Apple’s most recent quarterly numbers broke all sorts of records and, as we shall see, a number of laws.
Apple just released its numbers for the quarter ending last December, the first quarter of its 2015 fiscal year. The figures are astonishing:
iPhones: Apple sold 74.5 million, +57% over last year’s same quarter. iPhone revenue was $51.2 billion, +57%. That’s enough iPhones for 1% of the world population, 9.4 iPhones for every second of the past quarter. I hope to see some day a documentary movie on the supply-chain heroics leading (parts manufacturing, assembly, transportation logistics) required to achieve such numbers. But I’m not holding my breath.
Overall company revenue grew 30% to $74.6 billion, with the iPhone representing a never-before 69% of total sales. This why some now call Apple the iPhone Company.
Profit (a.k.a. net income): $18 billion. This appears to be the highest quarterly profit ever achieved by a company:
Record quarterly profits is becoming commonplace for Apple. The company has broken into the top 10 list five times since Q1 FY 2012.
(The Wikipedia article on record profits and losses has Fannie Mae’s $84 billionin 2013 in the #1 spot, but Fannie’s categorization as a Government-Sponsored Enterprise puts it in a different race—not to mention the $77.8 billion and $64.2 billion losses in Q4 2009 and Q4 2008 respectively.)
Cash: After generating $33 billion from operations, the company now holds $178 billion in cash and cash equivalents. To get a sense of the magnitude of this amount, $178 billion represents $550 for every US citizen, or $25 per human on Earth. The World Bank has more data here on income levels and other such numbers, and the Financial Times has a helpful blog entry, If Apple were a country…, that compares Apple’s “economy” to those of various nations.
If you’re hungry for more Apple numbers, I suggest you feast your eyes on Apple’s 10-Q (its quarterly SEC filing), especially the meaty MD&A (Management Discussion & Analysis) section starting on page 24. Management also discusses the quarterly numbers in its customary conference call; the transcript is here.
But not everyone thinks highly of Apple’s doings.
We have academics spewing sonorous nonsense under the color of authority, such as Juan Pablo Vazquez Sampere’s We Shouldn’t Be Dazzled by Apple’s Earnings Report, published in the Harvard Business Review. Sampere, a business school professor, finds Apple’s display of quarterly numbers unseemly:
“Announcing boatloads of money, as if that were point, makes us think Apple no longer has the vision to keep on revolutionizing.”
John Gruber offers a reasoned retort to the professor, but it probably won’t sway the likes of Joe Wilcox, a Sampere defender who writes: Atop the pinnacle of success, Apple stands at the precipice of failure.
Or consider Peter Cohan, a habitual Tim Cook critic, who recently told us there are “6 Reasons Apple Is Still More Doomed Than You Think.”
Apple… always one foot in the grave. But in whose grave?
This last quarter hasn’t been kind to the Apple doomsayers. A bundle of their lazy, ill-informed or poorly reasoned—and often angry—predictions are offered here for your compassionate amusement. Or we can turn to the ever reliable Henry The iPhone Is Dead In The Water Blodget for morsels such as this one, from November 2013: Come On, Apple Fans, It’s Time To Admit That The Company Is Blowing It. One of Henry’s points was that Apple prices were too high. It’s getting worse: Last quarter, the average price per iPhone rose to $687.
We now turn to law-breaking.
This is the Law of Large Numbers, not the proper one about probabilities, but a coarser one that predicts the eventual flattening of extraordinary growth. If your business has revenue of $10 million, growing by 50% means bringing in another $5 million. If your company is at $150 billion, 50% growth the following year would require adding $75 billion—there might not be enough customers or supplies to support such increase. Actual numbers seem to confirm the Law: Google’s FY 2014 revenue was $66 billion, +19% year-on-year; Microsoft’s was $87 billion, +11.5%; Apple’s $183 billion in revenue for 2014 was a mere +7%.
And yet, last quarter, Apple revenue grew 30%, breaking the Law and any precedent. iPhone revenue, which grew 57%, exceeded $51 billion in one quarter—close to what Google achieved in its entire fiscal 2014 year.
