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@aaplorchard-blog
An update on Apple's share buyback program. Assuming Apple relies on U.S. free cash flow and debt issuance to fund share buyback over the next three years, Apple is in a position to spend $150 billion on share buyback, repurchasing another 20% of its outstanding shares by 2017. The full reports: here and here To subscribe to the daily Apple email: here Twitter: here
My thoughts on Apple's strong 1Q15 earnings report.
The full report: here
AAPL Orchard daily email: here
Twitter: here
Announcing Above Avalon and the New AAPL Orchard Email
I am starting a new site dedicated to Apple analysis called Above Avalon, named after the legendary island where King Arthur recovered from battle wounds and derived from ‘apple tree’ due to its Welsh origin and the connection of apples with various legends. In conjunction with Above Avalon I’ve decided it is time to officially end Sammy the Walrus IV’s reign. Over the coming days/weeks I will transition Sammy to my real name.
Why reveal your identity? In recent months I had become less strict about letting some people know about Sammy the Walrus and the first reaction I would get is what’s the point of keeping the name? At first I had my reasons, but it got to the point where it didn’t make much sense to keep the pseudonym. One person summed it up well, “unless you are saying controversial stuff, there’s probably little reason to have a pseudonym”. Given my most controversial topics usually dealt with iPad and mattress purchasing tactics, that advice stuck with me. I also found that working on certain ideas was becoming increasingly difficult under ‘Sammy the Walrus IV’.
Who are you? For the past seven years, I’ve been a Wall Street analyst covering financial companies.
How does this impact me? Two things: 1) You won’t see ‘Sammy the Walrus IV’ on your Twitter stream as I transition to my real name, but you can expect the same type of tweets (whatever way you want to describe them) 2) You will see much more Apple content from me.
What is Above Avalon? Above Avalon is focused on analyzing Apple from a Wall Street and Silicon Valley perspective. My Wall Street and finance background, combined with my love for putting things together, serves as good foundation for analyzing everything from Apple's financials to current products. While there is already a thriving Apple rumor industry, the lack of relevant analysis and context for those rumors is glaring and Above Avalon aims to be the best Apple analysis site on the web.
I don’t get it; Above Avalon is just about Apple? Yes. Apple is much more than a computer or technology company. “Covering Apple” now entails a number of different industries including media, music, design, fashion, and eventually new industries possibly including automobiles, home automation, and the list goes on.
Why cover just Apple and not the mobile industry or other industries? As many of you know, there are some great people covering the mobile industry and other tech-related industries. While they do a great job at describing current industry trends, when it comes to Apple, I’ve noticed results become more mixed. I’m not sure if prior expertise clouds judgment, but I think covering entire industries (and then talking about Apple as an after-thought) is actually less effective. Certainly industry knowledge is needed, but thinking of industries from the viewpoint of Apple versus looking at Apple from an industry’s viewpoint leads to better results. I want to focus all of my attention on Apple.
What happens to AAPL Orchard? AAPL Orchard is now a daily email containing a synopsis of what is occurring in the Apple rumor and news sphere, including commentary on what that particular story means in context of Apple and the future. The typical format will include a few links followed by a brief description for each and one or two final musings about Apple. You can subscribe here, along with viewing a sample email.
What else do I need to know about all of these changes? Check out www.aboveavalon.com. You can also stay up-to-date with Above Avalon posts on Twitter and Facebook.
Thank you for the past four years. I’m excited for this new challenge and hope you join me on the journey.
Neil Cybart
November 2014
Finding the Middle Ground between Apple Pay and CurrentC
We have a legitimate battle in the mobile payments arena as Apple Pay goes up against a powerful consortium of retailers, collectively known as MCX, and their payments solution, CurrentC. A mere few weeks ago, we didn’t even know a battle was going to occur, which underscores how complicated mobile payments are and how various parties have different goals in mind. Apple Pay is guided by ecosystem lock-in and privacy, while CurrentC is about better competitive positioning in terms of payment processing while collecting customer information. I suspect we are seeing the beginning of back and forth negotiation between Apple and the MCX consortium to find a middle ground focused on how to track customer information while keeping payment transactions secure.
I’ve long felt that Apple Pay adoption is dependent on universal acceptance as using Apple Pay, instead of credit card swiping, requires behavioral change and if Apple Pay is only accepted at a handful of retailers, the overarching impact will never go mainstream. Gas stations, fast food restaurants, and supermarkets are among the most frequently visited retail establishments, sometimes more than once a week, and Apple Pay’s current mind share in that space is low. While it is early in the game, many of these “convenience” retailers are already part of MCX and look at Apple Pay with caution as the service doesn’t put data collection as a priority and relies on credit cards (and we know how Americans love their credit cards).
Among the biggest complaints about MCX’s CurrentC is how information is collected about consumers, but there may be beneficial aspects of collecting such information, including reward points and loyalty sales. However, well-publicized recent data breaches have reinforced the view that there should be a clear limit as to what kind of information is tracked or shared with the retailer. Can Apple Pay’s treatment of credit card information be combined with opting-in to retailers loyalty programs in order to satisfy user's privacy demands while supporting retailers’ business models?
In order to get a different look at the current mobile payments battle, Starbucks and Panera Bread represent interesting case studies. Starbucks is embracing Apple Pay by letting people use the service to reload the Starbucks mobile app, which is then used to pay at kiosks. Starbucks has previously said that roughly 15% of sales are done through the Starbucks app (not a trivial number). Panera is trying something a bit different with customers either required to hand the cashier a popular loyalty card, or providing a phone number, to receive benefits, and then using Apply Pay for payment. Starbucks and Panera are two restaurant chains that value timely ordering and payment, while relying on data utilization to improve offerings. Is this a pattern for other retailers to follow? Whole Foods has announced plans to rollout its own rewards program in 2015, which may involve downloading an iOS app. With Apple Pay rumored to eventually include loyalty programs via Passbook (I assume this would make a great home for these loyalty apps?); will this new feature entice MCX fringe members to jump ship?
