Category: Apple

One of the key things out of the Apple event last Monday was how exclusive and far removed from the mainstream the Apple Watch Edition is. The combination of pricing, limited numbers, and limited channels will make this a product very very few people will buy in comparison with the other two versions. It’s important for other reasons and is interesting in its own right, but that’s the subject of a whole other post to be written some other time. What I wanted to focus on here was what the pricing looks like if you strip the Edition out of the equation, specifically in context of the iPhone and iPad. The chart below shows lowest, highest and average selling prices for these three product lines. Obviously, the ASP number for the Apple Watch is an estimate and I have it pegged here at roughly $550 though I’d say anything from $500-700 is entirely feasible and it may well end up being higher than $550:

What you see when you strip out the Edition versions is the Watch sits right around the same range as the other two products. The lowest price is between the lowest iPhone and iPad prices, the highest price is slightly higher than the highest iPhone price and, in my opinion, the ASP will end up right in the same range as the iPhone. The other thing worth bearing in mind is the impact that buying additional bands might have on the ASP of the Watch, which of course Apple won’t be reporting directly, at least for the time being anyway. My ASP above is based on a single band sales model, but of course there will be people who do buy more than one band.

But the point here is the Watch is going to end up priced at a similar level to the iPhone and iPad, which has a couple of implications. Firstly, with regard to affordability, the iPhone has a similar ASP and range of pricing but is, of course, heavily subsidized and/or sold on an installment basis in a number of big markets. As such, affordability for the iPhone at this price range is quite a different question from affordability of Watch at the same price. The iPad has a slightly lower price range, both in terms of high and low and in terms of the likely ASP, but it’s sold to consumers at full price in most cases, which means affordability is in some ways a better fit here for how to think about the Watch.

The reasons for the variability in pricing are quite different for the two existing product lines versus the Watch:

• Specs, specifically storage size and radios (LTE vs. WiFi only) are a major driver of differences in pricing in the iPhone and iPad ranges, but have no impact on the Watch, which has identical specs at all price points, including the Edition. I’d expect this to continue to be the case – as others have pointed out, specs (or “speeds and feeds”) have been entirely absent from Apple’s discussion of the Watch
• Age is the other major driver of differences in pricing within the iPhone and iPad ranges, with older versions commanding a lower price and enabling Apple to take these devices downmarket without sacrificing quality. It’s obviously too early to tell whether the same will happen with the Watch, especially given the existing very large range of price points just with a single year’s model, but it continues to be an effective way to bring the price down
• Materials and finishes the only major driver of Apple Watch price variability, with the aluminum/steel/gold question the major driver, but with materials and finishes in bands an important secondary one. Though iPhones and iPads have hitherto come in different colors, the materials have been the same, so this hasn’t been a driver of price differences. It’ll be interesting to see how this changes going forward – will we see solid gold versions of any other Apple products?

As this brief analysis suggests, the reasons for the price ranges are quite different today but that could easily change over time, with age (though likely not specs) becoming a factor in Apple Watch pricing, and materials becoming a factor in iPhone and iPad pricing. But, in some ways, there’s also a parallel between the materials and finishes driver and the specs driver, in that Apple tends to charge a far greater premium for bumps in both these areas than the underlying cost drivers dictate. In other words, Apple has always charged significantly more for the higher storage iPhones and iPads than the lower storage versions, even though the cost differential is very small, driving higher margins on those devices. Similarly, it’s likely the cost difference between aluminum, steel, and gold doesn’t justify the difference (or even the majority of the difference) in price between those ranges, especially when it comes to the Edition. As such, margins will similarly be higher on the more expensive devices, just as they are with the more expensive iPhones and iPads. In this way, even though the specifics of the drivers of higher price are different, the model could end up being very similar.

I’m intrigued to see what the early sales suggest about how the different versions are selling and what the average selling price ends up being. As I mentioned earlier, we won’t know for quite some time because the numbers will be lumped in with other products in Apple’s reporting. As I’ve said before, I believe in time Apple will likely break these numbers out once they’re big enough to boast about, so hopefully we’ll get more transparency and resulting insight eventually.

Of the various apps Apple showed at the Apple Watch event this week, there was one I consider a sleeper. This is the app related to what I call “non verbal communication.”

Ben alluded to this in his column on “Dressing the Naked Wrist” right after the event. He called the app the “Love Tap”.

