Three Growth Story Lines for Apple in 2014

The more I study at the economies of scale within the tech industry the more I taken aback by the opportunities that lie ahead. Some opportunities like the traditional PC may not be big market comparatively but they can be very healthy markets. Others, like smartphones and tablets, are not only very large markets but they are also extremely lucrative ones.

As I have studied the why behind many market developments from the past 30 years of this industry it is truly amazing how monumental shifts in the market have favored Apple. Things I’m not sure anyone could have predicted nor anticipated. Apple simply kept being Apple and stayed true to their purpose and vision and found themselves at the right place at the right time to capitalize on these shifts.

Looking at how many of the largest global markets are developing there are several important Apple growth stories to highlight.

The iPhone (Literally)
For the past few years, analysts have been noting a slowdown in not just particular quarter of iPhone sales but also the smartphone category overall. We are witnessing the maturing of many markets of the smartphone category. This is a key observation because when a category reaches maturity the market begins to act different. One of the key things we have observed over the past 30 years with regard to consumer markets is that when they mature they segment. The result of this segmentation is increased competition and increased consumer choice. Diversity is a fundamental to mature markets and critical as they reach post-maturity (like the automotive market for example).

Because of this we anticipate Apple to start even further diversifying the iPhone line and most logical roads lead to a larger iPhone as a part of an expanded iPhone family of products. However, a larger iPhone is actually a key growth strategy (excuse the pun) for the global growth of the iPhone.

While sales of big phones are relatively small comparatively in the US there increasingly the norm in China and to a degree India. On top of that, big phones are a key to premium segments of each of those big high growth markets. Our conclusion is that for Apple to compete in premium in China and India a larger iPhone is the key.

We believe a larger iPhone could spur new growth for the iPhone even in saturated markets like Europe and US but also be a catalyst to grab new land in markets like Asia and India.

The Mac
I’ve been anticipating the Mac growth story for some time but I believe we are finally on the cusp of it. Without question the total addressable market for PCs has shrunk. That being said we believe the fundamentals of a significant market refresh are in place. Our research indicates that a high degree of self-awareness now exists by those who know they need a desktop or notebook form factor. Because of this we are observing that worldwide sales of notebooks in the higher priced tiers actually grow where they have typically remained flat. With this we are anticipating an ASP increase in the PC category as consumers realize that if they truly need a PC they want to buy a good one, which will last, and deliver the best value for the money, since they will likely hold onto it for 5 years or longer.

The fundamental shifts in the PC landscape we are observing favor Apple’s strategy with the Mac. The Mac also has the most to gain since it is starting from a lower market share percentage than Windows based PCs. Our estimates are that Macs make up approximately 6.25% of the total PC install base to date and represented 5% of PC sales in 2013. We estimate the percentage of Mac install base to surpass 10% by the end of 2015 with a target potential of 20% of the total WW PC TAM.

The iPad Air
Much of the focus over the past year has been on the iPad Mini. But a careful analysis of the iPad install base would highlight that there are more larger screen iPad’s in the current install base of Mini’s by nearly a 2-1 ratio. We believe if a larger iPhone comes to market it will challenge the existence of the iPad Mini. In fact, one way to think about the iPad Mini is as a transitionary product. This does not mean the iPad Mini goes away and it may–and should–remain as a part of the portfolio. We simply feel the volume opportunity is with the iPad Air.

Part of this logic is due to my conviction that the iPad Air is the new general purpose mass market computer. We believe that many consumers now are self-aware of their own computing usage habits and recognize the PC is overkill for 90% or greater of their everyday use cases. They still do value a larger screen and highly mobile compute device and we believe this market awareness favors the larger iPad to absorb a significant portion of the upcoming PC refresh as well.

We also believe the iPad Air represents a significant growth opportunity in markets where PC penetration is very low. We believe the iPad has a a groundbreaking opportunity to bring computing to the masses as the first personal computer for many in developing markets.

Summary
Ultimately we believe market fundamentals are shifting into the favor of Apple’s strategy. We also believe other vendors will catch on to this which is why we are anticipating certain categories to continue to see ASP increases. Seasonality plays a role in every vendors growth and understanding each regions seasonality cycle is key. But the bottom line is we are seeing positive signs in developing markets that those price sensitive customers who entered the market with low-cost phones, tablets, and PCs, are now starting to move upstream and become more value conscious than price conscious.

Well still less than half the planet yet to own a smartphone, PC, or tablet, the growth opportunities in this industry remain significant.

Published by

Ben Bajarin

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

8 thoughts on “Three Growth Story Lines for Apple in 2014”

  1. You say, “For the past few years, analysts have been noting a slowdown in not just particular quarter of iPhone sales but also the smartphone category overall.”

    According to comScore mobiLens data, iPhone share of the overall US cell phone market two years ago was 10.2%, one year ago was 17.5%, and is currently about 25%. Since the size of the US cell phone market has stayed about constant, there has been no slowdown in the growth of iPhone.

    We’re already past the maximum rate of growth for the US smart phone market, but the maximum rate of growth for iPhone isn’t projected to occur until it reaches 50% subscriber penetration in about two years time (see “http://www.asymco.com/2013/12/13/how-many-americans-will-be-using-an-iphone/”). It will take about another year after that, according to Horace Dediu’s projections, before the US smartphone market saturates, at which point Apple will have about a 68% share of all cell phones. But, also according to Dediu’s projections, it will be about then that the world as a whole passes the point of maximum smartphone growth rate (“http://www.asymco.com/2014/01/07/when-will-smartphones-saturate/”). So rapid growth for iPhone should be expected to continue for the next few years, unless trends change dramatically.

    1. I’m speaking of quarter on quarter slowdowns not declines. Certain quarters are seeing a slowdown but yes overall annual sales have increased but it is worth noting not at the same rate in many instances. Understanding seasonality is the key to noting and modeling quarter on quarter declines. For example from Dec to June, etc.

      I still expect growth, obviously from the point of the article, I was just stating that as we are getting saturated and as other markets do as well over the next 5 years we will observe the pace of that growth to slow.

  2. Although I agree that a larger iPhone would help Apple sell more, I’m not sure if that’s where Apple wants to go. The fact that Apple integrated the M7 chip inside the iPhone 5s is what confuses me. If Apple intends to make the iPhone into a fitness tracker, then the logical direction would be to make the iPhone smaller, not larger. Maybe small enough that even women can somehow manage without putting it into their purse.

    Of course, Apple may introduce a wearable device which includes the M7 chip, making the chip redundant on the phone and the wearable. It’s just that this kind of redundancy doesn’t feel like what Apple would really want to do.

  3. Exciting analysis, what really stands out is your call for much greater Mac growth. I haven’t seen this elsewhere, it’s a huge story if it comes to pass.

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