I suspect the MCX consortium is positioning itself to gain leverage for getting technology companies, and their respective mobile offerings, to be more hospitable to retailers’ business models. This may be a longer-term issue with shifting credit fraud liability in the second half of 2015 representing another twist to this battle. While “power in numbers” may not work in some fights, for mobile payments it’s a formidable near-term strength for MCX. It’s clear that CurrentC is an inferior answer to Apple Pay, and even to the payments system consumers rely on now, so the question isn’t, "Will CurrentC beat Apple Pay?", instead the question should be, “What elements of CurrentC are worth salvaging and then reworked to be included in Apple Pay?” Consumers like their credit cards, but dislike using credit cards. I think the credit card is here to stay and Apple Pay’s usage of credit card data is the way forward, voiding CurrentC, although Apple’s acceptance of loyalty programs is still a work in progress, keeping many retailers from moving away from MCX.
Friction exists between Apple and retailers as Apple Pay is focused on privacy while retailers have spent the better part of the last decade building their businesses on collecting the information that Apple Pay doesn’t value. I suspect Apple and MCX will eventually find some middle ground pertaining to tying in loyalty cards or rewards programs into Apple Pay, thereby enticing many MCX members to embrace Apple Pay.
I have a soft spot for wacky commercials. I like this Matthew McConaughey ad for Lincoln. The brand has seemingly been asleep for years, so having me post and talk about the ad suggests it was successful. Only question now is if consumers will say yes to Lincoln MKC. Lincoln and McConaughey signed a multiyear endorsement contract, so I'm looking forward to more wacky commercials.
“A smartwatch is very difficult for us because it is contradictory...Luxury is supposed to be eternal…How do you justify a $2,000 smart watch whose technology will become obsolete in two years?"
Jean-Claude Biver's comments, published in a WSJ Digits post, do a great job of highlighting how the high-end watch industry views Apple and the Apple Watch. While many in the watch industry expect Apple to send an all-start lineup into the game, Apple is busy reinventing the game.
AAPL Earnings Recap; iPhone Growth Accelerating
Apple reported a 4Q14 earnings beat to consensus and my estimate with strong guidance driven by iPhone sales strength.
Few takeaways and notes:
Mac. Over the past few weeks I was noticing that the Peak Mac theory, which stated that Apple will never sell as many Macs in a single quarter as occurred in 1Q12 (5.2 million Macs), was at risk of breaking apart as my long-term 4Q15 estimate was for 5.4 million Macs. Apple ended up reporting 5.5 million Mac unit sales last quarter, representing strong 21% year-over-year (yoy) growth, and a new quarterly unit sales record. Recent price cuts and upgrades resulted in strong Mac sales to college students.
iPad. Apple reported a 13% decline in iPad unit sales, which was in-line with my expectation. People calling for iPad's death will likely be disappointed though given the likelihood of a new iPad Pro model in 2015, along with the recently announced cheaper iPad mini and refreshed iPad Air 2. I still think iPad sales will pale in comparison to iPhone over time and the iPhone 6 will continue to cannibalize iPad sales, but Apple management seemed confident that there are enough niches (education and enterprise) to at least keep iPad sales from collapsing. I think it is appropriate to view iPad more like Mac, and given Mac's respectable growth last quarter, the iPad is far from over.
iPhone. Apple's overall earnings per share (EPS) beat my estimate by $0.10/share on stronger iPhone sales (39.3 million vs. my 36.5 million estimate). Management provided very bullish iPhone commentary with the expectation that iPhone will remain supply constrained through the end of the year. Apple shared other data points that reinforce iPhone momentum is accelerating from 13% yoy unit growth in 3Q14 to 16% growth last quarter to expected 30% growth in 1Q15.
Margins. According to management, the stronger dollar will be a "significant headwind" for Apple in the near-term, but the 37.5-38.5% guidance range already reflects the FX impact. On a normalized basis, I wouldn't be surprised if margin is closer to 40%, compared to 38.6% in 2014, on iPhone 6 strength.
Apple Watch Disclosure. Apple caused a minor Twitter uproar with new disclosure commentary concerning the way operating segments will be reported, including Apple Watch being lumped in with a few other products within the "Other Products" segment. Is Apple trying to hide something? I suspect the main reason for the classification is that Apple doesn't want to release too much information to competitors. If Apple disclosed Apple Watch revenues and unit sales, it would be possible to obtain average selling prices (ASP) and then back into which models were selling well, thereby giving key data to both low-end and high-end watch competitors. It isn't clear if Apple will disclose Apple Watch unit sales, such as opening weekend sales. I think it is reasonable to think if the sales are good, Apple may want to say how many units are sold without breaking out revenues.
Guidance. Apple provided strong guidance beating my revenue estimate and consensus. Most of the beat can be attributed to iPhone, where Apple could sell upwards of 65-66 million iPhone units, which would be the strongest yoy growth (30%) in over two years. The exact sales number will depend on how many iPhones Apple can produce, but it is safe to say that iPhone's growth is accelerating.
Apple is now trading at 13x forward EPS with net income growing 15-20% yoy.
AAPL 4Q14 Preview. Solid Quarter; Solid Outlook
Revenue: $39.8 billion (AAPL guidance: $37-40 billion range/Consensus: $39.9 billion)
I expect Apple’s revenue to increase 6% year-over-year.
Gross Margin: 38.0% (AAPL guidance: 37-38% range)
I expect Apple’s margin to decrease sequentially to 38.0% from 39.4% last quarter, primarily reflecting iPhone 6 shipments. Management’s margin guidance is approximately 0-100 basis points better than the 36.9% margin reported in 4Q13.
