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Apple’s Social Network – Stratechery by Ben Thompson

iPhone unit growth and revenue growth over time

Whereas the saying goes that “No information is sweet information,” within the case of Apple it seems that “Information about no information is dangerous information.” From Bloomberg:

Apple Inc. shares had their worst day since 2014 amid considerations that progress in its powerhouse product, the iPhone, is slowing. Within the fiscal fourth quarter, Apple stated iPhone unit gross sales barely grew from a yr earlier, although new flagship units got here out within the interval. On the similar time, Apple stated it will cease offering unit gross sales for iPhones, iPads, and Macs in fiscal 2019, a step towards turning into extra of a providers enterprise. Whereas some pundits praised the transfer as a strategy to spotlight a potent new enterprise mannequin, many analysts complained it was an try to cover the ache of a stagnant smartphone market.

Apple has lengthy been an exception within the smartphone area in relation to reporting unit gross sales, so deciding to not is just not that out of the bizarre; Apple, although, has all the time positioned itself because the extraordinary various — the perfect — and that strategy paid off for years with gross sales numbers that have been value bragging about.

A Historical past of iPhone Unit and Income Progress

The truth, although, is that unit gross sales in isolation have certainly misrepresented Apple’s enterprise for the final a number of years; particularly, they’ve underestimated it. Think about the final six years of iPhone income progress and unit progress:

iPhone unit progress and income have been clearly extremely correlated within the early years of the iPhone, when the one worth distinction within the line involved the quantity of storage on the flagship gadget. As Apple began maintaining older fashions within the lineup, although, income progress was a bit slower than unit progress on account of a slowly declining common promoting worth.

Then the iPhone 6 occurred: not solely was the “big-screen iPhone” stupendously widespread — and, it ought to be famous, was the primary telephone bought at launch on all of China’s cellular carriers — it additionally, for the primary time, included a configuration — the $749 iPhone 6 Plus — that had a better base worth than the iPhone’s conventional $649. The outcome was income progress that, for the primary time, considerably outpaced unit progress.

The iPhone 6S was the other story: whereas Apple thought that iPhone 6 gross sales figures represented the brand new regular, in actuality Apple had pulled ahead an enormous variety of flagship telephone consumers. Finally the corporate needed to take a $2 billion stock write-off on the iPhone 6S after over-forecasting gross sales; in the meantime, older mannequin telephones (together with the iPhone 6) have been nonetheless promoting nicely, so once more unit progress outpaced income progress.

It turned out, although, that the 6S was the brand new regular: iPhone unit gross sales have been principally flat ever since:

iPhone unit sales over time

What has modified is Apple’s pricing: the iPhone 7 Plus value $20 greater than the iPhone 6S Plus. Then, final yr, got here the large bounce: each the iPhones eight and eight Plus value greater than their predecessors ($50 and $30 respectively); extra importantly, they have been not the flagship. That appellation belonged to the $999 iPhone X, and given what number of Apple followers will solely purchase the perfect, common promoting worth skyrocketed:

iPhone average selling price over time

Nonetheless, although unit progress had been stagnant for a full three years (not simply the final yr, as many stories, together with the one above, incorrectly said), reporting these numbers helped Apple inform its story: in any case, you wanted unit numbers to calculate the typical promoting worth.

What the reviews are proper about, although, is that unit gross sales going ahead are completely a narrative Apple would like to keep away from: it is extremely unlikely that models will develop, and whereas Apple pushed pricing even greater with the iPhone XS Max, it in all probability can’t go a lot additional, which suggests it’s doubtless that the typical promoting price-based income progress story is drawing to an finish as nicely.

At the moment at Apple

Thus far I’ve targeted on the iPhone, and for good purpose: final quarter it made up 59% of Apple’s income; for the corporate’s vacation quarter it should probably strategy 70%. Nevertheless, the corporate may also cease reporting unit gross sales for Macs and iPads. This got here on the heels of a product announcement final week the place Apple launched a brand new MacBook Air, Mac Mini, and iPads Professional; all have been priced considerably greater than their predecessors.

