AAPL - Apple Inc.

[Liberty]

Keep in mind, Jobs was the guy who didn't want to open up iOS to outside devs...nor did he originally want the iPod to be able to sync with PCs.He had good instincts, but was far from infallible.

 

He also changed his mind quite often, even if he sometimes took some convincing to get there. Nobody gets everything right at first, but being able to change one's mind is still a lot more worthy of praise than the inflexibility that so many people who end up in positions of powers take pride in.

 

Oh, and I don't think he was against third party devlopers on the iPhone. But they couldn't have that ready at launch, so they tried to sell the "make web apps" solution, but they were already working on APIs at the time (got this from interviews with ex-Apple engineers on the Debug podcast, if memory serves me right).

[innerscorecard]

"On the Watch, our June sales were higher than April or May. I realize that’s very different than some of what’s being written, but June sales were the highest. The Watch had a more of a back-ended kind of skewing."

 

I remember how many of the "smartest people on Finance Twitter" were accepting the Slice data as the gospel truth.

[KCLarkin]

"On the Watch, our June sales were higher than April or May. I realize that’s very different than some of what’s being written, but June sales were the highest. The Watch had a more of a back-ended kind of skewing."

 

I remember how many of the "smartest people on Finance Twitter" were accepting the Slice data as the gospel truth.

 

Actually, this fits the Slice data well. Slice only looks at online purchases. The watch wasn't sold in stores until June.

[DCG]

No way Apple is actually happy with the Watch sales. Them lumping it in with Other items, such as Apple TV, is very telling.

 

Seems like they should at least try to get the Watch on a release cycle that is more suitable for the holidays.

 

Maybe I'll be proven wrong, but I still have have a hard time seeing smart watches as a large enough category to move the needle at any point in the near future.

 

Time while tell if they're able to grow this, or if it will just be another Apple TV-like 'hobby'.

 

 

I'd rather them focus on scaling CarPlay than the watch. CarPlay is something there is a real need for, and could be a huge market.

[GregS]

No way Apple is actually happy with the Watch sales. Them lumping it in with Other items, such as Apple TV, is very telling.

 

They are lumping it with Other Items because they can. Same as Amazon and AWS. They don't need to break it out until it's bigger (10% of revenues I think).

[stevevri]

No way Apple is actually happy with the Watch sales. Them lumping it in with Other items, such as Apple TV, is very telling.

 

 

Probably important to note that Apple (I believe Cook) specifically said they would do this before the Watch was even released.

[Liberty]

No way Apple is actually happy with the Watch sales. Them lumping it in with Other items, such as Apple TV, is very telling.

 

 

Probably important to note that Apple (I believe Cook) specifically said they would do this before the Watch was even released.

 

Yeah, why give anything to your competitors in a brand new category?

 

Also, for most of the quarter, demand was higher than supply, so numbers would mostly only tell you how many Watches the supply chain was able to make. We'll know more after much more time has passed, the Watches have been in stores, in more countries, OS 2 with native apps is out, etc.

[portfolio14]

Sanity check.

 

How will we define Apple Watch being a success? Is it successful if the business is as good as Swatch Group? Swatch has a 18% market share of the entire watch market and has a 70%-ish gross margin. It's a good benchmark.

 

Swatch's market cap is ~USD23b. That means if Watch is successful, it'll move Apple's valuation by only 3%!

 

Of course we can argue Watch is a new category. It doesn't just take away market share from the existing pie, but it grows the entire pie. But realistically, to have real impact on Apple's valuation, it has to be 10x better than being "merely successful". Everything has to aligned perfectly. That's a tough call.

 

Apple is like BRK. It's so big now. It's very hard to move the needle.

[Liberty]

Sanity check.

 

How will we define Apple Watch being a success? Is it successful if the business is as good as Swatch Group? Swatch has a 18% market share of the entire watch market and has a 70%-ish gross margin. It's a good benchmark.

 

Swatch's market cap is ~USD23b. That means if Watch is successful, it'll move Apple's valuation by only 3%!

