The iPhone and its Truly Disruptive Nature

Late last month I wrote about the 5 major industries impacted by the iPhone. I listed the PC, Telecom, Music, TV and Health industries that the iPhone helped change and in almost all of these cases it even forced them to change their business models.

While the iPhone impacted the industries above it also had a major impact on some specific products. As the chart below shows, in 2007, the digital camera market was about $6.5 billion. In 2014, it was about $2 billion. MP3 players represented just under $6 billion in 2007, today it is about an $800 million market. Portable navigation systems were hot in 2007 and were just over a $2 billion market; Today it is around $600 million. And Camcorders are all but gone these days. In 2007, they were a $ 2 billion market, and today it is barely an $80 million market segment.

It is remarkable how much the iPhone and smartphones, in general, have changed our world and markets over the last ten years.

But I am also struck by how much it has influenced the distribution of media platforms. As you can see from the chart below, Radio at 93% still has the largest reach when it comes to media distribution, followed by the TV at 89% and then the smartphone at 83%.

To be honest, given how much we look at our phones each day (on average of 80 times) and how central it has become to how we receive and consume information and media, I am surprised that radio and TV are as high as it regards media consumption.

I suspect that if Statista had done this chart based on age demographics, the smartphone would be # 1 regarding media consumption followed by radio and TV.

Another way to look at media consumption, especially news by demographics, comes from my friend Gary Arlen writing for MultiChannel.

In his article, he has this chart above from a Reuters Digital News Report that shares the main source of news by age. But his commentary on this chart is important-

“The infographic (pictured) from the Reuters Institute for the Study of Journalism is intuitive and simplistic. You can easily see that older people prefer TV news, while young audiences go for online and social media. No surprise there. But it’s misleading! True, the “Reuters Institute Digital News Report 2017” (unveiled this week) confirms that the screens-of-preference for younger audiences are mobile and dynamic. But identifying the platform does not necessarily tell you the source of the news. Consumers may look at an online or social media site to find reporting from established journalism sources (e.g., CNN, The New York Times, Fox News Channel) or just as easily from ersatz self-proclaimed bloggers or alt-news sources. The 136-page report delves more deeply into the distinction between the reception platforms and the actual content of the news.”

Both of these reports about media consumption underlines how important the smartphone has become regarding it serving as a media distribution medium. And I don’t see that changing anytime soon, especially with a younger generation who daily activities are driven by and centered around their smartphones.

I don’t think I can overstate how smartphones and technology, in general, have really impacted the lives of people of all ages but especially Millennials and the generation of them.
I recently attended a memorial service for a dear family friend who was a pastor-elder in my father’s religious organization and whom my father had become close to when this person was younger. He had influenced thousands of people’s lives, and at his memorial, there were many eulogies celebrating his life.

But what struck me was that almost every one of those under 30 who gave a eulogy read them directly from an iPhone or an iPad. There were no paper notes and there they read the eulogy right from their devices. Now I admit that I too have used my iPad with the teleprompter app when I have done structured speeches in the past but to see this as the main mode for these younger folks to use to deliver their eulogies was really striking for me.

While the iPhone has been a serious disruptor to many industries and changed our culture in many ways, it has only been on the market ten years. With Apple adding AR and eventually VR to their ecosystem portfolio and things like AI, machine learning, IOT and advancements in CPU’s, GPU’s, Batteries and other core technologies driving our digital revelation, I suspect the next 10 years will be even wilder in terms of the role technology plays in disrupting more industries and influencing our culture. Get ready for an even wilder ride over the next ten years.

Looking Beyond the iPhone

Today is the day. The first iPhone went on sale today, and the world would never be the same.

Over the past few weeks, many journalists have reached out to me for comments, and perspective on the iPhone’s last ten years. Not surprisingly, many of them asked the same question about what’s next? Where do we go that takes us beyond the iPhone? And can anything have the same impact? All fascinating questions, so I figured I’d add some perspective for the next ten years rooted in one of the more important observations I’ve made in recent years.

Connecting the Planet
Many of you have heard me tell this narrative before, but it is worth repeating and reminding, about what is still happening in the world around us.

The recurring debate about iPad vs. laptop continually reminds us of something so many people do not understand. The PC and Mac–for the greater part of the combined ~1.2 billion people who own one–is a work device. For the vast majority of those ~1.2 billion people, their smartphone is their primary computing device. In fact, this number gets even smaller if we just focus on the consumer installed base of PCs and Macs which is about ~700 million. We sometimes gloss over the fact that there are ~2.5 billion people on the planet for whom their smartphone is not just their primary computing device but it is their only computing device. We have successfully connected half the planet thanks to pocket computers, and we still have another 5-7 years to go to connect the other half.

The PC/Mac was a barrier to the Internet for most humans on the planet. The smartphone changed the game and Apple led that change. More interestingly for Apple, the Mac itself was a barrier to their success. The iPhone is the product that changed Apple’s fortunes and will continue down that road for some time. Think about this point in light of the Mac/PC vs. iPad debate. Apple will have ~100m Mac users, maybe ~200-300m iPad users, but in the not too distant future they will have one billion iPhone users. Whether we like it or not, we are still in the iPhone/smartphone epoch.

Consumer Adoption Cycles
The growing disconnect between the Technorati and regular humans who don’t live and breath tech all day understands how technology gets adopted. I appreciate all the industry discussion, and the desire to think about and predict what’s next but where I think there is a grave misunderstanding is the timeline for new technology.

This is where I want to share an important observation related to adoption cycles. Consumers adopt solutions to pain points very quickly. Consumers adopt new experiences very slowly. Any time a consumer is faced with something foreign, or unknown, or viewed as somewhat risky because they don’t know how they will use it, they adopt it very slowly. This is why things like smart watches, future wearables, VR, drones, AR glasses, etc., will have very long adoption cycles. From the viewpoint of how humans behave and adopt technology, the next big thing is still a long way away.

Price, naturally, plays a role in understanding these cycles as well. We have to factor in a humans willingness to adopt something brand new with the timetable to make that technology affordable. An excellent example of this, from recent history, is HDTV. There are few technologies, from the standpoint of objective value, that presented such apparent desire to own to the mainstream market than HDTV. Once you saw HDTV content for yourself, you were sold. Hdtv took ten years to go mainstream in the US, and longer in other markets. This was a combination of price, content, and a few other factors, but the point remains, one of the most compelling visual experiences took ten years to saturate the US market is telling of how slow consumers indeed move.

The Next Big Thing
I’ve said this before, and I believe it is true. The smartphone is still the next big thing. This single device is still poised to disrupt some other markets, and there is still some innovation breakthroughs (in battery tech, material science, silicon, engineering) that need to happen on the smartphone before we can start seriously considering when, and what the next personal computer for the masses will be.

Apple, AR, and The Potential for an Apple AR Headset

One of the things Apple does well is to use a platform approach to anything they bring to market. The Mac OS is a platform for hardware, software, and services. IOS is a platform for hardware, software and services and TVOS and Watch OS are also platforms in their own right.

By doing this, Apple can riff on these platforms and innovate at the hardware, OS and services level.

We are about to witness one of their most impressive riffs soon in the form of AR and how IOS 11 brings a whole new and exciting way to merge our physical world with our digital world. What is important about this initial foray into AR is that Apple is mainly using dedicated hardware in the form of the iPhone and iPad to deliver their first generation of AR solutions.

At the moment, a smartphone or tablet is the best way to deliver AR and the apps being developed will have a real augmented reality focus. In yesterday’s Think.tank column, Ben states very well that the path to AR for the masses will go through the smartphone and underlines the point I make above.

But if you follow this market you know that a there is another way being proposed to deliver AR as well, this one being pushed by Microsoft in the form of HoloLens and in a category they call mixed reality. This form of mixed reality uses a set of goggles that allows a person to see the real world around them and then superimposes virtual objects or information on top of these goggles.

This is an important distinction since Microsoft is not pushing VR in the similar way that Oculus or Vibe does in that these are closed systems, and you are actually in virtual worlds and cannot see the real world around you when in their VR applications.

While I like what Microsoft is doing with Hololens and Intel’s version of this called Project Alloy, they still use very clunky looking goggles that are heavy on the head and a lot of processing power. They get this from either a tethered solution or in Intel’s Project Alloy’s case, serious CPU’s and GPU’s embedded in their headset that is power hungry with relatively low battery life.

However, for goggles to be accepted by the mainstream public, they must be more like the glasses we have today and not int heir current form of heads up displays that make a person look like a science fiction character.

I have had the chance to see many goggles or glasses in the works, and I still don’t see either the breakthrough technology or designs that would be acceptable for consumers coming anytime soon. My sense is that they need to be more like our current sunglasses or reading glasses before the main consumer audience will every adopt them broadly. At the moment I just don’t see the technology ready to deliver on this type of glasses, which is why I believe that the smartphone and tablet will be the dominant AR delivery platform for at least another 3-4 years or even longer.

However, I do believe that Apple has designs in the works around some AR or mixed reality glasses and that these represent their natural evolution of their mobile IOS UI. While this may be quite a few years in the future, they have filed patents on a couple of glasses design, and the most recent one has an AR twist to it. http://www.techradar.com/news/apple-patent-paints-a-future-of-ar-glasses-and-gestural-controls#

Another hint that Apple is serious about some AR glasses comes with news that they recently acquired SensoMotoric Instruments. This is a company that has eye tracking technology that can be used for things like gesture controls and other AR like functions.

Here are some YouTube videos that show what this eye tracking solution from SensoMotoric can do

Here’s how SMI has presented itself at technology conferences over the past five years:
2013 – https://youtu.be/kiFpMbfj_08
2014 – https://youtu.be/sNomkPAovUE
2015 – https://youtu.be/PONJIXPJMek
2016 – https://www.youtube.com/watch?v=2HS2p2BmVsk
2017 – https://youtu.be/HtU-Y9g6Trw

David Goldman, VP of Marketing at Lumus states:

“Apple’s recent acquisition of eye tracking company SensoMotoric Instruments (SMI) is another indication that companies with plans to build head mounted AR systems would consider eyesight as the universal interface. We can expect to see tier-1 companies in the race for AR technology to either create similar homegrown solutions or to make similar acquisitions like this – in eye tracking, gesture recognition, voice recognition, and display technology companies so that another tech giant doesn’t corner the market.”

If and When Apple delivers some glasses it would be a significant extension of their platform and in this case, would most likely be the next major step in their evolution of their mobile UI that will be embedded into future versions of iOS. The big question is not if Apple will do this but when. While it is difficult to predict, I think that this is a 2020 product. Given what I know about the tech available today to deliver the kind of glasses that would deliver this new UI and be an important extension of the mobile experience in glasses that would be acceptable for the masses, I just don’t see it anytime soon. You can expect Apple and others to continue to acquire the proper technology to eventually deliver AR glasses that everyone will want to use. If I read the tea leaves right, this would allow Apple to reinvent the user interface again just as they did with the Mac and iPhone’ UI’s in the past.

The iPhone at 10 in Charts

Back in January, around the tenth anniversary of the announcement of the iPhone, I wrote here about the impact that it has had on the world, but talked mostly in qualitative terms. As we now approach the tenth anniversary of the first sales of the iPhone, it’s worth another look, this time from a quantitative perspective, because the iPhone is more or less unique among products launched in the last twenty years in the speed of its growth and its sheer scale.

Over a Billion Phones Sold

Apple sold its billionth iPhone sometime between August and September last year, and has now likely sold 1.2 billion in total. Very few products have sold a billion units in total, let alone in the space of just ten years from launch in a brand new market. The iPhone is unprecedented in the speed of its rise and the scale it’s achieved in such a comparatively short time.

But of course the iPhone wasn’t an instantaneous hit – in its first very partial quarter on sale, it sold just 270,000 units, and in its first four quarters just 5.4 million. It didn’t become a mass market phenomenon until its second year, when it sold nearly three times as many off the back of broader distribution, 3G, and the App Store. Since then, of course, it’s really taken off, rising to an annual peak (so far) of 231.5 million shipments in 2015.

Though it dipped a little the following fiscal year, the iPhone now looks to be on somewhat steadier footing again and heading for another period of growth, possibly rapid growth starting this fall.

Three Quarters of a Trillion Dollars

Not only has the iPhone sold in massive unit numbers, but the revenue associated with those shipments has been enormous too. Across its history, the iPhone has averaged around $640 in revenue per unit sold, for a total of around three quarters of a trillion dollars in total revenue since its launch ten years ago.

Three times, Apple’s quarterly revenues from the iPhone have exceeded $50 billion, and annual revenues have peaked at just under $160 million in the 2015 fiscal year. That would put it in the top twenty global companies by revenue by itself, and even the slightly lower total of $137 million in fiscal 2016 would put it easily into the top 40 globally and the top 20 in the US. And that’s without the App Store, Apple Watch sales, and other Apple products and services which are entirely tied to the iPhone installed base.

Since 2007, the iPhone has accounted for a little over half of Apple’s revenues, and since 2011 it’s accounted for nearly 60% of them, fluctuating a little from quarter to quarter, dipping as low as 57% or as high as 69% over the past few years. The iPhone is absolutely central to Apple as a company and its success since 2007, during which period its total annual revenues grew nearly ten-fold from $24 billion in 2007 to $233 billion in fiscal year 2015. Apple’s operating margins have also expanded by about ten points during that time, from 18% in 2007 to 28% in 2016, and all while spending more than ten times as much on R&D projects which have led to new products and services and will continue to do so in the coming years. Not only is Apple’s revenue today very dependent on the iPhone, but its future product lines are all enabled by the success of the iPhone too.

Another Ten Years?

Much has been made recently of what might come after the smartphone, or indeed which product being launched today might have an impact comparable to the iPhone’s ten years hence. But the smartphone is still by far the dominant consumer product, indeed the only product that’s likely to come close to 100% penetration among mature market populations and high penetration among emerging markets in the coming years too.

