and that’s not the half of it.’

The newcomer is slack-jawed. ‘What’s the other half?’

‘Well,’ says the shepherd, ‘you put my dog down and I’ll tell you.’

That’s Apple’s critics for you. They have all the facts. They’ve crunched all the numbers. They’ve done all the analysis. But they really don’t understand the business that Apple is in.

ADVICE

That’s the way with (critics), they’re always biting the hand that lays the golden egg. ~ Samuel Goldwyn

At the end of the day, the critics’ advice to Apple comes down to this:

The only way for Apple to be successful in the future is to abandon what made them successful in the past and to adopt, instead, the practices of their less successful competitors.

In other words, “Don’t be Apple.”

Why would Apple even consider taking such dreadful advice?

No vice is so bad as advice. ~ Marie Dressler

The advice the critics are giving is not new. Critics have been giving Apple the same bad advice ever since Apple was incorporated on April 1, 1976. (Perhaps the critics think Apple is an elaborate April fools joke.)

It’s like déjà vu all over again. ~ Yogi Berra

It’s not helpful. Instead of looking for viable solutions, most critics are simply looking for trouble, finding it where it does not exist, diagnosing it incorrectly and applying the wrong remedy. (( Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy. ~ Ernest Benn))

Things are never so bad they can’t be made worse. ~ Humphrey Bogart

It’s not informed. The people who know the least about Apple’s past are the one’s who insist they know the most about Apple’s future.

The further back you look, the further forward you can see. ~ Winston Churchill

It’s ignorant. Those who understand innovation the least are the ones who are the least understanding.

Fascinating how “I don’t know what Apple is doing” comes out of people’s mouths as “Apple doesn’t know what it is doing.” ~ Ben Thompson (@benthompson)

It’s superficial. It focuses on the what can been seen, ignores the unseen, and trivializes what takes place behind the scenes.

The fight is won or lost far away from witnesses – behind the lines, in the gym, and out there on the road, long before I dance under those lights. ~ Muhammad Ali

It’s arrogant.

Listening to critics tell Apple how to innovate is like listening to vulture tell a fish how to swim.

It’s wrong-headed.

Most of the “advice” people have been giving Tim Cook today on how to run Apple would eventually bankrupt the company. ~ Neil Cybart on Twitter

And it’s not coming from a good place.

Mediocre minds usually dismiss anything which reaches beyond their own understanding. ~ Francois de La Rochefouca

MY ADVICE

My advice to Apple is to not take any advice. But if they’re foolish enough to listen to me, here is what I would say:

Relax. Take a deep breath. This too shall pass.

In times like these, it helps to recall that there have always been times like these. ~ Paul Harvey

You can’t please everyone. Nor should you try.

You can’t base your life on other people’s expectations. ~ Stevie Wonder

You’re going to be criticized no matter what you do.

Do what you feel in your heart to be right – for you’ll be criticized anyway. ~ Eleanor Roosevelt

Ignore the short-term investors.

Successful investing is about having people agree with you … later. ~ James Grant

Ignore the doomsayers.

Never tell me the odds. ~ Han Solo, Star Wars

Don’t let the critics tell you what you can do.

McCabe’s Law: Nobody has to do anything. ~ Charles McCabe

I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite. ~ G. K. Chesterton

Don’t let the critics tell you what you can’t do.

The greatest pleasure in life is doing what people say you cannot do. ~ Walter Bagehot

Don’t listen to people who say it can’t be done. ~ Steve Jobs

Don’t let the critics tell you who you are.

Accept no one’s definition of your life; define yourself. ~ Harvey Fierstein

I don’t have to be what you want me to be. ~ Muhammad Ali

Go your own way.

The wisest men follow their own direction. ~ Euripides

Do what you do best.

Let each man pass his days in that wherein his skill is greatest. ~ Sextus Propertius

Do what you love.

I’d rather be a failure at something I love than a success at something I hate. ~ George Burns

Be who you are.

Whatever you are, be a good one. —Abraham Lincoln

I think you have to be what you are. Don’t try to be somebody else. You have to be yourself at all times. ~ John Wooden

Be Apple.

Dare to be yourself. ~ Andre Gide

And Apple, if you’re misunderstood, so what?

To be great is to be misunderstood. ~ Emerson

Innovation always has been — and always will be — misunderstood.

The trouble with innovation is that truly innovative ideas often look like bad ideas at the time. That’s why they are innovative — until now, nobody ever figured out that they were good ideas. ~ Ben Horiwitz

When you innovate, you must prepare yourself for everybody to tell you that you’re nuts. ~ Larry Ellison, CEO of Oracle

We are willing to think long-term. We start with the customer and work backwards. And, very importantly, we are willing to be misunderstood for long periods of time [emphasis added]. ~ Jeff Bezos, founder & CEO, Amazon.com

Invention requires a long-term willingness to be misunderstood. You do something that you genuinely believe in, that you have conviction about, but for a long period of time, well-meaning people may criticize that effort. When you receive criticism from well-meaning people, it pays to ask, ‘Are they right?’ And if they are, you need to adapt what they’re doing. If they’re not right, if you really have conviction that they’re not right, you need to have that long-term willingness to be misunderstood. It’s a key part of invention. ~ Jeff Bezos

And if people are saying you’re crazy, well, maybe that’s not such a bad thing.

If no one is telling you your idea is crazy, it’s probably not a very good idea. ~ Francis Ford Coppola

THINK DIFFERENT

In 1997, just six weeks after Steve Jobs returned to Apple, he announced the “Think Different” campaign. Here is a bit of the story behind the creation of the campaign:

Steve and I walked down the hall and on the door was this skull and crossbones taped on there. It was Chiat\Day. Lee Clow [the agency’s chief creative officer] gave this amazing performance about just how screwed up Apple was and how people felt ashamed that they were Mac people, and that they shouldn’t be. Then he just started showing pictures of people who did things different. Steve had tears in his eyes. There was no discussion about should it be “Think differently,” because Steve loved it. It was like the old band members were coming back together. ~ Tom Suiter ((Excerpt From: Max Chafkin. “Design Crazy.” iBooks. https://itunes.apple.com/WebObjects/MZStore.woa/wa/viewBook?id=697961602))

Here is Steve Jobs introducing the Think Different campaign:

The theme of this campaign is Think Different, honoring the people who think different and who move this world forward. And it is what we are about; it touches the soul of this company.

Here is The Crazy Ones transcript:

Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules and they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. While some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do. ~ Steve Jobs, October 5, 2011

Here is The Crazy Ones campaign video. I HIGHLY recommend you set aside sixty seconds to watch it. It’s well worth the time.

https://www.youtube.com/watch?v=TM8GiNGcXuM

Apple’s last earnings call made it clear the spectacular iPhone growth of the past has peaked. Although Apple is still doing well in services, Macs, and even iPhones, the drop in iPhone sales has left many people asking if Apple can ever grow the iPhone market again.

In a recent Tech.pinions Insider post, I suggested one way they could significantly grow the iPhone market was to target India with a special iPhone priced more accordingly for that market. That could go a long way toward getting them into a stronger position in India and reap major benefits as more and more of the 1.2 billion people in India move up the economic scale and as the smartphone plays a more important role in their communications, commerce, and education.

However, I believe there are at least two significant technologies that could drive new iPhone Growth and its ecosystem that could, over time, significantly bring back healthy iPhone sales and help them expand their overall audience. Each one could spur growth but, together, they could really take the iPhone up a couple of notches.

Over the last three weeks, I have traveled half way around the world to China and then, after a few days home, off to New Orleans to attend the Collision Conference. At the end of the week, I did a father/son day at the New Orleans Jazz Fest. While most of this trip was business related, there was time for sightseeing and of course, listening to great music and taking pictures at JazzFest, which is a very colorful event.

On the trip, I took a high-end Sony mirrorless camera as well as my iPhone. But, since I did not carry my Sony with me all of the time, 80% of the pictures I took were with the iPhone. Given the decline in sales of DSLRs and pocket cameras due to smartphones, I suspect that, for many, a smartphone camera is also the #1 way they take pictures these days.

There are rumors Apple may be putting dual cameras on the iPhone 7. I hope this is true. If a smartphone becomes my primary camera, then I want the best camera possible and one that, in many ways, works like a DSLR. While in China, I was shown a prototype of a smartphone with dual cameras and, by using the dual cameras, it took on a lot of DSLR features, including amazing digital zoom and special effects as well as more user controls. If this is the case and Apple puts dual cameras in new iPhones and makes an iPhone more like a DSLR, interest in that new iPhone could be huge and drive significant new sales in the next cycle.

The second technology is actually a category but one that, if supported by various tweaks to an iPhone and additional hardware, it too could drive iPhone sales into new territory. As many of you know, VR is poised to make a real impact on the world of computing by delivering a whole new way to see and view images, video, and even information. Its first impact will be in gaming but its reach will be broad and key industries like travel, real estate, sports and entertainment are all beginning to embrace VR in one form or another. With the right applications, it will be a big hit with consumers too.