 

Of course we can argue Watch is a new category. It doesn't just take away market share from the existing pie, but it grows the entire pie. But realistically, to have real impact on Apple's valuation, it has to be 10x better than being "merely successful". Everything has to aligned perfectly. That's a tough call.

 

Apple is like BRK. It's so big now. It's very hard to move the needle.

 

Apple Watch minimum bar for success is much higher than Swatch. Target is not Watch wearers, but a lot of people who don't wear a watch. It'll never be iPhone, but nothing ever will. Part of the Watch benefits will be making iPhone stickier and more attractive, though (and also the Mac, iPad, Apple TV eventually, etc). But that won't all happen within 6 months of launch or whatever. Version 2 of the Watch will be better, version 3 even better, etc.

[Liberty]

Despite selling a ridiculous number of iPhones, Apple didn’t sell enough according to Wall Street because analysts thought they’d sell even more iPhones. 35 percent growth is apparently not enough to feed the maw of the mindless beast that controls our economy. [...]

 

Explain to the Macalope how this supposedly works in terms that do not violate the tenets of logic that bind our universe together. First of all, as we point out almost every quarter, Apple didn’t “miss” anything. Analysts missed. The Macalope knows it hurts the tender feelings of the masters of the universe on Wall Street to suggest that they made a mistake of any kind, but when it’s your job to tell your customers in advance how many iPhones Apple sold in a particular quarter, it’s you who’s going to hit or miss, not Apple. Apple ships what they ship. You guessed wrong. You screwed up. Are we clear on that?

 

No, of course not. We will never be clear on that. We shall forever be locked in this battle, like a parent trying to get an intractable toddler to eat his peas.

 

http://www.macworld.com/article/2951299/smartphones/not-exactly-missing-it-apple-s-quarterly-results.html

[portfolio14]

Apple Watch minimum bar for success is much higher than Swatch.

Target is not Watch wearers, but a lot of people who don't wear a watch.

 

Yup. As I said, it has to be 10x higher.  :)

 

It'll never be iPhone, but nothing ever will. Part of the Watch benefits will be making iPhone stickier and more attractive, though (and also the Mac, iPad, Apple TV eventually, etc).

 

No dispute about that.

[johnny]

Started writing a post about Watch, ended up really being four.

 

1. Apple was forced in early

Anybody that has used the watch knows that it is "early". As in, atypically early for Apple. It seems to me that Apple recognized that there was an ecosystem risk to the iPhone if they just let Android partners continue to play around in the space. Things can get traction very fast, and I think they were concerned with some third party developer accidentally stumbling on the Killer App for wearables, and only having the Android platform to deliver it. If Apple had waited until there existed an obvious mainstream use-case for a connected wrist-wearable, it is quite likely that the iPhone moat would have eroded considerably.

 

2. It is a very hard product to pitch

Given that it is early, it is almost a tautology that there is no coherent mainstream pitch for the device. I have seen very little awareness/enthusiasm for the device outside of the Apple/Investor community, which I think is a great reason for everybody to temper sales expectations. The pitch for iPhone was very simple: it was a better phone, and you know what a phone is because you already have one. "That thing you have, but cooler."

 

Just to drive the point home, compare the keynotes for iPhone and Watch. The iPhone keynote mostly focused on showing people the stuff their phones already did (phone calls, email, internet browsing), but how much better the Phone did them. The Watch keynote, interestingly, also focused on showing people the stuff their phones already did, but instead of showing them done better, it showed them being done smaller, a bit slower, and on the wrist. Much less compelling at face value.

 

The lack of a “that, but cooler” pitch is crucial here. What does this thing do? Until we start to have some real mainstream answers, we shouldn’t expect sales to rip. I think there was a hope within Apple that they could drive a great deal of adoption with a fashion/status pitch. This angle could end up working, but the results so far are not inspiring. The celebrities they have gone to the trouble of collaborating with are not quite demonstrating iPhone-like product loyalty. Check the paparazzi pictures of Drake, Beyonce, etc. to see how the Watch has changed their lives.