AR and VR, wearables, voice speakers for the home, and many other products will emerge and grow over the coming years, but none of them will come close to matching the reach of the smartphone. Indeed, the smartphone itself still seems likeliest to be the enabler of many of these new technologies. Of course, the iPhone has minority market share of the overall smartphone market, and that share will likely continue to shrink as most of the market growth comes from emerging markets where the iPhone is a bit player if it has a role at all.

But Apple will continue to capture an outsized share of revenues and especially profits in these markets, and as I suggested in that piece back in January, even among Android owners its influence will continue to be felt daily in the design, features, apps, and services used on billions of smartphones every day. Will the iPhone still be around in ten years? Almost certainly. But its impact on our lives will certainly live on for not just the next ten years but quite possibly well after that too. And Apple as a company will forever be different because of what’s happened these past ten years with its foray into the smartphone market.

 

How a Silent Data Center Trend Could Bring Modular Computing to the Masses

I’m about to do something that will shock many of you. I’m going to talk about servers and the data center. If you follow my writing closely you know my main focus is consumer technology. But this interest in a data center trend was driven by my curiosity for anything interesting at a technical level.

Futurists have been talking about modular computing for decades. The idea that the central computing core (CPU) as well as other foundational elements of a computer like GPU, storage, memory, etc., can exist unbundled from the box has been a pipe dream for a long time. Its promise is significant. Completely scalable, near limitless resources, and always upgradeable to the latest and greatest. Not having the CPU, GPU, storage, memory, sensors, etc., stuck forever in the same box thus always having to replace the whole thing to get the latest components is a compelling idea. This is exactly what Intel’s Rack Scale design does and it is fascinating and could signal an interesting trend coming to consumer electronics.

What is new about Rack Scale from Intel is that the storage, memory, and the CPU, are all modular and can be switched, replaced, and upgraded as necessary. It is a brilliant strategic move for Intel because it allows them to sell more components more frequently. Now a server IT architect can put server infrastructure in place and simply replace any and all components as needed. You can also stack many of these components together and essentially have limitless resources by leveraging the power of resources like CPU, memory, storage, etc., that exist in other parts of the data center. It is a move to truly modularize the data center and it is a fascinating technological trend the watch. The challenge for Rack Scale architectures is the software. Most server side software assumes the computing resources (CPU, GPU, Memory, Storage, etc.,) is local and it is written as such. Supporting Rack Scale architecture in the data center takes nimble software that can recognize available computing resources wherever it exists in this modular design. This is a new twist for server software architects but it’s one that was already happening thanks to machine learning. Software to support massively parallel GPU processing stacks has been the norm in the enterprise as software has been evolving to offload as many computationally intense tasks off the CPU and on the GPU. The GPU is capable of much more parallel computing than the CPU given the GPU’s architecture design. To support full modularity in the data center, we only need continue this trend to support not just the stacking of GPUs together potentially infinitely but also other components like CPU, memory, and storage.

At the heart of this trend has been fiber optic cables which are capable of passing massive computing bits over long distances. Allowing a rack of CPUs, GPUs, memory, storage, etc., to sit farther away from the core and be stacked together for scale. While this trend is new, and still evolving, from cost, power efficiency, and computational resource standpoint it seems like something which will inevitably take over data center designs.

Bringing Modularity to Consumers
As any techie will know, the best modular computer available is a huge tower which can support a racking like article I just described but all housed in the tower itself. It looks something like this:

These rigs are typically used by gamers and can house, usually, up to three GPU cards, 4-6 memory card slots, 6 (and sometimes more) storage bays, and leave room for many fans to cool it. These systems can have nearly all the components, except the CPU, frequently upgraded and swapped out. It is the ultimate machine design for expandability and flexibility with components. The problem is roughly only about 20m people in the world buy or build systems like this. So what about the promise of flexibility and expandability for the rest of us? Or are we always going to be stuck with the devices we have which get old and slow over time.

This is where I think an interesting opportunity may emerge. While Apple is not the first to make noise about this, the idea of an external GPU that can connect to your laptop or desktop via a cable has been tried before. AMD and Nvidia have had demos of this and even some past desktop machines like this Sony Vaio Z shipped with an external GPU connected with a fiber optic cable.

The idea seemed novel at the time, but has always made sense to me from a user experience standpoint. Imagine, in the future, that on my desk at home I have my wonderful big screen 8k monitor. Sitting next to that glorious monitor is a rack of three GPUs. Stacked on that is a CPU cluster rack of an additional 10 CPUs. Next to that is an additional 20 terabytes of storage and another two terabytes of RAM. I need to do some heavy lifting design, graphic work, machine learning training, etc., so I bring my laptop upstairs, plug it into my monitor and rack of external components and all of a sudden I have available to me 100 times more computing resources than exist in my notebook.

I overexaggerated the components for the sack of the example, but hopefully you see what I mean. Apple made light of this by talking about external GPU support for macOS. The software needs to understand it can look for GPU resources outside of what is stuck on its internal motherboard. The cable need to support the transferring of computational bits back and forth, but if that comes to fruition, the idea that we can have potentially limitless computing resources starts to become possible. In Apple’s use case they pointed out how you could do high-end VR on a Mac just by using your Mac with an external display. The software looks beyond the limitation of the internal GPU and runs on the external one. Need more GPU power for better gameplay? No problem just add another one, or two, or three, or four! This is the fascinating promise of modularity coming to markets beyond just the data center and high-end gaming.

This type of system can also help consumers hold onto their notebooks even longer. Perhaps not something the OEMs love but there is still great value to the users who need machines with more computational capabilities but don’t necessarily want a huge desktop tower.

Given Apple’s slight pivot with Mac to start to think more deeply about the Pro community, I fully expect whatever they have up their sleeve with Mac Pro to take a much more modular approach, like the one I described than any pro product they have designed before. I can also guarantee this will drive other Windows OEMs in the same direction and we will see more modular designs that support component expandability within their notebook, desktop, and all in one designs.

Lastly, if we carry this further, why couldn’t even things like our smartphones or tablets benefit from modular designs? Perhaps I’ll have a need someday on my iPad to connect to an external GPU, or several, to use for some computationally intense activity that the local GPU on my iPad can’t handle. The bottom line is, moving in this direction allows for more options, and expandability in critical components for our computers than anything that has existed before. If we do go in this direction, it will open new possibilities that did not exist before, not just in the data center but in the home and office as well.

Wearables Gain Momentum

Perhaps the most surprising part of Apple’s earnings for many was the clarity for Apple Watch, with Apple stating sales had doubled year-over-year. Perhaps more interestingly, Tim Cook explained Apple Watch sales doubled in six of the top ten markets where it is sold.

What makes this worth paying attention to is the bump came in a non-holiday quarter. Many of us in the analyst community who study this market have been adjusting our models to reflect what vendors and retailers are telling us about wearables — they are increasingly becoming holiday season product cycles. Digging into what happened this quarter an interesting insight emerges. After speaking with many retailers and looking at the earnings and company narratives from Fitbit and Garmin, it is clear fitness trackers had a pretty bad first quarter.

This chart looks at Fitbit and Apple Watch sales for the past few years:

Speaking with retailers specifically, Fitbit has been the bellwether for the state of the fitness tracker market. It appears, at least with all available data we have at the moment, the fitness tracker market has been struggling. Even Garmin reported revenue declines of 3% in the fitness segment of their business. Garmin attributed this to the rapidly maturing market dynamics of the fitness segment. So both Fitbit and Garmin were down in their health/fitness segment but Apple Watch doubled? Something else must be going on in the market. I have two theories.

The first is Fitbit has served as a feeder for Apple Watch. This has been a thesis we have held ever since Apple Watch entered the market but have not had any data from the past few years to quantify it. The thesis is, a consumer buys a basic fitness tracker like a Fitbit, owns it for a year or so and validates there is value with a wrist-based device but wants more than what a basic fitness tracker offers so they opt for a smartwatch, in this case, an Apple Watch. We had shades of this thesis playing out at the end of last year as this was the path of Fitbit Blaze owners who moved up to Fitbit’s smartwatch from their basic fitness tracker. If we are looking at this just from a fitness perspective, it is possible consumers who were previous Fitbit owners, and established value with the idea, graduated up to an Apple Watch. This is why it may not be coincidence Apple Watch sales eclipsed Fitbit’s in a quarter for the first time.

The second theory is the market is moving beyond fitness. It’s possible consumers are starting to see the appeal of Apple Watch beyond fitness and more for the functionality. Not to say the fitness part isn’t important but perhaps it is not the single largest factor driving sales any longer. Apple Watch has also gained quite a bit of momentum and is starting to show up in greater volume in more markets. Perhaps the Apple Watch has proved itself to the skeptics now that they see the product on more people more often in public. Therefore, Apple is starting to gain the interest of people who once expressed none in the category. The continued marketing campaigns may have helped as well but there could be a snowball effect starting to happen with Apple Watch.

We know customer satisfaction remains high for Apple Watch so it stands to reason, as more and more people (roughly 25-30 million consumers) start telling others how much they love the product and find value in what it does that, at some point, we could/should see a tipping point. Perhaps that time is now.

Of course, we would need a few more quarters of sales to see which of these theories is playing out. 2017, in my mind, has now become somewhat of a defining year for this category to see if it can break out beyond fitness. Granted, we estimate the total market size globally for just a fitness-centric wearable to be between 200-300 million, still a decent market size. Ultimately, we are still bullish on the value but the upside will ideally go beyond health and fitness. That remains the story to watch.

Apple’s iPhone 8 Positioning Dilemmas

At this point, the rumor mill surrounding Apple’s next iPhones, expected to be released in the fall, is well underway. There’s some consensus emerging around what we’ll see, at least in broad brush terms, but lots of details are still murky. Given what we seem to know at this point, I think there are a few big dilemmas Apple faces with regard to the positioning of the new phones.

What We Think We Know

At this point, there seems to be reasonable consensus on a few points:

  • Apple will release at least three phones, two along the lines of those it has released the last three years and one a high-end premium entry taking a new place at the top of the lineup
  • That premium phone is likely to be the only one with an OLED screen, as well as several other possible features, including special 3D sensors, upgraded dual cameras, new materials, and others
  • That premium device will be priced above the usual price point for the Plus model, possibly significantly above, to account for the additional cost of components and materials.

What We Don’t Know

However, there is still much we don’t know, including:

  • Whether Apple will revamp the iPhone SE, now eighteen months old and the only device in the lineup still to be using the old sharp edges rather than the rounded ones of the 6 and 7 ranges
  • Which new features will make it into the standard models and which will be exclusive to the new premium model, including smaller bezels, dual cameras, and so on
  • How much the price differential between the premium model and the Plus model will be
  • Whether all the phones will launch simultaneously or whether the premium model will become available later due to supply constraints, as reported this week by KGI.

How Apple Might Think about All This

The Push to Raise ASPs

It’s worth thinking through how Apple might think about all this, and where it might come down on these various issues. By way of context, it’s worth recalling what Apple has done with the iPhone portfolio in the past few years and what that’s done to average selling prices. The chart below has a summary:

iPhone ASPs were steadily declining from 2011 to 2014 as a result of expansion into new markets, keeping older models around longer, and so on. But, in late 2014, the iPhone 6 and 6 Plus changed all that dramatically, raising the base price of one of the models by $100 and raising ASPs by a little less than that as a good chunk of buyers opted either for the larger device or the higher storage tiers. Things slowed down as the year-old devices dropped in price and Apple subsequently introduced the iPhone SE, but they got another bump this past fall when Apple introduced the iPhone 7 range, making some features and finishes exclusive to larger, more expensive devices. It shifted the mix between the smaller and larger models and ticked ASPs up again a little.

At this point, it’s fairly clear Apple sees raising ASPs as one way to counteract the slowdown in smartphone sales. It’s likely that whatever it does this Fall will be aimed in part at achieving that objective. But it has to do so in a way that doesn’t alienate customers by making them feel they’re being pushed to spend more. That’s going to be a tricky balancing act with at least three new devices in the lineup (and even more so with a new SE). The outcome will depend, to a great extent, on how keen Apple is to boost ASP and how much it prioritizes that over other objectives.

Redesigns Up and Down the Line

The biggest question in my mind is to what extent Apple redesigns the two standard models, which have had the same basic form factor, with minor changes, for three model years already. We’ve heard a lot of reports about smaller bezels and the removal of the home button but how dramatic will that change be on the standard models and how much will that change be reserved for the premium model? In my mind, Apple has to engage in a significant redesign across the board at this point. After all, competitors are rapidly moving to smaller bezels. Ideally, it will have a similar design across the line but use OLED and perhaps some materials or finishes exclusive to the premium model.

The next question is how much the price differential will be between what I’ll call the 7S plus and the premium model. There would be a nice symmetry if the price premium were $100-120 as it has been between the base and Plus models to this point. I think the $1000 price point we’ve seen reported is likely too high. I could easily see an $850-900 price point though and, of course, higher storage tiers would push some models over $1000 on that basis.

A Balancing Act

The balance Apple has to strike is between giving at least some buyers reason to buy the premium model while allowing many others to remain satisfied with the standard models. That means a sufficient upgrade in the base models to push owners of older devices to replace them, while maintaining enough of a premium for the high-end phone to make that feel worthwhile. All this, of course, gets more complicated if there are indeed supply constraints on the premium model, especially if Apple prices it attractively and it gets a significant mix of total sales.

