Wiser! #11 (Premium): If Apple was a country, it would be the 8th largest in the world. How do they do it? Strategic Insights from Wiser! Newsletter
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Apple is the most valuable company in the world.
Apple have built a global business with the scale of General Motors, the supply chain efficiency of Toyota, and the profit margins of Ferrari.
It is hard to think of any other company in the history of the world that has achieved massive scale, WHILST continuing to grow top-line revenues, AND sustain very high margins, YET still driven down costs, WHILST maintaining a position as a luxury brand.
By any measure, Apple is an awesome business.
And Tim Cook is an awesome CEO.
In the decade under his leadership, Apple has added almost $2 trillion in value. And this is after taking over from one of the most iconic, and seemingly irreplaceable figures of all time, Steve Jobs.
In this issue of WiserIn5!, we look at Apple's numbers, products, and strategy, and how it is putting clear blue water between itself and the rest of BigTech.
Apple: by the numbers
Earlier this week, Apple held its Q2 earnings call. Expectations had been high that Apple would report great numbers, but nobody expected them to be as good as they were!
Year on Year, Apple's Q2 numbers were;
- Revenue grew by over 53% to $89.6 billion
- Gross margin increased to 42.5%
- Operating margin increased to 31%
- iPhone sales grew 65% to $47.9bn
- iPad sales grew 79% to $7.8bn
- Mac sales grew 70% to $9.1bn
That's a $1 billion/day in sales at a 42% gross margin!
Apple has almost certainly benefited from the pandemic and the shift to working and learning from home. Unspent cash burning a hole in consumer's pockets has also fuelled Apple's performance.
Especially with the iPhone12, the first to offer 5G, where sales have outstripped expectations.
The M1 Chip...better, faster, (not cheaper)
The iPad Pro is reported to be 50% faster. And the iMac is now so thin (because of the M1 system on a chip), that the ports are on the side, not at the back.
The reason that this has made the news is that since 2006 Apple has used Intel chips to power their technology. But last year, they announced they would be switching to the Apple-designed M1 chip, based on the ARM processor.
The key point here is to understand the difference between Intel and ARM. Which is (in layman's terms) that the ARM chips allow significantly more computing capacity for significantly less power. (This 15-minute audio blog from A16Z explains the difference.)
This is achieved by the so-called "system on a chip" architecture, or “SOC”. The 16 billion transistors on a single M1 chip can perform multiple computing functions all on the same chip.
That is why the Apple M1 chip is, according to Apple, faster, quieter (no fan), and uses less battery.
It is also significant because it signals a move by Apple to bring their hardware platforms closer together. Up until now, iCloud has been the glue that held the Apple ecosystem together, creating a seamless user experience.
Now, the iMac and iPad Pro will share many hardware characteristics. With the point of separation at the operating system level.
Owning the rails
When you own the railway line, every train company has no choice. They have to pay you if they want to use them. And without the use of the rails, they can't go anywhere.
Apple's App Store, along with Google's Playstore, are the railway lines for the app economy. This means that any app developer that wants to be on the iPhone or iPad, has to pay for the privilege.
Even if they’re Netflix, Spotify, Facebook, or YouTube, they still have to pay between 15% and 30% of their iOS revenues to Apple.
And that was a lot!
Now, Apple doesn't report exactly how much they make from the App Store, they keep that info to themselves and wrap it up into their Services numbers. This is partly because the App Store is a flashpoint for critics, who argue that Apple exploits this monopoly-hold over the 1 billion iOS users globally.
This is something a US congressional hearing concluded last year when they found that Apple has monopoly power over iOS app distribution.
To deflect some of the fallout, Apple reduced the rate to 15% for smaller firms with less than $1m revenue through the App Store. (A big gesture with a relatively small cost impact to Apple).
As an aside, there is a titanic tussle between Apple and Fortnite owner, Epic Games in the courts. This came about after Epic tried a backdoor route to get out of paying the 30% App Store entry fee and Apple promptly kicked them off the platform. Expect more fireworks!
BTW, owning the rails isn't just about monopolistic pricing. It also gives you control.