 

3. The engineering constraints are significant and unintuitive to most.

The nature of a killer-app, and pace of its arrival, will be limited significantly by the physics of the object. I've been shocked this past year to see reasonably well-informed Apple analysts have bizarre conversations with one another about, for example, whether or not the Watch should have had its own cellular radio at launch. This is sort of like pondering if it makes any sense to flap your wings and fly home instead of driving during rush hour. That analysts’ intuitions about how the device ~should~ work are so far removed from what is actually possible illustrates the challenge the Watch will face in the early years.

 

4. There is substantial risk of product stigma developing.



While Apple now has a great ecosystem advantage due to developer interest in the platform, it comes at a huge cost: there are now a ton of software developers walking around prominently wearing their product. Which means there is a real risk that the average person on the street will see their first Apple watch wrapped around the hairy forearm of a conspicuous virgin wearing cargo pants.


Apple explicitly acknowledged in the keynote that for the product to succeed, people must be happy with how it feels and looks on them. This is prior to any assessment of function. Critical, then, that consumers don’t develop undesirable status-associations with the object. Apple has obviously done some deals to try and counterbalance this (Beyonce’s Apple Watch Instagrams have a palpable paid-placement vibe to them). But as I mentioned earlier, Beyonce and Drake don’t seem to be daily wearers of the watch, while Marco Arment and C.G.P. Grey are. That is a very dangerous situation from a product marketing standpoint.

 

In fact, I think this is -way- more important than financial performance. The biggest risk to the Watch is not that nobody buys it, but rather that it is so enthusiastically taken up by an undesirable, low-status group that it is doomed to mainstream ridicule (Google Glass).

 

[TorontoRaptorsFan]

BMW and Apple teaming up?

 

http://www.cnbc.com/2015/07/27/apple-in-talks-with-bmw-about-electric-car-report.html

 

 

[Jurgis]

BMW and Apple teaming up?

 

http://www.cnbc.com/2015/07/27/apple-in-talks-with-bmw-about-electric-car-report.html

 

Makes sense: they can call it iDrive

 

 

;D

[TorontoRaptorsFan]

The i3 is such an ugly looking car. I'm not surprised if sales have been poor.

 

If you want to make Apple a trillion dollar company it would make sense to get into the car business.

[Jurgis]

If you want to make Apple a trillion dollar company it would make sense to get into the car business.

 

If you want to make a billion dollar company, you start with a trillion dollar company and then get into the car business.  ;)

[Liberty]

http://www.bloomberg.com/news/articles/2015-07-29/samsung-profit-misses-estimates-as-galaxy-s6-phone-disappoints

[Guest 50centdollars]

If you want to make Apple a trillion dollar company it would make sense to get into the car business.

 

If you want to make a billion dollar company, you start with a trillion dollar company and then get into the car business.  ;)

 

+1

[Liberty]

If you want to make Apple a trillion dollar company it would make sense to get into the car business.

 

If you want to make a billion dollar company, you start with a trillion dollar company and then get into the car business.  ;)

 

+1

 

Making phones, like making cars, is a terrible business. There are always exceptions if you can avoid being commoditized.

 

If Apple ever makes cars, they won't make them like GM, with lots of capital-intensive company owned factories and lots of factory workers on the payroll, making products that offer the same thing as everybody else and compete in large part on price. They'll make them like iPhones, with their suppliers dealing with that messy stuff, only keeping the high value parts of the value chain in-house and proprietary, and outsourcing the rest.

[jason]

The difference is apple itself has become a cult.  There could be apple bottled water and fans of apple will gladly pay $12.50 a bottle for it.

[Jurgis]

The difference is apple itself has become a cult.  There could be apple bottled water and fans of apple will gladly pay $12.50 a bottle for it.

 

And when they go to piss in a garden, they could say: "iWater!"  ;)

[Liberty]

The difference is apple itself has become a cult.  There could be apple bottled water and fans of apple will gladly pay $12.50 a bottle for it.

 

That's a common error in thinking. People look at a company with very loyal customers and they go "oh, that's why they sell so much stuff at such high margins". That's like saying: "Oh, you have a runny nose, that's why you're sick." Confusing a symptom with the cause. People don't think the products are good because you have a good brand first, you get a good brand in the first place because people think your products are good.