At the moment, Apple has been silent on their VR plans but we know they have made recent hires focused on VR. Given Tim Cook’s recent comments that VR is something Apple sees as important in the future, I have no doubt Apple will eventually deliver some type of VR solution within the iOS and Mac ecosystem.

However, Apple’s M.O. is not to be first but instead, monitor a new technology or market and, when ready, deliver a comprehensive, well thought out version of their own. They could leap frog competitors and make them the leader in a field even if they are late to the game. They did this with the iPod, the iPhone and the iPad and I suspect the same thing could happen with VR.

The big question is how they approach this. Today, there are two means to delivering VR. One is using a tethered device like Oculus’ Rift, HTC’s Vive or Sony’s Playstation VR. In these early days of VR, a tethered solution is the only way to delver a high level VR experience. The other way is to use a smartphone with a Google Cardboard-like device or something like Samsung’s Gear VR that works with Samsung’s Galaxy smartphones to view VR content. Our research shows consumers will eventually want to use a VR headset that is not tethered and delivers the entire VR experience in the headset itself.

To that end, we believe Samsung is working on such a headset where the smartphone technology is embedded in a new version of the Gear. While I was in China, I saw a prototype from a company called Dlodlo.com. They showed me a VR headset that looks like regular sunglasses and has all of the tech needed to deliver a VR experience.

If I had to guess what Apple is doing, I would bet Apple is working on a combination of these two ideas. Perhaps a set of goggles that have a lot of complimentary technology for enhancing an iPhone-driven VR experience. The iPhone itself could have things like a 360 degree camera and other VR/AR features that make it unique and works best with this headset to deliver a great standalone experience. I am sure it could be backward compatible with perhaps an iPhone 4S and any iPhone 6 models but I think it would make sense to create a new line of iPhone VR models that work best with some type of low-cost optimized headset.

I am just speculating on what Apple could do but, after this trip to China and New Orleans, I can see a dual camera gives an iPhone more DSLR-like features and could entice a lot of users to upgrade. I also am a big believer in VR and its potential impact on the computing market and fully expect Apple to do something in VR that gives them a strong position in this space in the not-so-distant future.

Either technologies could impact the demand for new iPhones and help them expand the market for their ecosystem and services. Together, they could deliver another blockbuster product to drive huge new sales and refresh the iPhone in the near future.

The more I have reflected on what is happening right now in the consumer technology industry, in particular Apple’s position, the more a key observation hits me. Apple is in uncharted territory. I don’t mean because sales of iPhones are slowing or because their stock has a more skeptical sentiment around it than in years past. What I mean is Apple has never had a product like the iPhone that has reached such enormous scale, thus increasing their customer base to levels few thought Apple would ever reach.

Apple certainly had a mass market hit before the iPhone in the iPod. However, the iPod’s best year of sales was 2008 with 54.83 million units sold. The iPod helped Apple’s core customer base reach somewhere between 125-175 million users. The iPhone has taken the company to an entirely different level. Last year, Apple sold 231 million iPhones. The iPhone is the greatest hit Apple has ever had and their customer base grew from under 200 million users to now over 600 million. Apple has never had this many customers before. More importantly, they have never had this diverse a customer set. That is why they are in uncharted water.

I’ve pointed out how the iPhone has spanned the entire customer spectrum. It is owned all the way from early adopters to technology laggards. A rare few products can make such a claim. However for Apple, owning such large chunks of consumers across the spectrum is bringing new challenges by way of patterns of their customer’s behavior they have not seen before. Apple learns new things about their customers on a regular basis and has to plan and act accordingly. Nowhere is this better observed than with their customer refresh rates of new iPhones.

During their main growth period, Apple had been operating under a cycle of rather consistent upgrade patterns for iPhones. Depending on the specific country, the upgrade rate varied between 19 and 24 months. However, as Apple began to attract new customers, particularly those on the later end of the technology adoption spectrum, something interesting happened. Note this from Kantar Worldpanel on the US smartphone market on Apple’s launch of the iPhone SE:

The move should, first and foremost, appease Apple’s user base, 58% of which still owns an iPhone 5s or older. The average lifecycle on these iPhones is 27.5 months, longer than the overall smartphone market at 20.9 months, suggesting that up until now these iPhone owners have been hesitant to upgrade. This is either because they prefer a more compact iPhone, or because they are not interested in investing in the new models.

The key stat here is how iPhone 5s owners tend to hold onto their devices longer than the average. This is a new customer insight and, in this case, it is unique to a specific model of iPhone. There are significant portions of Apple’s installed base who do not behave like most other iPhone owners and this could prove quite challenging. Particularly as Apple looks to drive replacement rates within their installed base.

Prior to this last quarter, Tim Cook always gave us a statistic letting us know how much of the iPhone base had upgraded to an iPhone 6 or higher. For a few quarters this number grew steadily but now it is slowing. Apple has succeeded in getting most of their early adopters and early majority customers to upgrade to new devices but their laggard base is clinging to their older devices and seeing no need to upgrade.

I was at the Jazz Fest last Friday in New Orleans and did not miss an opportunity to make small talk with folks about their devices. At an event like Jazz Fest, we see a large representation of the mass market. I was surprised to see how many iPhone 5s are still in active use and even more surprised to interview so many consumers who see zero reason to get a new iPhone. Looking at some fresh research from our most recent US market smartphone study, 26% of current owners of a 5s or later have no plans to upgrade their smartphone in the next 12 months. While not entirely defined by the iPhone models they own, Apple has a sizeable user base that is likely to exhibit upgrade patterns the company has not encountered before.

The plus is these will remain loyal Apple customers and continue to spend money in Apple’s ecosystem. The negative is they will be unusually slow to buy new iPhones which, in turn, will have an impact on annual iPhone sales. In some ways, I’m not sure even Apple understands yet just how stubborn regular consumers are when it comes to replacing their stuff. And Apple has a lot of these regular consumers as their users and they may likely behave in unpredictable ways Apple can’t anticipate.

In this post from 2014, I made the case we should understand tech history is being made, not repeated. This is as true today as it was when I wrote it. For 25 years, we had a technology industry but only for the past 10 years have we had a true global scale consumer technology industry. This point continually goes underappreciated and misunderstood but it is central to acknowledge as we learn new things about consumers in this still young consumer technology market. These dynamics are new to Apple as they are to many companies competing for consumer dollars. At the end of the day, this diversity of global consumer behavior is what makes studying them fascinating and intellectually stimulating. But I sympathize with the companies for whom, I’m certain, these customers will drive crazy.

Over the past year, many people, on noticing the Apple Watch on my wrist, could not help themselves but ask, “So, how do you like your Apple Watch?” After a short pause, my answer has always been, “I like it!” So, one year into the launch of the device seems like a good time to explain my hesitation in answering the question and see if what I was happy with a week in still makes me happy today.

First off, let me explain my hesitation in answering this very straightforward question. It has nothing to do with not liking the Apple Watch. My hesitation comes from the fact that articulating why I like it to someone who has not tried it is not easy. What I usually end up saying is I like it because it helps me keep my phone addiction under control.

While the capabilities of Apple Watch are the same for everyone who has one, the hook it provides for users can be quite different. This is why it is hard to articulate why you like it in a way that speaks to other people.

My hook has certainly been notifications. The reliable nature of the notifications provided by Apple Watch allows me to have my phone on silent all the time because I know I will always see that tweet or email or text that matters to me the most. While allowing me to be in control, notifications also prevent me from getting sucked into email or Twitter. I can see what is happening and I have to make a conscious decision to reach for the phone to reply or interact which, in turn, forces me to judge whether something is urgent enough to interrupt what I am actually doing at the time.

Overall, I feel the Apple Watch lets me be more in the moment. Prior to the Watch, you would have never seen me without my phone on my desk or on the restaurant table, screen up of course! Now, I can happily leave my phone in my bag without fear of hyperventilating. The pre-populated answers you use to reply to a message, as well as voice dictation, are useful ways to do quick triage when waiting is not an option. Even those help to limit my engagement as they encourage a quick and to the point interaction. The bottom line is, I don’t think the Watch is about active engagement the same as it is for the phone. This does not make it less valuable. To the contrary. Having something that delivers, in an immediate and easy manner, what you need without a prompt from you is valuable and convenient.

The Activity App is not the Drill Sergeant I need

The Watch complications also help with my obsession of being in control, especially as I have my activity app circles on. While I quickly got bored with the gamification aspect of the activity app and I no longer check what badges I’ve earned, I still check my daily activity and progress. As I want to get in shape, I wish the activity app offered more than the current level of suggestions for the following week. I certainly would like to be pushed harder vs. asked to settle for a lower goal after missing one. In other words, I wished the Apple Watch were more like a drill sergeant than a supportive mother providing steps on how to achieve my target rather than making me settle for less.