Tim Cook showed how your heartbeat could be sent to another person who also has an Apple Watch to suggest you are thinking of them. In my case, since I am a serious heart patient, the message I would send with the heart beat tap to my wife would be “thinking of you and, by the way, I am still alive”.  I am pretty sure she would appreciate both messages. You can also draw a smiley face or other symbols to suggest some type of communication. For example, I might set up a simple code such as drawing a 10 and my wife knowns I will be home in 10 minutes. Or I could draw a X and it means I am leaving the office. Or I could draw any letter or symbol and give it a meaning so that creating a message would be fast and simple.

I did the smartwatch session at CES this year and Jeff Boneforte of Yahoo also suggested communication might be a killer app for many. In his case, he said he would never give his young daughter a smartphone to take to school as she should might lose it. However, he would consider getting her the entry level Apple Watch and use it to communicate with her. He could do something simple such as send the heart beat to show he was thinking of her. Or a quick message asking if she ate all of her lunch. Or a quick symbol that says, “I will pick you up in 10 minutes”. Since the watch has WiFi, all the parent needs is to log her watch into their school’s WiFi system and the child is capable of getting these messages as needed. Of course, she can also respond to the messages and, via the GPS, a parent could even confirm the child is at school and safe.

A few weeks after CES, I got to thinking about the ability to deliver non-verbal communication via the Apple Watch and realized that, for this to work, at least two people would have to have an Apple Watch. Sure, I could just text but on busy days when I am in meetings a lot of the time, it will be much simpler for me to see she has called and just use a pre-designed symbol to tell her I am in a meeting. You get the idea.

In fact, I would not be surprised if Apple Watches end up in bridal registries as young couples could surely find ways to use them before and after the wedding in possibly very creative ways.

My key point is, if the non-verbal communication aspect of this watch becomes useful for a lot of people in various situations and circumstances, we are talking about people buying them in two’s and not just individually. I’m not sure if that is Apple’s marketing plan but in my case I know my wife and I could get a lot of use from them since I travel so much and want to stay in touch as much as I can even if I am super busy while on the road or on days when meetings pile up.

Again, I could call or text her but this form of communication could give us a level of versatility we have never had. In fact, she is always after me for not staying in touch more when I am on the road and this makes it very easy to do. While the health apps and payments apps will also be important to driving demand for the Apple Watch, I will not be surprised if this non-verbal communication app becomes the one people use the most.

For the last 9 months, many of the major PC vendors have been asking what Apple had up their sleeves when it comes to updating the MacBook and, more specifically, the Macbook Air. It has been about 18 months since Apple refreshed this line and everyone knew it was due, at the very least, for a Broadwell update from Intel applied to all MacBooks.

Although I had heard from the supply chain six months ago Apple had a 12 inch notebook in the works, very little news had leaked about a possible small but thin and light MacBook until it was announced today.

In the meantime, Dell introduced a stellar new 13” notebook that is very light and thin and Lenovo, HP and others also have new ultrathins in their line.

However, as I am sure they suspected, Apple has pretty much reinvented the truly thin and light notebook with the new 12” Macbook with Retina display, which integrates an Intel Core M processor in a motherboard so small it takes up only a tiny space on the back of this new laptop. Its fanless design is due to the 5 watt Core M processor and some clever engineering from Apple. The keyboard is a full size keyboard and uses a new type of mechanical key half the size of the keys in current MacBook Airs. The new terrace contoured battery cell has 35% more battery capacity, giving it all day battery life, yet its design still allows it to fit in this very thin (13.1 MM at back and 5.1 MM in the front) ultra thin laptop.

For road warriors, this is the ultimate laptop. At 2 lbs, it weighs about the same as my iPad with the Zagg keyboard combo I use often. In fact, when I played with it, it actually felt like I was using the iPad with a Zagg keyboard but without a touchscreen but the full Mac OS experience. At least for me, this would be a very cool laptop to toss in my bag and keep with me all of the time and use as my primary computer.

Early on, I had the 11” MacBook Air but found the screen too small so I switched to the 13” model. But surprisingly, the 12” screen with no bezel makes it feel much larger than a 12 inch screen. I could easily use it instead of my 12″ MacBook Air to do all the tasks I normally do on a laptop.

However, for many people a screen this size is just too small. Which is why the 13” and 15” MacBooks and MacBook Airs sell so well over the 11” model. I also think that, while the CORE M is a excellent processor for this model, if you need more processing power in a laptop then the new MacBooks and MacBook Airs with Broadwell would be a better option.