 

I wish it was a cult, the economics would be even better. But the reason for the loyalty is because Apple has been making products that are very attractive to the higher end of the market for years and years, and their products are differentiated, giving some pricing power. The products have built a brand, and all that a brand does is reduce searching costs, so a lot of people trust Apple. But it's not a free pass. Start making products that the target segment of the market thinks is crap and very quicklly that trust goes away and so does the loyalty. The brand is a symptom of the good products, not a cause.

 

It's like Google's brand for search; many people won't compare different search engines all the time, because over time they've started trusting that Google has the best search.

 

The other common error in thinking is: "Apple stuff doesn't appeal to me, so I can't see how anyone else could find it worth paying up for, hence everybody else is being irrational and is either being fooled or there's a strange cult effect."

 

Meh. I might not find it worth paying up for a Porsche, but I can see why some people would.

[giofranchi]

That's a common error in thinking. People look at a company with very loyal customers and they go "oh, that's why they sell so much stuff at such high margins". That's like saying: "Oh, you have a runny nose, that's why you're sick." Confusing a symptom with the cause.

 

I wish it was a cult, the economics would be even better. But the reason for the loyalty is because Apple has been making products that are very attractive to the higher end of the market for years and years, and their products are differentiated, giving some pricing power. The products have built a brand, and all that a brand does is reduce searching costs, so a lot of people trust Apple. But it's not a free pass. Start making products that the target segment of the market thinks is crap and very quicklly that trust goes away and so does the loyalty. The brand is a symptom of the good products, not a cause.

 

It's like Google's brand for search; many people won't compare different search engines all the time, because over time they've started trusting that Google has the best search.

 

The other common error in thinking is: "Apple stuff doesn't appeal to me, so I can't see how anyone else could find it worth paying up for, hence everybody else is being irrational and is either being fooled or there's a strange cult effect."

 

Meh. I might not find it worth paying up for a Porsche, but I can see why some people would.

 

Liberty,

I think you are right 100%.

What keeps me from pulling the trigger with Apple is the fact it still relies so much on one product: the i-phone of course!

And of course the rest of the world is trying to find something better, which could replace it…

Do you see that changing? I mean: do you think Apple’s revenue might become more diversified in the future?

Or do you think Apple today is so cheap that you are not really worried about it?

 

Thank you,

 

Gio

 

[abyli]

Gio:

 

Are you saying that Google relies too much on search and Microsoft relies too much on windows or Facebook relies too much on facebook? :-)

 

Bing

 

Liberty,

I think you are right 100%.

What keeps me from pulling the trigger with Apple is the fact it still relies so much on one product: the i-phone of course!

And of course the rest of the world is trying to find something better, which could replace it…

Do you see that changing? I mean: do you think Apple’s revenue might become more diversified in the future?

Or do you think Apple today is so cheap that you are not really worried about it?

 

Thank you,

 

Gio

[Liberty]

That's a common error in thinking. People look at a company with very loyal customers and they go "oh, that's why they sell so much stuff at such high margins". That's like saying: "Oh, you have a runny nose, that's why you're sick." Confusing a symptom with the cause.

 

I wish it was a cult, the economics would be even better. But the reason for the loyalty is because Apple has been making products that are very attractive to the higher end of the market for years and years, and their products are differentiated, giving some pricing power. The products have built a brand, and all that a brand does is reduce searching costs, so a lot of people trust Apple. But it's not a free pass. Start making products that the target segment of the market thinks is crap and very quicklly that trust goes away and so does the loyalty. The brand is a symptom of the good products, not a cause.

 

It's like Google's brand for search; many people won't compare different search engines all the time, because over time they've started trusting that Google has the best search.

 

The other common error in thinking is: "Apple stuff doesn't appeal to me, so I can't see how anyone else could find it worth paying up for, hence everybody else is being irrational and is either being fooled or there's a strange cult effect."

 

Meh. I might not find it worth paying up for a Porsche, but I can see why some people would.

 

Liberty,

I think you are right 100%.