More context, please!

Over time, I have noticed I am not as strict as I was at the beginning with my standing and I blame the fact that the Watch is not always precise at capturing my stands. The lack of context negatively impacts my dependence on the stand reminders. If Apple Watch knows I am doing 65 miles per hour, chances are I am in a situation where standing up and moving around is not an option. If Apple Watch knows I am in a meeting because my calendar says so, I might not want to be reminded to get up. While I can mute reminders for a period of time, I wish there was some degree of automation to start with even if this requires an initial setup.

This increased context added to the more coach-like experience I am hoping for would turn the Watch, and Siri with it, more into an assistant deepening the relationship with the Watch.

Lack of compelling apps shows the current lack of devs interest

Aside from notifications, there are no killer apps I have found. After one year, I am still waiting for someone to make a decent sleeping app but I realize I might have to wait until the next generation Apple Watch when the Watch may have more sensors which will circumvent users having to enter when they go to sleep and get up. Overall, I feel developers are really not putting much effort into thinking about the Watch in a unique way. For me, the Watch is certainly not a duplication of my iPhone. The Watch is all about convenience and ease of use. Apple Pay probably best reflects what I mean. While I could do Apple Pay on my iPhone, it was not until I got it on the Apple Watch I became a regular user.

Developers seem to be waiting for more sensors and more processing power on the Watch. I am not sure if they are necessarily waiting for cellular though. I know I am not in a hurry for that particular feature if it means a compromise on battery life which right now serves me perfectly. While Apple Watch has helped my phone addiction I am not quite ready to leave my phone behind, but that is just me!

From controlling one addiction to becoming one

I like my Apple Watch and I would not go without it but I know I want more so I can love it. I want more so I can be addicted to it in the same way I have been addicted to my phone for so long. Only such a shift will make sure wearables avoid the same issues tablets experienced as they struggled to become a must-have for the masses.

On Friday, April 1, 2016, Apple celebrates its 40th anniversary. I have had the opportunity to professionally follow Apple since 1981. When I first began interacting with the company, it was a very small firm whose Apple II personal computer had gained traction with hobbyists and some schools and was just starting to leverage a software product called VisiCalc to push this computer to business users as well. At that time, most of my dealings were with Jobs and Wozniak and their small media department.

Of course over the years as Apple grew, especially after the Mac was introduced and it was marketed to the business world as part of a desktop publish solution, Apple’s place in the market became larger and the company really took off. Since then, I have had the opportunity to interact with all of their top management and have developed a pretty good understanding of their culture, how they work and what really makes them tick.

I am often asked what makes Apple successful and if they can continue that success in the future. To answer these questions, I believe one has to understand Apple’s past in order to predict its future.

The first characteristic that has made Apple successful was the visionary mind of Steve Jobs. His early vision drove Apple’s success up until he left the company in 1985. But, as history records, Steve’s management skills were sorely lacking in those days. However, as early as 1977, with the introduction of the Apple I, he set in motion one of the major tenets of Apple success. The concept of reinvention.

As you know, Apple did not invent the personal computer. That distinction lies with the late Eddie Roberts and his Altair Computer in 1974. This is the personal computer Bill Gates and Paul Allen wrote an OS for and set in motion the personal computing revolution.

Steve Wozniak was very intrigued by the Altair but did not have the money to buy one. So, in the 1975-1976 time frame, Woz created his own version of the Altair PC and tapped his friend Steve Jobs to help sell it. The result of this was Apple creating the first commercially successful PC to help kick start the PC market.

However, in 1981, IBM came to market with the original IBM PC and since IBM was a known quantity in the business world, it began to gain success and pushed the Apple II out of the limelight. This is when Steve Jobs’ “reinvention” gene kicked in again. He decided Apple needed to reinvent the PC by creating one that would be even better than what IBM had on the market. He and his team created the Mac and introduced the first graphical user interface and mouse for commercial use in a PC. Even here he was reinventing things. Both the GUI and mouse were invented inside Xerox Parc, but Jobs made it better and commercialized it with the Mac.

That idea of reinventing products was kept alive even when Jobs left the company in 1985. While Jobs made a key decision to create their own laser printer, It was John Sculley and his team that married Pagemaker to the Mac and birthed desktop publishing. Electronic publishing was not new by any means back then, but Apple reinvented it at a desktop level.

Sculley also made the major decision to put CD-Roms in all Macs and, because of this, Apple was able to use software to integrate text and media into a PC and birthed multimedia computing. Again, digital multimedia had been around for some time but Apple reinvented it in a desktop PC package.

From the latter period of Sculley’s role at Apple and until 1997, Apple fell into disarray. Much of that came from Apple losing its vision and reinvention philosophy. Their CEOs started to copy the PCs in the market in order to try and compete with them. They even allowed for a clone of the Mac and, to me, Apple lost not only its vision but its soul during that period.

But when Jobs came back in 1997, he put them back on a path of reinvention. He started with reinventing the Mac by introducing the candy-colored all-in-one iMacs. Although Apple did not invent the MP3 player, Apple did reinvent it in the form of the iPod. And Apple did not invent the smartphone, but they reinvented it in the iPhone. And tablets had been on the market for 20 years when Apple reinvented it with the iPad in 2010 and made it one of the most disruptive products we have seen in many years.

I see this principle of reinvention as a key part of Apple’s DNA. They tend to wait and see if a technology is valid and then come in with something better, tied to their ecosystem, and apply many forms of innovation to their version. Apple has not entered VR/AR yet but I suspect they will wait to see where the sweet part of this market is and then do a product better than what is on the market now.

There are rumors Apple is creating a car. I am not sure if a physical car is in the works but I have no doubt they are looking at how to reinvent the automobile experience and tie it to their ecosystem. We also know Steve Jobs gave Tim Cook a goal to find ways to reinvent the healthcare system. Apple is on track to make major contributions to the future of the health care processes and impact the interaction between health care providers and patients in new ways that will ultimately change healthcare for the better.

Apple seems content to not being the first one to market with a new technology but instead, let the market develop to a point and then enter with a product well designed, well thought out and connects to their apps and services.

Another key tenet of their strategy is based on innovation and design. I met with Steve Jobs on the second day he came back in 1997 and asked how he was going to save the company. Apple was $1 billion in the red and in serious trouble. He told me he would focus on taking care of his core customers, ones that used the Mac for graphics, engineering and design. But he also told me he would focus on industrial design. At the time, I thought he was crazy but, sure enough, industrial design has been key to Apple’s success. That, along with creating apps and services that pay great attention to detail and Apple has lived by these tenets to help make them one of the most valuable companies in the world.

The other part of the equation of Apple’s success has been its steadfast leadership who learned Jobs’ vision in person and have been chartered to drive Apple forward by preserving its culture, commitment to innovation and the quest to make Apple great at everything they do. Make no mistake about it, Apple is Steve Jobs’ company and this management team will do everything possible to drive his vision forward and keep his legacy alive.

So how does this help forecast Apple’s future? For one thing, Apple still has a lot to prove in their quest to honor and drive Steve’s Jobs’ vision and legacy into the future. And Apple is not done innovating and reinventing by any means. Also, any hardware they create, regardless of what that is, will be tied to an ecosystem of apps and services that can only grow and get better over time. But I wouldn’t call Apple’s strategy formulaic, since they often deviate and continue to bring new ideas and technology to their products and ecosystem. However, they live by the tenets I shared above and these seem to be the guiding principles for how they think about and create products and services.

When I hear Apple’s best days are behind them I just look at their history and, from what I know of this company, I factor that into looking at their future. That is why I have no doubt Apple will reinvent products, and itself, and continue to be a powerhouse in technology for decades to come.

Apple this week announced the new 9.7-inch iPad Pro, a $599 product that joins its 12.9-inch device in targeting professional users. During the event, Apple reiterated its ongoing argument that the iPad Pro isn’t just a good replacement for an old iPad but that it’s also a suitable replacement for a personal computer (from here forward, I’ll consider a PC to be any device running Windows, Mac OS, or Linux). I’ve been watching this space since the beginning and I don’t think it is terribly valuable to revisit the whole ‘consumption versus creation’ debate about tablets. Obviously, plenty of people use them to get work done and Apple, in particular, has added features to the iPad like the ability to run two apps side by side that make this easier than ever before. But one challenge to Apple’s view of the future is the app story. Unfortunately, Apple’s iPad still has a professional app problem.

Now, the knee-jerk reaction to this comment is to point to the stat, put forth during the event by Apple, that there are over 1 million apps available for the iPad today. The problem is the overwhelming majority of those apps are geared toward consumers and carry consumer-centric pricing designed to drive high volumes of downloads. Alas, these are not typically the apps professionals need to make the transition at work from a PC to an iPad.

