By Kelvin, FQ Tan – Disclosure: I hold a long position in Apple.
What is iPhone: Product or Platform?
In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More
Is the smart phone war over already? The existential threat from Android.
Is China slowing?
What is happening to iPad? falling and falling sales…
Would you rather Apple increased its dividends instead of buyback?
What is iPhone: Product or Platform?
That is the real question.
Was Windows a product which made it a platform, or platform which made it a product?
The iPhone was iPod before it became a phone.
The iPod sold well it did, was it because the iPod was a player?
It’s one approach trying to estimate iPhone sales on a sample of suppliers.
App Store revenue may not amount to much, yet Apps are central to iPhone.
Not too long ago, software came in boxes bought off the shelves.
Life being a developer was doubtful then.
One would be fortunate to have a publisher, and then content with whatever finite reach the distributor had.
After all was said and done, whatever was left on the table was mere pennies on the dollar.
In contrast, developers are living in a golden age today.
For 70 cents on the dollar, work on development, forget about receivables, and forget about getting to the marketplace.
Is it a wonder why we will be seeing Apps for everything imaginable blossoming under sun?
Engagement is being transformed…
Unless this distinction is seen, the phone is just a piece of hardware. And workflow, ecosystem has no meaning.
Internet of all Things
There’s only 2 choices, being device-centric, or being platform-centric.
In a device-centric world, devices are managed individually, to each it’s own.
In a platform-centric world, the platform manages the devices. That’s “Hey Siri, I’m coming home at 8pm tonight“.
So, what’s going to be the brain and the thread weaving it all together?
Smart Phones – iPhone vs Android
Some have declared the war has been won by Android already, by virtue of market share and Apps count.
What’s not apparent is that:
By seeking to cater to all forms and factors, Android’s greatest strength also became it’s greatest weakness.
This ensuing fragmentation has become a bane for developers trying to determine bugs being due to code or device.
Just ask the developers which platform do they release as their platform of choice?
Vice versa, Apple’s weakness is actually its strength.
Being diametrically opposed, iOS and Android have their own turfs, and neither could replace the other.
China is Slowing?
Charles Dickens ‘It was the best of times, it was the worst of times’, China is a tale of two economies…
Is the party just getting started? Apple’s 30th retail store in China opens on 14th Jan.
Currency headwinds? Elsewhere probably. For China, silver lining or indifference perhaps. This is how a Chinese feels about iPhone, we shall see when data comes in.
For those concerned about Android war of attrition between Chinese vs Chinese vs Koreans, the Mac vs PC could be a good study. Is it not puzzling how Mac manages to grow its market share and retain it’s profit margin, amidst intense competition and declining trend of the industry?
Does it mean anything if the latest craze among Chinese parents is preschool coding classes?
Why has iPad sales been slowing?
Well, the iPad simply has a longer lifecycle.
The first iPad was released in 2010, its adoption gathered momentum in subsequent versions, and that pool is about to come due.
Gadgets are often purchased in the spur of the moment, and gets neglected soon after.
Rather than quarterly sales number, the more meaningful number would be the pool of active iPads users.
In this context, the % of iPad buyers buying iPad for the first time is a more meaningful indicator than sales figure.
Think workflow, not workstations.
iPad has just reached critical mass, and is now leading the change in workflow to become a viable alternative to Windows, reaching beyond where the latter could not.
From a management total cost of ownership perspective, there are growing reasons to adopt iPad than not.
The key driver of iPad sales will be Apps, more than hardware specifications. Ask IBM.
Perhaps Apple can offer a similar iPad Upgrade program too, and offer the program all over the world.
That will help to tighten the lifecycle and drive critical mass further.
Due to fragmentation and lack of critical mass, Android will likely remain confined to handsets for a considerable time…
Share Buyback and Dividends
Some people are displeased with Apple taking on debt to finance the buyback.
Others would rather have more dividends and less buyback.
With its payout ratio on the low end, less than half of MSFT,
Apple could comfortably afford to increase its payout anytime.
Instead Apple’s decision to prioritize buyback over dividends reflects a trade off between time horizon.
Apple is acting in shareholders interest to invest in its shares now,
then ideally, switch over to increase dividends and stop buyback completely later on.
Given Apple’s current state of affairs, it’s pragmatic to lock in the low rates to invest unto itself, and still hold on to its cash.
It would be a different matter for Apple to issue debt for dividends.
Apple has committed to return $200B back to shareholders by Mar 2017.
With 6 more quarters and $25.3B left to go,
Apple will have to hike its dividends payout soon, by 45% to 75c to meet it’s checkpoint.
The key question is: Will Apple be able to maintain it’s current earnings, and keep up further capital return programs?
Look beyond iPhone sales number to see the economic landscape, perhaps you too shall see that we are merely at the cusp of a generational shift.