In the EU's anti-trust case against Apple, the European Commission argues that Apple has broken competition laws with its App Store policies. Such as favouring Apple Music over Spotify in the app listings even though Spotify is a superior product to Apple Music (IMHO).
Services, Recurring Revenues and Subscriptions
A big shift in Apple strategy unfolding before our eyes is the switch from a transactional to a recurring revenue relationship.
What does this mean? Subscriptions.
Apple will not just rely on you buying a new iPhone every 2 years or a new iPad every 3. And paying them nothing in between.
The strength of the recurring revenue model is that it is built upon loyalty, trust and value. These are strong bonds that tie the consumer to the Apple brand.
At the recent product launch, they announced the Apple Podcast subscription service to compete directly with Spotify and capitalising on the creator economy.
The point is that pulling consumers into the Apple ecosystem and enticing them to pay monthly for Apple Services is the growth strategy.
And this is already big.
On this week’s earnings call, the Apple CFO, Luca Maestri, reported that Apple had "more than 660 million paid subscriptions" across its Services division, including video, music, news, and games.
At $17bn, Apple Services is now the 2nd largest revenue earner after the iPhone. Apple Services' revenues grew 27% last year.
Privacy is worth paying for
In 2015, Tim Cook, the CEO of Apple, expressed his point of view that "privacy was a fundamental human right". (He may have publicly said it earlier, I just couldn't find any record of it).
Regardless of when he said it, the point is that it has shaped Apple's strategy for differentiating itself from the rest of Big Tech ever since.
In a world where so much tech is "free" to the user because it is "paid" for by the advertiser, Cook's strategy is to appeal to the wealthiest billion people on the planet with an iPhone who are willing to pay for their privacy.
And in so doing, Cook has established a very clear distinction between Apple and the rest of the ad revenue-driven BigTech.
The latest move since the introduction of privacy "nutrition labels" came this week with a new iPhone/iPad update. In iOS 14.5, the long-awaited privacy settings came into force.
These are now imposed on all apps in the App Store. iOS will now ask users if they want to opt into being tracked by an app.
This key change is centred around a 4 letter piece of tech called "IDFA", or Identifier For Advertisers.
Since 2012, apps developed for iOS have used an "identifier" to conduct tracking across different websites and apps. The identifier is used by the app to connect information collected from different websites and apps so that a profile (of the user) can be built.
This profile is used by advertisers to micro-target ads at the user.
In iOS 14.5, Apple flipped this feature on its head.
By default, the IDFA is now automatically obscured, preventing apps from tracking a user's movement in other apps and online. All apps must ask the user to opt-in to being tracked, using a feature called App Tracking Transparency, or ATT.
However, this new feature has not gone down so well with the other tech platforms whose business model is based on ad revenues.
Facebook relies heavily on tracking user activity.
The iOS privacy option prevents Facebook from capturing one of their key metrics called "view-through conversions". This is where Facebook measures how many users saw an ad but did not immediately click on it, then later made a purchase related to that ad.
Facebook's response has been to shift the focus away from the public spat between Zuckerberg and Cook and onto their push into eCommerce, where Facebook's Marketplace has more than a billion monthly users.
Facebook believes it can minimise the impact of lost ad revenue from the iOS user base by driving greater sales through its Marketplace, thereby showing value to the advertisers.
As for Google, who has already announced the end of Cookies on their Chrome browser, their response was to announce a number of changes to its ads system and has warned: "publishers may see a significant impact to their Google ad revenue on iOS".
IMHO, what’s next for Apple
- Apple will push further into Services, especially Education and Learning from Home (the market values the monogamous relationships of subscriptions far higher than the one-night stand of transactions).
- Apple will extend further into going vertical and is likely to cut the link with Google by launching their own search engine. Although Google currently pays billions of dollars to make it the default search engine on the iPhone, this monopolistic relationship is drawing anti-trust scrutiny and attention.
- The attention economy is a lucrative space for Apple, which already has a billion of the wealthiest people on the planet as iPhone customers. Buying Pelaton is a no-brainer to Scott Galloway.
- Apple Car. I hope so!
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Apples's App Tracking Transparency, YouTube
Neeva, flipping the search engine on its head, Rick Huckstep
History of Apple, ThoughtCo