As a whole, Apple is generally regularly underestimated as a company. However, with the iPhone making up such a large percentage of Apple’s revenue and many calling Apple an iPhone company, that underestimating extends to the iPhone. Apple’s and the iPhone’s growth significantly has to end, is the common narrative. Apparently, it is not sustainable in the minds of many.
The smartphone market is a big one. The biggest market of any consumer tech product. It’s the only product almost every adult will own some day. Apple’s share of smartphone sales for the calendar Q3 2015 quarter was 14.5%. The dynamics of the global smartphone market are hard to read for many but have been clear to me for some time. As markets mature, consumers start becoming more refined in their needs, wants, and desires with a smartphone. This simple dynamic is what led Apple to have the highest number of consumers upgrade their smartphone to an iPhone from an Android phone. This dynamic, which is a result of both the maturing of markets like greater China and Eastern Europe, is an underappreciated one in terms of the iPhone’s upside. Another statistic I’ll share from our primary research is, while our data returned a 28% switching from Android to iPhone number, 26% of Samsung owners in our panel indicated intent to make the iPhone their next smartphone.
During yesterday’s earnings call, Tim Cook shed some interesting light on this new user question. The Android switching dynamic is certainly a new user addition to the Apple ecosystem. However, some interesting stats were shared about China as well.
– 50% of iPhone buyers in China buying a iPhone 6 and up are buying their first iPhones
– The number of first-time buyers was even higher than 50% for those who purchased an iPhone 5s
The key takeaway is that the new iPhones are driving new users to the customer base, especially in China, and the legacy models are playing a significant role as well in driving new customers. This later point on the 5s gives me an indication the iPhone 6 and 6 Plus, at now discounted rates, will continue to drive this dynamic of adding customers. Cementing again the theme of last year that the year before models are drivers for Apple in the lower-tier price points. Take this point and apply it to the iPhone 6 and 6 Plus. These phones are so well built and the SoC so well made, they can last quite a long time in the market. Next year at this time, the iPhone 6 and 6 Plus will still be in the market and discounted even more than they are right now. They will still be competitive in the overall market and even more attractive to first-time buyers/switchers by hitting lower price points. Meaning, Apple’s lineup is strengthened each year with last year’s and the year before model at addressing many different price points and, remarkably, still competing at those price points several years later with newer Android phones.
The vast majority of Android vendors are fighting the trends of the race to the bottom. Android is suffering from the “good enough” problem in many markets. This makes it hard for vendors to have cutting edge specs or genuine innovation, which is helping tip the market in Apple’s favor as global markets mature. A truly fascinating dynamic to understand.
With only 31% of the base upgraded, 69% of Apple’s global installed base is still ripe to upgrade. Based on my estimates, that breaks down to roughly 320-330 million consumers still needing to upgrading. How long this transition of the base will take is unclear but roughly 330 million consumers are ready for an upgrade.
Lastly about iPhones. China seems to keep stumping many Apple watchers. Interestingly, we are now starting to see seasonality for Apple in China in ways we did not before. Note my chart of Apple shipments in US and China.
(Forgive me for not revealing the Y-Axis as the hard data is for our institutional clients)
As you can see, Apple’s shipment line in China was steadily going up. Now, it has seasonal variance just like the US market has for some time. These dynamics are new, with no historical comparables to lean on. Even other Chinese OEMs who sell in China don’t have this same degree of seasonality. This means the two biggest quarters for iPhone growth will come from the Dec holiday quarter for many markets and the March Chinese New Year holiday quarter. These two quarters alone made up 42% of Apple’s fiscal year shipments of iPhones. I expect that percentage to rise as a part of Fiscal 2016 iPhone shipments.
China seasonality is helpful for the overall model and looking at similar big shopping quarters in other markets for Apple could help understand the growth signals as well.
A few other highlights:
- Mac: 5.7 million Macs is incredibly strong, given the PC environment we are witnessing. This is fueled both by enterprise sales as well as the back to school segment. Feedback we got from IT managers and CIOs was the Macbook was gaining traction in their workforce and we heard similar with students. I’m looking for a 6m+ Mac shipment quarter in Dec.
- Apple Watch: Based on math I feel is reasonable and logical and given several assumptions of products in the “other” category, I’m fairly confident Apple Watch sales were in the 3.5-4m range for the quarter. Up sequentially is a postive sign and feedback I’m getting from many retailers is positive for the direction of Apple Watch sales next quarter. Most importantly, though, Apple Watch owners love it.
- iPad: I’m not as worried about this category as others may be. Its decline is not concerning. I do believe iPad Pro will help but this product is not on as predictable of a refresh cycle as other products. I’m willing to bet we will have some surprise iPad sales quarters, but working these into forecasts will be very tough. So consider the iPad a sleeper with some surprising quarters ahead likely.
- Services: Perhaps one of the least appreciated parts of Apple’s model is the services business. This business had a record $5.1 billion quarter, up 10% YoY. This is positive because it means Apple is continuing to get their customers involved in their ecosystem. Upside here can continue to come from Apple Music, iCloud storage, an Apple TV subscription service (if it happens) and, of course, continued growth in App Store revenue. All of this points to stickiness and loyalty in the Apple ecosystem.
Things are looking positive for Dec for Apple in many vectors. The market dynamics we are seeing change in real-time in categories like PCs, and smartphones, are truly fascinating and again teach us new things about consumers in these segments. All of this makes historical comparables and “conventional wisdom” hard to base a complete model on. Luckily, we have our quarterly market research across 30 global markets and 25,000 consumers to lean on.