EPS: $1.32 (Consensus: $1.31)
I expect Apple to report 11% yoy EPS growth. I am including a 6 billion share count (implying around $5 billion of buyback - similar to last quarter).
Product Unit Sales and Commentary
Macs: 5.0 million (9% yoy growth)
Apple has reported Mac unit sales growth over the past three quarters and I expect this trend to continue with back-to-school sales and iPad fatigue (students opting for MacBooks vs. an iPad). After a difficult 2013, the Mac line-up seems to be holding its own and the idea of "Peak Mac" (Apple will never sell as many Macs as it did in 1Q12) is starting to look a bit premature.
iPad: 12.4 million (12% yoy decline. Consensus is closer to 13 million.)
I expect Apple to report continued Pad unit sales declines. As I previously highlighted, the iPad is in a perilous position and I don't see last week's iPad refresh as having much impact on the category's trajectory.
iPod: 1.7 million (50% yoy decline)
iPhone: 36.5 million (8% yoy growth. Consensus is closer to 37-38 million.)
iPhone launch quarters can be a wild animal. With many moving parts, including channel dynamics, sales vs. shipped differences, and the degree of delayed purchase behavior in August and early September, the actual sales number shouldn't be judged too harshly, but instead be included with next quarter's results to get a better idea of overall iPhone sales trends. Similar to last year, many ordered an iPhone 6 online hours after launch only to have the phone ship in October, so it’s clear that a large number of iPhone 6 (especially the Plus) launch sales will be pushed into 1Q15. My 36.5 million iPhone unit estimate assumes 7 million units of iPhone 6 and 1 million units of iPhone 6 Plus units, along with 29 million legacy iPhone units selling at roughly a 20% slower weekly sales pace than seen in 3Q14 (2.9 million).
I expect Apple's earnings to come in close to consensus demonstrating continued EPS growth from stronger net income and a lower share count resulting from share buyback. In terms of 1Q15 guidance, I am expecting approximately $56-60 billion of revenue (consensus is around $63 billion) and 38.0-39.0% margins (which would equate to EPS of approximately $2.25, or a 9% increase from 2014). It is important to remember that weaker iPad mini sales, as a result of stronger iPhone or iPad Air sales, will actually help Apple's financials as the iPad mini's lower ASP and margins weighed on Apple results.
I exclude foreign exchange impact from results given its non-operating nature. Apple is hedged against significant foreign exchange moves, but nevertheless there may be some impact flowing for the results.
The primary Apple story over the next few months will be the iPhone 6 rollout and corresponding implications on margins (iPhone 6 Plus running with a higher margin than iPhone 6, with both models positioned stronger than iPhone 5).
Apple iPad Event Notes
1) The iPad mini got 10 seconds of stage time. At this point Apple is keeping it around just to make sure they are selling tablets for less than $300. Watch the iPad average selling price (ASP) over the next few quarters to see if there is any evidence of people buying the cheap (and old) iPad mini instead of other iPads. I doubt it.
2) Most of Apple's iPad Air 2 sales pitch focused on the camera and corresponding apps. While I'm sure there are some neat use cases (children's sport events, physical therapy sessions, etc.), does an iPad really do a better job than an iPhone 6? For some the answer is yes, and those people will buy iPad Air 2, but for most, I suspect the answer is no.
3) Notice how "iPad apps" just doesn't have the same ring and excitement it once had. Apple had a few demos onstage and "this is okay" seemed to keep ringing in my head. The app ecosystem is tired (not just iOS).
4) Apple announced a new retina iMac for $2500, $700 more than the non-retina option. I'm sure once you use a retina iMac you never want to go back, but as I look at my non-retina iMac, and it's pretty decent screen, $700 seems steep.
5) New Mac mini with a lower $499 price. I'm sure there are people who were waiting for this and it will open up the Mac to new customers, but nothing too noteworthy when compared to the rest of the Apple product line. Look at the specs and no wonder it's $499.
6) Overall, a pretty laid back Apple keynote, especially when compared to last month's blockbuster of an event. I published my latest thoughts on iPad a few days ago and I have nothing to add after watching this event. I would expect a larger iPad Pro next year and I think Apple should get rid of the iPad mini and reduce the price of old iPad Airs.
Random bits:
Tim Cook almost called the Apple Watch, "iWatch". He has already called it iWatch in public before (which is rare for an Apple executive to do). Seems likely that "iWatch" was used internally to describe the watch while it was being developed.
We may have seen our first Hitler reference in an Apple keynote (can thank Stephen Colbert). Never understood why someone would reference Hitler to anything, but that's another topic.
Just another confirmation Apple is an iPhone (and Apple Watch) company. I suspect that is where most of the excitement and attention will be focused on for the next 2-3 years.
Thoughts on iPad
The iPad is at a crossroads. Introduced by Steve Jobs four years ago, the iPad has gone on to become a phenomenal success (225 million units sold bringing in $112 billion of revenue and approximately $30 billion of profit), but I suspect Apple management will alter the iPad line-up in response to wearable devices and larger-screen phones and in the process iPad’s ultimate trajectory will be more modest and niche than many expect.
Slowing iPad Sales Momentum
iPad sales growth has slowed dramatically from 65% year-over-year unit growth in 2013 to a 10% year-over-year unit decline last quarter. Such a contrast is startling given how promising iPad seemed in early 2013. When I first discussed my iPad concerns in 2013 (Apple had just reported a much weaker-than-expected quarter for iPad shipments), I received very strong pushback as many said iPad was fine and just suffering from varying release cycles. I knew that was not the reason for the sales weakness, but it was still hard to see why iPad sales and the overall tablet market were slowing so dramatically. Some pointed to longer upgrade cycles, which has some truth to it, but I wasn’t convinced that variable had enough explanatory power to turn 50%+ growth into sale declines within a few months as iPad was not near saturation (there are plenty of people who don't own an iPad). I suspect there has been a much broader ongoing trend for why iPad has been struggling to gain new users; larger-screen phones have been cannibalizing iPad sales and iPhone 6 is going to make things worse for iPad.