What this new fully redesigned MacBook will do will make all other makers of ultra thin laptops go back to the drawing board and try to copy Apple in the same way they tried to create MacBook Air-like products just to compete. I see this new MacBook being the gold standard for ultra-thins. While the new ultra-thins by the major PC vendors are competitive, Apple’s design is by far the best implementation of this concept and all others will be compared to it when it comes to design, form and function.

My guess is Apple has a winner with this new MacBook and it will be a godsend for students and road warriors alike who must have a computer with them at all times and want no compromises.

After I played with this new MacBook, I began to wonder why Apple may also be doing a 13” tablet as some rumors have suggested. In my case, my iPad and the Zagg keyboard served as a pseudo laptop for me but I can see me switching completely to the MacBook 12” now and using the iPad more for tablet-like browsing and apps, instead of light productivity. I suppose we won’t know any time soon what Apple is thinking about regarding a larger iPad since rumors say it will be delayed to this fall.

If Apple does bring a 13” iPad to market, it will be interesting to see how it is positioned. I had planned to get one and use a Bluetooth keyboard with it and make it my pseudo laptop. But with the new MacBook 12″ model, I would not even consider that anymore unless it had some unique productivity features that made it different from other tablets. This is one that is hazy to me and will be interesting to follow.

Apple observers are forever predicting the company is about to launch dramatic new products. For a long time, it was an Apple television, display and all. Now, expectations driven by some Apple research on what cars need has people convinced the company is about to get into the auto business.

Don’t believe it. Endless rumors about what Apple is up to is a fun parlor game and creates stories to fill up web pages. But it ignores how Apple actually does business. Apple likes to surround itself with a lot of flash, but the fact is its phenomenal success is the result of a somewhat plodding approach, but one that is very difficult to criticize.

Apple is the most profitable and, with a more than a $700 billion market cap, the most highly valued corporation in the world. It accomplishes this with a lot of careful steps. It puts huge effort into operations, from acquiring components to retail. Its concern with product detail is obsessive. But it has some key, unique principles:

Move slowly and carefully. Somewhat computerized watches have been around at least since 2004. The market has been flooded with new watches for the past couple of years, from Google, Microsoft, and just about everyone else in the market. Apple will finally have the Apple Watch out this spring, the usual case of taking its time. It will be good, it will meet customers’ needs, and it will be expensive.

The approach is similar to the iPod and the iPhone. Let the competition experiment and make mistakes. Design an exquisite entry that works far better than anything in the market. Grab the market, selling to people who never even considered the competition.

Apple can maintain its standards because it never brings out more than one significantly new product a year and often skips that, sticking with updates of the current line. The iPod came out in 2001, the iPhone in 2007, the iPad in 2010, the Apple Watch in 2015. In between, we got some redesigns of existing products such as the new Mac Pro in 2013 and the iPhone 6 and 6 Plus in 2014.

It is true, especially in the Jobs days,  that Apple would attack a possible product, such as the phone, that it was actively developing. But that has been a rare course. It should be quite clear Apple has no interest in a television. If nothing else, no one, even Gene Munster, has ever come up with a case where a TV made sense as a business. The notion now seems to be dying as the the TV business itself continues to suffer. It will continue to develop the Apple TV box–a new version is expected this fall–but that’s it.

The car situation is more complex. Apple has an interest in autos, but that certainly is for developing systems for cars–support for the iPhone is already common and is likely to be expanded–but not designing or building cars. Although cars are increasingly wheeled computers, everything about their manufacture — their regulation, their sales, their ownership — is dramatically different from anything Apple knows.

The car business also violates Apple’s core move that new products should quickly be profitable. Tesla is in its fifth year and its losses are growing at about the same rate as its sales. CEO Elon Musk admits profits are still quite a distance away. Apple could afford to buy Tesla in the extremely unlikely chance Musk was interested in selling it but it simply does not fit its approach to business. Starting a new car company would be even more complex, more expensive, and less practical.

Minimize the product line: Samsung offers a countless number of phones (ignoring multiple colors and variants for carriers). Apple sells the iPhone 6, 6 Plus, and 5s. Hewlett-Packard makes a couple dozen laptops, Apple makes the 11″ and 13″ MacBook Air, the 13″ MacBook Pro, and the 13″ and 15″ Retina MacBook Pro. The Apple models do not offer buyers much modification–mostly processor, memory, and storage. The limited range provides huge advantage everywhere from manufacturing to promotion to retailing.