This isn’t a shock: the Mac line has been growing in worth for years, whereas the iPads Professional are balanced by a robust entry-level product that begins at $329. The truth of each the Mac and iPads Professional is that they’re area of interest merchandise, and area of interest clients are prepared to pay larger costs for merchandise that higher meet their wants.

What was extra fascinating about final week’s occasion although, and which casts extra mild on Apple’s new progress story than the merchandise introduced, was the ten minutes within the center dedicated to Apple Retail.

That is how Apple CEO Tim Prepare dinner launched the phase:

Now there are methods that Apple goals to encourage creativity in our customers, together with in our shops. The mission of our shops has all the time been to complement the lives of our clients by educating and galvanizing them to go even additional. One of many new ways in which we’re taking their creativity even additional is thru our Right now at Apple periods.

Right now at Apple was introduced with a press launch in April, 2017, and acquired its first on-stage point out through the iPhone X keynote. Final week’s presentation, although, actually highlighted how At the moment at Apple is probably the easiest way to know the best way Apple thinks about its progress alternatives going ahead. Senior Vice President of Retail Angela Ahrendts defined:

We began with the issues which are core to Apple’s DNA, issues individuals most use their units for and belief us to show them, like images, music, gaming, and app improvement. And as Apple continues to develop curriculum like Everybody Can Code and Everybody Can Create, we embed these classes and methods into our At the moment at Apple programming for all clients, together with educators and entrepreneurs. And we maintain all of our periods in all 505 retail places, like at Apple Cotai Central in Macau, which opened a couple of months in the past. Right here, clients are attending a session referred to as Photograph Walks, the place they study new options, like portrait lighting and depth management, whereas exploring the town collectively in an actual social means…

And as we proceed to push the design of our flagships to be even higher gathering locations the place everyone seems to be welcome, we’re additionally creating international platforms for native expertise. Photographers, musicians, builders, and artists share their artistic presents…

Because the launch of At this time at Apple, solely 18 months in the past, we’ve got held over 18,000 periods every week, attended by tens of millions of curious creatives around the globe. And with the most recent launch of the Apple Retailer app, we’ve made it even simpler so that you can discover out what’s occurring close to you. Simply faucet on the Periods tab and also you’ll see a highlight of the most recent At present at Apple periods in your metropolis. It can additionally advocate periods based mostly on the merchandise that you simply personal, and signature packages like Music Labs, Youngsters Hour, and Photograph Walks.

What’s putting about As we speak at Apple is the size of its ambition mixed with its worth: free. In fact that isn’t true in apply, as a result of one wants an Apple system to realistically take part (and an Apple ID to even enroll), however that raises the query as to what Apple clients are paying for once they purchase an Apple product? Apple’s level in highlighting At the moment at Apple is that clients are usually not merely shopping for an iPhone or an iPad or a Mac, however slightly shopping for into an ongoing relationship with Apple.

Apple’s Social Community

Extra broadly, this explains CFO Luca Maestri reasoning on the earnings name for not reporting unit gross sales:

Third, beginning with the December quarter, we’ll not be offering unit gross sales knowledge for iPhone, iPad and Mac. As we’ve got said many occasions, our goal is to make nice services that enrich individuals’s lives, and to offer an unparalleled buyer expertise in order that our customers are extremely glad, loyal and engaged.

“Engaged” is an fascinating selection of phrases, as engagement is an goal usually related to social networks like Fb. The reasoning is clear: the extra engaged customers are, the extra they use a social community, which suggests the extra advertisements they are often proven. Social networks accomplish this by aggregating content material from suppliers in addition to customers themselves, and regularly tweaking algorithms in an try and maintain you swiping and tapping, and coming again to swipe and faucet some extra.

This can be a world that has all the time been overseas to Apple: its previous makes an attempt at facilitating social interplay on its platforms are memorable solely because the butt of jokes (iTunes Ping anybody?). This isn’t a shock: Apple’s tradition and strategy to merchandise are antithetical to the tradition and strategy essential to create and develop a standard social community. Apple needs complete management and to launch as good a product it may possibly; a social community requires an iterative strategy that’s designed to cope with fixed variability and edge instances.

