How Large Can Apple’s Services Grow?

In a recent post, I discussed that Apple has to grow outside of tech to continue growing. I also mentioned that the reason why Google and Amazon continue to grow is because, although they are tech companies, what they are selling is actually non-tech products to non-tech audiences (they are selling stuff like advertising slots, books and diapers).

So even as we see Apple’s services growing at 20%, and that it makes more money from services than from Macs, I think the more important trend to look for is how much they are positioned to earn from non-tech products.

To clarify,

  1. Sales from the App Store are nice, but we have to be aware that the vast majority is from games, and most money comes from a small number of “whales” (online game junkies). It is overly optimistic to expect this segment to continue 20% growth in the mid-term. More likely, we will see a flattening of growth from games and maybe a slight increase do to healthy growth of the non-game segment (which will however not contribute too much to the total).
  2. Music is unlikely to grow rapidly.
  3. Other cloud business (probably mostly additional iCloud storage) may grow rapidly for a short time, but few people really need Terabytes of storage, and prices are likely to drop heavily with competition.
  4. Apple Pay is more interesting because people might use it to pay for all kinds of stuff, including non-tech stuff. It is easy to envision Apple Pay being used to purchase advertising slots, books and diapers for example. We know that VISA has revenues of almost 14 billion USD (and obviously, from its business model, a lot of that is profit).

In summary, to understand the growth potential of Apple’s services, I think it is important to look at the non-tech markets and to see how Apple could add a thin layer of their services on these. Apple Pay is a typical case, but I would not be surprised if they decided to play a more direct role in e-commerce, for example. In the long term, I expect that these will be the main contributors to Apple’s service revenue, not the App nor Music stores.


Matt Richman has done a similar but much better analysis of the non-tech service opportunities for Apple.

Is India Really The Next Big Opportunity In Tech

A lot has been made about how important India is to tech, and what a big opportunity the 1.2 billion population is.

While that maybe true, I think it is also important to contemplate the possibility that this may not actually be the case; that despite its huge population, India may not yet be an attractive investment.

Rakuten Ventures had this to say at Tech in Asia Singapore 2016.

While India has a population of 1.2 billion, there are only about 40 million to 50 million people who actually have “real” smartphones – and not those weird Android permutations – and who are at least in the middle class, earning about US$10,000 a year.

If you’re looking at ecommerce alone, you’re talking about a demographic that has been shrunk from 1.2 billion to 40 million or 50 million. That’s basically the addressable market […] For us, when we look at a market, we ask ourselves: ‘Can we get in at the price point we want? Can we actually see a lot of these platforms accrue the value that they want?’ We don’t see that yet.

Objectively, the International Monetary Fund puts India’s GDP per capita for 2015 at 6,162 international dollars, which is less than half of China’s at 14,107. While obviously growing quite quickly, it isn’t necessarily growing that much faster compared to other countries with similar absolute levels. Although macro data obviously does not tell the full story, it does support Rakuten Venture’s view to a certain extent.

If we do accept Rakuten Venture’s view that ‘while India has a population of 1.2 billion, there are only about 40 million to 50 million people who actually have “real” smartphones’, then it does seem like other markets which aren’t receiving as much hype, might actually hold larger potential.

I think this is something worth thinking about. It might be more important to look at metrics of usage like Web usage or Twitter usage to understand how many people do have “real smartphones”, or use the ones they have as such.

iPhone SE Early Statistics

We now have some early statistics on iPhone SE sales in Japan from BCN Ranking. Note that BCN Ranking only provides data from their partners, which include Amazon and major retail outlets, but does not include the Apple Store for example. Also note that the current data is for the March 28th to April 3rd time period whereas the iPhone SE was only released on March 31st.

For clarity, I am only listing iPhones, and I am listing by carrier.

BCN ranking iPhone SE

The interesting observation is that unlike the iPhone 6s where the 64GB model sells better than the 16GB model on all carriers, the reverse is true for the iPhone SE; on all carriers, the 16GB iPhone SE model sells better than the 64GB model. This suggests that iPhone SE users intend to use their phones more casually, and are more driven by price. Importantly, we have to understand that the data is only for the opening weekend which is typically skewed towards early adopters, who we would expect to prefer higher capacity models. It seems that the trend for iPhone SE users to be casual owners might be very strong.

Of course, we do not know the product mix of the items in stock, so this might simply be a result of inventory skew. However, assuming that this trend holds true, then we can make the following tentative conclusions;

  1. The iPhone SE appeals more to users who are more considerate of price, and who do not intend to use their smartphones very heavily.
  2. These users would typically only replace their current smartphones after they have completed their 2-year contract. A strong opening day turnout of this segment suggests that these users were holding onto old phones (either old iPhones or Androids).