A Different World
For a new product category, iPad’s sales pitch was fairly straightforward; a device that sat between your phone and PC; able to do a few tasks better than both your phone and computer. Web surfing and email were highlighted as prime examples, as well as reading ebooks. Initial sales were very strong and the iPad was off to the races. Fast-forward four years, and iPad faces a much different consumer tech landscape.
2010 Environment
iPhone (along with most phones) have small displays.
MacBooks are thick, heavy, and non-retina.
People are completely mesmerized by new apps.
2014 Environment
Phones are much bigger (iPhone now comes in 4.7-inch and 5.5-inch display options).
MacBooks are thin, light, and retina.
The paid app (and even free app) ecosystem is tired and somewhat stale.
Apple now has a much harder sales pitch to make for iPad. Why buy an iPad when you could have an iPhone with a screen that doesn’t seem that much smaller than an iPad mini? Why buy an iPad when you can have a more powerful and just as easily transportable Macbook Air? The space between a phone and PC is smaller now than in 2010 primarily as the phone has become more powerful and larger. Tablets are getting squeezed.
Slowing iPad App Innovation
I can’t remember the last time I downloaded an iPad app. Curious to see how others were doing, I posed a question on Twitter, “How many iPad apps have you downloaded in the past month?” On any given question I get a decent number of responses, but this time I received a very muted reaction with a few “0” responses. Why am I not downloading iPad apps? I consider iPad app innovation to have slowed with iPhone continuing to take a disproportionately high amount of attention in the app ecosystem. Most of my daily mobile usage now occurs on an iPhone.
Messaging: iPhone (iMessage, Facebook, Twitter)
Email: iPhone
Web surfing: iPhone (Tweetbot)
Games: Not many games, but the latest fad is usually on iPhone
Photos: iPhone
Weather: iPhone
Traffic: iPhone
Maps: iPhone
Video podcasts: iPad (for the larger screen)
I suspect one reason for suboptimal iPad app innovation has been that app developers have been too preoccupied with iPhone’s explosive usage to focus resources on iPad and if everyone is focused on iPhone, can you blame them? Of course, I’m not suggesting there is not intriguing software for iPad. Anyone in a specialized field (medicine, sports, film, music, etc.) will be able to point out apps that harness iPad’s potential, but that is niche – and even Apple’s latest iPad commercials reiterate the niche factor. However, for the average person interested in basic tasks like web surfing, email, and photos, phones are very capable devices and are consequently winning a larger share of app innovation. As I wrote after a few days with my iPad back in 2011, the device is all about apps. If I have no interest in downloading or even using iPad apps, I view that as an ominous sign for its future. My interest is moving elsewhere, namely to iPhone, and soon Apple Watch.
iPad’s Primary Use Cases
I don’t want to paint such a grim picture for iPad. Apple is still selling millions of iPads (likely around 12 million during the past three months down from the 14 million last year). How could this be if the space between phones and PCs has been shrinking over the years and there isn’t the same quality of app innovation?
1) Laptop/Desktop Replacement. Many people are using iPads as their main computer, replacing old laptops or desktops. Interestingly, more people are telling me their parents and grandparents love iPad as it's the first computer that is truly easy for them to use. In many ways, this is exactly what some saw when the iPad was unveiled – a laptop/desktop replacement. Looking ahead, however, I don't see there being much to prevent phones from doing a better job at replacing laptops or desktops. Why buy an iPhone and iPad, when you can just buy a larger iPhone?
2) Education. While there have been high profile cases where large school districts, and even countries, considered implementing iPad programs, success seems to be underwhelming due to logistical concerns as well as budgetary limitations. I also think a lesser discussed reason is the proliferation of larger smartphones leading many students to use their phones much more in 2014 for tasks that the iPad was initially positioned to do. There’s clearly still a market for iPad in education, but I suspect it’s much smaller and more niche than many imagined a few years ago.
3) Enterprise. iPad in the workplace remains the unknown factor. I suspect iPad sales to the enterprise may represent a growing share of iPad sales. In this context, Apple's recently announced partnership with IBM takes on a new light - one of offense to find use cases for iPad.
iPad Has a Future; It Just Needs Help
The iPad is a great device that needs some changes to reflect the current landscape.
1) Apple should stop selling the iPad mini. As a low-margin response to cheap Android tablets and given the lack of a large iPhone, the iPad mini served its purpose keeping Apple in the tablet game, but today there really aren’t many reasons to keep the iPad mini around. Consensus seems to think Apple will add Touch ID to iPad mini later this week along with some other updates, but beyond that, unless sales trends improve (I wouldn’t expect them to), I don’t see the iPad mini staying in the line-up for too long and I think that is only for the better. In order to keep product offerings in the same price range as iPad mini, Apple could work on lowering iPad Air pricing to approach that $299 level over time.
2) Introduce an iPad Pro. An iPad with a 12.9-inch retina display, new software that moves beyond just rows of app icons, and capable accessories including keyboard stands and styli. Once again, Apple’s IBM partnership comes into play. A large iPad Pro with customized software and accessories would certainly be more interesting to enterprise users than an iPad mini with basic office utilities.