When we talk about business users, and especially users in small to medium-sized companies, there is an incredible breadth and depth in the types of software they are using on their PCs. Small software companies create, sell, and update much of that software, charging what it costs to support these activities. Unfortunately, these prices are often not sustainable inside the App store. The fact is, the current economics, as well as the discovery system within Apple’s App Store, are not favorable to developers that create more specialized business applications with higher selling prices but smaller target markets. And that’s before we discuss the challenges around the lack of free trials and fee-based updates. Apple can make a pretty compelling argument the iPad Pro has all the power a person needs to get work done but, if they don’t have the right apps, it’s a moot point.

Enterprise Mobility

As mobile has moved from hype to buzz to reality, there’s been a strong push by the enterprise to embrace it. The result has been a significant increase in the number of mobile apps commissioned and deployed by large companies. The success of these rollouts has been spotty at best, as evidenced by research by my IDC colleague John Jackson that shows an app launch failure rate of about 30% in US enterprise surveys from 2014 and 2015. Failure being, effectively, the launch of purpose-built enterprise app that didn’t gain traction with the enterprise users it targeted.

I bring this up to show the depth of the problem: These are apps specifically created and delivered to a captive user base that still failed. You can see why small app developers, faced with deciding whether to attempt to create a new, necessarily low-priced iPad app for professionals or just to continue to support an existing app for the PC would more often choose the latter.

MS & Adobe

During its September 2015 launch event for the 12.9-inch iPad Pro, Apple brought out Microsoft to talk about Office for iPad. Today, those placing an order for a new iPad Pro can even have Apple pre-install Microsoft’s Office 365 on their new hardware. I happen to think Office on iOS is quite good. But its existence is driven by Microsoft’s realization that, for Office to stay on top, it needs to be on all platforms, not just Windows. Microsoft has deep pockets that let it subsidize the cost of creating apps for iOS and not worry about near-term profits (although I suspect its Office 365 subscriptions on iPad already clear that bar). I’d say the same about products from other large companies such as Adobe, which demonstrated its Creative Cloud at the same Apple event. Of course, there are exceptions among smaller companies, too, such as the Omni Group, which has a growing list of successful professional iOS apps. Finally, the partnership between IBM and Apple continues to drive a great deal of conversation around enterprise apps, but it doesn’t appear to be driving the creation of much in the way of general purpose business apps.

In the end, I’d like to see the iPad Pro become a larger part of the professional personal computing discussion. For many, it may prove to be an ideal end point when paired with an Apple Pencil and keyboard. From a hardware perspective, the iPad Pro is ready; from an OS perspective, I’d argue that IOS is getting closer all the time. But moving forward, if Apple wants to create the future it describes for the iPad Pro, it needs to make the necessary moves within its App store to incentivize developers to build the apps professionals in companies of all sizes need to get work done.

Apple’s legendary Super Bowl commercial promised to show why 1984 in the real world wouldn’t be like “1984” in the George Orwell book. This week, I’ve seen a number of tweets from people snickering at the fact Apple’s iPad and iPhone product lines are becoming more complex and referring to Steve Jobs’ moves back in 1997 to simplify the Mac product line. Though it’s true these portfolios are becoming more complex (more diverse might actually be a better way to put it), it’s disingenuous to pretend Apple is in the same boat in 2016 as it was in 1997, and here’s why.

The 1997 context

When Steve Jobs returned as CEO of Apple in 1997, the company was in dire straits in a number of ways. For context, here are some quick numbers from Apple’s 1997 fiscal year:

• Revenues were just over $7 billion, down from $9.8 billion the year before and $11 billion the year before that
• The company had operating and net losses of around $1 billion each that year
• Apple sold 2.9 million Macs in the 1997 fiscal year and essentially no other significant products

It was in this context Steve Jobs returned and famously became frustrated at the huge number of different Mac models Apple was producing. For further context, we’ll borrow from Walter Isaacson’s book on Steve Jobs, discussion a product review meeting shortly after Jobs became CEO again [emphasis mine]:

The product review revealed how unfocused Apple had become. The company was churning out multiple versions of each product because of bureaucratic momentum and to satisfy the whims of retailers. “It was insanity,” Schiller recalled. “Tons of products, most of them crap, done by deluded teams.” Apple had a dozen versions of the Macintosh, each with a different confusing number, ranging from 1400 to 9600. “I had people explaining this to me for three weeks,” Jobs said. “I couldn’t figure it out.” He finally began asking simple questions, like, “Which ones do I tell my friends to buy?”

It’s worth breaking that down a bit – despite the fact Apple sold under three million Macs that year, it had a dozen versions with meaningless numerical names, driven by two factors that had nothing to do with actual customers: internal bureaucratic momentum and pressure from retailers. No wonder Jobs was fuming – it would be as if 2016 Apple had twelve different versions of the Apple TV, created specifically for Best Buy, Wal-Mart, and Target. All of this led to Jobs’ radical simplification of the Mac line down to just four products according to a two-by-two matrix: consumer and professional, and desktop and portable.

Back to 2016

Let’s take a reality check about the year we’re in. In Apple’s most recent fiscal year, which ended in September 2015:

• Revenues were $233 billion, up from $183 billion the year before
• Apple made $71 billion in operating profit (or ten times 1997 revenue) and $53 billion in net income
• It sold 20.6 million Macs, 231 million iPhones, 55 million iPads, and millions of units of other products from iPods to Watches to Apple TVs

Right from the start, it’s clear 2016 is not 1997. The sheer scale of Apple’s business today and the enormous number of shipments of its key products put it in a completely different league and the financial state of its business is record-breakingly good rather than heartbreakingly bad.

Let’s take a lot at the portfolio in Apple’s two biggest product categories – iPhone and iPad. If we focus just on the current product in each category, we have:

• Three iPhones, differentiated by screen size: iPhone SE (4 inches), iPhone 6S (4.7 inches), and iPhone 6S Plus (5.5 inches), all now with very similar specs
• Four iPads, with two consumer-grade devices at 7.9 and 9.7 inches, and two professional grade devices at 9.7 and 12.9 inches.

In and of itself, that’s actually both remarkably simple, as illustrated below. Here’s the iPhone portfolio:

And here’s the iPad portfolio, which is now remarkably close to Steve Jobs’ 1997 vision for the Mac line, with two form factors and two target audiences:

Older devices and names cause complexity

What makes these portfolios more complex in reality is the fact that, ever since 2009, Apple has kept some older devices in these product lines in market even when replaced by newer versions. The iPhone 3G was the first to stick around and others since then have stayed around for several years. In the current lineups, the two iPhones 6 and the iPad Air and iPad Mini 2 fill these roles (and the replacement of the 5s by the SE in the lineup actually simplifies things). In general, those devices somewhat break the simplicity of the portfolios but, even with their inclusion, we can get a pretty simple picture for each. Here’s iPhone:

And here’s iPad:

 

I’ve used the term “sub-premium” in both portfolios – I’m sure Apple could think up a better category name here but the point is both lines offer two tiers for their mainstream devices – the best available and something slightly less. Arguably, the biggest problem isn’t the structure of the portfolio but the naming conventions. The iPad Air and Mini have different names but really belong to the same general category, while adding numerical suffixes just complicates things – having an iPad Mini 2 and 4 on sale just raises the question of what happened to the iPad Mini 3. In some ways, Apple’s 2012 strategy of naming the new iPad simply that – the New iPad – seems the better way to go here. Something similar could be done with the iPhone line too, to denote size and recency without the messy numbers and letters. It’s interesting that there’s now also a maximum of two options per device size as well.

Maturity drives diversification

The reality of 2016 is Apple sells massive numbers of iPhones and iPads each year compared to the number of Macs sold in 1997. The maturity and scale of these products demands increasing segmentation to better address the needs of a large and increasingly diverse set of customers. As growth in the overall smartphone and tablet markets slows, reaching new customers in both markets will require more targeted devices. Apple has never been a company to try to serve every segment in the market but the iPod and iPhone have significantly broadened Apple’s mass market appeal and needs to reach more segments than ever before. The challenge will be to retain simplicity in these products, to name them in a way that clearly describes the differences between them and, ultimately, to make it easy to answer Steve Jobs’ 1997 question: “Which ones do I tell my friends to buy?”

When anyone talks about VR these days, they normally bring up Microsoft’s HoloLens, Facebook’s Oculus Rift and Samsung’s Gear VR. A recent product from HTC called the Vive just entered the VR scene and we have Google’s Cardboard VR viewer that must be added to this conversation.