This is an interesting dynamic.

As we get more data, we should be able to make an assessment of the popularity of the iPhone SE relative to other iPhone models and to Android phones. Given that the majority of smartphone users are not techies nor social media junkies but plain ordinary citizens, I tentatively expect quite strong performance.


The data for the first full week of sales in Japan (Apr-4 to Apr10) are now available on BCN Ranking, and I have used the new data to plot a chart.

IPhone SE BCN ranking numbers

We see the same trend as the opening weekend that I previously discussed in the above post. However, with the improved visualisation, we can see some additional points.

  1. The 16G iPhone 6s actually sells quite well on all carriers. Techies have ridiculed the 16G model as not having nearly enough capacity. While that may be true in use, many of the people who purchase even the flagship model do not seem to care. However, users of the iPhone 6s Plus model do seem less eager to purchase the 16G model.
  2. The iPhone SE clearly skews heavily towards the 16G model, and as I have said in the above article, this suggests that current iPhone SE buyers are more price conscious, and do not seem to be heavy users of smartphones. The new chart shows that this trend mirrors that of the iPhone 6. Hence it looks like the segment that purchased the one-year-old iPhone 6, is similar to the segment that has purchased the iPhone SE so far.

Considering that the iPhone SE (16G: ¥52,800) is significantly cheaper that the one-year-old iPhone 6 (16G: ¥74,800) and that both are probably attracting the same price conscious buyers, we can expect iPhone 6 sales to rapidly decline and be picked up the the iPhone SE. Of course we can also expect an acceleration of Android users switching to iOS.

How Large Can Apple Grow

It has long been said that Apple earns more than 90% of all profits in the smartphone hardware business. Apple has also seen the first sales decline for more than a decade. It doesn’t take a marketing genius to see that it will be difficult from now on for Apple to grow this business in the future.

On the other hand, Google and Amazon are continuing to grow their businesses at a healthy rate. What is the difference here?

One perspective is to look at which buckets of spending each companies revenue is coming from. Take a look at the following fantastic chart that I took from The Economist; “How countries spend their money”


Although I do have some issue with the figures in this chart (the spending on communications seems much too small, for example), it does illustrate the point that the whole economy is much more than tech. In fact, tech spending by the average consumer is probably only a bit larger than their cell phone bill.

Apple’s business is confined to tech. They only capture the expenditure that a person is willing to spend on communication and recreation. On the other hand, Google carries ads for everything from housing, transport, food transport, to education. Similarly, Amazon can capture a margin for every product sold through retail stores. Apple’s business in only tech, whereas Google and Amazon earn money from the mundane non-tech daily activities and necessities that have been part of the economy for hundreds of years. This is why Apple’s business currently has a hard limit whereas Google and Amazon are in markets that can enjoy growth for much longer. Consider that Google still have a very small portion of total advertising expenditure, and likewise Amazon has only a very small percentage of total retail.

Therefore, unlike Google and Amazon, Apple has to find new markets to enter if they want to continue to grow rapidly. Strengthening their position in tech profits doesn’t help them much if human beings only tend to spend so much on communications and recreation. They must enter markets like housing, transport, education and health. On the other hand, Google and Amazon do not. They just have to worry about being disrupted.

Another thing to note is that Amazon has much more business potential in physical goods than it has in digital. Digital goods like those that Amazon sell only serve the need for recreation and education. On the other hand, their physical goods serve recreation, health, clothing, furnishing and alcohol. These are collectively much larger buckets than the digital goods. It makes total sense that Amazon is not really interested in making money from digital goods, but is instead using them to attract customers for the physical ones.

Of course for Apple, entering new markets is something that it has done quite well in recent years. Recent activities and rumours suggest that it is going to enter transport and health. Its activities in education also should not be ignored. Personally, I would like to see enter housing since the housing market is often the centre of economic turmoil and Apple might do something good about that.

Waves in tech and how Apple and other tech companies grow

When looking at the rhetoric around whether or not Apple has will or will not continue to grow rapidly, I often sense that people are not looking back at the history of tech and trying to understand how the tech giants grew in the first place. I’ll try to go into this a bit here, and from this, I’ll try to understand Apple’s chances of future growth and escape from maturity.


Tech did not grow by companies single-handedly creating new markets out of thin air. Instead, tech grew on top of waves. The successful companies are those that rode these waves. The unsuccessful ones were the ones that missed them, or fell off half way. There have been many waves in tech.