Even with a product line-up consisting of an iPad Air and iPad Pro, I would still suspect phones to eventually cannibalize the larger iPad Pro, but Apple would at least be able to get another couple of years of respectable sales out of iPad. When you add Apple Watch to the equation, the scenario where people keep their large iPhones stashed away in a backpack, purse, or satchel, while their Apple Watch handles communication and notification functions doesn't seem too much of a stretch. Maybe now you can see why I think so highly about Apple Watch’s potential while being more pessimistic towards iPad.
iPad Was the Right Product At The Right Time
I’m convinced if Apple had to do things over, they wouldn’t change a thing. The iPad was the right device at the right time. The past seven years in mobile has essentially boiled down to people discovering which sizes of glass they prefer in their pocket. In 2010, it seemed like consumers would want a phone, tablet, and laptop/desktop, with the tablet eventually replacing the laptop/desktop, although many in Asia and emerging markets disagreed. As phones become larger and more powerful and wearables become more popular, I suspect consumers will be content with just a phone and wearable device. I still see a future for iPad, but it looks more like Mac instead of an all-encompassing mobile device next to iPhone and maybe that is what Apple had in mind all along.
Bendgate Is Closed
Last night Consumer Reports chimed in on Bendgate, concluding iPhones don't bend under normal use. I think this report, coming from the consumer review site that infamously hit Apple hard with its Antennagate analysis, marks the unofficial close of this completely ridiculous witch-hunt.
The question all along hasn't been, "Do iPhones bend?" Of course they bend. iPhones are made of material that will eventually succumb to a certain level of applied pressure. I haven't tried it, but if I took my heavy-duty tools and machines to my iPhone 5s, I'm sure I will be able to get something to bend. If I really wanted to, I could gather enough arm strength to do something stupid to my phone as well. One could ask, "Why would I do such silly things?" and I would only be able to shrug my shoulders. The real question everyone should have been asking (if they were desperate to find a question to ask) is, "Do iPhones bend during normal use; walking, running, basically living your daily life?" All of the evidence (both empirical and anecdotal) support the "no bending" claims. Now a very select few have claimed their iPhones have become bent (although they also claim to have sat on them a lot - they aren't sure). These same people admit the bending is hard to see at times and you need to look at it in a certain light. I'm skeptical. If these people are genuine, they can return their iPhone and get a new unit. Apple sells a lot of iPhones and if your phone is one of the very few bad apples that made it through the rigorous quality assurance tests (Apple claims only nine people reached out to them complaining of a bent iPhone), I would just consider myself lucky, exchange the phone, and move on with my life.
Over the past week I received many jokes from Android users about Bendgate. Nearly every phone marker chimed in with their own unoriginal bending jokes, tweets, ads, and musings. Mainstream media picked the story up and ran with it. Curiously all of these reports were missing something - evidence. No one bothered to take a step back and think about this whole debacle for a second and actually see if their iPhones were bending. I suspect one issue is there weren't many iPhone 6 Plus units out there in the wild to even observe possible bending. Notice how these "-gates" only take place a mere few days after launch.
It's 2014. We shouldn't be surprised that we had to live through another iPhone "-gate". These spectacles only reinforce my view that iPhone continues to hold significant global phone mindshare (which is much more important these days than market share, but that topic is for another day). Stories of iPhone's demise have been in the news since 2007. Some have even tried to ridicule iPhone buyers, maybe one of the weirdest, and counterproductive, types of envy a competitor can possess. When you are in the lead, and running forward, competitors can only pin a target on your back and Apple seems to be wearing quite an effective shield.
It's reassuring to know that while the world has been preoccupied with Bendgate, Apple engineers have been busy creating the product for next year's iPhone "-gate"; iPhone 6s.
Apple Keynote Notes
My notes from Apple's keynote:
Development. The tech landscape saw this wearable device coming from a mile away. Over the past year, competitors have come out with their own watches, and in many cases, have already shown a few reiterations. I suspect Apple Watch development started in earnest back in 2011 with most features at least thought out by 2013 and everything largely set by early 2014. The growing phenomenon of people using the iPod nano as a watch in 2010 most likely got the ball rolling. Yes, that means Steve Jobs was around for at least the early watch discussions, although Tim Cook told ABC News that Apple Watch development began around late 2011/early 2012.
AskTog. In early 2013, former Apple employee Bruce Tognazzini wrote what I term "the iWatch manifesto", a highly detailed, yet supposedly hypothetical, wish list of what an Apple smartwatch could or should do. As I expected, most of his commentary turned out to be true and was announced today. I suspect some of his points that were not released today will be included in future versions. One has to imagine competitors were aware of the article and knew most of the features announced today were coming.
Hardware & Software. From a hardware perspective, the Apple Watch doesn't strike me as overly magical (like the iPhone did). However, the software is differentiated from peers.
Battery. People are worried about battery life. Apple didn't say, but implied an Apple Watch battery will last roughly a day. I think a 12-14 battery life is probably the most likely answer and I don't see much issue with such a span for a first release. I don't wear a watch in bed now, so I think it would be common practice to charge your Apple Watch every night. What does this mean for sleep tracking or those with extra long daily schedules? Maybe buying two watches is their answer.
Use Case. Apple didn't go into much detail about why someone should use an Apple Watch, instead demoing a few features that seemed cool or at least interesting. I think most of this is taken from the iPad playbook - show users various things you can do with the device and then step back and see what sticks. At one point Apple even mentioned there is much more to say about the device, but there wasn't enough time.
Goal. Apple is going after the watch, not the smart watch.
Competition. I suspect Samsung (and many others) will come out with various watches that look very similar to Apple Watch in a few months (some larger or smaller than Apple Watch).
Pricing. Apple said Apple Watch would start at $349. I imagine some of the higher-end models will likely go for over $1000. I would not be shocked if over time, you see Apple watches retail for thousands of dollars (a special Marc Newson $5000 edition anyone?). Of course, Apple will also work to lower the entry-level price to a more manageable $99 etc.
Future. I see a world where the watch will eventually replace the phone. We aren't there yet, but I think it's coming and most major tech players will have a wearable tech platform up and running by 2015-2016.