What Apple has to avoid at all costs is creating a situation in which the premium model is the one people really want but it’s priced too high and available in insufficient numbers for people to actually buy it. That could depress total sales and maybe even put some people off buying iPhones entirely in this cycle. The best case scenario is Apple continues to see a significant mix shift towards the larger and more expensive phones while still being able to meet demand for the other models. Whether it achieves that objective will depend on how carefully it positions the various models in the new lineup in terms of features and pricing and whether it’s able to both predict demand and secure sufficient supply to meet that demand. As we’ve seen with prior launches, that’s already been a tough objective, even without the additional complexity of this year’s launch.

Millennials and Apple

One of the key narratives I regularly encounter is surrounding the Millennial demographic and Apple. In our most recent millennial study, we included some sentiment questions about Apple we think give us some insight into the current mindset of millennials around Apple hardware. There are many data points collected by us and many other researchers to suggest Apple hardware is still highly desireable by this demographic and repurchase intent for iPhones in particular remains high among millennials. I have no data to suggest this dynamic will change and there was certainly a time when this group held Apple in the highest regard from an innovation standpoint. One of our questions was intended to see what 18-24-year-olds specifically felt about Apple when it comes to innovation.

In our last millennial study, we asked a specific question: “Which statement best reflects your feelings around Apple products?” We gave the respondents multiple choices which all reflect statements we heard frequently when we interviewed this demographic on this particular topic. The results were fascinating to dig into, particularly when you look at gender and platform. Here is the chart and answers to the specific choices we gave them.

It’s fascinating that millennial men have a much more critical eye and opinion of Apple’s perception as an innovator as compared to women. After seeing this data, it makes sense that the most vocal personalities on Twitter making noise about this are either men or millennial men. This chart also speaks volumes of a fascinating difference between the relationship men and women have with technology.

This chart below stood out to us as well. While the answers options we gave them were not necessarily limited to the notebook/desktop category, it was interesting to see this demographic’s answers when we looked at notebook/desktop operating systems — Mac and Windows owners.

Fascinatingly, Windows owning millennials feel like Apple should leave PCs to Microsoft. Another interesting statistic is nearly 25% of both Mac and Windows owners feel Microsoft is catching up with Apple in PC design and innovation.

I look at all of this in two ways. First, if the iPhone 8/X/Pro or whatever it is called is all we hear its shaping up to be, I think the perception of Apple and innovation will go up. However, that sentiment may still only be applicable to iPhones and some of the sentiment we see and hear around Macs may still exist until Apple revisits or does something to bring a breath of innovation back to the Mac. I still maintain the PC is an incredibly important platform. Even among those under 30, who still spend about four hours a day on their PCs or Macs, roughly about the same amount of time they spend on their smartphones per day. So the PC/Mac is still an important category from both a usage and engagement standpoint.

My other takeaway from this study isn’t charted here but has to do with Apple going beyond hardware with this demographic. Apple’s software (apps) only occupied two spots in the top ten of daily apps used by them — iMessage at #6 and Safari at #8. Both are good apps to have this demographic using daily but why not Mail? Gmail was number 5. This is why I hope efforts like Clips and other new apps for media creation and expression pay off for Apple. I hope Apple can engage this demographic in more ways than just hardware since that will be necessary in the years to come.

An Important Step Forward in Apple’s Strategy

As I was thinking broadly about Apple’s pricing shift with the iPad, it’s clear there is an important strategy coming into play for Apple. Any good analysis of Apple notes their value is in the ecosystem, the comprehensive whole of their offerings, not just one product, feature, or service. The more Apple products and services you use together, the better the whole experience gets. For Apple, the value runs deeper than just multiple hardware sales per customer. It’s also in understanding the customers who have more than one Apple product also spend more on apps and services and thus, are higher ARPU customers. While I don’t have the specific data to validate this, I’m confident owners of multiple Apple products are also more loyal than customers with only one Apple product. The key point is Apple’s market position strengthens when customers go deeper into their ecosystem.

With that in mind, it is now important to note that approximately 55-60% of Apple’s customer base is iPhone-only according to my model. Meaning, less than half of Apple’s total device installed base has more than one Apple product. The iPhone is the entry point (it has the largest installed base of any Apple product by far) and Apple’s strategy must include leveraging that relationship with an iPhone owner to get them deeper into the ecosystem by adding more Apple devices to their life. This is where their pricing strategy comes into play.

Neil Cybart from Above Avalon outlined the fascinating pricing strategy by Apple in this post. He expands on the observation that how Apple tends to be more aggressive on price in certain areas — Apple Watch, Airpods, even iPod — looking at it historically. This view stands in conflict to a general narrative that Apple’s product prices are always “expensive” or “high-end”. Furthermore, Ben Thompson expands on this pricing tactic with this sound observation:

…Apple is far more aggressive with pricing in these non-essential product categories: of course the company wants to provide a superior user experience and confer status, but it also wants to convince people to buy into the category in the first place. To put it in pricing terms, I strongly suspect the degree of price elasticity for a product is inversely correlated to the necessity of said product (that is the less you need a product the more sensitive you are to price).

Reflecting on both their points and looking back historically on how we have seen Apple operate on pricing strategy, it does seem clear there is a difference between how they price products they view as core or essential, like iPhone, and ones that are not. This pricing strategy is designed to get at the core of what I outlined. Apple wants to make it easy for customers to add more Apple products to their portfolio. If we follow this logic, Apple views the iPhone as essential and things like iPad, Airpods, Apple Watch, Apple TV, etc., as accessories. Sound logical — until I start to think about the Mac.

Is the Mac Essential or an Accessory?
The biggest question in my mind in Apple’s pricing strategy is related to the Mac and whether the Mac is an essential core product or one that is an accessory. There are sound arguments both ways. We can certainly argue the Mac is more like the iPhone and an essential product and I’d bet the ~100 million Mac owners out there would agree. Apple’s pricing of the Mac is more like the iPhone as it is priced well above the ASP of Windows PC market by roughly 2x. Yet, another argument can be made that Apple’s posture with the Mac is more it is a niche or non-essential product not everyone needs.

Steve Jobs’ own comments — the laptop/desktop form factor is a truck or a specialized category — would seem to support this view as well. Yet, reconciling their Mac pricing strategy within the pricing strategy of other categories continues to be a question mark using the essential vs. non-essential pricing concept. Obviously, the Mac is one of the more expensive products for Apple to make and that is a fundamental understanding. However, that does not mean Apple couldn’t create a lower-cost, entry-level Mac to entice more customers into adding a Mac to their portfolio of products. This is exactly what I’m going to argue they should do.

The shift in Apple’s iPad pricing suggests to me they understand the iPad may not fully be the PC replacement Apple hopes it would be. While they are advertising iPad Pro more aggressively with that goal, we will have to wait until the end of the year to see if these new campaigns have any impact. My gut tells me they won’t and I truly want my gut to be wrong because I believe so much in the iPad. However, nearly every data point we have from our research overwhelmingly confirms the strength of the notebook/desktop form factor for consumers. For this reason, I believe Apple should start to think about the Mac pricing strategy the same way they do with iPad and other products more complimentary to the iPhone. In fact, I’d argue the combination of Mac + iPhone is stronger in value than of iPad + iPhone. Clearly, all three together is the trifecta of computing experiences.

I’ve long argued Apple could easily jump to 10-15% share of the PC market with a simple pricing strategy for the Mac which included a price point of around $799. For example, take the current Macbook Air and offer it at $799 and I have a strong suspicion they could dramatically take share and impact the similarly priced Windows PC category. Better yet, add retina to Macbook Air and update the specs to modern components, keep it at $799 or even $899 and Apple would dramatically alter the competitive landscape of what we are seeing happen with Windows PCs and gain significant share in the worldwide notebook sales market.

Interestingly, even the iPhone has more approachable entry-level products. The Mac is the only line that doesn’t. Again, my conviction comes from a great deal of recent data over the last year or so which overwhelmingly confirms the importance of the traditional notebook form factor. If Apple was to offer an aggressively priced entry-level Mac, I’m confident this product would only strengthen their ability to attack the 60% of their base who only has an iPhone.

Apple may have thought iPad was the way to do this and that may be true. However, adding a similar strategy with Mac pricing will only help their efforts that much more.

New iPad Pricing, EDU, and the Clips Strategy

Reflecting on Apple’s announcements yesterday and it is clear the new pricing scheme of iPad is the most significant. What this demonstrates is a fascinating and nuanced observation. When needed, Apple is willing to compete more on price. In fact, I remember many years ago Steve Jobs on stage making a big deal about the iPod hitting a $199 price point and the significant jump in sales they saw when they hit that aggressive price. I view this move of bringing the price of the updated iPad Air, now called iPad, down to $329 in the same light. This move is going to all but crush many Android tablet OEMs ambitions but it carries with it a very interesting challenge for Apple as well.

While I have a hunch on how Apple will navigate this (by being this aggressive with the price of iPad), Apple runs the risk of significantly hurting the sales as well as their high-level strategy for iPad Pro as a competitor to Windows PCs. In fact, you can argue this iPad, at $329, could dramatically cannibalize sales of iPad Pro. To a degree, I think Apple is OK with this. We know the iPad Air line has been the best-selling model for some time. We also know 50% of sales of the iPad Air are to customers new to the iPad family. Up to this point, even at a $399 starting price, the iPad Air 2 was the entry level iPad. Apple has furthered and strengthened that proposition by now starting at $329. Another thing to note here on price is this will get very interesting during the holidays when we could see the price of this iPad well below $299 as retailers get aggressive with promotions.

An interesting story line to watch will be if this new pricing scheme pays off more with iPad upgraders or more with brand new iPad buyers. My gut sense is this will pay off more in getting new buyers into the iPad family, which I think is the more important strategic element of the two.

iPad versus Chromebooks
A market insight we acquired after the holiday shopping season in the West was the force behind an unusually strong Chromebook quarter at big box retail. Chromebooks had not traditionally sold well at retail as the bulk of the 1.5-2 million quarterly Chromebook volume was going direct to the education channel with very small percentages through retail. This last holiday had a slight change in that trend and the reason was because parents were noticing their kids were using Chromebooks in their classrooms and wanted them to have similar tools to use at home. At $250, with an angle for your child’s education, this seems like a no-brainer.

Apple’s pricing move with iPad is a subtle (or perhaps, not so subtle) shot at Chromebooks to attempt to gain some share back in the EDU space where Apple was gaining momentum early in the iPad lifecycle. Understandably, most educational institutions make the hardware purchasing decisions for their staff and students based largely on price. This is also slightly frustrating since I do not believe Chromebooks are the best tools for our teachers to get the most out of the benefits of technology to educate our kids and their future. But Chromebooks get the job done, in most cases. A key point is they are much more prevalent in k-5 grades than they are in Junior High, High School, or College where we see more traditional laptops and even iPads in use.

Apple has aggressively priced iPad at $299 for the direct to EDU channel which compares to the EDU ASP of Chromebooks of around ~$260 USD. The benefit to iPad is it runs all the main Google services educators use — Google Docs, Google Classroom, etc. — and it runs all the Microsoft apps educators use. Also, it has access to the apps on the iOS App Store. Competitively, it is well positioned. Apple also collaborated with Logitech on a ruggedized case that offers a direct to EDU price of $99. In total, for $399 including iPad and rugged keyboard case, with the benefit of all the apps and services educators and students need, all on one platform. The price may still seem high but we are going to talk to IT buyers in education over the coming months to see how the cost/opportunity has changed at all now that Apple has gotten more aggressive with pricing for iPad.

Strategically, we view this as an important battle for iPad and the next generation. Finally, there is an interesting trend brewing in education around BYOD for students. Since most of the software/services students and teachers use together all reside on the cloud, it technically does not matter what hardware students want to use for their needs. I’m very curious to see how this new iPad pricing strategy plays out as parents look to get their kids an educational tool they don’t just need for school but want to use for much more. Given the choice between a Chromebook, a low-cost Windows PC, or an iPad, what do you think kids will choose? I know where I would place my bet.

Clips Strategy
While I wanted this post mostly to be about iPad strategy, I did want to mention a few things about Clips.

First, this is an example of something I want to see more of from Apple. First party apps you can only find on iOS. I’ll be interested to see how Clips is accepted into the market. It will be a fascinating test for Apple to see what part of its base chooses to download and use a first party app vs. one that comes as the default. I will view this as an extremely encouraging sign if Apple can generate significant downloads and sustained usage of this app and I hope it yields many more creative apps from Apple that strengthen their differentiation.

With Clips, Apple is not trying to create an app that competes with Snapchat and Instagram, despite what people seem to believe. They are misreading the play with this app. Apple understands the importance of the camera as one of the pivotal experiences with our smartphones. This tool allows people to create and share to any network they choose. Folks may argue that young people today only live on Snapchat and Instagram and use their tools to create media. But the reality is it is commonplace for them to create media in one of those apps and then save their creation and share it broadly across many other networks. What matters is what that tool allows them to make that is creative and expressive in ways other apps do not.

My take on clips is it is extremely clever and a smart step in the right direction for Apple to own a few more core experiences with first party software. The voice to text and machine learning to know friends and family who are in the clip is also a very clever and non-threatening way to expose more people to machine learning and AI.

You can bet we are watching this one closely as well.

Smartphone Brand Stories in China

China is an incredibly important market for the global technology industry. It is also a fascinating one to study because, more often than not, the market as a whole is an anomaly. So we often see things that happen and work in China that do not provide applicable lessons for the broader technology market as a whole. One continual example of this reality is the smartphone market in China. Brands can seemingly come out of nowhere, sell tens of millions of phones in a year, then fizzle out. The technology battle that happens in China is very often one centered around brands. Chinese consumers are some of the most brand conscious in the world. It’s a fundamental idea to understand why Apple has had continued success in the region.

I decided it would be interesting to make a few observations on the Chinese market and the story of a few specific smartphone brands.
Take a look at this chart. I’ve shown the percentage of a few name brands in China and their presence by accessing a mix of Chinese apps and cellular network activity.