Apple also minimizes design changes. I own a MacBook Air, a MacBook Pro and an iMac. The oldest of these is five years old (the durability, both in terms of performance and usefulness, is another wonder) but you would have to look very hard to find some minor design functions that differ them from current models.

This approach lets Apple maintain pricing that yield wonderful profits. (Although Macs and iPhones are considered expensive, they compare fairly to models by other manufacturers meeting the design and quality.)

Control retailing. You cannot buy a Mac at Walmart. You can get an iPhone, but not an iPad. Apple is very careful about what it sells where. Except in special circumstances, such as the need to move stock before an upgrade, sellers are never, ever allowed to discount. ((Pricing of phones, of course, is somewhat more complex because most sales include subsidies under service plans.))

Apple’s stores have been brilliant. I remember when Apple opened its first store in Tyson’s Corner Mall, in Washington’s well-off Virginia suburbs in 2001. I was convinced it would be a flop. The store, in the mall’s prime location, was too big and too expensive. No one wanted to schlep a Mac home from a mall (Mac desktops and laptops were all there were).

This is why Steve Jobs and Tim Cook run Apple and not me. The Apple Store was and continues to be a phenomenal success. I know of no outlet as consistently full of customers. And they are rich with buyers, not just shoppers. Amazingly, after 14 years, no one has successful copied it.

One critical thing is Apple moved as slowly on stores as it did in developing products. There are fewer than 500 Apple Stores, all of them handsome and very carefully located. They sell more per square foot than any other retailer, an honor long held by Tiffany.

All of these factors share patience and caution. Apple comes out with bold products but it sticks with the old Latin rule of festina lente–make haste slowly. It may be an odd principle for a company that lives on the leading edge of technology but it is tough to beat.

I have always had an interest in watches. Ever since my grandmother gave me a Hop Along Cassidy watch for my 5th birthday, they have been a constant companion. I suppose part of the reason is I am very conscious of time. My wife and staff complain I always have to be early and never late to anything. I watch the clock closely to make sure I am always on time since I value my time very much and want to honor that in the people I am meeting with.

Although most of my watches have been relatively cheap but functional, I did invest in an expensive watch during one of my trips to Switzerland in the late 1980s. I was in the beautiful city of Interlaken and saw a gorgeous Tag Heuer watch in a jewelry shop window. I went to school in Switzerland in the early 1970s and got to know of the craftsmanship of Swiss and German watchmakers and had always wanted to own one. This particular Tag Heuer was extremely well made and beautiful. I just could not resist buying it. So I took out the old credit card and paid about $700, a fortune at the time. It is still the most expensive watch I have ever owned and today it has great sentimental value to me even though I broke it playing golf a few years ago.

Some Background

In the mid 1970s, my first tech job was with a company in Mt. View, CA that made some of the original LED readout watches. This preceded the introduction of digital timepieces and I learned a great deal about the watch industry during that time as well as witnessed the birth of the digital watch age up close and personal. I remember distinctly the threat these watches had on traditional watchmakers and, by the early 1980s, the market was flooded with digital watches, specifically coming from Asia. By the mid-to-late 1980s, even some Swiss and European watchmakers joined the digital revolution. However, those who made the high end, handmade timepieces resisted the move to digital and even today, Rolex, Breitling, Tag Heuer and many of the top watchmakers are still at the top of their game with analog watches that appeal to the richer folks who can afford them. In fact, there will always be a demand for high end watches since most are bought more as jewelry than for telling time.

When Apple introduced the Apple Watch last fall, I went back to some of my sources around the world connected to the high end watch market to get a sense of how they viewed the Apple Watch and if they saw it as a threat to them in any way. What I heard was a bit surprising. They told me what Apple had done was to create a completely new paradigm in watches. Most believed Apple will define what a “watch” will be and do in the future. Most importantly, these sources told me that even the ultra high end watch makers are taking note and struggling with how to respond, given the fact the Apple Watch is not as much a watch as it is a wrist computer that could shift the role a timepiece plays in people’s lives.