Retail. Apple will need to figure out a way to showcase dozens of Apple Watch variations in Apple stores, requiring a new way of thinking of wearable retail. Angela Ahrendts has her hands full.
iPhone. New models largely as expected. The iPhone 6 Plus (5.5-inch screen) seems a tad large, especially when compared to the iPhone 6 (4.7-inch screen). The gold version does not look as good with these larger phones. I suspect the 4.7-inch iPhone 6 silver will be a top seller. These news phones will likely maintain Apple's iPhone unit sales growth in 2015, especially from strong sales in Asia.
Apple Pay. Apple introduced a mobile payments platform and while I am interested, I am a tad skeptical at how this is going to trend in real world implications. If I still need to carry credit cards because there are various retailers who don't support Apple Pay, how effective is such a service? Certainly Apple Pay represents the strongest movement yet for the mobile payments arena, but for now I am taking a wait-and-see approach.
U2. I still don't quite understand the point of Apple subsidizing a U2 album. I get that Apple wanted a musical act to close out the event, but U2?
Summary. Apple did what it had to do to give Apple Watch a solid chance of succeeding. The hype for today's event seemed higher than the initial iPad event and I think it's clear Apple wanted people to know Apple Watch is a big deal and should garner the corresponding attention. For now, I think Apple early adopters will buy Apple Watch (5-8 million units), with a decent uptake in some market niches (another 5-10 million units). While some are expecting 60 million units sold in the first year, I am taking a more measured 2-3 year horizon before we see those kind of sales numbers. Ultimately, I think Apple has a winner with Apple Watch.
Wearable Device Now, iWatch Later
John Paczkowski over at Recode is reporting Apple will announce a wearable device in two weeks. Tim Bradshaw over at FT is saying Apple's new wearable won't be called iWatch. While things can obviously change, and Apple product naming is notorious for being kept close to one's chest, both journalists have solid track records.
I have three observations.
1) No Leaks Suggest Delayed Launch. We have seen no leaks of a new Apple wearable device. While it certainly is possible that Apple doubled down on secrecy, I highly doubt that we would have no leaks of any kind for a brand new product that had entered mass production (2-4 million+ units) weeks ago. I suspect this new Apple wearable device, if announced in less than two weeks, will not go on sale anytime soon. I still would expect demos to be available at the event as Apple is fully capable of producing a few hundred devices internally. While the new Arizona sapphire plant certainly is intriguing and may play a role with wearables, there would be too many other partners involved in a wearable device for there not to be any leaks. While I still wrestle with the exact timing of shipping (I fully expect Apple to announce the ship date or at least a somewhat narrow timeframe), I think there is a low probability of an immediate launch.
2) Sharing the Stage. If Apple introduces a wearable alongside iPhones, I think the "wearable as an iPhone accessory" mantra makes a lot more sense that having a huge iWatch-only event, similar to the first iPad, where a wearable device can stand alone on its own merit and not require another iOS device. If a wearable device requires an iPhone to function, it makes more sense to announce alongside new iPhones. Over time, I expect wearables to become fully capable of moving beyond accessories, but we are only talking about the first version of a still unannounced product.
3) iWatch vs. Wearables Category. Apple may view the wearables category as requiring training wheels as consumers may not understand or connect with a full blown "iWatch" right out of the gate, so an in-between wearable device would be required to make the learning curve more manageable. For example, an iPad introduced in 2005 probably would not have done as well since people wouldn't have been familiar with a touch interface - not to mention the lack of an app ecosystem. It is possible Apple will initially sell a wearable device similar to a fitness band, but focused on the much broader and mainstream subject of health, only to expand the lineup in subsequent years with various editions, price points, and styles. I have a growing suspicion that Apple's wearables category will not be comprised of just one or two models but an array of devices as wearables will usher the era of fashion into personal technology. Apple's recent retail hires support my thesis that a new way of thinking is required to sell a range (maybe up to dozens?) of wrist devices.
At this point I expect a "wearable" device to be introduced in two weeks, with the goal of getting users acquainted with this new wearables product category, while the more powerful and much more important "iWatch" is kept for 2015 or later.
What the Beats is Going on? Thoughts on Apple Acquiring Beats
Apple is reportedly interested in acquiring Beats for $3.2 billion.
Here's what I'm thinking:
1) Separate the rumored deal price from the transaction. It's a lot of money for Apple and in many ways focusing too much on the money will make it difficult to focus on the underlining acquisition target.
2) What is Beats? While everyone seems to have a different answer, to me Beats is a start-up music company that is after one thing: music mind share. Think of music and Beats comes to mind, right? No? Well give it a few more years and the growing popularity of those "obnoxiously large" headphones may change things. Co-founded by intelligent musicians (and businessmen) who "get" music, Beats knows what it is doing and more importantly what it's after. Headphones, stereo equipment, music streaming service, and the list goes on. Beats wants to own music.
3) Apple is Afraid. I suspect Apple feels threatened as its mind share for music is declining. The iPod died on behalf of its older sibling, the iPhone, and following its death, the grip Apple had on music has started to slip. Think of digital music, and Pandora or Spotify may come to mind. Beats could very well be on the same path of music stardom. This past holiday shopping season, Beats headphones were everywhere (and people were buying them in droves). Walk down the street and you could tell when someone was wearing Beats. For the first time, the white EarPod was being threatened. Who knows what things would look like in a few years. Apple would be looking to change that with this acquisition. I suspect Apple is interested in buying Beats to gain music mind share.
4) Similar Cultures. Beats and Apple share similar cultures where passion is the ultimate driver. While there would undoubtedly be segments or pieces of Beats that Apple will shutter, Beats could very easily represent a decently sized (fewer than 200 people) division within the Apple system. Sure, this would mark a departure from the way things have been, but judging from Disney's success, sometimes you have to let the past go and embrace the future.