The data is collected from hundreds of millions of devices accessing developer tool kits provided by companies like Baidu (one of the standards for app development and analytics for Chinese developers). I see the analytics reports for all three major developer toolkits and have triangulated between them to make sure the above chart is consistent. The other point to note is this includes tablet traffic so, in the case of Apple’s share, it is what total iOS share makes about the analytics.

On the point of Apple, what you notice is the fairly consistent 30% device share using these metrics. The analytics data breaks down this data by device model for developers. They know what screen sizes, resolution, network capabilities, etc., have the majority share so they can is use their resources wisely. This is one reason so many developers in China continue to focus on iOS. Not only are Apple devices ~30% share of the market opportunity for them but Apple provides both better economic incentives for these developers (since they can make more money on iOS) but Apple also offers them far fewer hardware variables than the open ocean of Android devices that exist in China. A simple look at this data by any developer and it’s clear where your best software opportunity lies. Interestingly, the ~30% presence of iOS devices is pretty consistent with actual installed base estimates of iOS in China which we are confident is in the 30-35% range or about 280m iOS devices in total in use in China.

Samsung’s Decline
Perhaps the biggest storyline to me is Samsung’s decline in China. Before the smartphone era, and even into the beginning of it, Samsung was a dominant brand in China. Local brands becoming dominant in China is a relatively new phenomenon because, for a long time, Chinese consumers felt Chinese brands were not up to the quality of foreign brands and no one wanted to risk spending their hard earned money on a brand that could be lower quality. For this reason, Chinese consumers tended to purchase brands they were familiar with and knew were quality. Samsung was in that class. The other point to note here on Samsung is while their brand was viewed as reliable and high quality, it was also not playing in the high-end in China but competed with much more affordable, somewhat low-end devices on the price spectrum. This, I believe is the singular reason for their decline.

Apple has never competed on price in China. It kept them in a class unto themselves from a brand standpoint. Samsung’s strategy to compete on price and be affordable for a majority of Chinese consumers left them vulnerable once Chinese brands gained in recognition and were the same price or lower than Samsung. Perhaps a law of consumer electronics has emerged. Start by competing on price, and you will always compete on price. This is why we do not see brands that start in the low-end affordable market succeed in the high-end premium market.

Huawei’s Steady Climb
What impresses me most about Huawei’s growth in China is how remarkably steady their line is compared to other Android brands. This, I would argue, is the sign of a stable strategy in China and one that suggests to me they are not a “flash in the pan” story that grows fast and falls like other brands in the region.

The vast majority of data points we see on Huawei shows a continued rise in loyalty of buyers to repurchase a Huawei phone, not something we see of other Android brands in China. We also see the Huawei brand being one consumer are expressing a sentiment that they believe Huawei is innovative and, in some cases, Chinese consumers say as innovative as Apple. Also something that was not true a few years ago.

Huawei remains the brand to keep an eye on and, as I’ve said before, they are likely going to take over Samsung in many markets. I would not be surprised if, some day, Huawei takes Samsung’s place as the leader in smartphones sales worldwide.

Shooting Stars
Lastly, I want to point out the swap in places of Oppo and Xiaomi. Xiaomi was the solid number three brand in China, receiving all kinds of press, attention, and local love for their flare. Now, their trendline is in decline with no signs of recovery and Oppo is emerging as the clear number three brand with Vivo hard on its heels. It is notable Vivo and Oppo are a part of the same larger electronics company in China called BBK. If you look closely at the chart, BBK used to be a smartphone brand with Vivo as a sub-brand. Somewhere around the end of 2015, they decided to shift focus from the BBK brand to Vivo. Knowing this, if we add up the brand share of Oppo and Vivo, it comes out to 17.44% which means BBK devices as a whole would be the number two share leader in China above Huawei. This dual brand strategy of BBK is one to watch and the dynamic between these two brands, which can focus and compete in different areas independently, could cause Huawei some troubles they have not yet anticipated.

That being said, shooting stars in China can rise and fall quickly. It is important to not just look at who has the most sales share or a flashy sales data point and look at who is developing sustainable growth strategies that have worked over time, not just for one quarter. That is the broader story this chart tells.

Apple and Generation Z

I received a mixture of feedback on Twitter when I tweeted Phil Baker’s column from yesterday. Most of the feedback was critical of Phil’s point that Apple may be losing the younger generation. They argued that, because so many of them prefer Apple hardware to everything else, others do as well. This is a solid point and is mostly true. But, there are a few points worth thinking about on the subject of Apple and Generation Z.

First, I have two daughters of this generation. Second, it is nearly impossible to study this generation quantitatively because they don’t take surveys. In fact, most of the primary research we do at Creative Strategies never goes lower than 18 years old. Through some of our partner research we access, it can go as low as 16. I’ve never seen large quantitative studies from young people below the age of 16, though. Which means, for those of us working as researchers, all we have are our observational skills and an ability to study behavior and map it to future outcomes. With this point in mind, I’m going to make some observations I think will help us frame the question of Apple and the next generation.

Technology Observations of K-8th Grade Students
As a part of several research projects specific to education, I have been talking to both educators/teachers and IT managers deploying thousands of devices — Windows PCs, Chromebooks, iPads, and Macs — in their school districts. One inescapable reality I continually encounter in this research is the dominance of Google’s Chromebooks in the lower grades. When I dig into the realities behind this (which is a lot more than simply the cost of the hardware), the real value for students, parents, and educators is that they live on the cloud. I frequently heard stories of how great it is they don’t have to worry about things like file management since all assignments, documents, homework lists, projects, etc., are always stored in one central location accessible from any device they choose. This is the deeper value proposition and daily workflow this generation is using as they grow up. While it’s true to say this generation is growing up with technology, the more profound point is this is the first generation growing up depending on the cloud.

Technology Observations of Higher Education
As these kids get older and move on to high school and college, a few things change. First, they stop preferring Chromebooks and begin desiring something more like a Mac, a Windows PC, or a tablet. While their hardware desires change, they are still relying on the cloud on a daily basis. As they move up, new avenues to the cloud emerge. It is no longer just for staying connected with their teacher, managing personal assignments, etc., but it evolves to also include collaboration. The value of the cloud moves from a singular experience, one mostly via teachers and students/parents, to one that broadens to include fellow students as they collaborate on projects.

While I’m making a few big picture observations, the image I’m trying to paint is one where the cloud has become central to generation Z’s workflow. Most of the software and apps they use regularly are much more cloud-centric rather than being specific to any one hardware platform. These conclusions lead us to a few outcomes worth mentioning.

First, this generation is growing up depending heavily on the cloud. However, it is largely not Apple’s cloud. Second, the vast majority of their day-to-day software experiences are not one Apple provides — with the exception of iMessage in a few markets like the US and Safari on iOS. Things like Facebook, Instagram, Snapchat, Google Search, Google Docs, Gmail, Chrome, etc. all rank higher in daily usage than any of Apple’s first party apps on iOS for the majority of Millenials via a recent survey we just completed on 18-24 year olds.

My concern is that Apple, while still being a valued brand that makes high quality, desirable hardware for this generation, is simply becoming “just a hardware company” to them. At which point, their potential to switch to Android or something else entirely becomes more feasible when most of the main apps and services they use exist on other platforms. The reality of this, if it comes true, is Apple’s only sticky proposition to this demographic is the hardware. Which I fear runs the risk of Apple’s ecosystem lock-in wearing down over time.

If I was Apple, the first thing I would do is double-down on first-party software. I’d make sure I had a few must-have apps this generation can’t live without. Second, I’d go all-in on the cloud and try to create cloud services this generation “lives and dies on” — a phrase I have heard more than a few times from this demographic when it comes to Google Docs.

Fortunately, we have the ability and access to keep on eye on this and see what new developments take place with this younger generation of consumers. The big takeaway from me is just how cloud-centric this generation has become.

Unfortuately, while they may grow up with Apple hardware, they are not growing up in Apple’s services. Project out ten years from now, as more and more core computing experiences move to the cloud, and you can envision why that may be a problem for Apple.

Has Apple delivered Steve Jobs’ Vision of Disrupting TV?

One of the last real public mysteries surrounding Steve Jobs comes from a comment he made to his biographer, Walter Isaacson, telling him about his vision for TV. Here is the passage that caused quite a stir in the tech world when the book was released and is still a topic today:

“He very much wanted to do for television sets what he had done for computers, music players, and phones: make them simple and elegant,” Isaacson wrote. 

Isaacson continued: ‘I’d like to create an integrated television set that is completely easy to use,’ he told me. ‘It would be seamlessly synced with all of your devices and with iCloud.’ No longer would users have to fiddle with complex remotes for DVD players and cable channels. ‘It will have the simplest user interface you could imagine. I finally cracked it.’”

The tech media took Jobs’ comment at face value and started saying Apple was going to make a TV. To be fair, Jobs set this speculation up by using “TV” in the physical sense instead of what I believe was meant to be a metaphorical idea. While there have been some reports that, at some point, Apple looked at doing a TV, my sources say that idea never really got any serious support within the company. A physical TV, to Apple, is just another screen and doing one with their logo on it made no sense at all.

Six years after, I think we can look back at the comment and get a better picture of what I believe Steve Jobs was saying and how Apple is delivering on Jobs’ full vision now.

As one who has followed Apple since 1981, I have become adept at understanding what some call “Apple Speak”. This loosely means I try and look past what Apple actually says and to what is either behind the comment or what Apple really means from what is always a measured public statement.

To understand what Jobs was likely saying and how it has shaped Apple’s overall TV strategy, one has to realize that ultimately, Apple is a software and UI company first and a hardware company second. Don’t get me wrong, hardware is critical to Apple but, inside the company, it is seen as just a vehicle for delivering their software, UI and services. When the iPhone was introduced, Apple SVP of Marketing Phil Schiller showed me the original iPhone before the launch. He put it on the table in off mode and asked me what I saw. I said I saw a block of metal with a glass screen. He then told me “It is a blank piece of glass for them to deliver their exciting new software”.

I remember that conversation as if it was yesterday since it has helped me understand Apple much better over the years and has shaped my thinking and comments about Apple since 2007. Schiller’s emphasis on the idea the iPhone was a blank screen or canvas for Apple to paint on is at the heart of Apple’s real reason to exist. Jobs understood that from the time he introduced the Mac and carried it over to every product Apple has introduced since then.

The second thing to understand is all of Apple’s software innovations are built around a platform of an OS, a UI, and a set of services then delivered on “blank screens” such as a PC, tablet, phone, or even a TV. This concept of platform is what drives Apple and all of their innovation stems from this core value proposition.

A little side note about how Jobs came to develop this way of thinking. 

A few years before Sony’s founder Akio Morita passed away, I had a chance to interview him about his decision to buy a movie studio. He told me, “Movies, TV, and music are just content”. Sony wanted to own content to use on their devices. Morita made it clear to me and others these properties were just “content” for him to exploit on their devices. Jobs had met Mr. Morita and was a great admirer of his. I believe this helped Jobs formulate his view of the world and, ultimately, influenced his decision to create the iPod and eventually the iPhone. 

We all know how Apple disrupted the PC market with the Mac through its GUI and mouse. We also know how Jobs disrupted the music industry with the iPod and the communications world with the iPhone. And the iPad was the first fresh new design of a mobile computer we have had since the early days of laptops and it disrupted the PC market in many ways. They all had one thing in common — they all had a powerful platform that used an OS, UI and services delivered on some type of hardware with a screen.

Let’s look at Apple TV. When it was introduced, it was called a hobby. But since then, it has sold in the tens of millions and, for many Apple users, this is an important vehicle for streaming movies, TV, and even music to their TV. But it was an important piece of technology for Apple for another reason. It allowed them to develop a TV OS platform in real time that would allow them to create their approach to disrupting TV. While Jobs probably had an actual TV in mind when he made the statement to his biographer, his real emphasis was not on a physical box but instead, as he said, “It would seamlessly sync with all of your devices and with iCloud.” No longer would users have to fiddle with complex remotes for DVD players and cable channels — “It will have the simplest user interface you could imagine.” This was a software OS, UI and platform vision — the TV was just another “blank screen” to Jobs.

This vision of Apple disrupting TV was made clear at the recent Recode Media conference when Apple SVP Eddy Cue said, “The Apple TV platform is what was disruptive.” The disruptive nature was in creating a TV platform that delivered video on every screen Apple has in their hardware arsenal, one that has an easy UI (Siri), and uses iCloud to keep all of that content in synch and deliverable on demand. It is also a platform where Apple and their developers can create innovative apps and services to bolster this vision.

As my friend Benedict Evans of Andreesen Horwitz recently tweeted:

“Apple failed at TV makes me laugh. They’ve sold 1.5 billion TV’s” just with the iPhone and iPad. Add the TV experience to cumulated Mac’s and through Apple TV’s and that number is closer to 2 billion “TV’s.”

Apple’s TV platform allows them to innovate well beyond the OS, UI, and devices. Apple has two original content shows that will debut soon. One is focused on “Carpool Karaoke” and the other is about app developers, patterned somewhat on the concept of “Shark Tank”. Apple creating original content is just following Akio Morita’s playbook that Jobs borrowed to create a disruptive vision for their TV experience. 

Although other video distributors like Comcast, Amazon, etc. have adopted the idea of allowing a user to play back their video on TVs, tablets, and smartphones, Apple’s approach is based more on a platform play that they and their developers can innovate on to go beyond just video. Eventually, they will integrate many more features and add-on content and interactions through the Apple TV OS, something that cannot be done by pure video content distributors. 

This phase of making Apple TV even more disruptive is still in its early stages but it is clear, at least to me, Jobs’ vision of creating a richer TV environment will change the overall TV experience in time and is on track to deliver Steve Jobs’ last big vision he created for his customers. 