This, although, is why As we speak at Apple is compelling, specific Ahrendts’ reference to bringing individuals collectively in a “actual social means” — and she or he couldn’t have emphasised the phrase “actual” extra strongly. Apple is in impact making an attempt to construct a social community in the actual world, facilitated and managed by Apple, and betting that clients will proceed to pay to realize entry.

Apple’s Common Income per Consumer

To be completely clear, I’m not arguing that As we speak at Apple is the reply to a saturated smartphone market or Apple reaching the bounds of worth will increase. The corporate is clearly counting on “Providers” income, which principally means App Retailer income, an enormous portion of which comes from in-app purchases for video games, in addition to a rising variety of subscriptions, some offered by Apple (like Apple Music), however most by third events.

What this framing of a “actual world social community” does present, although, is perception into the place it’s Apple’s new reporting falls brief. It’s all properly and good that Apple will now separate Providers income and its related cost-of-sales beginning subsequent quarter; extra perception into Apple’s progress driver is clearly applicable.

What’s lacking, although, is the equal of unit gross sales for Providers, particularly, the variety of lively clients Apple has, and the related income per consumer. That is the precise metric that issues to social media corporations, and to the extent that Apple’s progress is derived from regularly monetizing its present consumer base over time, it is sensible right here as properly.

To make certain, an correct quantity would very a lot embrace system income: I specified by Apple’s Center Age that the corporate’s progress was based mostly on getting extra money from its present consumer base by way of larger common promoting costs, promoting extra units (i.e. Apple Watch, AirPods, HomePod, and so forth.), and elevated providers income; to the extent Apple is right that specializing in solely units misses the story, additionally it is right that specializing in solely Providers is deceptive as nicely.

Apple’s Priorities

Sadly Prepare dinner already declared on one other earnings name final February that this quantity isn’t coming:

We’re not releasing a consumer quantity, as a result of we expect that the right approach to take a look at it’s to take a look at lively units. It’s additionally the one that’s the most correct for us to measure. And in order that’s our considering behind there.

There are two issues with this: first, whereas an lively units quantity is useful, the 1.three billion quantity that Apple introduced on that February earnings name was the primary in two years; it has not been up to date since. Second, the variety of lively units could also be simpler for Apple to measure, however it merely isn’t as helpful to buyers because the variety of lively customers for causes Prepare dinner said himself final week:

Our put in base is rising at double digits, and that’s in all probability a way more vital metric for us from an ecosystem perspective and buyer loyalty, et cetera. The second factor is this can be a little bit like when you go to the market and also you push your cart as much as the cashier and she or he says, or he says what number of models you’ve gotten in there? It doesn’t matter rather a lot what number of models there are in there when it comes to the general worth of what’s within the cart.

It’s not simply “general worth”, although: it’s what number of clients there are complete, and the methods through which their cart is altering — i.e. what’s the put in base, and what’s the fee of progress that Prepare dinner is referring to?

Sadly Apple seems to be most involved with the highest and backside line. Maestri stated simply earlier than Prepare dinner’s remark:

On the finish of the day, we make our selections from a monetary standpoint to attempt to optimize our income and our gross margin dollars, and that we expect is the main target that’s in the perfect curiosity of our buyers.

It’s definitely troublesome for anybody, notably Apple’s buyers, to complain about Apple’s income and gross margin dollars, happening a few years now. For all these years, although, stated income and revenue have been based mostly on unit gross sales.

Now Apple is arguing that unit gross sales is the fallacious approach to perceive its enterprise, however refuses to offer the numbers that underlie the story it needs to inform. It is rather truthful for buyers to be skeptical: each as as to if Apple can ever actually be valued independently from gadget gross sales, and in addition whether or not the corporate, for all its high-quality rhetoric and stage shows, is actually prioritizing what drives the income and revenue as an alternative of income and revenue themselves. I do assume the reply is the previous; I simply want Apple would present it with its reporting.