5) Let's go back to price. I think Apple is overpaying for Beats. Recent valuations pegged the music streaming service at around $100 million with the entire company worth a reportedly $1 billion last year. While additional details may come out in the coming days I suspect Apple is overpaying to avoid others from coming in and competing over price. It's a lot of money for any company, and regardless of how much cash Apple has in its bank account, it's still a lot of money. To me this means Apple is serious about this bet.
6) Lots of unanswered questions.
- Will Apple actually promote the Beats brand post acquisition? Such an idea is still hard to grasp, but maybe they would have to in order to maintain a gripe on the music mind share they are acquiring. Is the reason Beats headphones are popular because they aren't Apple branded? If I had to bet I would say Apple walks a thin line introducing new Apple-branded music product, while also keeping the Beats brand around. Such an idea is still hard to swallow though...
- Will there be a Beats brain drain (employees leave) and does it even matter?
- How will this impact future Apple products? I suspect we are going to see Apple attempt a very significant push at a true music streaming service where I can have any song, when I want it (NOT RADIO), wherever I want it...and it would be free for iOS users signed up for Apple's new mobile payment system.
- Will this open the floodgates to additional Apple acquisitions? If the answer is yes, then we may be entering a new era in tech M&A as the biggest tech company in existence is officially an acquirer (I don't think this is the case though).
Acquiring Beats would be a new type of transaction for Apple. While there are similarities to previous acquisitions, there are just as many differences and for the first time we may be seeing Apple "doing what is right" - fighting for its survival. Apple wants to own music.
14 hour update: After plenty of Twitter discussions and thought, the only additional comments I have include:
1) Jimmy Iovine may play a big role. If the $3.2 billion price tag holds up, it becomes obvious that Apple is paying for intangibles (branding, music industry relationships) and not current products or services. In essence, Apple would be buying the music industry - something that Apple would not be able to do organically. Iovine has been critical of iTunes and it's possible Apple wants him to revamp iTunes and bring the service into a new era (with the full support of the music industry).
2) Would Apple replace the iTunes brand with Beats? Is it possible for a declining consumer electronics brand (iTunes) to turn around and regain its strength? Maybe the only way for Apple to regain its grip on music is to update its branding from iTunes to Beats (among other things). In such a case, a $3 billion price tag doesn't seem as crazy.
Samsung’s Crisis of Design 2.0
Samsung unveiled its second attempt at wearables, along with its latest flagship phone, earlier this week at MWC. I was not impressed and I am growing more confident that Samsung not only has another “crisis of design”, but will also soon face major headaches from competing Android OEMs. I think we are on the verge of a new phase in mobile phone hardware: Samsung competitors will finally be able to find a footing and begin to attack the giant. Meanwhile, I suspect Apple has already placed Samsung in the same drawer as Microsoft; irrelevant. Tim Cook and company is marching to a completely different beat.
1) The Galaxy Fit looks awful. A curved AMOLED touch screen with a huge piece of plastic on its underside attached to a Modern Glam (plastic) watch strap. I’m having a hard time seeing what is so “beautiful” or “pretty” about Samsung’s new fitness device, to quote a few easily amused tech bloggers. The company’s business model is not dependent on good design and few would suggest otherwise, but I struggle to understand how people can look at the Galaxy Fit and be even mildly impressed by such a horrendous product. One tech blog went so far as to say the Galaxy Fit is a “smartly designed fitness band”. It’s a piece of curved glass set on top of a bunch of plastic with an extremely awkward user experience and interface. Smartly designed?
2) Samsung Galaxy S5. Samsung’s flagship phone now comes in gold and has a fingerprint scanner. While the joke would typically stop there and many would say “copying a good artist is a pretty good strategy”, Samsung didn’t even copy well. The gold color is the wrong shade of gold (Modern Glam gold?) and the fingerprint scanner doesn’t work. I really don’t think I need to say much more about Samsung’s new flagship phone. I suspect Samsung will unveil the real Galaxy S5 this May? Interestingly, Apple was very quiet this week versus last year's PR push leading up to the Galaxy S4 launch. I wonder why...
3) Samsung is a fish out of water without new Apple inspiration. Samsung is struggling. The easy smart phone growth achieved by simply shipping an alternative to iPhone (bigger screen) is drying up and with no clear path to additional revenue or earnings growth, the company amusingly jumped into wearables. The Galaxy Gear was downright disgusting, while the Galaxy Fit isn’t far behind. Samsung likes to throw around the “we give consumers what they want” meme and I am left wondering who was asking for something like the Galaxy Gear or Galaxy Fit? Samsung is throwing a lot of poop against the wall and desperately hoping something sticks. While some may label such a business strategy as acceptable, I have my doubts that consumers are going to stand by a company that is willing to ship products that merely represent different batches of wall poop.
4) Samsung’s credibility is taking a hit. Last year I noticed a few of my acquaintances made the switch from iPhone to Samsung. The usual reason given for such a move involved wanting a change or simply being bored by iPhone. Interestingly, on follow-up discussions in recent weeks, these switchers are now regretting their move away from iPhone due to Samsung’s plastic and subpar build quality. More than a few people on Twitter tell me the same thing about friends or family being disappointed with their Samsung phones. The amount of negative feedback caught me by surprise. Interestingly, only a few hours after introducing the Galaxy S5, Samsung rumor blogs were talking about a new Samsung phone coming out in May that actually wasn’t made of cheap plastic. Have we reached a point where even Samsung realizes the “not an iPhone” plastic gold Urban Glam option probably isn’t going to do much in terms of winning converts from competing platforms? Consumers are starting to notice what Samsung is actually shipping and the grumblings are getting louder.