Apple, Content, and Exclusivity

Exclusivity = differentiation. This is a key point to understand. Apple has always remained differentiated in the market on the back of what they offer that no one else can. Apple’s management likes to call this out in presentations and earnings calls by using the phrase “only Apple.” What they are referring to is something they alone are uniquely positioned to offer. While it is true many parts of their differentiation has to do with procedures and philosophies related to hardware design, the real differentiation is combining that with the genuine nugget of exclusivity which is iOS and macOS. I can confidently say both Apple’s margins and volume sales of iPhone would be half or less of what it is today if they shipped the same Android software as everyone else. While software remains a key differentiator and the biggest factor as over time as hardware differentiation diminishes, understanding elements of content exclusivity is the next piece of Apple maintaining broader ecosystem “stickiness”.

Apps aren’t always the Answer

One of the more interesting things we have learned is the limits of the app ecosystem on Apple products beyond iPhone. While it is true Apple has the most robust developer ecosystem out there, the most fruit yielded from this seems to benefit iPhone more and other products not so much. When we looked at the upside for iPad, Apple TV, and Apple Watch, the default answer on why be bullish with these products against the competition was always the apps. However, this has not played out as a major factor for iPad, Apple TV, or Apple Watch the way we or others have thought. Of the three I mentioned, perhaps the strongest argument where this has worked is with iPad, but I’ll save some concerns on this related for a separate post on why I think Apple’s iPad strategy is at risk. That being said, what if the future of Apple TV and Apple Watch, or any other new category Apple creates, is not apps? What if the value of Apple’s large and robust developer ecosystem only yields the most fruit for iPhone and, to a degree, iPad but nothing else? While I don’t want to discount a long view that this can change, we can certainly make the case that, up to this point, apps have not moved the needle for either platform. This is where my mind turns to the need for exclusive content and services.

While it is right to be skeptical about Apple’s entry into producing original video (a la “Planet of the Apps”), largely because it is not a core competency of the company, exclusive content, both in music and video, is the only thing that will make the services themselves more valuable. I strongly believe that, without exclusive video content, Apple will have a very hard time growing the Apple TV business. As much as Apple believes they can solve the search and discovery problems of TV, there will remain very little to differentiate their Apple TV box from a much lower priced Fire TV, Roku Box, or any number of third-party hardware which play all the same apps (HBO Go, Hulu, Netflix, Amazon Prime Video (which isn’t on Apple TV)) as well as all the network apps that let me access the content I pay for. Besides a few exercise apps I use on Apple TV (admittedly not a mainstream use case), there is very little differentiating the Apple TV experience for me as opposed to other devices I use. This will remain the Apple challenge until they build consumer pull-in exclusive content. Note this stat, for example, from a series of Morgan Stanley reports I’ve read. They found that 37% of new Amazon Prime subscribers said Amazon’s original content in Prime Video was the single biggest factor in their decision to subscribe. As of Q4 2016, over 50% of new Netflix subscribers said Netflix originals where the primary reason for them to subscribe. Not surprisingly, that number goes above 70% for HBO Now. It should come as no shock that exclusive original content drives subscriptions to entertainment.

This is why I think Apple is going down the road of creating exclusive content is an important one. I agree with the assessment that Apple does not need to try and compete with Netflix or Amazon on volume. However, they must compete with them on quality or none of this will work. The analogy I’ve been giving the investor community on this was all Apple needs is one Game of Thrones. That alone could drive the differentiated value. This is the crucial step for Apple’s TV ambitions. It is chicken and egg. Reports are likely correct Apple is having trouble getting content deals done, which is no surprise because they have nowhere near the leverage they once did in the iPod era. They won’t have that leverage until they have a large enough base of customers on Apple TV, which they won’t get until they have more exclusive content. A real strategic web to navigate.

Smartphone Brand Repurchase Intention

As I’ve said before, the global smartphone sales race is establishing the global consumer tech brands to fuel the next decade. When we talked about global consumer technology brands in the past, companies like Samsung, Apple, LG, and Sony were in the spotlight. Out of those, only Samsung and Apple are left with companies like Huawei solidifying themselves in the discussion and others like Xiaomi, Oppo and, to a degree, Vivo, trying to get there. Smartphones are the entry point for the next big tech brands and, while most can make a healthy living staying in China, they will not enter the global brand picture unless they can succeed elsewhere. As Huawei attempts to grow in Europe, Africa, and parts of the Middle East, Xiaomi and Oppo are the only other brands we track beginning to make inroads in markets outside of China. Since this is a brand (or future brand) discussion, I think its helpful to see how sticky the brand is when it comes to repurchase intention.

This is likely one of the more global looking brand repurchase intention charts you will see. Most do not cover as many countries as we have access to. However, for the sake of where these brands have some traction, I’ve included a specific list of countries for balance.

The chart depicts top “brands to purchase” as the consumer’s next smartphone. I have charted it out by smartphone owners of said brands. As you can see overall, Apple’s repurchase intent is quite high. As is Samsung’s and Huawei’s when we look at the average across the six countries. You may have seen stats of Samsung’s repurchase rate being high 60% before and we can arrive there when we look at just a few countries. Similar to Apple, it varies quite a bit by specific country when we look just at that country’s responses but, given this is a more developed market look at North America, Western Europe, and China, I think it gives a holistic picture.

When I dig into this data, I’m looking more at how the Android brands are performing and where consumers are looking to go next within Android. Apple seems to maintain a 20-30% range of interest from Android brands any given quarter consistently. Where we see these spikes of intent are as consumer jump from Android brand to Android brand. Looking specifically at this chart, it seems Huawei is poised to gain a lot of customers from Xiaomi and Oppo in the near future, particularly in China. It follows along with the trend we have been seeing with Chinese consumers sentiment toward Huawei continuing to grow. In fact, recent research studies we have read from Mainland China suggest Huawei is coming up on the heels of Apple as a brand local consumers consider most innovative.

From a global perspective, Apple and Samsung are holding relatively steady. The data suggests Huawei is stabilizing as well, thanks to their efforts in recent years since there was a time when their churn was quite bad. Huawei is in a strong third place and the real question is, can any other vendor cross the 100m smartphones sold a year bar? Xiaomi came close, Oppo is nearing Xiaomi’s range with 60-70m per year but that seems to be the ceiling at the moment and largely driven by China alone.

It is worth remembering that pulling off a global brand is exceptionally difficult. Right now, Apple and Samsung are the two that have accomplished this to varying degrees. Apple has maintained a premium global brand status where Samsung has done that in some markets but not all as Apple has. Huawei is using the “affordable premium” strategy and, depending on what other hardware they feel they can tackle, it will be interesting to see how far and wide their brand can go. But, from the data we are seeing, I’m not sure anyone beyond those three is even remotely close to being included in the discussion.

Note on the data: It is not longitundinal which would yield the most accurate repurchase intention, however, I am confident it is directionally accurate.

Has Apple Missed the Voice-Controlled Hub Revolution?

By now, most have either heard of Amazon’s Echo or Google’s Home hub that uses voice as the means to get answers to questions, set alarms, play music or be used as a control center for controlling IoT devices in the home.

Amazon’s Echo is the most popular version with an estimated 11 million sold in its first year. It has also become the talk of the tech world as it has made popular the idea of voice interfaces and AI all the while becoming an entrenched concept in the minds of techies and nontechies alike.

If one looks at what Amazon has done with the Echo and, given its success with selling it by the millions, it makes one wonder how Amazon could drive this type of innovation yet Apple seems to have missed the boat altogether. Well, it comes down to a technical as well as a philosophical approach to delivering this concept of a home hub with voice controls.

Apple has invested heavily in AI and Siri and, to them, it is the best way to deliver the idea of a voice-controlled assistant. More importantly, it is primarily delivered via a smartphone with a screen that fits in your pocket. Apple’s position is that the best personal assistant is the one you have with you at all times. They recently broadened this from a mobile-only delivery platform and have extended it to Apple TV and the Mac, which makes it possible to have that voice assistant at your disposable anytime and anywhere you happen to be.

Amazon was just as enamored with voice-controlled assistants and AI but they had a problem. Unlike Apple, who had a smartphone to deliver this type of voice assistant, they killed their smartphone and did not have anything with a screen on it under an Amazon-made label. Consequently, their only way to deliver a voice assistant was through a dedicated screen-less device like the Echo. It gave Amazon a great voice assistant for the home and allowed them to deliver a sort of Trojan Horse and get people to use more of their Prime services.

We could argue all day about which approach is better. In my case, I have Siri at my disposal on multiple devices as well as an Echo in my kitchen and Echo Dots in my study and at my bedside. I like both and use them depending on my situation at the time.

There is also the issue of both platforms being used to connect to IoT devices in the home. Apple’s HomeKit has solid backing as does Amazon with their own Echo-connected ecosystem of devices. Google has both smartphones and Google Home, also with solid backing for its IoT connected devices. So, from a consumer’s standpoint, they have more options to use voice and AI than ever before.

But Apple’s decision to not create a home hub competitor is predicated on their belief that Siri at your fingertips has a much greater potential. Their recent introduction of the AirPods bolsters their thinking and position on this. Interestingly, over the years I have written multiple articles talking about wearing an earbud that would be connected to some type of pocket device to give you information on demand and allow you to interact with data. I did my first piece on this idea for a UK-based publication called Microscope in 1988.

Although it has taken decades to get here, Apple’s AirPods, tied to an iPhone, is pretty much what I envisioned when I wrote about this over the years. While I admit AirPods make one look geeky, they serve the purpose of an always on, always connected personal assistant that can act on command anytime and anywhere. This is why Apple has opted to bet on this idea rather than create a dedicated home hub like the Echo or Google Home.

As Ben pointed out in yesterday’s Insider, Tim Cook made it clear Siri and HomeKit are critical and Apple is very bullish on it.

Here is Cook’s comments on this from the anaylyst call:

“The number of HomeKit compatible accessories continues to grow rapidly with many exciting solutions announced just this month including video cameras, motion detectors and sensors for doors, windows and even a water leak. Perhaps even more importantly, we are unmatched when it comes to securing your home with HomeKit enabled door locks, garage doors and alarm systems.

I’m personally using HomeKit accessories and the Home App to integrate iOS into my home routine. Now when I say good morning to Siri my house lights come on and my coffee starts brewing. When I go io the living room to relax in the evening I use Siri to adjust the lighting and turn on the fireplace. And when I leave the house, a simple tap on my iPhone turns the lights off, adjusts the thermostat down and locks the door. When I return to my house in the evening as I near my home, the house prepares itself for my arrival automatically by using a simple geofence. This level of home automation was unimaginable just a few years ago and its here today with iOS and HomeKit.”

We recently had a stellar demo of how HomeKit with Siri works in a home fully equipped with HomeKit-connected devices throughout the house. It was impressive and underscores Apple’s belief that the best voice AI assistant is the one that is with you all of the time instead of being a single device planted in the kitchen or den.

Here is a link to the many HomeKit devices that work with IOS and Siri-
http://www.apple.com/ios/home/
https://support.apple.com/en-us/HT204903

Apple actually has a lead in this area by nature of hundreds of millions of iPhones in use around the world. In the end, I believe their approach will be the biggest winner in the home hub race. But Apple needs to be more active in promoting the idea that the iPhone and iPad, with Siri, gives you a digital assistant anytime, anywhere. They need to show that this is the best solution and to raise its profile in the marketplace.

Juicy Takeaways on Apple Post Earnings

Don’t Count Us Out In Smarthome
All of Tim Cook’s commentary during his opening statements was a shot at Amazon’s Echo and Google Home. In case you missed it, here it is in full.

“The number of HomeKit compatible accessories continues to grow rapidly with many exciting solutions announced just this month including video cameras, motion detectors and sensors for doors, windows and even a water leak.

Perhaps even more importantly, we are unmatched when it comes to securing your home with HomeKit enabled door locks, garage doors and alarm systems.

I’m personally using HomeKit accessories and the Home App to integrate iOS into my home routine. Now when I say goodmorning to Siri my house lights come on and my coffee starts brewing. When I go io the living room to relax in the evening I use Siri to adjust the lighting and turn on the fireplace. And when I leave the house, a simple tap on my iPhone turns the lights off, adjusts the thermostat down and locks the door. When I return to my house in the evening as I near my home, the house prepares itself for my arrival automatically by using a simple geofence. This level of home automation was unimaginable just a few years ago and its here today with iOS and HomeKit.”

Apple wants to make sure folks haven’t forgotten about them when it comes to the smart home. Certainly, the smart home is new and just getting started with related products having their best quarter ever this last holiday at US retail. Apple is no doubt playing the long game and is strategically positioning Siri on your iOS devices as the control center for your smart home. With all the hype and buzz around Amazon’s Echo, Apple wanted to remind folks they are just as relevant in the smart home buzz with a product over 600 million people have (iPhone) vs. one ~10m people have (Amazon Echo).

Customer Base is Growing, which is Key to Services Narrative
Apple’s services narrative is no doubt one of the more interesting story lines. Understanding this narrative requires understanding a few key points.

