Notes on Apple's refresh

Reactions to Apple events are generally either 'that's crazy' or 'that's boring', and reactions to yesterday's were definitely on the 'boring' side. There's certainly a bit of housekeeping (new Apple watch bands, say), but actually, I think there are two things that are pretty important. 

Finally, the cheaper iPhone

People have been talking about cheaper iPhones for as long as there's been an iPhone. Starting with the iPhone 3G, Apple successfully harnessed itself to the operators' handset 'subsidy' model, and it then passed through the shift from embedded subsidies to unbundled hire-purchase deals without a hitch. But each year's new iPhone still starts at over $600 before that subsidy, and that still works its way through to the consumer in the form of higher monthly charges or up-front payments, and of course prepay (with no subsidy) is a large market in western Europe (and increasingly the USA) and the only significant model outside developed markets. 

So far, Apple has addressed this by selling models from the previous two years at discounts of $100 and $200, taking the entry price before subsidy down to $400 or so. In addition, the second-hand market for iPhones is strong (seemingly rather stronger than that for Androids of similar price), giving another way to increase the size of Apple's ecosystem, though of course providing no direct revenue. And Apple's move to offer its own frequent-upgrade plans gives another way to broaden the base. 

Public data for this has been scanty, but Apple's ASP stayed high enough that it was pretty clear it wasn't selling many of the old models, and yesterday Apple confirmed this, saying that it sold 30m '4" iPhones' (that is, the 5 and 5s) in 2015 out of 230m total iPhone units. 

The last time Apple looked at addressing this directly, the result was the iPhone 5C. Install-base data seems to show that this sold about as well as previous 'last year's model' phones at that price point, but no better - it didn't really change the story, and Apple didn't continue the strategy. It went back to just selling discounted older models again. 

Now we come to the iPhone SE. This is a very different strategy. The iPhone 5C was clearly a different, cheaper product. It looked different, coming in colours but having a bulkier case to no other user benefit and had a lower spec. It was very obviously a 'cheaper iPhone'. 

In contrast, the iPhone SE is effectively a smaller iPhone 6S at a lower price. It has almost all of the same components and specs, and even a better camera than the discounted-to-$500 iPhone 6. It uses a premium design (albeit from an older model). The only meaningful difference from the flagship is that it has a smaller screen and costs less. 

So, I'd suggest that the iPhone SE is not the 'cheap one' any more than the iPhone 6S is the 'cheap one' compared to the iPhone 6S Plus. It's the smaller one, but it's still a top-of-the-line phone. 

Hence, as the tweet at the beginning says, what Apple has really done is moved from selling older models at discounts with the 'proper' iPhone starting at $600, to starting the iPhone range at $400 and scaling up on screen size and price. 

There are a bunch of interesting second-order implications for this. By launching six months after the actual iPhone 6S Apple smooths out the supply chain and reduces cannibalization from people who really want the 'newest one', and probably gets better component prices. But it's still selling premium components instead of 2-year-old components at $400 instead of $600, so I'd expect a long discussion of margin implications at the next quarterly call. And this also points to how misguided it is to poke around in earnings releases from Apple's supply chain to work out iPhone sales. One can also wonder what happens in the next product cycle - presumably the iPhone 6 disappears, the 6S goes to $500 and the SE is refreshed, perhaps without a new name. Or does it go to $300? Certainly it'll be on the second-hand market at $200.  

But the key thing is that after 8 years, the iPhone range really now starts at $400, not $600 or more. With the 6 and 6 Plus Apple addressed screen-size as a reason to buy premium Android and their results are clear in Samsung's financials. Now it's going after price and the mid-range. $400 is still nowhere near the $150 or so that decent Android phones start at (let alone the entry price of $50 or less for one with very low specs), but this is still going to shake things up. 

Second, the iPads

Apple has sold over 300m iPads. It has 70-80% share of tablet traffic web share, and tablets are a double-digit share of web use. The users love them. But sales are slowly declining. 

To me, there are two linked issues here. First, tablets are essentially filling a PC use case - a large screen device that's not in your pocket all the time but that can do more - and that market is in decline as smartphones take over more and more of that use. Tablets are selling into a declining market as smartphones increasingly dominate. And second, the replacement rate for tablets, just as for PCs, is slow - PCs are around five years and tablets may be close to the same (it's still too early to say). A three or four year old iPad is just fine, especially if you don't carry it around with you. 