I have had a chance to test most of these products and the VR experience each offers is fascinating. Microsoft’s HoloLens is perhaps the most immersive of the group but Facebook’s Oculus Rift also makes one feel they are part of the action. But both of these products are at the high end of the VR experience — pricey and not what I would consider a product for mainstream consumers. On the other hand, Samsung’s Gear VR goggles at $99.00 and work with a Samsung 6 series smartphone. It is a product that can give many consumers a taste of VR and what the future of true immersive computing is all about. More importantly, with the right apps, they can participate in VR now. Although its optics are poor and it does not provide head tracking as the others do, these low cost goggles still provide a glimpse of VR and how it could impact a person’s world in many ways. And, while Google’s cardboard goggles are interesting, the experience it delivers is mediocre at best.

There is a lot of skepticism around VR with many thinking this is 3D TV all over again. Perhaps, but I think this has more legs than 3D TV and, in fact, represents the way we bring immersive computing to a very broad audience. If done properly through a PC and priced moderately, it could even help bring the PC market back to some level of growth. Today, Oculus needs a PC to run but it also needs one that has a $300 graphics card while the goggles cost $600. But what if a set of goggles could be created for under $250, use the power of Intel’s integrated graphics to drive them, and deliver a great VR experience even if it does not rival the gaming graphics of Oculus? This approach trumps any mobile VR solution that exists now and would be more affordable for many PC users.

I believe the reason VR for consumers may take off sooner than later is the travel, real estate, auto, retail and advertising industries are about to embrace VR and make it an important part of their marketing and communications platforms. For example, the cruise industry will soon be taking 360 degree photos and videos of all the rooms on their ships so, when using VR goggles, they can put a person inside the cabin they might be interested in booking and allow them to “walk in the room” to see what it is like and then explore the ship as if they are there. The real estate industry has the same goals. When looking at any property, instead of seeing 2D images of what a house or apartment looks like, 360 degree photos married to VR goggles allows them to put a person into that house or apartment so they can view it as if they were standing inside. And the auto industry will capture a 360 degree image or create a video of a car someone wants to purchase so they can look inside and out as if they are actually at the car.

Creative advertisers will soon adopt VR and shoot videos and images with 360 degree cameras and create more immersive ads that are informational and entertaining in which a person will be viewing that ad as if they are in the ad environment itself.

Last summer, I got a call from the makers of Patron Tequila who wanted to come by and see me. I had hoped they were bringing me samples but instead they showed me a VR ad for their product. It started with using VR to take a person to the agave fields in Mexico and walk with the workers as they cut down the plants. Then to their distillery to see how they make their tequila and a short section of the three different tequila’s they make and how each are different with individual flavor profiles. The concept behind this is “experiential advertising” and you can imagine, if the creative minds in ad agencies embrace VR, the world of advertising could be turned on its head.

Let’s not forget about sports. This weekend, Fox will be providing a VR of a professional fight for use with Samsung’s Gear VR goggles. I expect the sports world to begin embracing VR in a big way over the next few years and create a lot of content for these types of headsets. A leader in VR sports content is NextVR, who will be involved with the Super Bowl and delivering VR content related to this event.

Also, we expect the education market to embrace VR as well. According to an article in TechCrunch, “Google is expanding its Expeditions program, the company’s effort to bring virtual reality-based field trips to the classroom, with the launch of a dedicated Android application for schools and educators who want to take their students on virtual adventures by way of mobile devices.”

As for retail, a company called retale.com is creating a VR platform for retailers. One example is their ability to provide furniture stores with the ability to deliver a virtual experience in which one could walk into a furniture showroom and see a couch or chair they want and look at it as if they are there in person. This app even provides a virtual sales person who could help with the viewing and possible purchase. The folks at Retale.com initially are doing this for the Oculus Rift but will add other VR headsets and platforms over time.

With all of this VR activity going on, it is interesting that Apple has been silent on this subject. Yes, there are VR Apps for iOS that can be used with Google’s Cardboard goggles but, as of now, Apple does not seem to have any VR interest or strategy of their own. That does not mean they are not watching this area closely or whether they even have R&D on VR. In fact, their lack of any public commentary in this may be strategic.

As one who has studied Apple for decades, it has become clear Apple does not actually like to invent new products themselves. For example, they did not invent MP3 players but, with the iPod, they made them better, easier to use and delivered the future of mobile music to Sony’s chagrin. They did not invent the smartphone, but they eventually created the iPhone and rewrote the history of mobile communications. And they did not invent the tablet. But with the iPad, they created product that brought tablets to the masses.

Apple’s MO is to sit back and see if a product has real interest by consumers and then apply their engineering, industrial design, services, and retail might to a product with the goal of making it the best of breed solution in the market. So, should Apple jump on the VR bandwagon anytime soon? Given their history, I don’t see that happening in the near future nor would I advise it. This is a developing market that needs flushing out. On the other hand, the way they attack markets that show promise makes it possible that, while others will try and get their product adopted by consumers quickly, Apple could be the one that actually delivers a solid hardware, software, and services ecosystem. No matter when they jump in, they could become a powerful leader in this space if they wanted to.

VR is still in its infancy and the idea it would only be for gamers and high end techies at first is probably correct. And, there are big issues surrounding the creation of VR content that needs to be solved before this takes off in a big way. But as more and more lower cost VR headsets hit the market and many industries embrace these VR goggles and create content for them, I believe VR will be driven into the consumer market much faster than anyone expects and will help deliver a much more immersive computing experience that could change they way people interact with content.

There’s a whining at the threshold,
There’s a scratching at the floor,
To work! To work! In Heaven’s name!
The wolf is at the door!

~ All Apple Analysts Everywhere ((No, seriously, it was written by Charlotte Perkins Gilman, In This Our World [1893]))

In “The Shepherd’s Boy”, Aesop provided us with a wonderful fable about a boy who repeatedly cried wolf because he wanted to draw attention to himself. The moral of the story was that an alarmist might be believed once, perhaps twice, but then they would never be trusted again.

Wow, was Aesop ever wrong. If you’re an Apple analyst, you can cry wolf time and time again and each and every time, Wall Street investors will react like a flock of frightened sheep.

iPhone Sales May Be Slowing

It was the best of times, it was the worst of times. Apple just had its best year ever so, by employing some sort of perverse logic, many Apple analysts have concluded it is only logical to assume Apple must now have its worst year ever.

Wait, what?

But hold on to your hat, there’s more logic where that came from! Not only is Apple going to have a bad quarter — which inevitably means they’re going to have a bad year —  but…wait for it… it also means Apple is — dun, dun, dun — doomed!

No, seriously, an Apple analyst is literally predicting Apple is doomed.

The iPhone slowdown spells doom for Apple. ~ Jeff Reeves, MarketWatch, January 9, 2016

With all due respect, it’s pretty obvious Jeff Reeves doesn’t know how to spell.

Nature, not content with denying him the ability to think, has endowed him with the ability to write. ~ A. E. Housman

And what is triggering this coming Apple apocalypse? Why a single quarter of flat or decreasing iPhone sales, that’s what.

And what are all these gloom and doom predictions of lowered iPhone sales predicated upon?

“Channel checks.”

Seriously?

Year after year after year, channel checks have proven to be an unreliable way to gauge future sales of Apple products. But year after year after year, the cry of “channel checks” — like the cry of wolf — fills the hearts of Apple investors with dread.

I’ve been following tech for 15 years and am still startled how a random, flakey estimate can become accepted Truth in 24 hours.” ~ Benedict Evans on Twitter

Déjà Vu All Over Again ((Attributed to Yogi Berra.))

It’s not like this is anything new. People have been predicting doom for the iPhone since its inception.

Saturated

The market is already saturated with popular [phones] that are virtually free to consumers. … The old iPod magic doesn’t translate (to) the iPhone. ~ Ashok Kumar, Capital Group, 30 July 2007

Overstretched

There is no doubt, in my mind, that the whole (smartphone) sector is hugely overstretched. The whole sector is priced as if the average player would sustain 25 per cent margin in eternity. It’s bordering on absurdity. This will end in tears. ~ Per Lindberg, MF Global Ltd, Feb 2009

Tears, perhaps. But Apple cried all the way to the bank ((I cried all the way to the bank. ~ Liberace)) . Lindberg was right when he predicted Apple wouldn’t be able to sustain 25 per cent margins. It was more like 40 per cent.