5) Samsung competitors are foaming at the mouth. The long-standing joke is that the best Android phones available in the market (never a phone made by Samsung) don’t sell well because no one cares about anything other than Apple and Samsung. I think that may change. After this week, I am becoming confident that consumers are going to stop being passive and begin seeking out alternatives to Samsung in the form of HTC, Sony, Nokia, Lenovo, or countless of other Asian OEMs, all of which are making significant progress in shipping attractive phones at attractive prices (I would include Nexus, but Tony needs to help Google rework distribution). In terms of hardware specs, most of these phones are already at parity and with several Samsung competitors now focusing on hardware design; consumers will simply have fewer reasons to instantly turn to Samsung. Whereas in the past, Samsung might have been the default choice for Android, I suspect that lead will start to slip. In addition, Samsung recently announced that they will reduce their advertising and marketing budget as mobile phone profits decline (not exactly the best timing for such a move). While smaller mobile hardware companies individually lack the ability to compete against Samsung, and just the thought of going up against Samsung can scare many executives into a cold chill, I think each competitor can take a bite out of the giant which can collectively create serious damage. To succeed against Samsung: 1) Focus on branding 2) Save or raise as much capital as you can and throw it into marketing 3) Narrow your distribution focus 4) Figure out why someone should buy your phone. The challenge is significant and Samsung will not stand still, but 2014 is the year. Wait any longer and limited resources may not allow another fight in the future.
Bonus - iWatch Implications from Galaxy Fit. The iWatch will not look like the Galaxy Fit and the iWatch will certainly not operate like the Galaxy Fit. The best way to think about this would be envisioning a small table in Jony’s design lab with various iWatch prototypes. The Galaxy Fit version (simple rectangular curved piece of glass positioned on a plastic watch strap) would be instantly cast off as a no, if it even would be positioned as a possible prototype in the first place. I highly doubt the iWatch will include a strap/buckle or a thick piece of bulging glass. The device won’t depend on an awkward user experience where you have to rotate your head and arm just to look at the device. In summary: Look at the Galaxy Fit and you now know what the iWatch won’t be.
My Letter To Apple SVP of Retail Angela Ahrendts
Angela,
I planned on buying a new iMac on Black Friday. In order to make the process smoother, I ordered online at 6am and chose personal pickup. Approximately one hour after I placed my order I received an email saying that my order was ready. Everything was going well since I would be able to coordinate my Apple store visit with other Black Friday observations at the mall, however my experience with the Apple retail store was very disappointing.
My first interaction with the Apple store was a greeter assigned to the entrance. After saying that I was picking up an iMac that I ordered online, he told me to go see “the guy with the grey hat”, pointing in the general direction of the rear of the store. Relative to other Apple stores this particular location is small and I would venture a guess that it is one of the smallest out there, a carry-over from the early years of Apple retail. After a few minutes it became clear that the “guy with the grey hat” wouldn’t be available any time soon, so I was off to find someone else.
Even though there were plenty of red shirts visible in the store, everyone seemed focused on some task. After finding another worker that actually was not with another customer, I was told to go see another person for personal pickup, who unsurprisingly was with another customer. A few more minutes go by and I finally get my iMac. Overall I didn’t find the experience too magical and in fact, compared to other stores during Black Friday including Macy’s, I would classify Apple’s customer service as inferior.
1) I am not a fan of having to talk with a greeter at the Apple store entrance only to be shuffled to someone who clearly is not free to assist me and repeat why I am in the store. The whole process seems highly inefficient. Instead, getting my information and then relaying that to another employee who can come forward to help me seems more enjoyable. This process may actually exist in other Apple stores and I almost remember something like this occurring to me in the past, but it has been a few years.
2) Apple retail employees have different tasks even though you would never know it because everyone wears the same shirt color. Some workers do not deal with money, others only go around answering questions. This scenario becomes tricky when trying to buy products or pick up previous orders. Compare this to Macy’s where mostly anyone you find walking around can hop over to the nearby register and take care of your order.
3) The floor layout is just unnecessarily chaotic as people are standing around for various tasks such as purchasing product or getting tech support. Generally the front of the store is geared towards selling product with the back dedicated for the Genius Bar, but the middle zone is a very awkward area with people randomly standing around.
In previous years, I recall Apple have a more traditional check-out process for gift cards and other smaller items such as iPods, but such a layout did not exist this time around. Maybe I’m being a bit unfair and I just timed it wrong?
Apple retail just isn’t working anymore and you clearly have numerous objectives to accomplish in 2014.
Good Luck, Sammy the Walrus IV
P.S. I’m enjoying the iMac
Back up the Truck - Buy Stock in Coldplay
It was an eerily quiet 2013 for Coldplay. Besides one new song for ‘The Hunger Games: Catching Fire’ soundtrack, the band was in hibernation. If Coldplay was a stock, it would have experienced an awful 2012 and 2013. In reality, this is exactly when all of the heavy lifting is done and new songs run through the imagination, creation, and tinkering stages. Hibernation can be a healthy way of nurturing fan relationships (cravings) and resetting media’s infatuation.
Source: Google Trends
A quick look at Google Trends shows that interest in Coldplay (judged by Google searches) stands at eight-year lows. Of course, interest is largely a product of album releases and concerts (none of which occurred in 2013). Coldplay interest peaked during the very busy 2005, 2008, and 2011.
Coldplay Albums
2000: Parachutes
2002: A Rush of Blood to the Head
2005: X&Y
2008: Viva la Vida
2011: Mylo Xyloto
2014: ?
People are now wondering if Coldplay has topped, unable to match the sheer momentum experienced in 2011. Doubts over new competition, such as Imagine Dragons, or if people are just tired of Coldplay are getting louder. The latest rumors say Coldplay’s latest album may be released Summer 2014. I would bet that the album will be #1, Coldplay interest in Google Trends will once again reach a new relative high, and the Coldplay PR machine will return with a vengeance. Hibernation is a good thing. If Coldplay was a stock, I would be buying it hand over fist as 2014 will be a good year for the band.