I don’t expect the high end watchmakers to change course since the jewelry aspect of their business will always have appeal. And a lot of people will still want these precise handmade timepieces for years to come. But I got a sense from talking to these folks they see the Apple Watch as a game changer. And the operative word for them is “wrist computer”. When digital watches flooded the scene they were easily copied; which is why the transition from analog to digital watches happened so fast. But Apple’s approach, given the fact they own the hardware, software and services layer and have created a platform for wrist computing, means it is going to be very difficult to replicate quickly by the competition. Sure, Android Wear and Android smart watches will try but with what I have seen already from Apple’s design and the integration with apps they make and those coming from their software partners, Apple could have an edge for at least a year or two, if not more.

But it was the acknowledgement that the Apple Watch is a game changer to the pros in the watch industry that is important. Although there are a lot of watches on the market that are designed for vertical use — dive watches, watches for race car drivers, pilots, etc. — what Apple is bringing to the watch market is the redefinition of the watch. And because it is a platform for apps, one device can be many things to many people. These traditional watchmakers understand this and have told me they see the Apple Watch as highly disruptive to their industry. While the basic concept of the watch won’t change, it will now be defined in terms of a wrist computer over time and that changes the game for them in a big way.

This early in, it is too hard to tell whether Apple will sell boatloads of Apple Watches, although most of us predict they will sell around 22-24 million in the first 12 months it is on the market. But after talking to serious players in the watch marketplace and them telling me it is clear the Apple Watch will be a game changer, I am taking the impact of the Apple Watch on them and the consumer much more seriously.

Apple had a big issue with the the first quarter of its fiscal year. True, it’s a problem most companies would love to have, but it’s still a problem: Apple has piled up far more profit than it can figure what to do with.

The profit of $18 billion, far more than the earnings of $13 billion in the same quarter of 2013, was more than any company had ever earned in a single quarter. One could go on for a long time with the superlatives about the Apple results, but none of these address the problem. And, unless Apple does something extraordinarily stupid, they won’t go away.

Global difficulty. The difficulty is Apple is a global company. One of the remarkable facts, just sort of mentioned in passing by CFO Luca Maestri, is profit was sharply reduced by the fall of other currencies, especially the Euro, against the US Dollar. But that decline is almost entirely an accounting phenomenon because Apple, like other U.S. based internationals, does everything it can to avoid bringing the money home. There’s an enormous tax savings in leaving the profits outside the U.S.

With no real need for the money, it makes no sense to bring it home. Apple is getting no pressure from stockholders beyond the 47 cents a share. One way to use a lot of cash would be to invest in acquisitions, but Apple doesn’t play that way. It did break its historical course last year in buying Beats for $3 billion, change it probably found under the cushions of Tim Cook’s couch. Its other acquisitions tend to be very small and favor specific reasons –technology, engineers, patents, and the like. ((A favorite suggestion of observers is Apple should buy Tesla. Only a few problems: Tesla is not for sale. Its owner, Elon Musk, says it is unlikely to show a profit for several years. Apple is brilliant at designing, making, and selling phones and Macs but knows nothing about automobiles.))

Beginning in March of last year, Apple returned $130 billion in cash to shareholders, including both cash payments and the repurchase of stock. But the cash on hand of of about $160 billion before that payout is back to $142 billion and still growing after the most recent quarter.

Mounting cash. The biggest reason for the cash accumulation is U.S. tax laws. The profits go untaxed as long as the money remains outside the county, but is subject to considerable taxes when it is returned to the U.S. The extra cash Apple paid to shareholders last year was done using a trick. The money was actually left overseas and the payment was made with cash raised by issuing bonds in the U.S. market. This allowed the money to be “returned” home without encountering taxes. But there is a limit to how much you can handle this was without, among other things, disrupting the financial system.

Apple is just the extreme case of U.S. corporations leaving their profits overseas.  A study by Audit Analytics showed last year that companies listed in the Russell 1000 have $2 trillion in profits outside the U.S. and that has surely grown further.

Tax experts agree that the law on taxation of foreign earnings, beyond the one-shot permission during the Bush administration in 2004, is needed. Proposals range all over the political field, from the liberal Citizens for Tax Justice to the conservative Bush Center. But the chaotic Congress looks like it is unlikely to take any serious tax action. The Republicans who have a majority in the House and Senate have no agreement among themselves. And they have no agreement at all with the Democrats, whose backing is needed in the Senate, or with President Obama.