No Growth

When the iPhone came out, it was so far beyond what was out there on the market, pretty much up until now, but with what’s coming out from competitors, that advantage is going away. For the first time, Apple’s going to be faced with a serious growth challenge. ~ Edward Zabitsky, ACI Research, 22 Apr 2009

Everything Has To Decline

If you look at any institution in history – look at the Roman Empire – anything in history, and what it looks like when it’s peaking. Look at Apple, and how can you say it’s not peaking? (H)ow much better can it really get? The thing is, it may take another year or two before it starts to decline, but it has to – everything does. ~ Trip Hawkins, Founder and CEO of Digital Chocolate, 3 Aug 2011

Peak

The last quarter slowdown could be foreshadowing bigger issue to come for iPhone sales and mark a peak in the growth rate of the iPhone. ~ Charlie Zhou, Seeking Alpha, 31 August 2012

Last Hurrah

With all things tech, fused products and commoditization are inevitable markers of the product cycle. The iPhone 5 will be Apple’s last hurrah as competitors increasingly gain ground. ~ Kofi Bofah, Onyx Investments, 29 August 2012

Shrinkage

Apple just reported that it sold more than 5 million iPhones over the iPhone 5′s opening weekend. This is a very disappointing number. It’s below top Apple analyst Gene Munster’s estimate of 6 million to 10 million. Worse, it indicates that growth may be slowing at Apple. Apple sold the iPhone 5 in nine countries over its opening weekend. It sold the iPhone 4S in seven. It actually sold fewer iPhones per country this year than the last. That’s not just deceleration, that’s shrinkage. ~ Nicholas Carlson, Business Insider, 24 Sep 2012

Winding Down

One thing Apple investors are waking up to, in other words, is that the iPhone’s amazing run is winding down. ~ Jay Yarow, Business Insider, 18 December 2012

Slowing Down

There’s no way around it: The iPhone business as currently constructed is slowing down significantly. ~ Jay Yarow, Business Insider, 23 April 2013

All-Time High

Apple’s struggles with the iPhone 5 appeared just shortly after the phone’s launch. That event coincided almost perfectly with Apple’s all-time high. Although the iPhone 5 has sold well (it’s the world’s single best selling phone), it failed to live up to the expectations of optimistic Wall Street analysts. ~ Salvatore “Sam” Mattera, The Motley Fool, 9 July 2013

Sales Growth Slowing

Looking at the yearly trajectory, one can see how the rate of iPhone sales growth is slowing down.” ~ Sam Gustin, Time , 28 October 2013

Slower Growth

Apple could be negatively impacted by slower growth in iPhone sales. In my opinion, the company cannot grow indefinitely in the smartphone market area and one day, it will materialize in its share price. ~ Gillian Mauyen, Seeking Alpha, 15 November 2013

Wow. Apple analysts cry wolf, wolf, wolf, wolf, wolf, wolf, wolf, wolf, wolf, wolf, wolf, wolf — with nary a wolf in sight. Yet now they expect us to take them seriously?

It is a mark of prudence never to trust wholly in those things which have once deceived us. ~ Descartes

Predictions

Let’s face it, predicting the future is not Wall Street’s forte.

Economist Alfred Cowles dug through forecasts of popular analysts who “had gained a reputation for successful forecasting” made in The Wall Street Journal in the early 1900s. Among 90 predictions made over a 30-year period, exactly 45 were right and 45 were wrong. This is more common than you think. ~ Motley Fool

Wall Street indexes predicted nine out of the last five recessions. ~ Paul A. Samuelson

The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come. A similar story can be told virtually every year. ~ The MoneyGeek Unplugged

Investment bank Dresdner Kleinwort looked at analysts’ predictions of interest rates, and compared that with what interest rates actually did in hindsight. It found an almost perfect lag. “Analysts are terribly good at telling us what has just happened but of little use in telling us what is going to happen in the future,” the bank wrote. It’s common to confuse the rearview mirror for the windshield. ~ The Motley Fool

 

Stocks have reached what looks like a permanently high plateau. ~ Irving Fisher, Professor of Economics, Yale University, October 17, 1929

To be fair, just because the pundits have been wrong in the past, doesn’t mean they will be wrong this time around. I honestly don’t know how many iPhones Apple sold this past quarter. But here’s the thing: The pundits don’t know either.

In the case of news, we should always wait for the sacrament of confirmation. ~ Voltaire

Much Ado About Nothing

Everyone acknowledges iPhone sales were unexpectedly high this time last year. That creates what analysts call a “tough compare”. In other words, Apple is being punished this year for doing so well last year.

If Apple doesn’t beat last year’s iPhone sales, it doesn’t portend an inexorable downward sales spiral. Apple is the world’s biggest company, as measured by market value, with around $525 billion market cap ((Market cap is a constantly changing number. Jay Yarrow listed it at $565 billion in his article but as of January 20, 2016 it is around $525 billion)). It has $206 billion cash on hand. It had $13.5 billion in cash flow last quarter. It is expected to do $77 billion in sales this quarter. (Via Jay Yarrow, Apple is going to have a tough year – Business Insider.) Apple remains — despite all the current kerfuffle — the most profitable company in the S&P 500.

A bad year for Apple would be a great year for almost any other company. So is Apple doomed? Not so much.

Cause And Effect

We’ve got to disabuse ourselves of this notion that short-term stock fluctuations accurately reflect the long-term health of a company.

(Wall Street) focuses on the waves and not of the currents. ~ Consuelo Mack

The breaking of a wave cannot explain the whole sea. ~ Vladimir Nabokov

Wall Street likes to focus on the short-term.

If you heat your company by burning the furniture, Wall Street will adore you and write glowing articles about you but you’ll be cold soon. ~ Farooq Butt (@fmbutt)

but a good company must focus on the long term instead.

If you’re long-term oriented, customer interests and shareholder interests are aligned. ~ Jeff Bezos

Wall Street has cause and effect reversed. You can’t tell how good or bad a company will do by looking at its stock. But you can tell how good or bad its stock will do by looking at the company. Believing the direction of AAPL stock determines the direction of Apple is like believing a weathervane controls the direction of the wind.

Buy Low, Sell High

I thought the goal was to buy low and sell high. If so, this might be a good time to buy Apple stock rather than to sell it.

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. ~ Warren Buffett

But what do I know about stocks? Not very much. But that Warren Buffett guy, he seems to know a thing or two.

If a business does well, the stock eventually follows. ~ Warren Buffett

Apple owns the high end in smartwatches, smartphones, tablets, notebooks and desktops. Seems to me, that’s a pretty good place to be.

Total Apple device shipments (iOS, WatchOS, TV, Mac) 2015 about 330.5 million. ~ Horace Dediu (@asymco) 1/14/16

The End (Or Is This Never Ending?)

Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market. ~ Warren Buffett

If you can’t tolerate fear-mongering, then you shouldn’t be in the stock market to begin with. Invest in something safer and more stable — like Syrian real estate.

“Apple is screwed” – 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015 [2016, 2017…. ~ Sammy the Walrus IV ((Sammy the Walrus is Neil Cybart’s nom de plume)) (@SammyWalrusIV)

It seems as though this has become an annual ((Semiannual? Quarterly? Daily?)) ritual. The naysayers keep crying “Wolf” and I keep responding “Bull”.

It’s always been easier to explain how Apple will fail than it is to explain how the company will succeed. ~ Neil Cybart on Twitter

If the cries of Apple’s doomsayers unnerve you, then get the hell out of Apple stock, because the FUD ((Fear, Uncertainty and Doubt)) is never going to end. Analysts are going to keep on crying “Wolf” and scared investors are going to keep on acting like sheep. Do yourself and Apple a favor. Get the flock out. Apple doesn’t want you as an investor anyway.

If you’re in Apple for only a week… or two months, I would encourage you not to invest in Apple. We are here for the long term. ~ Tim Cook

 

Apple is run ‘for the investors who are going to stay, not the ones who are going to leave.’ ~ Warren Buffett

Post Script — Just For Fun

A MAN STOMPS INTO A BAR, obviously angry.

He growls at the bartender, ‘Gimme a beer,’ takes a slug and shouts, ‘All financial advisers are arseholes!’

A bloke at the other end of the bar retorts, ‘Take that back!’

The angry man snarls, ‘Why? Are you a financial advisor?’

The bloke replies, ‘No, I’m an arsehole.’

(Just in case you’ve never read my bio, I was once a lawyer, but I didn’t feel that I was hated enough, so I became a financial advisor just in time for the collapse of the technology bubble in the year 2000.)

This is a thought I’ve had for some time now – I’ve mentioned it a couple of times in various places, but I haven’t had a chance to write down my reasons for thinking this would be a good idea until now. Given the context of Netflix’s huge international expansion, now seems as good a time as any, especially since CES has been even less newsworthy this year.

Apple has long been reported to be working on a subscription TV service. Though Apple itself has, of course, not commented on these reports, the consensus is Apple is planning a cable replacement service, but likely a “skinny” one, offering a smaller number of channels than the classic pay TV service and with a heavy focus on the on-demand aspects as well as an app-based UI for various Apple devices. However, the negotiations have apparently stalled over Apple’s desire to keep the price under a certain level which, in turn, implies breaking up the traditional bundle and the sorts of channel packages most rights owners have historically negotiated.

Given this present impasse, it makes sense to ask (A) why Apple wants to be in this business in the first place and (B) whether there might not be some other way for them to get into it. The answer to the first question is simple: as I wrote here a few months ago, I believe Apple recognizes the strategic importance of strong content services and is getting back into providing that content. Though it took a few years, Apple has finally accepted and begun to embrace the shift from by-the-drink models to subscription models, as demonstrated by its acquisition of Beats and subsequent launch of Apple Music. However, it doesn’t yet have an equivalent service for video, hence those long-standing (and so far fruitless) negotiations.