Right now, Apple is “guiding” to a next quarter growth rate that exceeds 20%. For the entire 2015 fiscal year, this would mean “finding” an additional $37 billion to $40 billion in sales, more than half a Google, and a little less than half a Microsoft.
Inexorably, products are standardized and, as a result, margins suffer as competitors frantically cut prices in a race to the bottom.
Exhibit 1: The PC clone market. As mentioned, the iPhone ASP (Average Selling Price) moved up, from $637 in Q1 FY 2014 to $687 last quarter. Moving the ASP up by $50 in such a competitive market is, to say the least, counterintuitive. At the risk of belaboring the obvious, a rising ASP means customers are freely deciding to give more money to Apple.
We’re told that this is just a form of Stockholm Syndrome, the powerless customer held prisoner inside Apple’s Walled Garden. Not so, says CEO Tim Cook in a Wall Street Journal interview:
“…fewer than 15% of older iPhone owners upgraded to the iPhone 6 and 6 Plus…the majority of switchers to iPhone came from smartphones running Google Inc.’s Android operating system.”
This correlates with Apple’s 70% revenue growth in Greater China, a part of the world where, in theory, cheap clones rule.
Why this one still has disciples is puzzling, but here we go. With the bigger market share come economies of scale and network effects. Eventually, the dominant platform becomes a gravity well that sucks application developers and othersymbionts away from the minority players who are condemned to irrelevance and starvation. Thus, just as the Mac lost to Windows, iOS will lose to Android.
Apple has gained PC market share in all but one quarter over the past eight years—that’s 31 out of 32 quarters.
But even that impressive run isn’t as important as the sustaining number that really does matter: profit share. Despite its small unit share (around 7% worldwide, higher in the US), Apple takes home about half of all PC industry profits, thanks to its significant ASP ($1,250 vs $417 industry-wide in 2014, trending down to $379 this year). Apple’s minority unit share in the mobile sector (13% to 15%) captured 90% of mobile profits this past quarter.
Small market share hasn’t killed the Mac, and it’s not hurting the iPhone—which enjoyed a much happier start than the Mac.
This is one of Clayton Christensen’s worries about Apple’s future. In the end, modularity always defeats integration:
“The transition from proprietary architecture to open modular architecture just happens over and over again. It happened in the personal computer. Although it didn’t kill Apple’s computer business, it relegated Apple to the status of a minor player. The iPod is a proprietary integrated product, although that is becoming quite modular. You can download your music from Amazon as easily as you can from iTunes. You also see modularity organized around the Android operating system activity that is growing much faster than the iPhone. So I worry that modularity will do its work on Apple.”
This was written in May 2012. Three years later, the iPod is all but gone. The music player that once generated more revenue than the Mac and paved the way for the iPhone by giving rise to the iTunes infrastructure has become an ingredient inside its successor. With 400 millionunits sold, Apple no longer even reports iPod sales. One could say integration won.
Christensen rightly points out that in the PC clone market, modularity allowed competitors to undercut one another by improving layer after layer, smarter graphic cards, better/faster/cheaper processing, storage, and peripheral modules. This led to the well-documented PC industry race to the bottom. But Christensen fails to note that the Mac stubbornly refused (and still refuses) to follow the Modularity Law. And, as Apple’s recent numbers show, the iPhone seems just as immune to modularity threats.
I have no trouble with the Law of Large Numbers, it only underlines Apple’s truly stupendous growth and, in the end, it always wins. No business can grow by 20%, or even 10%, forever.
But, for the other three, Market Share, Commoditization, and Modularity, how can we ignore the sea of contradicting facts? Even if we set Apple aside, there are so many “exceptions” to these rules that one wonders if these so-called Laws aren’t simply convenient wishful thinking, a kind of intellectual Muzak that fills an idea vacuum but has no substance.
As Apple continues to “break the law,” perhaps we’ll see a new body of scholarship that provides alternatives to the discredited refrains. As Rob Majteles tweeted: “Apple: where many, all?, management theories go to die?“
You can read more of Monday Note’s coverage of technology and media here.