  1. Apple’s ARPU increases over time. There is something about Apple’s ecosystem; the longer you are in it, the more you tend to spend. This is why Apple made a point of saying revenue per user is increasing. Apple’s base is maturing and increasingly spending money on software and services to consume on their iOS devices. Apple threw out a data point we had not had before — 150M paying subscribers of subscription-based content. That includes Apple’s first party subscription content but also third party. The third party point here is key. Apple just sent a signal to the industry that, if you want to thrive with a subscription business, iOS is the platform for you.
  2. The Market Comes to Apple. Understanding that key point about the Serivces business carries with it the dependency that Apple’s customer base grows. Here again, time is on Apple’s side. Our research confirms that, the longer a consumer owns a smartphone that is not an iPhone, the more likely, over time, they are to consider buying an iPhone. Take this chart, from our fall smartphone study, which shows the year a person first got a smartphone that was not an iPhone but who has since switched.What this chart visualizes is how the highest switching percentages from Android to iOS come from people who owned a smartphone, in this case, an Android smartphone, the longest. Time favors Apple. A cleaner way of putting it is, the market tends to come to Apple vs. the other way around. This is essential to understand as Apple continues to take share in the US, China, major parts of Europe and now on a slow increase, in India.
  3. iPad Gains New Customers. Apple’s clarified on the call that a significant portion of iPad sales came from first time customers is an important one. We know the iPad replacement cycle is very long — 4-5 years. A bit longer than a smartphone and a bit shorter than a PC. But while the iPhone is clearly their largest driver of the services business, when it comes subscription services and, in particular video subscriptions like HBO Now, Starz, Hulu, Sling TV, etc., the iPad is a key platform for media services. The fact this base is growing and first time customers are joining the iPad family is a key data point.

Apple’s confidence during the call was clearly a testament to the extremely valuable customer base Apple has. They spend more money on apps and subcription services (an Apple customer is 3x more likely to subscribe to Netflix than an Android owners – via Creative Strategies Consumer Smart Cloud Study) and the clear evidence that, as a first time customer comes into Apple’s ecosystem, they spend more on a year over year basis on average. Services is an interesting business because it appears to be less impacted by seasonal trends than other products. While the $5-7b range of services revenue per quarter is not anything close to something like iPhone, the fact that it’s growing and will continue to grow and contribute increasingly meaningful value to Apple’s bottom line is significant. Apple’s goal to double the services revenue business over the next two years feels ambitous but could actually be conservative when you study the trend lines within their user base.

My main takeaway statement from this quarter’s earnings as we look out the next few years is Apple continues to perform against all odds.

Apple vs. Qualcomm

I had been waiting to comment on this until I got to the bottom of a few things. Qualcomm’s earnings call yesterday helped bring some clarity to the situation. All in all, I can’t help but feel there is something much deeper going on behind Apple’s intentions here. On the surface, it looks like they just want to pay less in royalties to boost their margins but I’m not sure that is the only dynamic at play.

In case you missed it, the Federal Trade Commission launched an anti-trust lawsuit against Qualcomm. It seemed curious at the time, but then Apple also launched a suit against Qualcomm and did so in China as well along with cooperating with the South Korea lawsuit against Qualcomm.

First, the dynamics of the relationship between Apple and Qualcomm and how it is different than most other smartphone manufacturers. At the moment, there are three companies who buy a discreet modem from Qualcomm. A discreet modem is a dedicated modem not integrated onto the SoC (System on a Chip). Those vendors are Apple, Samsung, and Huawei. Apple is the only one of those three who purchases ONLY a discreet modem from Qualcomm across the portfolio of Apple products. Both Huawei and Samsung buy a discreet modem from Qualcomm for some products and a fully integrated modem/GPU/CPU on the SoC from Qualcomm. The reason these three companies are unique is that all three of them also make their own SoCs and are not in need of Qualcomm’s Snapdragon CPU/GPU architecture since they design their own.

If we look at this lawsuit on face value, it looks like Apple wants more favorable terms from Qualcomm in what they pay in royalties. Interestingly, and this is somewhat unique to Apple, they do not pay Qualcomm anything in this agreement. Their ODMs have this royalty deal and they pay Qualcomm but Apple inherits those costs in what they pay the ODM. As a part of the agreement with Qualcomm, Apple’s ODM pays a royalty on the wholesale price of iPhone. Qualcomm clarified on their earnings call that royalty has a cap, so it’s something like X percent of the wholesale price of the product up to a certain amount. This part was likely negotiated with Apple, the ODM, and Qualcomm as some cross licensing has taken place and there is evidence, which came out in prior lawsuits, Qualcomm was giving Apple some special deals to keep them from going to any competitors (which they did when they brought Intel into the fold with the iPhone 7). While we don’t know the exact split, Qualcomm made it known that Apple and Samsung make up about 40% of their chip and licensing dollars. A lot of that has to do with royalties since both those companies are the only ones who ship in volume smartphones above $500 — Apple more than Samsung in that tier.

On their earnings call, Qualcomm defended their business model and the fair dollar amount they charge to Apple because of all the things Qualcomm provides Apple which allows them to innovate and charge a premium. Their argument for the fair value tended to lean heavily on things Qualcomm makes possible for Apple around connectivity which makes their products and services valuable. Arguably, Apple adds a bit of their IP to things Qualcomm is claiming they should get value for which is likely part of their complaint. Lots of gray areas and this will likely be a heavily contested part of the argument should this suit go to court.

Apple and Modems

Currently, Apple has modems in two products — the iPhone and the iPad. Eventually, it is likely Apple sees a future where modems exist in most, if not all their product lines. Telecom analysts have been predicting for years that notebook attach rates of modems would go up. With tablets, it has remained in the ~25-30% range, varying by quarter, but mostly to tablets (mainly iPads) going into enterprise accounts where workers are using them as their primary computers out in the field. Interestingly, I learned from a trusted source that Apple has been beefing up their training of sales staff at carrier retail stores to sell Apple Watch. Apparently, carrier channel stores have not only been focusing more on selling wearables/smart watches but that they have also sold quite well at carrier retail.

Combine that with what I have heard from big box tech retail stores like Best Buy and Apple’s support and provisions of Apple Watch supply. I conclude Apple has been doing and focusing more on the carrier channel than they have with tech retail stores with Apple Watch when it comes to third party channel. All of this signals to me that the time is near when Apple puts a modem in the Apple Watch. The challenge here remains with Qualcomm since, as I mentioned above, Qualcomm (and now Intel) play the crucial role of connectivity in Apple’s products. Looking to the future in things like Apple Watch and AirPods, if we believe those will have standalone modems someday, then Apple simply can’t work out extra space in an already cramped motherboard for a dedicated modem. They will need to integrate that modem onto the SoC for their efforts in miniaturization to go anywhere over the long haul. With Watch being the product I’m seeing add connectivity first, Apple’s entire logic in the computer on a chip design is a fully integrated board. It is hard to see either Qualcomm or Intel giving Apple the needed rights to design their modems into the chipset, which is a key part of the argument Apple is headed in the direction of designing their modems.

Back to the lawsuit. Something tells me this legal battle is more than just Apple wanting to pay what they believe is a fair price and I think Qualcomm knows this as well. On the call, President Derek Aberle spent a few minutes on a rant about how vigorously they will defend their IP and business model in court if that is what Apple wants. Then he also said, “And if we go to court, the full depth of their plans will be uncovered.” It seems like that was either a threat, saying to Apple, “we will expose your plans in court” or they just have an idea Apple has bigger plans and, some of those broad plans may require help or patents from Qualcomm.

While there is certainly a financial aspect to this lawsuit for Apple, I can’t help but have a hunch there is something much more strategic they are after and their cards are not yet fully on the table. This will be a fascinating case to watch and see what emerges during trial if Apple lets it get that far. Most analysis I’ve seen pegs the time for this to play out to be 2-3 years. Times are changing in the business for both Apple and Qualcomm, and it seems like both would be best to suited to come away with this as stronger partners than enemies.

Why Trying to Upstage Apple Could Backfire

Last Sunday, Samsung held a press conference to share why some units of the Galaxy Note 7 caught fire and caused real damage to their phones and their reputation. Although the reason is clearly a technical one, the underlying problem is they did not take the time to do the proper QA to make sure all of the components were tested properly and worked flawlessly in this new model.

More importantly, the reason they did not take the time is they wanted to beat Apple to the market with a smartphone they believed would trump what Apple would bring out in the fall and to try and minimize the damage a new iPhone would have on Samsung’s premium smartphone. Look how that turned out. Not only did they have phones “blow up”, literally and figuratively, it caused a major PR nightmare for the company that was magnified when the FAA banned the Galaxy Note7 from all airplanes and created a constant reminder to the flying public how bad Samsung’s product.

One key message to Samsung and other smartphone makers from this debacle is that trying to beat Apple to the punch to gain mind share without doing serious QA is not only foolish but could be dangerous to the public and the brand. I am still amazed Samsung let this happen, given its history of creating great and safe products. The urge to beat Apple at all costs is just not worth it.

By contrast, Apple’s QA process is precise, thorough, and detailed. They will not bring any product to market unless it meets their high standards for quality and safety. The recent delay in bringing the AirPods to market is a good example. By not getting them to market in a timely fashion for the holiday season, they left a lot of money on the table and caused great frustration to those who really wanted them for Christmas. But Apple’s attention to detail and quality outweighed any profit push. They only brought the AirPods to market when they were actually fine tuned and really ready.

Now, to be clear, Apple has not been perfect in this area. They have had a few missteps with products (remember “Antennagate?) but they were minor compared to what happened to Samsung.

Apple’s competitors need to be realistic about the market and how stumbles could really hurt them. It is one thing to think a company has a great product and believes it will be better than what the competition may bring out. But, in the case of Apple who is so secretive we never really know what they will deliver until they announce it, trying to out guess them and beat them to market without doing the proper due diligence and quality controls is pure folly.

Evaluating the iPhone’s Impact

This week marks the ten year anniversary of the announcement of the iPhone by Steve Jobs. There’s understandably been lots of reminiscing about the launch event itself, some of it rueful in relation to more recent Apple launches, but I think the most interesting thing about the iPhone launch is to think about the impact it’s had on the broader consumer technology industry.

The impact on smartphones

You’ve probably seen one of the many “before and after” pictures out there which show what smartphones looked like before the iPhone and what they came to look like afterward. The most obvious impact the iPhone had was on what smartphones in general were like after its launch. A few before-style smartphones still launched after (and BlackBerry arguably pursued mostly that model for years), but almost all smartphone makers suddenly realized the iPhone was the one people actually wanted. But it goes much further than that – the iPhone taught regular people why they’d even want a smartphone in the first place and, in the process, mainstreamed the smartphone.

Prior to the iPhone, smartphones were largely used by two classes of people. In North America, in particular, but also beyond, they were mostly used by business people and were email-centric. BlackBerry and various devices based on the Windows Mobile platform dominated this part of the market. In Europe and some other markets, however, a different type of smartphone dominated, much more consumer and media-centric, with Nokia one of the largest vendors. Though both were popular among certain segments, neither had mass-market appeal and both visions of the smartphone were limited relative to what the iPhone would become. Once launched, the iPhone arguably absorbed both those use cases in one device, though it took a year or two to get really good at business email.

The iPhone ultimately represented a different vision of what a smartphone should be – the internet in your pocket, though that was only one of the three main value propositions Steve Jobs outlined at the event. Beyond that, the iPhone would become a computer in your pocket, capable of many of the same things as your computer at your desk, but highly portable and much more fun to use. Almost every smartphone since has sought to emulate that fundamental value proposition, though it took years for competitors to match the execution. It’s impossible to know what smartphones would have been like in the absence of the iPhone – they surely would have evolved in some of the same directions over time – but it’s certain the iPhone dramatically changed the market. Whether you use an iPhone or another smartphone today, you can thank Steve Jobs and the iPhone for almost all of its functionality.

Creation of new markets

Even beyond the smartphone market, though, the iPhone has had far-reaching impact, especially following the release of the App Store a year after the initial launch. Though the value proposition of the essentially unchangeable iPhone of 2007 was already strong, what really transformed it was the App Store and all the additional value that came with it. Certainly, there were lots of existing websites which now had easy to use versions encapsulated in apps on the iPhone. But it went far further – thousands of completely new ideas found form as apps in the App Store and it’s arguable that the iPhone helped launch many companies that have become enormous in their own right. Neither Uber nor Tinder would exist today without the iPhone-driven modern conception of the smartphone. It’s also likely Facebook and Twitter would be a shadow of their current selves in the absence of the iPhone and the innovation in smartphones it drove.

Beyond apps, there are also huge new hardware categories that have emerged in recent years that were enabled by the iPhone and all that came after. Wearables are the single biggest of those, with Fitbit and other fitness device vendors benefiting enormously from easy Bluetooth LE-enabled syncing with iPhones and other smartphones. The Apple Watch also benefited from this tie-in to the iPhone. A huge variety of other smart devices, however, would also have been almost impossible without the iPhone and other iPhone-like smartphones: smart lighting, smart locks, smart scales, smart fridges, and all the other technologies we’ve seen over the last several years which rely on app controls.

And then there are the plethora of other devices which have borrowed smartphone technology and components, starting with Apple’s own iPad and an array of other touchscreen devices. Almost every small electronic device released in recent years also benefits from iPhone-driven innovation in screens, radios, chips, sensors, and miniaturization in general. Everything from drones to AR and VR technology to smart earbuds benefits from the massive scale and innovation driven by the iPhone and all the smartphones it spawned.

The most transformative product of the last 20 years

Ultimately, the iPhone is the most transformative product of at least the last 20 years, pioneering a whole new category of devices but then sowing the seeds of both new device categories and service and app businesses too. It didn’t do that all itself – many other device vendors have innovated in very meaningful ways in this market as well – but the presence of the iPhone is what prompted a massive paradigm shift by every other vendor and fomented a burgeoning of innovation across the smartphone market and many other categories. Almost none of the technology we use today is unaffected by the innovations introduced ten years ago this week.

The Challenges and Opportunities for Apple in 2017

As we head into the new year, I want to embark on a series of posts outlining the key opportunities and challenges facing some of the big names in tech. I’ll continue this over the next few weeks. Given the wave of negativity surrounding Apple at the moment, I thought looking at the key opportunities and challenges the company faces would be a good place to start.