If Apple wants to launch a subscription video service, there are really only two options: traditional Pay TV or subscription video on demand as offered by Netflix, Hulu, and Amazon. In addition to the rights challenges associated with pay TV, the other problem is that pay TV at scale is an almost uniquely American phenomenon. Yes, there are other markets where people pay for satellite or cable television, but it’s nowhere near as universal and the prices are nowhere near as high. In addition, the content you’d need to provide such a service is unique in each market and, as such, launching beyond the US would mean repeating those negotiations all over again for each subsequent country. In addition, even within the US Apple would have to either acquire a plethora of local broadcasting rights (or have someone else act as an intermediary), limit local content to a few major cities, or forgo local content altogether, none of which seems appealing (something I’ve also discussed previously).

Enter SVOD as an option. Apple could create its own service – given its long-standing iTunes licensing relationships, it already has many of the pieces in place to be able to create this but an increasingly important aspect of such services is exclusive content. Though Apple is venturing into the content creation and curation business with both Beats 1 and Apple News, creating original video would be a completely new game. At the very least, Apple would have to contract this work out or make an acquisition of an existing content provider and it would be very unfamiliar territory for the company. Even after all this, Apple would be going up against the three major incumbents, with Netflix arguably strongest of all, and would therefore face an uphill battle gaining significant share.

Going back to the second of my two questions, might acquiring Netflix be an alternative route to the same goal, i.e. offering Apple customers a subscription video service? As the market leader and now the first global pay TV service, Netflix is in some ways pioneering what Apple might ultimately try to build itself and has a huge head start over anything Apple might build. Acquiring Netflix would fill the strategic hole around subscription video, while also bringing on a fast-growing and potentially lucrative revenue stream. This year’s international expansion (as I wrote elsewhere yesterday) will dent margins, but it’ll also lay the groundwork for a significant expansion in margins once those markets gain scale. I’m bullish on Netflix and its model and, although the international expansion has dominated news coverage of Netflix’s CES keynote, it also outlined several new pieces of original content and shared metrics around the success of earlier offerings. Netflix would also bring important skills for content delivery and web and cloud services, areas where Apple has consistently struggled to perform.

The main objections to all this are as follows:

• It would be a very expensive acquisition
• Netflix likely doesn’t want to be acquired
• Netflix is not exclusive to Apple devices.

Acquiring Netflix would certainly be Apple’s largest purchase to date. Apple certainly has the cash to acquire Netflix (though there’s the matter of repatriation of that cash from overseas to deal with) and, if the price was high enough, Netflix’s board would be duty bound to accept on behalf of the company’s shareholders, dealing with the second objection. The third objection is tougher to deal with or it would be were it not for the fact Apple Music is an existing high-profile example of a cross-platform content service from Apple, since its recent launch on Android. Netflix wouldn’t have to be an Apple exclusive to add value – as we’ve seen from Apple Music, there are ways to build a content service into the OS through features like Siri which can make it more compelling on owned platforms and there would doubtless be other ways to extend that, too.

Lastly, I think it’s worth noting such an acquisition would make sense even if Apple still wants to pursue its broader ambitions in the TV space. Netflix has a clear focus and has been reluctant to move beyond it but, through its international expansion, it has signed content deals and will generate name recognition in many countries where Apple’s brand currently isn’t strong in the video space. As such, should Apple eventually build a pay TV replacement service, its Netflix assets (including those content delivery capabilities) would be very useful there as well.

Do I think Apple will actually do this deal? In all likelihood, no, though I wouldn’t rule it out. But in a world where services like Netflix are taking over from the traditional pay TV, it would make a lot of sense for Apple to use some of its huge cash pile to bring the market leader in-house and plug a strategic hole at the same time.

It’s been an interesting year for Apple – they’ve announced one completely new hardware product (the Apple Watch) and two major updates to existing product lines (the 4th generation Apple TV and the iPad Pro). In the process, they’ve also launched two new operating systems: watchOS and tvOS, for the Apple Watch and the new Apple TV respectively. However, the one really new product that didn’t get a new operating system was the iPad Pro, which runs iOS, the same operating system that runs on all iPads as well as iPhones and the iPod Touch. There’s a logic to this, but there’s a case to be made Apple should have launched a new OS – call it padOS – with the iPad Pro.

What watchOS and tvOS represent

The two new operating systems Apple has launched recently are, in reality, versions of iOS optimized for two new form factors – the Watch and the Apple TV. Each of them has customizations which make them work best on, respectively, 1.5 inch screens worn on the wrist and 40+ inch screens several feet from the user, which they interact with through a remote. Even though both operating systems are based on iOS, each is markedly different. The Watch adopted a black background with circular app icons arranged in a tightly-packed mosaic rather than a grid. The Apple TV adopted a light background with landscape-orientated rectangular app icons arranged in a scrolling grid. Within apps, too, the interaction models are very different, reflecting once again the significant differences in how users will interact with them. Both tvOS and watchOS represent versions of iOS fundamentally re-thought for new form factors while retaining many of the benefits of their iOS heritage, including ease of porting apps, and concepts such as apps and the App Store.

The case for padOS

Let’s turn to the iPad Pro, and the case for an equivalent operating system optimized for that device. Like watchOS and tvOS, this operating system wouldn’t be completely new but would instead be largely based on iOS while making adjustments and optimizations for the new form factor and interaction models. In reading through the many reviews of the iPad Pro over the last few weeks, a recurring theme has been the way the iPad Pro both succeeds and fails in breaking the traditional iOS model. Though optimized in some ways for use with a keyboard and the Pencil, there are some glaring shortcomings in this approach, many of them covered very well by John Gruber. It’s hard to avoid the sense, as you read these reviews, that Apple was somewhat hamstrung in its approach to the iPad Pro by not wanting to break any of the iOS conventions, most strikingly that it should always be a touch-first operating system. That makes perfect sense on iOS devices that were never sold with official accessories like the Smart Keyboard or Pencil, but far less so on a device where one of the main selling points is the ability to work in an optimized fashion with an official keyboard.

What a separate padOS would allow Apple to do is break the set of expectations that come with iOS and to start to allow this new operating system to flourish in a way it can’t when it’s strapped so tightly to the rest of the iOS portfolio. UI changes, new interaction models, and more would make perfect sense on the iPad Pro that would be nonsensical on the iPhone and vice versa. Separating the two would allow the best features that make universal sense to exist on both platforms, while also allowing each flavor to be optimized for the devices that run it. Split-screen multitasking, picture-in-picture and other new features Apple introduced in iOS 9 suggest at least some of this can be done within a single universal operating system. But the grid of icons that characterizes iOS feels like the wrong model for the iPad Pro, where the massive amount of real estate on the home screen could be put to more efficient use. The problem is, both users and Apple engineers working on software for the iPad may well feel like the iOS badge comes with certain expectations that can’t be broken, even on a new form factor.

The clearest expression of the future of computing

I think back to Tim Cook’s comment in introducing the iPad Pro, that it represented, “the clearest expression of [Apple’s] vision of the future of personal computing”. If that’s truly the case, and all Tim Cook and Phil Schiller’s comments since then seem to bear this out, then the iPad Pro can’t just borrow iOS from the iPhone. It needs to have a dedicated operating system designed first and foremost for this device and not primarily for the installed base of 500 million or so iPhones in the world. As long as the iPad Pro is a tiny fraction of the installed base for the operating system it runs, it’s going to be very tough for it to grow into the vision of Apple’s senior management. But put a dedicated team on creating padOS, with the freedom to depart from conventions and patterns that have become inextricably tied with iOS, and you could see much more rapid development toward the device Cook, Schiller, and others are imagining. Just as it was right to launch the new Apple TV and the Apple Watch with tvOS and watchOS rather than simply versions of iOS, so to the iPad Pro’s operating system needs its own distinct identity to be able to truly flourish.

If you buy into all this, the next big question becomes which iPads should run this new operating system. Does the iPad Pro truly stand alone, or do the same accessories and interaction models eventually extend back down the line to the iPad Air and even the iPad Mini? Should those devices also run padOS? Or should the new OS instead be called iOS Pro or something else that makes clear it’s optimized for this specific device and not iPads in general? These and other questions certainly need to be answered before Apple can move forward with such a strategy but I absolutely believe Apple should be moving down this road if the iPad Pro is to achieve its full potential.

When Apple previewed the new Apple TV, Tim Cook declared, “We believe the future of television is apps.” He went on to extoll how “when you experience TV through an app, you realize how much better (TV) can be. You can search for what you want and watch it when and where you want. And you can interact with it in powerful new ways.”