So, while it is easy to say that reform is needed to create more reasonable rules for the taxation of foreign earning, don’t hold your breath. And Apple will continue filling up Uncle Scrooge’s vaults around the world.

74.5 million iPhones exceeded everyone’s expectations. You can only see that number and feel there remains unprecedented demand for the iPhone. More importantly, demand is not yet satisfied. Apple said only a small percentage (“low teens”) upgraded this cycle. There is still a lot of the iPhone installed base to upgrade in the coming years. What does stand out is how Apple didn’t really lose many customers by not releasing a larger phone sooner. The conventional wisdom was that, by not addressing the larger screen size, Apple would lose customers to Android and have a hard time winning them back. However, what this 74.5m in iPhone sales tells us wad this was not true. Apple didn’t lose customers and, more importantly, they increased their base of new users by anywhere from 15-18m based on my estimates. It’s hard to come away from the data on this quarter and not conclude demand for the iPhone is stronger than ever.

While my estimates for China were high, Luca Maestri, Apple’s senior vice president and Chief Financial Officer, confirmed the US is still the largest iPhone market. But I’m certain I was in the ballpark and they are close. It remains a significant inflection point for Apple with regards to China. With the current quarter containing the Chinese New Year, I expect not only a strong overall quarter for Apple related to iPhones but also in China in general. Apple appears to be guiding 54-55m iPhones for the current quarter and it seems to be the consensus on Wall St. as well. The growth in China remains strong and continues to be a critical market for Apple.

Growth in China can’t be understated. Even if it is not Apple’s largest iPhone market yet, it is the most important market for Apple from a growth standpoint.

The big question on everyone’s mind is, can the growth continue? The strength of the China market with the current quarter including the Chinese New Year, it means Apple will continue to have strong back-to-back quarters. The post holiday lull will be gone as China picks up strong in the first part of the calendar year. With a small percentage of Apple’s base upgrading, it means 2015 should be strong as well. So yes, it appears the growth will continue.

Bullish on iPad?

No disguising iPad numbers. It will certainly remain a narrative in the overall story. But iPad is performing no different than overall tablet trends. It is being treated more like a PC than a smart phone by consumers so refresh rates are longer. Apple has a large installed base of iPad 2s so it seems likely a refresh could be happening. With 50% of customers new to the iPad, Apple continues to add to the base each quarter. All of this is key for the iPad business.

The iPad will be fine. Even between 15-25m a quarter trend lines, it is a healthy business that plays a key role in the Apple ecosystem and product lineup.

One other thing to watch is a potential growing trend of connected and perhaps subsidized tablets. Verizon and AT&T both reported growth in connected tablet sales. Not all of these were iPads but the point is, subsidized tablet sales with connectivity by the carrier is an example of a growing trend that could possibly be a catalyst for the iPad.

Mac as a Growth Story

The Mac grew YoY 14% and I maintain this as a growth story for Apple in 2015. There is share to gain from the Windows OEMs as a part of the enterprise and consumer refresh cycles we expect in 2015. I can see a quarter in 2015 where Mac sales get above 6m but I’m not confident in which one. Regardless, this is a growth line I’ve been anticipating for some time and I expect it to continue into 2015.

The Consumers Everyone Wants

I’ll close on this point. It is becoming overwhelmingly clear that Apple’s near monopoly on the “most profitable” customer base is a huge differentiator for their ecosystem. More importantly, the things they are doing — larger iPhones, Apple Watch, etc., — are all things that increase their grip on the top 20% of customers. What this does is create catalysts for their ecosystem. Apple Pay is a great example of this. With rapid adoption of contactless payments and retail outlets recognizing the benefits of supporting Apple Pay to attract Apple’s valuable customer base, it creates what is, in essence, a network effect. Because Apple’s customers generally are more apt to spend money and are therefore more profitable, they are the type of consumers stores and brands desire to attract. So they will support something like Apple Pay because it drives their end goal.

Similarly, carriers realize these customers are more valuable than Android customers (generally speaking). So carriers push and are willing to be aggressive with iPhones because Apple brings them less risky and more valuable customers. This is the power of what having the most valuable customers does for Apple’s ecosystem.

Stepping back and looking at the big picture, it certainly feels like there are distinct and clear lines between Apple’s customers and Google’s with Android. Two completely different ecosystems in nearly every way. I like this recent tweet from Jean-Louis Gassee.

