On Tuesday, February 12, Apple CEO Tim Cook spoke at the Goldman Sachs Conference and provided us all with some miscellaneous thoughts on the state of Apple. What follows are my thoughts on his thoughts. (All quotes are from Tim Cook unless otherwise attributed.)
“The cannibalization question raises its head a lot. The truth is, we really don’t think about it that much. Our basic belief is, if we don’t cannibalize, someone else will. In the case of iPad particularly, I would argue that the Windows PC market is huge and there’s a lot more there to cannibalize then there is of Mac, or of iPad. I think if a company ever begins to use cannibalization as a primary or even a major factor of what products to go to, it’s the beginning of the end.”
Some variation of this statement should be tacked on the wall of every corporate CEO in the world. We live in an age of accelerating disruption. If you don’t constantly seek to disrupt (cannibalize) yourself, someone else will surely do it for you.
“We are making moves to make things more affordable. When we came out with iPod it was $399, today you can buy an iPod Shuffle for $49. Instead of saying how can we cheapen this iPod to get it lower, we said how can we do a great product, and we were able to do that. The same thing, but in a different concept in some ways.”
Industry watchers should pay particular attention to these words. Notice that Cook didn’t say that the price of the iPod had dropped. Rather, Apple created a wholly new product in the form of the Shuffle that provided a lower cost alternative to the iPod
During the holiday quarter, Apple sold almost every iPhone 5 that they could make. Apple is not going to make a lower cost phone just to make a lower cost phone. Like the Nano and the Shuffle, Apple will make a lower cost product if they can find a way to provide greater value to their customers. But like the Nano and the Shuffle, it’s likely to be a wholly new product, not just a cheaper version of the original.
Apple Retail Stores
“The average store last year was over $50 million in revenue.”
As the chart from Asymco, below, shows, Apple didn’t just make double the per square foot value of the average retail store, they made double the per square foot value of the second best retail store in the world (Tiffany). To say that this is astonishing is to damn with faint praise.
An average of fifty million in revenue, per store. That’s breath taking. There isn’t a CEO in the world who wouldn’t give their eye teeth to have such numbers.
“We had a difficult time last quarter with satisfying everyone.”
On January 13, 2013, The Wall Street Journal reported:
“Apple Inc. has cut its component orders for the iPhone 5 because of weaker-than-expected demand, people familiar with the situation said…” ~ Wall Street Journal
Well, “people familiar with the situation” should be embarrassed and the Wall Street Journal should be mortified for printing that poppycock. We now know that Apple couldn’t make iPhone 4, iPhone 5, iPad Mini and iMacs fast enough. Apple’s inability to meet demand may be a problem, but demand most assuredly was not their problem last quarter.
“The tablet market will be huge, it will be a huge opportunity for Apple.”
“If you look at the full year last year, there were more iPads sold than HP sold of its entire PC line-up. There has been a sea-change. We’re in the early innings of this game. The projection is that this is going to triple in 4 years. When you think about that, the actual number is 375 million, that’s more PCs than are being sold around the world. The tablet is attracting people who have never owned a PC and people who have owned them but aren’t great in the experience.”
“Sea change” is exactly the right phrase to describe what is happening in computing. The inimitable Horace Dediu commented that: “…iPad revenues were $10.6 billion last quarter. Google revenues (ex-Motorola) were $12 billion and Microsoft’s Windows and Windows Live were $5.9 billion. It won’t be long before iPad will be bigger than both Windows and Google.
Below is a chart showing the relative position of Apple to other tablet manufacturers.
(Image courtesy of Why Apple Will Continue To Climb)
To put it in a nutshell, no one is better positioned to take advantage of the changeover from notebooks and desktops to tablets than Apple is.
So, to sum up, iPhone revenues already exceed all those of Microsoft and the iPad is about to duplicate that feat. That’s a pretty nice little business you’ve slapped together there, Mr. Cook.
“I have no idea what market share is, we’re the only company that really reports the units we sell.”
Does Apple’s market share really matter all that much? Well, let me put it this way. During the past year and a half, Android’s market share numbers have exploded. And what is the price that Apple has had to pay? Apple has INCREASED its profit share from 50% in May 2011 to 72% last quarter. And they’ve done all that while only controlling a total of 7.8% of the mobile handset sales. There isn’t a business in the world that wouldn’t gladly take profit share over market share. And that should be the end of the story.
Of course, the counter-argument is that profits are a trailing indicator and that dominant market share must, inevitably, lead to a dominant platform. Only all the available evidence says just the opposite. Apple has the smaller market share, but they have the dominant platform. In fact, Tim Cook just provided us with 8 billion more pieces of proof to support that claim.
“…we built an ecosystem that is the best in customer experience on the planet. In addition, it’s fueling an incredible economic gain for developers. We’ve paid over $8 billion to developers.”
For those of you who are keeping score at home, that’s a jump of $1 billion in payments to developers in just one month.
Here’s a rule for us all to live by: When our theory conflicts with reality, we should create an alternative theory, not an alternative reality.
(As an aside, if Apple has 72% of the mobile phone profit share with only 7.8% of the market share, then with about 50% market share in tablets, what do you suppose their profit share is?)
Apple’s Achilles Heel
“If you look at skills, Apple is in a unique and unrivaled position. Apple has skills in software, in hardware, and in services. The model of the PC industry, that model’s not working for what consumers want today. Consumers want an elegant experience where the technology flows to the background. The real magic happens at the intersection of these, and Apple has the ability on all three of these spheres to innovate like crazy and really cause magic.”
One of the keys to the Macintosh was its hardware and software integration. One of the keys to the iPod was its integration with iTunes. One of the keys to the iPhone and the iPad was their integration with the App store.
Tim Cook correctly identifies one of the keys to Apple’s future – the integration of hardware, software and services. And he’s right when he suggests that the model of the PC industry is not working for what consumers want today. This is evidenced by the fact that many companies are moving toward a more integrated approach.
However, while Cook states Apple’s integration as a fait accompli, it is, at best, a work in progress. Apple has proven its competency in integrating hardware and software but with services like iCloud, maps, game center, etc., the jury is still out.
It is good that Tim Cook is talking about the integration of hardware, software and services. But whether Apple can deliver on the promise of his words is still an open question. And the future success of the company may well rest on the answer that Apple – and its newly revamped administrative team – provides over the next two years.