Apple has clearly had a v2 rethink around this, to try to drive greater switching from PCs (and Macs) both within that upgrade cycle and perhaps accelerating it. It has added the pencil and the keyboard (both pretty much the 'right' instance of each), added split-screen multi-tasking and pushed into productivity, both with OS features and the partnership with IBM, while Microsoft has helpfully also put Office (mostly - some elements such of charts are works in progress) onto the platform. It's trying to address the things that keep people on Windows or Mac - generally that one app or use case. Having started with the new larger iPad Pro last year, it's now rolled this strategy out to the 10" format. (It's not clear what happens to the Mini - this is now somewhat marooned between the 10" format and the iPhone Plus, and Apple may just keep it on as a convenient cheap entry point, rather like the iPod Touch.) 

Arguably, after the software changes and accessories, the remaining piece is the difficulty in making money selling iPad productivity apps - partly because of the free or near-free products from the industry giants. On this, I suspect the App Store is the subject of a broader conversation inside Apple. 

All of this sits within a broader generational shift in productivity, though. The iPad has great productivity stories - for example, Paper, Office, Box & Dropbox, Slack, Quip, OnShape, IBM or Adobe. But the real shift is around a move away from typing & filing and towards SaaS, cloud, AI and unbundling of Office itself. That is, you don't compete with PowerPoint or Excel by making better software for slides or spreadsheets. You compete by moving away from slides and spreadsheets. (For more discussion of this see here

12 tablet apps

Tablet apps, after an explosion of excitement when the iPad was first launched, are in something of a lull. It's hard to make money, the install base is flat (or, more precisely, the base of tablets that are not generic black plastic devices that never install apps is flat) and attention has shifted firmly back to the smartphone.

Yet there is still some great work being done, and great content and experiences to be had. The larger screen can show a full website in a way that a smartphone cannot, yes, but there is also scope for native tablet apps to do things that you would struggle to achieve with either a smartphone app or a website, whether that's content display, interaction design, input methods or even just distribution. So, here's an entirely personal selection of 12 that I'm always glad I have. 

(Fiftythree, which makes Paper, is an a16z portfolio company. The app is great.)

How many Android tablets?

More extrapolation from Google IO numbers, this time looking at tablets. Google gave two 'charts' on this topic, shown below. 

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In addition, Google's developer dashboard gives a breakdown of active Android devices by screen size: in the first week of July they accounted for 12.6%, not including phablets. And since Google also, for the first time, told us the active base, 'over 1bn', we can calculate an active tablet base of at least 126m devices, rising to 138m if we take 'over 1bn' as 1.1bn. 


Apple, almost uniquely in the market, reports tablet sales and shipments. In the last 12m (which I presume that "62% in 2014" bubble refers to) iPad shipment were 69.7m and sales were 73m. If Android tablets indeed had 62% of sales (the chart isn't clear if it refer to sales or shipments) then that would equate to a market of 192m units and 119m Android tablets sold in the last 12 months. 

This would imply that Android tablets have an average active life of a little under a year. Or, that they have a life of more like two years (say) but half of them are inactive.

Conversely, it's pretty clear that the active life of an iPad is if anything too long, from Apple's point of view - at least two years and probably longer. Apple has sold 143m iPads in the last two years and 196m in the last three. 

That, in turn, implies that each iPad unit sale is worth 2x more active devices over time than an Android tablet sale - before looking at actual usage. 

There are, though, two problems with this data. The first is that it's not clear if that 'Android tablets market share' includes AOSP tablets in China, where the vast majority Android devices  have no Google services and hence do not show up in Google's active user figure or the developer dashboard screen size breakdown. Sundar did say that this doesn't include Kindle and other Android variants, which would add 'a few percentage points'. So it probably doesn't attempt to include China.

The second is that it appears that a very large number of cheap Android tablets are used mostly or entirely offline, consuming video via SD card and playing games. So those might not be in Google's MAU data either. 

A year ago, Google gave a more explicit set of numbers for Android tablet sales, in the chart below. If you eyeball the numbers, that equates to 50m tablet activations (i.e. not AOSP) in the 12m to July 2013. 

(I'm not sure, incidentally, why this sources Gartner and IDC as well as 'Google internal data' - shouldn't Google know activations?)

50m tablet activations in that 12m period compares to 70m iPad sales in the same period (more or less), giving a total market (excluding AOSP) of 120m units and  Android a market share of 41%, which is probably close enough to the cited 46%. Activations in the previous 12m look like about 15m: Apple did 53m, giving Google Android a market share of 22%, though, not 39%. Something has got lost in those numbers somewhere along the way. 

One more thing. Google's internal data on tablets activations and device screen sizes is self-reported by the devices when they access play, using the Android screen profiles described here. But devices that are on the margin between two buckets can and do change what category they report from region to region and from one software update to another. This is a particular issue for phablets, where it's really a matter of opinion whether you should tell an app this is a normal or large screen, and whether it's xhdpi or xxhdpi. 