Digital productivity wave

This is the era when word processors and spreadsheets became popular (1980s to early 1990s). This created the first growth wave of PCs. Microsoft was the company that benefited the most from this wave. Both IBM and Apple initially rode this wave quite well, but they fell off half way.

Essentially, this was the digital productivity age. Word processors relieved us of the need to start out with a new sheet of paper every time we mis-typed a word (it allowed us to edit). Spreadsheets saved us from hours typing digits into calculators.

One thing to note is that the GUI revolution did not create a new wave, but instead empowered the ongoing digital productivity wave. The core job of tech remained more or less the same.

Internet wave

This was when the Internet took off and GUI-capable PCs made it accessible to mere mortals (mid 1990s to mid 2000s). Microsoft again rode this wave with Windows 95. The rise of the Internet also provided the wave which Amazon, Google, Facebook and others rode to become giant companies.

The Internet provided us with instant communication and information. It connected friends and co-workers via email. It connected shops and customers via the WWW. It allowed us to share photos via Facebook. It allowed us to find documents in the form of web-pages through search. This is significantly different from the previous digital productivity wave, which can easily be understood if you consider how the Internet wave changed how we presented our work. In the digital productivity wave, we still printed our work out onto paper. In the Internet wave, our work was shared digitally and instantaneously.

The Internet wave is still with us

The Internet wave has actually been very long. Starting in the mid 1990s, it is still going strong in 2016. The Internet companies are still growing, not necessarily because they are amazingly well run, but simply because the pie is growing. E-commerce is still a small portion of total commerce in the US and growing. Amazon is still riding this wave. Similarly, Internet ad spend is still a small fraction of total ad spend and this is what allows Google to continue to grow. The Internet is still growing, and in fact, this has been fuelled by none other than the iPhone which put the Internet in our pockets.

Apple’s maturity

Apple’s growth has slowed because although it dramatically expanded the time we spend on the Internet, it’s business model does not benefit proportionally with Internet usage. A single iPhone today is used much more on the Internet than it used to be in 2007. It is used for much more tasks, consumes much more data, and much more time is spent staring at their screens. However, Apple still charges basically the same amount of money per device. Apple does not earn significantly more money from the extended usage.

This is in contrast to Google and Amazon, both of which benefit proportionally from extended Internet usage. This is why Google still consistently grows at double digits whereas Apple’s growth comes and goes.

Finding the next wave

Although Apple could grow by finding a business model that grows in proportion to Internet usage (charging for content, services and payments), another way for Apple to escape maturity is to ride the next wave after the Internet.

Fundamentally, the Internet is about information and communication. Although these are very important facets of human existence, they are not the most important. Apple first entered the scene with digital productivity, and then rode re-ignited the Internet and communication wave with the iPhone. Similarly, Apple could provide tools to set fire the next wave.

One of these waves could be health. People living in developing countries spend their money on a plethora of things or which health is a huge portion. In fact, the money that we spend on health is much larger than what we spend on communication and entertainment (the current revenue centres of tech).

If Apple could find a way to benefit our health, keep us healthy, reduce our dependence on medication, improve the effectiveness of physicians, make health insurance more efficient, Apple would be opening the door to a huge market.

Thinking about Uber

The interesting thing about Uber and other services like AirBnb is that they are not just information services; they are the whole stack. Uber does not just notify taxi drivers where their customers are or assist payments; they provide the cars and the drivers.

In this sense, they operate outside of the Internet wave. They are entering the real world, and this is very different from what Microsoft, Google and Facebook have done before them.

This provides us with a hint at what the next wave could be.

What’s next for Apple

For Apple to find significant growth, they must find the next wave outside of the Internet. There is only so much left to do in communications if they continue with their business model of creating great products. Even VR has only limited potential if it is to stay within the boundaries of entertainment and communications.

If you look at where a individual in a developed country spends their money throughout their lifetime, housing, health, transportation, education are much larger than entertainment and communications. If Apple can successfully contribute to any of these markets, the current discussion of Apple maturing will soon seem utterly ridiculous.

Why Do Companies Outsource?

Last week, news broke out of Apple’s “McQueen” project; a plan to move Apple’s iCloud data away from Amazon’s AWS, Microsoft’s Azure, etc. and into its own data centres.

This isn’t really a surprise or an insidious plan by Apple to damage its competitors. It’s obvious if you think about what the benefit of outsourcing is for any company.

Companies outsource if;
1. The technology is not a core strength of the company.
2. The technology will not be a key differentiator going forward.
3. There are cost benefits (mostly due to scale) of outsourcing.