What keeps me from pulling the trigger with Apple is the fact it still relies so much on one product: the i-phone of course!

And of course the rest of the world is trying to find something better, which could replace it…

Do you see that changing? I mean: do you think Apple’s revenue might become more diversified in the future?

Or do you think Apple today is so cheap that you are not really worried about it?

 

Thank you,

 

Gio

 

I encourage you to read this thread, Gio. A lot of your answers are within.

 

Basically, you have to look at the structure of the market. You can't take the model that you use to look at a levered subscription business and try to apply it to Apple, for example.

 

Here's a few important points that help the analysis, IMO. They have to do with barriers to entry and what I can "table stakes" (minimum that you need to even be at the table).

 

So say you want to compete with the iPhone for the profitable end of the phone market. What do you need?

 

First of all, you need a modern mobile operating system and an app store with at least a few hundreds of thousands of apps so that everybody finds most of what they're looking for (easy to get the top popular apps, but everybody has a few different apps that they want that aren't just the top ones).

 

Only about three companies even have the resources to pull off a modern mobile OS, and microsoft has already failed to get traction there. Microsoft also never even got to the part where they had a good app store.

 

Google's approach is to make its OS availble to everyone, so by definition it can't be a differentiating factor. This means that if you try to make a high-end phone with Android, as Samsung or HTC tried, you are asking your customers to pay more to basically live in the same OS as people who buy the cheapest phones. A hard sell.

 

Then you need high quality user experience. That's tough for Android because the carrier wants to do one thing and add some crapware, the phone maker wants to try to differentiate (but they are all attrocious at software because software is really hard), and the OS maker is trying to do its own thing. So you have a kind of committee working on every phone.

 

I won't even talk about good industrial design, but let's just say it's hard to get right and you need a very specific culture that values it and has "taste".

 

Then if you really want to appeal to the higher end and convince people to pay more, you need high quality hardware. But for that you need to invest a lot in manufacturing and R&D, molded plastic and commodity parts won't cut it. But if you aren't making money - don't have margins - it gets very hard to keep up with Apple on manufacturing and R&D. So far everybody other than Apple is losing money except Samsung, and Samsung isn't doing too well because their OS isn't differentiated so the lower end is always nipping at them at the margin.

 

Anti-Apple people will always say stuff like: Oh, the Sony is thin and power efficient, the Nokia has great build quality and a good camera, the Samsung has a big screen and very fast internals, the Nexus has an OS that you can actually upgrade and no crapware, the HTC has good industrial design, etc. As if people were buying 7 different phones. What matters is 1 phone vs. iPhone, and so far, none are close when it comes to the overall experience (which includes buying in stores, service, software upgrades, etc).

 

Anyway, the list goes on and on, but I think the barriers to entry and the table stakes are pretty scary. What's then left is: Can you trust Apple not to screw it up? That's where being very familiar with the way they work and their culture matters. People think they're about big flashes of innovation, but the money is made on incremental improvement, and they have a great system for that. The original iPhone was a flash of brilliance, but the iPhone 4 was better, and the 4s was better, and the 5 even better, and the 5s the best one yet, the 6 was even better, etc...

 

Either when I see a competitor structure itself in a way that they can win, or I see Apple stumbling down, I'll sell. But so far I don't see it, and what we're left with is a long-term oriented company growing EPS above 40% with 200bn in cash that if you ex out, they are selling at a very low multiple. As an added barrier of safety, Apple's strong Brand means that they can try things and think more long term and have some screw ups and people will stick with them, but if you're HTC and you have a screwup, people will abandon you in droves.

 

If you look at the switcher rate form Android to iPhone, it's been increasing. This probably means that a wave of people who bought Android as their first phone because they thought it was just like the iPhone that their friend had but cheaper haven't been satisfied. The rate of switchers from iPhone to Android is very low, it's a very sticky product that people tend to buy again and again every few years.

 

Tim Cook tends to be a guy you can take at his word, and when he says that we're just at the very beginning of the phone revolution, I believe him. The personal computer wasn't running out of steam in the mid 80s, and I don't think Apple is running out of ways to improve the iPhone quite yet.