This, incidentally, is one reason why I sometimes mark shares of tablet sales with terms like 'approximate'. 

Finally, of course, all the available usage data of tablets shows iPads with around three quarters of total use, even in China. 

Media attitudes and use

Another fascinating set of market research from Ofcom, the UK TMT regulator: I've extracted a few of the best charts, and the original is here

Video on tablets

An obvious exception to the 'smartphones may be beating tablets' thesis - video consumption. This chart shows requests for video on the BBC's iPlayer service (full source here).

iPads and tablet growth

Apple's revenue has pretty much stopped growing. This chart shows the quarterly revenue the company has reported - a series of ever larger spikes upward around new product launches, but with a flattening trajectory. 

If you look at this on a a trailing 12 months basis, to smooth out the spikes and see the underlying trend, you see a very clear 'S' curve. 

And the US revenue is pretty much flat, though China is certainly growing. 

Apple has three main buckets of revenue - iPhone, iPad and  everything else. If you split these out, you can see that the really dramatic slowdown is actually in the iPad business, not iPhone. 

This is something of a change - a year ago the general narrative was around the rather obvious ceiling on iPhone sales and the possibly huge but unknowable potential of the iPad. Now things have turned around. 

Part of this slowdown in revenue is due to a decline in ASP as Apple rolled out cheaper iPad models...

But if you look at unit sales you see pretty much the same trend: flat for the last year. 

Screen Shot 2014-04-25 at 2.33.18 PM.png

Shifting back to the raw quarterly numbers, you can see the same trend.

When asked about this on the conference call earlier this week, Tim Cook talked a bit about changes in inventory. But actually, that isn't the point - the underlying trend looks the same whether you look at sell-in or sell-through.

(Note, incidentally, that no other mobile device company provides anything like this much this data) 

So iPad sales are slowing. Why? Is it competitive pressure from Android? Not really. 

This chart, and dozens of others from every possible source, makes it very clear that the iPad dominates tablet web traffic in a way that it does not dominate smartphone web traffic. This particular chart shows the USA, but I hear the same story from companies everywhere from the UK to China. The same is seen for app use. People are not substituting iPad use for Android use, not at anything like the scale needed to explain the slowdown. And Android tablets that try to offer the same 'post-PC vision' as the iPad are not selling especially well - the real global volume is in the generic black plastic devices at much lower prices - and they don't even show up in usage stats. 

The classic negative view on iPads was that they couldn't compete with PCs because they lacked multitasking, keyboards, Office (until now) etc, etc. But that' s an incomplete response, because PC sales are suddenly weak too (and only part of that is Windows 8). 

So what IS going on? Perhaps one answer is in this chart. 

Screen Shot 2014-04-25 at 3.15.26 PM.png

On one hand, as I wrote here and Steven Sinofsky discussed in this podcast, moving to new devices and form factors involves new software experiences, and new software also often both creates and requires new business processes. It's hard to spend a day creating a 20-slide sales report on an iPad, even now that MS Office is available for iPad. But actually, that sales report should be a SAAS dashboard that takes 10 minutes to annotate. It will take time for those business processes to shift to enable more corporate tablet use. 

On the other hand, the smartphone explosion is putting the internet into the hands of far more people than ever before, and it's alway there. If you're watching TV and want to know about an actor or a product, do you go upstairs and turn on your PC, walk across the room to pick up a tablet, or just pull a smartphone out of your pocket? The declining relative utility of the PC is reflected in a slowing replacement cycle (you don't replace the one you have) - the tablet has yet to make the sale in the first place, outside the initial wave of adopters. 

Compounding this, the smartphone explosion is accompanied by an apps explosion. There are thousands of amazing apps on iPad (and very few on Android tablets, which is why the balance of use between the two is so skewed), but the smartphone opportunity is so much bigger that it attracts much more attention: there are more of these devices, some use cases make much more sense on them (such as Instagram) and some only make sense on them (such as Uber, Hailo or Lyft). So the smartphone experience now is very rich. 

(A complicating factor, of course, is that these categories can't be neatly divided - phablets blur the boundary between phones and tablets and 'convertibles' blur the laptop/tablet boundary. But sales of both these are relatively small for now - even phablets)

A good illustration of this shift from the PC to mobile was Facebook's results this week: it now has more mobile-only than desktop-only MAUs and 79% of MAUs are mobile. 

So, looking at tablets and smartphones as mobile devices in a new category that competes with PCs may be the wrong comparison - in fact, it may be better to think of tablets, laptops and desktops as one 'big screen' segment, all of which compete with smartphones, and for which the opportunity is just smaller than that for smartphones. And so tablets will over time eat away at laptop and desktop sales just as laptops ate away at desktop sales, but the truly transformative new category is the smartphone. Maybe.