This reminded me of something CBS CEO Les Moonves said back in 2012. He recounted how Steve Jobs pitched him hard for CBS to provide its shows to a proposed Apple subscription service. Moonves declined, telling Jobs, “You know more than me about 99 percent of things but I know more about the television business.”

In other words, it doesn’t matter how satisfying the viewing experience is if it can’t supply the television industry with the steady revenues needed to drive a business where the majority of shows are already expected to fail.

So it was significant this week when Apple announced that CBS and NBC were joining the Apple TV lineup just a week before the new hardware goes on sale. Apple TV now includes the top four broadcast networks plus PBS — a pretty attractive package for wannabe cord cutters.

Does this mean the networks have seen the error of their ways? Does Tim Cook’s Apple know more about television than Les Moonves and CBS? Not hardly. For one thing, the most popular content on leading apps most often comes from traditional television networks.

Though it’s true streaming services, mobile devices and DVRs have taken a toll on same-day viewing and related ad revenue, that predictable decline has been slow enough for the networks to experiment with other revenue streams. Today, they all have lucrative deals in place with some combination of Netflix, Amazon and Hulu (which is owned outright by NBC Universal, Disney ABC and Fox.) In fact, according to Morgan Stanley, Netflix spends nearly twice as much licensing shows from the broadcast networks as they do on all their original programs combined.

And no wonder. Like most video apps, Netflix resembles a stamp album of graphics and logos. The familiar ones are mostly likely the ones you recognize from traditional TV. Because TV networks build in time and space for promotion, their new shows enjoy a huge advantage over original series on streaming services. Long before digital analytics, networks cross-promoted new shows to viewers of similar or compatible series. House of Cards may be a hit for Netflix, but it may not be profitable since it carries huge cash promotional costs. Then again, it may not be a hit by conventional measures. Netflix refuses to reveal actual viewer numbers.

Broadcast networks enjoy another huge promotional advantage: their local affiliates. Never underestimate the appeal of local news and the promotional power of local promos. Even Oprah Winfrey’s eponymous OWN network floundered for years after she gave up her syndicated talk show and the thousands of local promos that supported it. It’s no accident the broadcast giants withheld their Apple TV apps until they could confidently include live streaming of their local affiliates. (ABC and NBC lets “authenticated” cable or satellite subscribers stream the local affiliate through the Apple TV. CBS charges $5.99 monthly for their All Access service, which also includes hundreds of episodes of such classic CBS and Paramount fare as Twilight Zone, Mission: Impossible and all the Star Trek series.)

My guess is Tim Cook knows very well apps themselves are merely a temporary gateway to the real future of TV and the Apple TV. If the rumors are true and Apple plans a comprehensive subscription streaming service, then the distinctive advantage may well be Siri — but only if her smart search proves smart enough. In the September demo, Siri was asked to “show me some comedies” and the Apple TV quickly displayed some popular current titles. That’s not much different from the data-driven suggestions within Netflix.

But what if you can say “Show me that comedy show with the guy from Saturday Night Live” and Siri comes up with Will Forte’s “Last Man on Earth,” Fred Armison’s “Portlandia” and Bill Hadar’s mockumentary, “Documentary Now.” And what if you can tell your iPhone or Apple Watch to “Record the Channel 4 News at Six” and feel confident you’ll find it on your Apple TV? Now you’ve really got something useful. It’s convenience for viewers and, for the TV industry, finally a tangible way to squeeze solid promotional value from all those talk show appearances and social media publicity. As if to support this theory, Apple just announced all tvOS apps must support Siri remote in their “core functionality” in order to be accepted in the forthcoming Apple TV App Store.

As a result, something else Tim Cook said earlier this week may prove prophetic. He told the Wall Street Journal Digital conference he’s “never been so confident” that Apple TV “is the foundation of the future of TV.”

There’s another reason I think Apple will succeed. Unlike other executives in the tech sector, Tim Cook and Eddie Cue almost never use the dismissive term “content.” Instead they talk about their love for music and “great TV shows.” Even in a business where only money talks, that message isn’t lost on the creative community.

OK, so I just made up a word, but it’s the best word I can think of for one of the biggest new trends with Apple’s business. One that has the potential to dramatically change its relationship with its customers. The trend I’m referring to is the increasing move at Apple to establish recurring monthly revenue relationships with its customers and move away from merely having periodic one-off payments for hardware. I think there are several very positive things that could come out of this for Apple but I think there’s also potential for a specific downside to this shift.

An increasing number of subscription services

As a company which began selling hardware and, to a lesser extent, software rather than services, Apple has dabbled over the years with various subscriptions. eWorld, back in the 1990s, was a short-lived online service sold as a monthly subscription and, with iTools, .Mac, MobileMe and most recently iCloud, Apple has had various other membership-based services, some of which have been sold on a monthly subscription basis as well. But over the last several years, Apple’s number of monthly subscription services and their centrality to its product offerings have increased quite a bit. iCloud storage is one of the most commonly used of these, with monthly plans starting at 99 cents per month and rising to $9.99 per month in the US. But Apple also has iTunes Match, priced at $24.99 per year (or just over $2 per month), Apple Music at $9.99 or $14.99 per month for the individual and family plans respectively and, of course, iOS users can sign up for a plethora of third-party services through their iTunes accounts, from Netflix to MLB.tv to subscriptions to the New York Times.

As of today, an avid user of Apple devices and their associated services could easily be spending $50 per month through their iTunes account on a combination of automatically-renewing services, billed monthly. If Apple launches a TV/video subscription service at some point (as seems likely), that total monthly bill could easily rise to $80-100. Apple is tapping into a broader societal trend away from one-off purchases and towards monthly subscriptions, which has affected everything from software (with SaaS becoming the dominant model for both businesses and consumers) to content (with the move from purchases of physical media to digital content and now to streaming services like Spotify and Hulu).

The iPhone Upgrade Program adds an interesting wrinkle

With the iPhone Upgrade Program, Apple is applying this same subscription and monthly payment model to buying hardware. Under this program, iPhone users can pay anywhere from $32 to $45 per month to lease an iPhone directly from Apple. It’s easy to imagine this kind of program being extended to other Apple hardware over time, too. Apple Watches and iPads are already offered on installment plans in at least some cases by wireless carriers and Macs of various shapes and sizes could eventually join them. As such, hardware may begin to shift from a series of occasional one-off purchases to a regular monthly revenue stream.

An affordable way into the Apple ecosystem

Combining these hardware leasing programs with the subscription services I mentioned could allow customers to buy into the Apple ecosystem for a single monthly fee starting at $50 or so and going up quite dramatically from there, depending on which Apple and third-party products they opt to include. This could potentially make Apple devices more accessible for people for whom several hundred dollar one-off cash outlays are hard to afford. It could also have a powerful psychological effect on consumer perception of the cost of owning Apple devices. It’s not a stretch to think Apple might eventually start to bundle some of these things into a single package for customers that includes music and video subscription services, cloud storage, and the like as well as hardware ownership. All of this, in turn, could help make Apple’s future financial performance more predictable, since customers would be on a regular upgrade cycle, with recurring monthly revenues, and less volatility than the current annual product launches. As such, both consumers and Apple (and its investors) would benefit – a win-win.

The potential downside – paying the Apple bill

If there’s a downside to this, it’s this regular monthly relationship could put Apple in the same boat as a number of other things consumers really don’t enjoy dealing with. A monthly Apple bill would be one of a number of bills the customer would pay in this way, along with their phone, TV, water, and electricity bills. Though the barrier to entry for the Apple ecosystem would be lower, and the psychological effect of paying $50 at a time instead of $650 is powerful, so is the effect of facing a regular monthly bill for that amount (or higher). There’s a risk that, as Apple embraces this “monthlification” of its business, it begins to occupy the same mental space for consumers as a utility.

The associations people have with the other things they pay for on a monthly basis this way are not generally positive – think of the feelings you have about your water, electricity, phone or cable bill, for example. Consumers start to become very aware of quite how much is leaving their bank account each month, and they also become more aware of periodic increases in that amount, especially if they’re hard to understand. If Apple does go down this road, it will have to be conscious of the subtle ways in which its relationship with customers will change. Though a several hundred dollar (or even several thousand dollar purchase) can be hard to stomach, once it’s made, the customer is left with full ownership of a product and the fading memory of how much it cost. But with monthly payments, the customer is constantly reminded of just how much they’re paying for the privilege of using (but in some cases not owning) those same products.

An inevitable shift

I think this gradual shift away from one-off purchases and towards monthly payments is inevitable – as I said, it’s taken over the software and content worlds already and, especially in the US, the move to monthly payments for phones is also well underway. Apple is wise to embrace this shift rather than resist it, but it also needs to be very careful about how this plays out and be especially wary of layering one monthly payment after another onto customers’ accounts. The move to monthly payments could well be a good thing for Apple and its customers. But Apple needs to make sure that’s the case in reality.