He is referring to Apple’s market share. But it is a great point. The minority share actually feels like a monopoly in the grand scheme of things.

There was an interesting announcement today that many will mistake as “advertising” on the upcoming Apple Watch. TapSense announced a hyper-local/contextual platform that delivers promotions to the Apple Watch. Some see this as something people will hate or not appreciate.

However, if done right, this could be extremely valuable and strategic in driving the smartwatch into the mass market.

Deals not Advertising
Consumer don’t want ads — they want deals. That is, in essence, what TapSense is offering. When you observe what drives behavior for many consumers today, you’d see it has everything to do with deals. Generally, deals come via email or even postal mail. Retailers have know for decades consumers who opt-in to their programs respond extremely well when offered a deal. This example of a Starbucks deal from TapSense shows the potential.

Where mail and email fail is they are neither timely or contextual. If I am walking by a Starbucks, wouldn’t it be nice to get a deal from them? Or better yet, what if my smartwatch was smart enough to know I was walking, or going to be walking or driving by a Starbucks (since it knows my route thanks to the Maps app), looks at my calendar and sees I have a 30 minute window before my next meeting, it’s 20 degrees outside and I may appreciate a warm beverage? A lot of very smart things have to take place for this to happen but you can see how this is a scenario which is possible and inevitable. One example of many I’ve thought about that make this interesting.

When mobile — meaning not stationary and looking at my phone, tablet, or computer — I’m not staring at my smartphone screen at all times. It is likely in my pocket or bag. The smartwatch is the piece of smart glass I have visible practically at all times. Because of that, while mobile, it is this display which makes the most sense to receive contextual and hyper-local deals.

Lastly, an observation about marketing/advertising. Magazines have always been one of the best examples of great marketing. This has everything to do with magazines generally being fairly niche and interest specific. Personally, I have three special interest magazines I subscribe to — Food, tennis, and farming. I find the advertisements in these magazines extremely useful because I am very interested in these subjects. Therefore, I’m being marketed to because I’m a captive/willing audience for products or services related to my interests. This is the element that has been very hard to replicate in the digital world. Facebook, Google, and others are too broad of platforms and do a terrible job showing me only ads/marketing related to my interests and passions.

I believe the smartwatch will have some role to play here — deal offering rather than generic advertising. Deals personalized to my interests that can impact my shopping/purchasing decisions have great potential. The ability to receive these types of push offerings becomes even more interesting the more personalized the product and the more the platform, in this case iOS, knows (or I allow it) to know about me. And that is key – if Apple allows this functionality, it will undoubtedly be entirely opt-in by the user.

These types of push offers are one of the areas that make me think there is more to this smartwatch category than people realize.

I’ll have more of my thoughts in a report on the smartwatch opportunity later this week.

A number of prominent personalities on Twitter yesterday retweeted some “expert” opinions of the iPhone from 2007. I particularly liked this paragraph:

The big competitors in the mobile-phone industry such as Nokia Oyj and Motorola Inc. won’t be whispering nervously into their clamshells over a new threat to their business.

The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks. In terms of its impact on the industry, the iPhone is less relevant.

This image of a Street Smart article also contained a notably negative view on Apple’s chances with the iPhone as well.

This view of Apple from many “smart” people seems rooted in what I call the common misunderstanding of Apple. Most investors, either VCs or Wall St., like to put nice, clean definitions they can understand on the companies they cover. They like to use a template for other similar companies. Often, trying to fit Apple into their templates is like trying to fit the proverbial square peg in a round hole. And when their predictions about Apple or their products don’t pan out, they have little explanation. This type of investor has templates for hardware companies, software companies, and services companies. They more often than not use a hardware template model to analyze Apple because Apple generates nearly all of its revenue from hardware products. However, that would not be possible if they did not also own their software and services. A tricky combination for most.

But I’ve always found it helpful to think to what a company actually sells. And while I’m generalizing this viewpoint, I’ve always felt Apple is an experience company and, at the center, that is what they sell. It is the experience of their products consumers gravitate towards. It starts with the design and flows to the simplicity and delight that comes from the software. Tight services integration will be the next step Apple brings their famous experience to.

Some define what I call “the Apple experience” as the Apple ecosystem. They are certainly related but I believe the Apple ecosystem was born out of the Apple experience first and foremost. Ecosystems and experiences are harder to understand and companies who sell an “experience” of any kind are bound to confound many.