Opportunity

iPhone 8 Super Cycle – Especially in China
Our research indicated that, in developed markets in the West (in particular the US market), we would see a stronger than anticipated upgrade cycle. All the evidence in post-Q4 sales we have seen validates our research. With this research and data in hand, we modeled different scenarios going into 2017 with the iPhone 8 super cycle in mind. The last super cycle came with a form factor change from the 5s to the 6 and 6 Plus. Consensus thinking is the next major form factor change could be another such catalyst.

Remember, Apple’s two largest markets by installed base of iPhones is the US and China. These markets combined make up nearly half of the global iPhone installed base. When these markets move, iPhone sales spike. Notably, China has a larger iPhone installed base than the US and it is altogether possible a massive refresh cycle in China alone would spur a super cycle-like sales quarter. And we do believe there is significant pent up demand in China at the moment as a huge chunk of iPhone owners are waiting for something big to come in the iPhone 8.

Just looking at the data, Chinese consumers have been holding onto their iPhones longer and longer each year. A good chunk of the Chinese consumer base who jumped into the iPhone family with a 6/6 Plus is still holding onto their devices. The replacement cycle of iPhones went up around 10% from 2015 to 2016 and there is significant evidence Chinese consumers are holding onto their iPhones longer. Per my chart below from active device data in China, we are seeing, for the first time, a mix shift toward the 7 Plus and the reasons have given us a key insight into the Chinese consumer mindset regarding Apple. They will buy whatever is perceived as a significant innovation. It appears the camera in the 7 Plus was enough to cause a mix shift. Which leads me to believe a big form factor change, the addition of OLED, wireless charging, etc., will cause a huge sales cycle in China. Should these things come in the iPhone 8, expect Apple’s sales from China to be significant.

Not to downplay the iPhone 8 opportunity at a global level but we believe the biggest opportunity awaiting Apple in 2017 is the Chinese market with the iPhone 8.

iPad Continuing to eat into PC replacement sales
Articles came out, post-CES, claiming the PC is interesting again. These articles are not wrong. However, with as much press the PC is getting and even with as many interesting innovations coming to PCs from all vendors, our firm and many others are still anticipating -6% to -8% (with a bear case of -10%) decline in the category in 2017. Those forecasts take into account all the interesting things coming to PCs.

I am still bullish on iPad. Call me stubborn but I am. I maintain all these wonderful innovations coming to PCs still over serve the mainstream consumer’s needs. Yet, I acknowledge the mainstream consumer still wants/needs more than their smartphone for many tasks which fall into the productivity and creativity department. We believe, as consumers get more comfortable around viewing the iPad as a PC (notebook/desktop) replacement, the iPad becomes an attractive platform for them to choose for these tasks.

We have been counting sales of iPads as part of the PC category for years and now many other analyst firms are doing the same. Which means, should the iPad hit the opportunity with consumers we believe it is being positioned for, we will see Apple’s share of the PC market grow dramatically in 2017 or possibly 2018.

With Apple’s move to make the iPad more directly compete with PCs, we expect their iPad products in 2017 to continue to take aim at mainstream consumers considering a new laptop will consider the iPad instead. This is, I believe, the ultimate opportunity for the iPad.

Siri – Voice Assistants
Siri is, for Apple, both an opportunity and a challenge. I’ll focus on the opportunity here. Siri remains a strategically important factor in my analysis. It is the one major feature I believe will deepen consumer loyalty to Apple in perhaps unprecedented ways, which is saying something, given Apple’s customer loyalty today. Siri has the opportunity to become your ultimate helper. We use the word “assistant” but that seems too vague. Siri has the potential to become something closer to your secretary or your concierge. The true helper that helps you get things done, manage your life, learn new things, and more in even better ways than you do today. This is the upside and Apple understands this. As they did with last year at WWDC, I expect more advanced Siri APIs to show up this June at the developer event. As Apple gives third parties more hooks to use Siri and better serve the customers of their service, apps, and more, I think we will see Siri gain the trust of Apple customers. But that trust is not quite there yet, which is the root of the challenge.

Challenges

HomeKit
In all honesty, HomeKit support is less further along than I anticipated. A key part of my analysis related to Apple revolves around them having one of the most desired, profitable, and important customer bases in the world. This reality has afforded them a number of structural advantages. Specifically, a robust third party software ecosystem creating unique, proprietary, and vastly better quality apps on iOS than on other smartphone platforms. A key assumption around HomeKit and smart connected appliances from third parties leveraged this viewpoint to conclude hardware companies would integrate HomeKit because they want to target customers who have money to spend on their products. This, however, is not happening at the pace I and many others expected. In fact, many of these vendors who used to be, or should clearly need to be Apple partners with HomeKit, are specifically not embracing HomeKit and instead supporting Google Home and Amazon Echo/Alexa.

All of this feels counter to logic. There are more iPhones in the market than Google Home or Amazon Echo by orders of magnitude. Yet the biggest names selling appliances, connected hardware for the home, etc., are not embracing HomeKit. This is troubling. Part of the issue relates to Apple’s requirements to be HomeKit capable which includes a hardware chip and participation in a particular security/privacy policy. Both things are good, since security and privacy will be essential to move the smart home into the mainstream. But, at the moment, it seems like vendors are not embracing HomeKit at the rate they are other ecosystems and Apple needs to work to change that trend.

We have a really long way to go in this space but these vendors don’t write their own software or manage their own cloud systems. This is where Amazon is seizing this opportunity and it will be interesting to see how they battle or support Apple with their own development of Alexa. I consider Amazon’s structural advantages in these areas to be a challenge for Apple.

Siri’s Challenges – Building Trust
During a round of qualitative interviews with about a dozen average consumers I spent time talking to, I heard the words “Siri is stupid” more times than I expected. Siri remains, by far, the most used voice assistant in the global market today but I’m not sure Siri has completely earned the trust of its users. Several folks in our interviews said they use Siri for some things like setting timers, reminders, etc. but then use Google voice search (via the app or web) when they need to find something out. There is no question Google search is better and I fear the main use case for voice assistants being a web search is not leaving the best first impression of Siri with its users.

As I noted in my article on AirPods, the criticism of Siri not always understanding you, or missing what you are saying, were greatly diminished with the AirPods thanks to better background noise cancellation and beam forming mics able to pick up my voice clearly. Even if we acknowledge some of the issues with Siri are not necessarily related to the backend technology but the microphone, or internet connections or some other variable, we can’t ignore that consumers see this as a failing and blame Apple or Siri and then are led to believe it isn’t good or doesn’t work as it should. It is the sentiment around consumers trusting Siri which is my biggest concern with the technology. I’m not sure consumers’ first impressions with Siri are what Apple wants or hoped for and it may be a case where having it in beta and putting it into consumers’ hands too early was a worse idea than waiting until it was absolutely ready. Only time will tell.

As we study this space over the next year, a major focus will be about sentiment and trust of these assistants. We want to learn which ones they tend to depend on more than others or in which situations than others, to get a better picture of how this may play out. But, right now, from data of customer satisfaction we have from a previous study, it seems the Amazon Echo and has higher customer satisfaction than Siri which gives Amazon the early edge in setting a better first impression.

I am not counting Apple out, not even close, but I do think some of the more negative first impressions Apple has had with Siri simply mean they have to work that much harder to establish trust and confidence that Siri is the assistant most worthy to add value to consumers’ lives.

All in all, Apple remains incredibly well positioned in many areas currently relevant as well as ones which will be relevant in the future. That does not mean they are not up against perhaps, more challenges than in previous years. It will make 2017 an interesting test for the company and their current leadership.

Why Apple Needs to take Aim at Their Core Customers

On the second day Steve Jobs came back to lead Apple in 1997, I had a chance to meet with him and ask how he planned to revive and save Apple. Apple was $1 billion in the red and we now know they were about 6-8 weeks from possibly going under. He did not hesitate to tell me he had two key initiatives to bring Apple back to health.

The first thing he told me was he was going to go back and take care of the needs of his core customers. He defined these customers as the creative types who loved the Mac as well as engineers, programmers, publishers, and ad agencies. Indeed, these were the users who put the Mac on the map when it was first released in 1984. Jobs felt that, in the time he had been gone, past Apple CEOs had forgotten about these customers as they tried to expand the Mac’s reach in the marketplace.

The second thing he said he would do would be to focus on industrial design. Even then, Jobs saw something none of us did at the time. He started Apple down a path towards making design a cornerstone of all Apple’s future products.

But it was his first initiative that has been coming back to me a lot these days as have I read multiple stories that suggest Apple has been too slow to upgrade products and be more innovative on the Mac, especially when it comes to meeting the needs of their core customers. Various articles suggest Microsoft, particularly with its Surface tablet PCs and their new desktop Surface Studio is now the leading innovator in developing products for the creative professionals and they are starting to steal Apple’s core customers.

Over Thanksgiving, I was told of a person who had been a major Apple devotee and was a serious creative professional. This person decided to buy a high-end Windows machine, adding key processors and components to it. They said the renderings they were doing took considerably less time than it did on their Mac Pro. Consequently, his entire team bought these new modified Windows machines and sidelined the Mac Pros.

This may be an isolated case. I have also talked to other high-end creative types and, given their significant investments in software and hardware designed around Apple products, I just can’t see them ever jumping over to Windows. However, the fact this one creative pro was able to upgrade a Windows machine to deliver more power for faster rendering of their work is not something Apple can ignore.

The one complaint that seems common is it takes Apple too long to bring out new MacBook Pros and Mac Pros to keep up with the growing needs of the creative professionals. This is not necessarily Apple’s fault. They rely on the processor upgrade cycles Intel has on next generation CPUs and especially ones that would meet Apple’s design and power criteria. But it did take them 14 months to bring out a new MacBook Pro, something that has caused frustration from their creative community of users.

I believe Apple still has the creative community high in their focus. Although, to be honest, the products for this class of users are more like trucks than sedans. When Steve Jobs introduced the iPad in 2010, he said PCs were like trucks, designed for specific uses, but the iPad was more like a car and where the largest growth in users would be. Although I believe Apple will always make Mac Pros, MacBook Pros, and MacBooks (representing around $20 billion of their current revenue), I do think that, over time, they would like to see more and more people transition to an iPad Pro and iOS as it has the best link to their services business, which is a huge growth segment for them.

Regardless of Apple’s long term strategy, I do think Steve Jobs’ goal to keep their core customers happy needs to be top of mind for Apple. I also think they probably do need to be quicker in innovating around the Mac Pro platform as it is clear Microsoft has these same customers on their radar and would love to steal them from Apple if they can. While this market is small, the products for these customers have high margins and is still a very lucrative product line for Apple. I don’t think they want to give up any ground to Microsoft if possible and I do expect them to continue to make the MacBook Pro and Mac Pro the best of class tools for the creative community.

Reflections from a Day with Microsoft and a Day with Apple

Getting Thing Done vs. Doing New Things – by Ben Bajarin

My friend Benedict Evans had a great post a while back where he outlined how, when a technology is toward the end of its cycle, it tends to be at its best. This sticks in my mind as I reflect on the last few days with both Microsoft and Apple releasing some of the best PCs we have seen in some time. In fact, if you look at the modern PC lineup from all major PC OEMs overall, they are they best we have ever been.

This makes sense for a category over 30 years old. By now, we know exactly what people do with these devices and are able to focus innovations in hardware and software on the tried and true behaviors of PC users. Here again, Steve Jobs’ metaphor of the PC being a truck is proving true. When you look at the modern innovations of trucks — how much they tow, innovations in the truck bed for more durability and heavier loads, the lowering of the tailgate with a gesture, etc. — they are optimized for workflows of a very specific type of worker. This is exactly what we are seeing with the PC category.

The focus of all hardware and software in the PC category is not about doing new things. It’s about doing the things we need to do even better. There is a hyper-optimization trend for the specialized user who values things like a full tough screened all-in-one computer, or pen input, or a TouchBar. But we must not forget this is a very small segment while also a valuable one. It makes perfect sense for Apple and Microsoft to focus their innovations in hardware for a group who values it. This, again, is exactly how trucks are made and why trucks are not cheap.

We are expanding our tools for computing so that we are now in a space where the type of job you have will dictate the type of tool (PC) you use. This reminds me of hammers. I have a hammer. It is a very basic hammer and, as far as hammers go, there is nothing special about it. My brother-in-law, who is a carpenter, has a different kind of hammer. His hammer is specialized to the task he does every day and makes his life easier. He has a framing hammer which has a longer, curved handle, larger head, better weight distribution to drive framing nails into studs with less effort, yet innovations in wood, carbon, and steel make it lighter than my hammer. It also costs $100. He hammers nails every day and I hammer maybe once a month. Hence, I’m not spending $100 on hammer. Yet, while he could get away with using my hammer in his day job, he uses a tool better suited for the task. This is exactly what we have now in the PC category.

When you hammer nails all day, you look at framing hammer features and functions and can see why they are valuable to you. You are self-aware of your pain points and what products have features which speak to you and help you do your job better.

Looking back, competition is what got us here. It was Microsoft’s desire to respond to the competition of the iPad that led them down the path of an ecosystem of touch-based PCs in the market today of all shapes and sizes. I’d argue it was competition from touch-based PCs which led Apple to the TouchBar. All desktops and notebooks used to look the same in form and function but now we have a diversity of the portfolio, each focusing on a piece of the pie instead of the whole pie itself. This is good for everyone who needs a PC on a daily basis to get stuff done.

From a hardware standpoint, what I found interesting was how the difference in philosophy between desktops and notebooks and between Apple and Microsoft have led the Mac to be on an island all by itself. No touch screen, but TouchBar. Which, in my mind, means the iPad Pro is what is actually competing with Windows PCs and tablets that are pushing touch experiences and software as a part of their work flow. If consumers compare the tools this way, I think things may get very interesting from a sales perspective.