In the case of Apple, cloud infrastructure was not a core strength of the company so it made sense to outsource at the onset. However, it became clear that the cloud would be a key differentiator going forward. Additionally, the scale of Apple’s cloud operations became huge, and hence the cost benefits of outsourcing became negative.

The only thing that was surprising to me was the fact that Apple was outsourcing at all. I would have thought that Apple had had everything in house years ago.

The Outdated iPhone 6/6 plus

Going into 2016, I think it is prudent to remind ourselves of a couple of new additions to the iPhone product line that Apple made in Fall 2015, and which could significantly affect their ability to target the mid-range market. These are, the outdated iPhone 6 and 6 plus.

As they have been doing for quite a few years now, Apple has reduced the prices for their year-old models, and is selling them in parallel to their current ones. In the United States, the iPhone 5s starts at $450, the iPhone 6 at $549 and the current iPhone 6s is at $649. The iPhone 6 plus is $649 and the iPhone 6s plus is $749. While not yet in the budget phone range, these models significantly expand the iPhone product range for the more budget conscious customers.

Second hand iPhones are also quite popular in some developing countries. With the new iPhone 6s/6s plus models, we can expect a large number of iPhone 6/6 plus models to enter the used phone market.

This is significant because a) the larger size iPhones sold extremely well in 2015 and they should also sell well to budget conscious customers, b) developing markets tend to favour larger screens. As a result, we can expect the demand for the price-reduced or used iPhones to significantly exceed that of previous years. Although the effect on Apple’s short-term financial results is likely to be small, it could strongly impact Apple’s future prospects in developing countries.

This is something that was completely foreseeable, and I discussed this in Fall 2014 when the iPhone 6/6 plus was first announced. The year 2016 is when we will see the actual effects. I think we should remind ourselves that this year, we might see Apple making significant inroads into budget conscious countries (namely some European ones) and developing countries.

iPhones, Battery Cases, Battery Life and Samsung Galaxy S6

With the release of Apple’s new Smart Battery Case for the iPhone 6/6s, some pundits are proclaiming that this is proof that Apple has been putting form over function, and that this product is an admission that the iPhone’s battery life is not enough.

Of course, the more careful journalists like Joanna Stern do not forget to mention that the people who find the iPhone lacking in battery life are heavy users.

You know who I blame for my battery anxiety disorder? Obviously not me, and my excessive checking of email and social media. I point the finger at Apple, and its insistence on compromising battery life for phone slimness.

On Tuesday, the company finally admitted that heavy iPhone 6 or 6s users like me could use more power

Some are less so and make very careless comments (Phil Baker writing for Techpinions).

The thinness tradeoff most likely was driven by their passion for ID winning over usability. Apple’s design of nearly every product for years has been about thinness, from the Air to the iPads, to the phones. Each new generation is thinner than the last. Apparently, there was no one strong enough to push back. I bet at least 80% of iPhone 6 users would have preferred more battery life in exchange for a phone that’s 1 or 2 mm thicker.

Now I am totally aware that in survey after survey of smartphone users, battery life is the major concern. However, the percentage of customers who are complaining is in the 30-40% range, and it is also unclear whether they are suffering enough to chose a phone that has more stamina, but is also heavier and bulkier.

Lacking any good publicly available survey results, we could look at the market-wide product trends for clues.

The hugely respected Anandtech website conducted battery tests for a variety of devices, and concluded the the iPhone 6s/6s Plus have very good battery life compared to other smartphones. If the iPhone battery life was so inadequate, and 80% of customers would really put up with a few extra millimetres of thickness for a larger battery, then why haven’t the competition opted for better battery life then the iPhone?


The Samsung Galaxy S6 is also reported as to having a smaller battery than its predecessor. Why would Samsung do this if most customers valued battery life over thinness?

Personally, I know I often run out of battery life and I bought the Smart Battery Case. I have my own opinions, but I am also aware that they do not represent the bulk of the market. That is why data is important and why personal opinions are mostly worthless, unless you are writing reviews for a audience that is just like you.

Piece Of The Puzzle : Chromebooks In The U.S. And The Rest Of The World

I just found a very interesting pair of reports by Puneet Sikka on Market Realist/Yahoo Finance.

  1. “Why Apple Devices are Losing Share to Chromebooks in Schools”
  2. “Microsoft Gained Presence in the International Education Market”

The former article describes how Chromebooks are now more than half of all devices sold to US Schools (3Q15). The latter one tells us that in the international market, Chromebooks only have a 3% market share. In particular, it tells us that Chromebooks have a tiny 1% share in Brazil, Mexico and India, all markets where cheap Google/Android phones are doing exceedingly well due to high price sensitivity.