I was thinking about this point when I was giving a talk about Sleep Number at an executive summit for a Fortune 500 company. I explained how Sleep Number is using technology to better the sleep experience. I told them that ultimately, Sleep Number is not selling a mattress or a bed, they are selling better sleep. That is essentially their mission and technology is now an enabler to them selling better sleep.

While we can debate the ecosystem, or even the lifestyle elements of Apple the company, it is ultimately the experiential part that will continue to cause misunderstanding. Experience is nuanced and it may mean something different to many. For some, Apple is a way of life, for others it is the technological product that causes the least frustration. For many others, it simply gets out of the way and empowers them to compute in ways other products make too complicated.

When companies or products don’t fit the standard templates of experts, they can make bold claims that end up hurting their credibility, especially with those who do know better and who are usually the ones the experts hope to have credibility with. Lots of folks love to write off Apple and history proves writing them off is a bad idea. On this point, a quote from Chris Dixon seems apt:

No company is perfect, and no company can be held to the standard of making perfect products. But as Colin points out, Apple does a good job making products people want and love. Failing to recognize this point continues to be a central error.

The common misunderstanding of Apple will continue as they advance into new categories. A general misunderstanding of the goal and definition of what success looks like for the Apple Watch will be THE misunderstanding of Apple in 2015.

While it was hard to really understand the true impact of the iPhone at the time, for a contrast to the doom and gloom of the Bloomberg article above, take a look back at Tim Bajarin’s PC Magazine column from July 2007 on his first impressions of the iPhone after the launch. I particularly liked this statement at the end of the article:

“The iPhone will become the gold standard in smartphones, and likely give Apple at least a two-year edge over the competition.”

When Apple releases their earnings for the 2014 holiday season in mid-January 2015, I expect them to have record sales of iPhones and Macs. The street predicts Apple will sell between 63-65 million iPhones but I think it could be higher given the strong interest in the 5c in China and older iPhones still in the pipeline. I suspect even their tablet business was robust over the holiday.

In 2015, I believe demand for the iPhone 6 will continue to be strong and have record numbers as each quarter, especially in the US, people will be coming out of current carrier contracts and upgrading their phones throughout the year. By next fall, Apple will have new models that will help keep that cycle moving forward.

Last quarter, Apple sold one million more Macs then they did in the previous year’s quarter. New iMacs and a new Macbook Air (out in 2015 — thinner, lighter and sport Intel’s newest chip) will continue to drive strong Mac sales. We also believe Apple will introduce a 12.9“ tablet aimed at business and this too could help enhance their tablet sales in 2015. BTW, this could be a game changer for the Apple crowd. While Apple will not back the 2 in 1 concept a la Microsoft Surface, a larger screen iPad with a 3rd party keyboard could make it a productivity workhorse while also finding its way into the home as a great portable TV and movie player.

Then there is the Apple Watch. I and many others are still skeptical about whether a market for smartwatches even exists. If there is one, Apple will be the company to make it happen. Apple has an important edge over possible competitors. They own the hardware and design, software SDK, application store and a powerful distribution network with their stores. While I don’t know what the killer app for a smartwatch is, Apple has empowered the software community to create apps for their new watch platform and I never underestimate the genius and innovation that could come from that community. I predict Apple will have at least 5,000 apps for the Apple Watch when it launches and we should see many killer apps that appeal to a very broad audience.

On a related note, I have the privilege of moderating a CES Supersession on smartwatches on Wednesday, January 7th at the Venetian Hotel, Level 1, Casanova 605. If you are at CES and interested in smartwatches, I encourage you to come by. I have execs from Samsung, Motorola, Intel’s Basis division and Yahoo on this panel to discuss if there is a market for smartwatches. The actual title of the session is “The Market for Smart Watches”. Super Sessions are open to anyone who attends the show.

Then there is Apple TV. I believe 2015 will be the year Apple lays their cards out on their new Apple TV strategy. I personally don’t think they will do an actual TV but they could dramatically redesign their current Apple TV hardware as well as give us a new type of UI and way to access and interact with TV and streaming media. This too should be a game changer given what Steve Jobs told his biographer.

There is also a possible wild card in the works. Tim Cook has stated publicly they are working on things nobody has even talked about in the media. Maybe 2015 will be the year we see something in a completely new category that could also impact their bottom line.

While Apple had a great 2014, I will not be surprised if they have an equal or even better 2015.