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.
- 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.
- 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.
- 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.