In fact, if you look at the chart below, it clearly shows that Chromebook market share is much higher for developed countries than for emerging ones. Although one might presume that cheaper Chromebooks are more suited for low-income countries, the reality is that the inverse is true; low-income countries prefer Windows.


The reason is clearly stated in the article;

The main issue with these countries is that they do not have the required broadband infrastructure to support the cloud-based storage requirements of Chromebooks.

We often only look at the flashy devices that we use, made by the most powerful tech companies in the world; Google, Microsoft and Apple. We often forget that to make these devices work, we need a lot of infrastructure. We also forget that WiFi can be very, very expensive when you want to deploy a network capable of handling hundreds of simultaneous connections. We forget the infrastructure because unless you have to dealt with it directly, it is invisible.

This is something to keep in mind.

  1. Google exists only because broadband Internet access is cheap. Its business model and its data collection relies on the infrastructure of vast network of Internet equipment that most people in developed countries now take for granted.
  2. Amazon exists only because of a highly developed and inexpensive network of deliveries to your doorstep. This was not common 30 years ago in Japan, and I assume, most other countries.
  3. Microsoft and Apple built their businesses before this infrastructure. They have business models that work without it.

One could ask the question; what infrastructure enables Uber? What recent changes have occurred to it? Or they could ask, what infrastructure enables self-driving cars? Then they should look at other countries to see if the infrastructure is there.

I strongly believe that to understand the underlying current flowing through technology and innovation, one has to understand the gradual changes of the infrastructure. The tech that we see are often just the rocks that are being pushed downstream. The Chromebook example is a strong reminder of what we should keep our eyes on.

Why The “Disruptive” Label Matters

In a recent “Critical Path” episode, Horace Dediu discussed the definition of disruption (00:46:40). Basically he outlines the boundaries of disruption theory and sets 3 criteria for Disruption.

  1. Entrant product serves customers who are over served by current incumbent product, or serves non-consumers.
  2. Asymmetry of motivation. The incumbent is not motivated to directly compete with the entrant.
  3. There exists a “Technological Core” that enables the entrant to continually improve the product.

Now this is totally great. It is great that the criteria for a “Disruptive Innovation” is clearly laid out, and that we can now identify whether a certain upheaval in the market qualifies for the Christensen-ish definition of Disruption or not. I totally agree with the criteria, as should, I believe, anybody who has carefully read Christensen’s books.

The problem is, if you have three criteria that you can answer with yes/no, then you have 2 x 2 x 2 = 8 possible situations. Only one of these Christensen Disruption. What are the others?

Furthermore, it becomes important to understand what it means to be a “Disruptive Innovation”. Clearly, Christensen does not intend “Disruptive Innovation” to describe all situation where there has been a significant disturbance in the market. He only talks about one. Then the question is, what makes his single segment so important? More importantly, why are so many Venture Capitalists upset and why do they complain so much when a single academic declares that the companies that they are investing in do not fit his criteria of “Disruption”?

The key to this question is to understand what the power of “Disruptive Innovation” is. The companies that are “Disruptive” are the ones that can benefit from this power. The ones that do not qualify cannot.

In any market competition, the companies with the more resources generally win. The weaker companies typically lose. However, this isn’t much fun. Venture Capitalists looking for incredibly high returns, are instead betting on small and weak companies that will somehow accomplish something that much larger companies cannot. They are essentially betting on David beating Goliath.

Sometimes smaller companies will out-manoeuvre larger companies by being more nimble. Sometimes the willingness of smaller companies to experiment with crazy ideas will allow them to win. However, until Disruption Theory, there was no theoretical framework that could predict which smaller companies would have a high probability of success. And there still isn’t any other.

Disruption Theory is still the only well accepted business theory that has been demonstrated to be capable of identifying (probabilistically) the winners from the losers. It is the only theory that gives us a path that David could take to reliably beat Goliath. It is the only well known wave.

Companies that qualify as “Disruptive” in Christensen’s definitions are the ones that could benefit from “Disruptive” dynamics, and who can ride the waves to beat the most powerful incumbents. This means that they can make the most of the resources (capital) that investors pour into them.

On the other hand, companies that do not qualify must take a different path. Although each individual path has not been fully explored, weak entrants will typically not survive on these paths. There is not well identified wave to ride. There may be other waves, but we can’t reliably count on them.

I hope that this describes what not being “Disruptive” in the Christensen sense means. It means that if you are not “Disruptive”, you are not riding Christensen’s wave. If you are a battleship, then you are probably OK, but that means that there isn’t much fun for the investors who poured billions of dollars to build the battleship. Unless you ride the wave, you probably aren’t going to get insanely high returns.