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”

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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.

Waves

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.