Now, thinking about the future. Everything from this week is about getting things done, not doing new things. The big question facing the industry is, what’s next? Inevitably, letting humans do things not possible before with any previous tool is part of what is next. My gut says it is something in the AR/VR/AI spaces. This is where Microsoft’s announcement around Windows that the upcoming release will support Windows holographic VR and AR experiences is interesting. Arguably, by the end of next year, Microsoft could have well north of 400 million PCs in the market capable of having an AR/VR experience with hardware built on the Windows Holographic platform which can start as low as $299. As software developers start enabling humans to do new things, then we are breaking new ground. This is exciting and the next decade is going to be very interesting but the PC, as we know it, is nearing its end. Parts of the old will still linger in the new but it will be all the new things made possible with the latest tools that will lead us to look back at PCs of old and reminisce.

What Was at Stake this Week for Microsoft and Apple? – by Carolina Milanesi

Ben focused on the touch approach of these two companies and the impact of what was announced this week might have on the market. I would like to take a moment to talk about how different these two events were as far as the impact they will have on the two brands.

For Microsoft, we were at their device event yet we were asked to imagine what we could do with Windows 10 and with the Creators edition in particular. It took almost an hour to get to the new devices in Microsoft’s attempt to continue to balance a platform for all the partners and their own portfolio of devices. Overall, however, the day did a lot to lift the Microsoft brand and Windows ecosystem.

Paint 3D and the whole focus on bringing 3D to the masses; People, the new app that puts people at the center of your communication flow; HoloLens in B2B and B2C — all point to a Microsoft really focusing on setting the foundations for the next era of computing and investing in becoming the go-to brand for the next generation. As I mentioned on Twitter during the event, it is so refreshing to see Microsoft looking ahead to the next generation of users without letting the current users drag them down and limit their possibilities.

Surface is the best showcase for that next vision. A vision that started with Panos Panay’s team rethinking the PC in 2012. A vision that, while from a hardware perspective required a few iterations, it was one others within the Windows ecosystem as well as Apple and Google validated by launching similar products. What we saw yesterday however, is even more powerful than the first Surface as software, apps and hardware really came together with the Surface Studio to an extent we have not seen before. Validating Steve Job’s vision: “People who are really serious about software should make their own hardware.”

So let’s forget about the fact the Surface Studio might not be for everyone because of pricing and the focus on drawing/sketching. Let’s focus on the excitement the device is bringing to the Microsoft brand and Surface by drawing people into stores. Let’s look at the impact the Surface Dial might have in having developers think of how to take advantage of it. Finally, let’s think of the people that might end up considering a Surface Pro because of Surface Studio.

At Apple, the story was different. Apple did not need to re-energize its brand. Nor did it have to show they can deliver a piece of hardware very much in tune with its software. Apple needed to deliver a new MacBook Pro many have been waiting for. Apple could have easily followed the trend and delivered a touch-screen enabled MacBook Pro – at the end of the day they said they would never do a pen for the iPad until they did a pencil. Instead, they remained true to their idea that, when you have a keyboard, touch should be close to where you fingers are most of the time — is close to the keys, not the screen. So the MacBook Pro gets the Touch Bar. Apple reinvents the MacBook Pro, not its brand or its vision.

As I looked at the Touch Bar, I started thinking about how iPad Apple reinvented Mobile Internet Devices and Tablet PCs by focusing on apps and building on the ecosystem they created for the iPhone. Through apps, we did things differently. The Touch Bar has the potential to do the same for the MacBook Pro. Touching something with my finger in the same way as I would do with my mouse does not necessarily change my workflow. But we saw today how Photoshop and Final Cut Pro took advantage of the bar to perform common editing tasks differently. This is the power the Apple ecosystem has over Windows. While the Mac app store has not been as vibrant as the iOS one, the Touch Bar might ignite more interest, especially as the MacBook Pro is now clearly positioned as a higher-end device with users that are prepared to invest more in their tools both for work and play.

Apple also had to explain where the MacBook Pro and the iPad Pro sit and, although the rationalization of the story here might be a little more difficult to follow, I believe it boils down to one thing: Apple offers choices. Their computing offering spreads from the iPad Pro 9.7″ all the way to the MacBook Pro 15”. This explains the pricing we saw today – aside from the fact Apple might also want to make a statement this was not a simple refresh.

Two school of thoughts on touch, no right or wrong. Two brands that, despite their differences, have done a lot this week to show that the PC market still has innovation and, while sales will not bounce back overnight, we might see much more engaged users going forward.

Could AR be Apple’s Next Big Thing?

In August, I wrote a piece suggesting Apple did not have any VR products that could hit the market any time soon.

Since then, Apple CEO Tim Cook has gone on record stating AR seems to hold more promise for the market than VR and, while not ruling out a VR play directly, it seems AR may be where Apple is focusing more of its energy these days.

As you know, AR and VR are one of the hot new areas the tech industry is focusing on. In fact, as I stated in a recent column, AR and VR will most likely become the next major user interface that will drive the next generation of computing at all levels.

But I think AR and VR, in what is called “mixed reality”, may be one of those transformational technologies that actually changes the computing experience altogether.

At the recent Wall Street Journal D conference, Microsoft’s CEO Satya Nadella made an interesting observation. He stated, “The ultimate computer is this mixed reality world, where your field of view becomes this infinite display”.

Indeed, the concept of having an infinite display to see and interact with your digital content is fascinating. We got a taste of this with Pokemon Go but take this to more extreme visuals. Walking down the street, one can see their outside world but relative images, content and data could be superimposed on these scenes and would deliver a richer view of your surroundings. Or, if you need directions as you walk, the map is right in front of you and shows you where to turn and guide you to your location in a more visual manner.

In listening to Tim Cook talk about AR, I get a sense he has a similar vision of an infinite display being important to any product they bring out in the AR category. However, I suspect his ways of delivering on this may be a bit different than the one Nadella and Microsoft envisions. Microsoft has already shown their hand via their AR-focused HoloLens platform, delivered through large and expensive goggles. The good news is the entire computing experience is built into the headset, unlike the VR headsets from Oculus and HTC’s VIVE that are tethered to a special PC or laptop with a dedicated graphics card to drive the VR experience.

But scuttlebutt in the AR and VR circles is Apple’s approach to delivering AR may be more through an iPhone and, perhaps at a touch of a special strip on the bottom of the screen, it could instantly overlay AR-based info and content in the context of what you see through your iPhone screen. When I first heard this idea tossed around from some VR researchers, it got me wondering if this made sense.

One of my big concerns about delivering AR through goggles or glasses goes back to my own experience with Google’s Glass that I tested when they first came out. Besides making me look like a geek and like I was threatening the privacy of anyone I was with, they just did not work well as a vehicle for delivering data and information through a small screen that was hard to view. These glasses or goggles make sense for use in dedicated applications like VR gaming or in vertical markets where these types of VR/AR glasses can be used for specific needs but not as everyday digital eyewear.

On the other hand, if I just hold up my iPhone and point it at a site and AR-based images and content are superimposed on the screen, this would be more culturally acceptable as well as being a very effective way to add AR to the smartphone user experience. For this to happen, Apple would have to do a great deal of work in software tied to AI and machine learning. It goes beyond what they do with Siri right now. At the moment, Siri is a voice-based AI. But, superimposed AR images and content would need to draw from an even larger data base of pictures, images, and information with contextual context coupled to AI and machine learning for this to work.

Recently, Apple hired some top talent in AR, VR, AI and machine learning and most thought this was specifically related to making Siri smarter. But, if Apple’s next big thing is AR delivered via an iPhone, these new hires make even more sense.

Now, this does not preclude them from doing some type of goggles to augment this AR iPhone experience, especially if their ultimate solution would be mixed reality applications where VR is also a part of their solution.

However, given Tim Cook’s rhetoric that is centered more around AR, maybe optimizing the iPhone for AR apps is their starting point and, as it evolves and the technology gets better, perhaps they expand what they do and can offer apps also include VR.

But if AR is their next big thing and it comes initially via a new iPhone, it would not surprise me if Apple becomes the one who brings AR to the masses while most competitors focus on the higher end of the AR and VR market.

Context for Microsoft and Apple’s Events

This week will see PC-centric events from both Microsoft and Apple, with Microsoft launching its latest Surface devices on Wednesday and Apple updating its Mac line on Thursday. As such, it’s interesting to think about the context for these announcements as a way of thinking about what might be announced and how we should see it. It’s also interesting to think about these things in the context of earnings – Microsoft reported earnings last week and Apple will report on Tuesday this week. In both cases, ahead of these announcements.

Microsoft – a growing but small Surface revenue line

Microsoft’s earnings (see here for a deeper dive) showed the Surface revenue line is growing at a decent clip – 29% year on year and 38% on an annualized basis. Trailing 4-quarter revenues for the Surface are shown below:

Surface 4 quarter revenues

However, quarterly revenues are settling into a pattern where the fourth quarter is the biggest and each subsequent quarter drops off a bit until the next refresh of the hardware. So, if the trend is to continue, this week’s event needs to give the line as big a boost as previous years’ events have. However, it seems more likely we’ll get modest spec bumps to the existing hardware alongside a new all-in-one PC. If that’s the case, revenue will more likely dip year on year for the first time because spec bumps alone likely won’t drive a new buying cycle for the existing products and an all-in-one won’t drive the same demand as the existing Surface products. Microsoft has effectively conceded as much, as its guidance for this quarter suggests a drop in Surface revenue.

In the grand scheme of things, Microsoft’s Surface revenue, though useful, is still a tiny fraction of overall PC revenues, or even of Mac or iPad revenue at Apple. This is a narrow strategic play for now and, although the all-in-one will expand the addressable market, it won’t do so dramatically. The original purpose of the Surface line was to show OEMs what could be done – what’s the purpose of this line now? Satya Nadella is famously more skeptical of the value of first-party hardware than Steve Ballmer was, so why stick with this product and what’s its future?

Apple – if iPad is the future, what is the Mac?

The question for Apple is quite different. The Mac was always Apple’s core business until first the iPod and then the iPhone came along, but has recently been either Apple’s second or third largest hardware product line by revenue and is consistently the third by shipments after the iPhone and iPad. Mac sales have been slipping lately, in part because it’s been such an unusually long time since much of the Mac line received a significant refresh.

Perhaps more significantly, Tim Cook has recently referred to the iPad Pro as “the clearest expression of our vision of the future of personal computing” and recent iPad Pro ads have referred to the iPad Pro as a computer. So, if the iPad Pro is both a computer and Apple’s vision of the future of computing, what is the Mac? In an interview with Backchannel a few months ago, Phil Schiller suggested a possible answer in talking about his philosophy of Apple products. He first said the philosophy should be to use the smallest or most portable device that was up to the task and then, when asked about the role of the desktop Macs, said:

“Its job is to challenge what we think a computer can do and do things that no computer has ever done before, be more and more powerful and capable so that we need a desktop because of its capabilities,” says Schiller. “Because if all it’s doing is competing with the notebook and being thinner and lighter, then it doesn’t need to be.”

The role of the laptop was described as basically doing almost everything a desktop could so, in some ways, it’s Schiller’s vision for the MacBook line, too. Given how the recent iPad Pro ads have highlighted the capabilities of that device relative to traditional computers, what is it that computers – and Macs specifically – can do iPads can’t? I’d guess we’ll get some answers to that question on Thursday. Given Schiller’s remarks, this will probably be about sheer power, among other things, but I’m curious to see what else is part of this story.

The broader picture – hardware capabilities versus philosophical differences

Despite all the individual motivations for both companies, perhaps the most interesting thing to think about is how competition between the Windows and Mac lines has evolved over time. For quite some time, Macs enjoyed meaningful hardware advantages – they were better looking, more portable, had better battery life, and so on, especially once the MacBook Air launched. It took several years before Windows laptops even came close in terms of some of these key features and so the hardware advantages were an important element of the competition between the two.

But recent advances in Intel chips and other enablers have permitted Windows manufacturers to get a lot closer in terms of hardware performance. While design differences are a matter of opinion, at least some Windows laptops are better looking and a number of premium Windows laptops now combine MacBook Air-like thinness and battery life. They even have trackpads that perform well too, something Windows laptops seemed bafflingly unable to achieve for a ridiculously long time. At this point, I’d argue the main differences between Macs and Windows PCs are philosophical rather than grounded in meaningful hardware performance differences. Do you prefer the Apple or Microsoft approach to software? Do you prefer the Apple or Dell (or HP or Lenovo) approach to hardware? Does the tight integration of those things matter to you and who does that better – Apple or Microsoft?

With that in mind, one of the most interesting questions in my mind with regard to this week’s events is how this competition looks at the end of the week. Has Apple re-established a meaningful hardware advantage that will again take Windows PCs years to claw back? Or does Apple reinforce the philosophical differences that have arguably become more important over recent years? The release of the 12″ MacBook last year suggested Apple could still open up hardware advantages in portability relative to Windows laptops but did so at the expense of performance, much as the original MacBook Air did. Can Apple now bring some of the same hardware chops to the more powerful members of the MacBook line, improving their portability without sacrificing power? Or will we see more subtle improvements in hardware performance combined with an emphasis on the power of macOS?

I’ve focused here on Apple’s role in moving this competition forward because we largely know the state of the Windows PC market. Yes, it’s possible Microsoft may innovate in interesting ways on the all-in-one side, but I think we’re all expecting more meaningful across-the-board updates from Apple rather than Microsoft this week. But Microsoft’s event may also change these competitive dynamics subtly. Rumors of a revamped Paint app for Windows would highlight an attempt to hit Apple in one of its traditional strongholds – bundled creativity software – so it will be interesting to see how that plays out as well. All told, I think what we see this week from both companies will set up a new phase in the competition between these two companies and their respective ecosystems.