In early 2007 Apple Computer dropped the 'computer' and simply became Apple Inc. At the time Steve Jobs said 'Mac, iPod, Apple TV and iPhone. Only one of those is a computer. So we’re changing the name'. Now, they may as well change it to 'Apple Smartphone' or 'Apple Mobile'. I've written before how financially important iPhones are to Apple. Yesterday's earnings announcement, which included the first full quarter of iPhone 6 and 6 Plus sales, further highlights Apple's dramatic shift from a computer and music player company to a mobile phone company. The iPhone now accounts for 68.6% of Apple's revenues (up from 55% just six months ago in August, 2014). This is before accounting for revenue contributions from the App Store, iTunes, Apple Pay, and accessories that could be attributed to the iPhone. Clearly, the iPhone 6 and 6 Plus have been a huge hit, and are more important than ever to Apple.
The cable TV industry by the numbers 3Q14
I wanted to take a look at what's going on in the pay TV industry in the US, so I charted out some data from the top providers over the past ten years. A few caveats before we get to the data... I looked at the 13 biggest providers as of today, which represent approximately 93 million of the 101 million total pay TV subscribers. These were not the 13 largest 10 years ago (in fact some did not exist), so some of the older data may be a bit misleading, especially as it pertains to cable providers (as opposed to satellite or teleco providers). Unless otherwise noted, all data was taken from SEC filings.
The total number of pay TV subscribers is roughly holding steady as a percentage of total households over the past few years. It seems pretty clear that satellite and telco (AT&T and Verizon) providers have been taking share away from cable providers. Again, the older data under-represents the total number of cable subscribers, and therefore total pay TV subscribers. Total household data is from the US Census.
We can clearly see the growth of the individual satellite and telco providers here. Some of the sharpness in changes to Comcast's and Time Warner's subscriber numbers are due to acquisitions and to a lesser extent divestitures. The smaller cable companies all seem to be slowly losing share to the larger companies.
ARPU (Average Revenue Per User) is the average revenue providers receive from video services alone, and does not include internet or voice revenue. I was only able to calculate ARPU for companies that reported revenue from video services separate from other services. AT&T, Verizon, and Cox do not report this, along with a few of the smaller cable providers, but over 80% of the total subscribers represented in the previous chart are included in the ARPU calculation.
I've seen many news articles that mention rising monthly pay TV bills, but the dramatic rise in prices over just ten years was still a surprise to me. Over the past ten years rising prices can be partially attributed first to the analog-to-digital cable TV transition, and then more recently additional fees for HD boxes and DVR's. The pay TV providers have also passed along higher costs from the TV networks, in part due to higher prices for premium programming such as live sports and high-budget original content. This explains why many providers are reporting record revenues even as their subscriber growth slows or turns slightly negative.
Finally, I wanted to see how the number of subscribers to various video services compares to pay TV subscribers. HBO/Cinemax and Netflix numbers are both reported in SEC filings. Hulu is a privately held company, but they occasionally report paid subscriber numbers on their blog. Although it is not a fair comparison, Netflix and HBO/Cinemax now have more subscribers than Comcast, the largest pay TV provider. However, their ARPU is a fraction of the pay TV providers'.
I plan to regularly publish updates to these charts as more numbers are released and provide some insights into what is going on in the industry. If you'd like access to the raw data I used or have any questions or comments feel free to email me.
Notes from the iPhone 6 event
Apple made a lot of announcements today. Here are a few things that stood out to me that may be a little under the radar of the big tech blogs. iPhone 6 Differentiation: There are some subtle features (other than size and price) that differentiate the 5.5" iPhone 6 Plus from the 4.7" iPhone 6. The 6 Plus's screen is larger, and also has more pixels at a higher density. The camera on the 6 Plus has optical image stabilization, which helps reduce shaky videos and blurry photos, while the 6 only has digital image stabilization. The 6 Plus has a larger battery, which gives it better battery life across various use cases. However, the increase in battery life from the 5s wasn't quite as much as I'd hoped for. The 6 Plus's software also makes use of the larger screen in landscape mode in some apps, much like the iPad does. For example, you'll see a list of emails on the left quarter or so of the screen and the current message in the rest of the screen.
None of these features alone should be enough to convince average consumers to buy the 6 Plus over the 6. They do help justify the $100 price premium, especially for users concerned with battery life or photo enthusiasts.
Margins: The introduction of the 6 Plus at a $100 premium to the (already premium) 6 and some tweaks to pricing of storage tiers should be a boost to Apple's gross margins. The base models of the 6 and 6 Plus both come with 16GB of storage, but an extra $100 bumps up to 64GB (instead of 32GB on previous iPhones), and they added an additional 128GB tier. The 5s also starts at 16GB, but an extra $50 now gets you 32GB. 16GB is starting to feel pretty small, and this will likely entice more users to spend a little more to get more storage. That extra $50/$100+ is basically pure profit for Apple.
Branding: We got Apple Watch and Apple Pay, not iWatch and iPay. Will the 'i' prefix be deemphasized for future products and features?
Cloud Security: Apple didn't address last week's iCloud breach. They did unveil Apple Pay, which stores information in the cloud, but not actual credit card numbers.
Speaking of cloud, the live stream itself was atrocious. It cut out at least a dozen times, froze my Apple TV twice, and there was a very annoying and distracting Chinese language audio stream layered on top of the English stream for about the first half of the event. Apple gets a lot of things right, but cloud stuff just isn't one of them. I can't help but think Google wouldn't have had these problems.
Notes of interest from Apple's 3Q14 earnings: iPad sales down, Mac sales up, and China
Apple released their third quarter earnings yesterday. Revenues and profits were up over last year, mostly driven by iPhone sales and 28% overall growth in China. However, iPad unit sales were down 9% compared to the same quarter last year. At the same time, Mac unit sales were up 18% in a computer market that is declining slightly overall. So iPad sales are down and Mac sales are up, isn't this the opposite of what should be happening in the post-PC era? In the earnings call Tim Cook gave some additional insight into the situation. Although iPad sales were down, he said in developing markets sales were up overall and mentioned a few with rapid growth: Middle East (64%), China (51%), and India (45%). He also mentioned that Mac's were stronger in developed markets and rattled off a number of countries including the US and Canada where Mac sales were up at least 10%. He also mentioned that Mac sales in China were up 39%.
The first takeaway for me is that China continues to be Apple's biggest opportunity by far, both in terms of growth and absolute size. With iPhone sales up 55% in BRIC countries (Brazil, Russia, India, China), it seems China has a large appetite for all of Apple's main product lines and that will make up a huge portion of the company's growth going forward.
The second takeaway is that iPads aren't replacing the PC. I continue to think it makes the most sense to look at tablets and PCs together as part of one large-screen device category. We'll all have smartphones, and most of us will have a large-screen device also. For some people that will be a computer, for some it will be a tablet. Apple's numbers point to how that trend may be playing out. Macs seem to be doing better in countries like the US and Western Europe and iPads are doing much better in developing markets. As a whole, people in developed markets may want to use more productivity apps (whether for doing work at home or personal use) and prefer to buy a computer. Whereas, people in developing markets (who are also more likely to own a smaller and less capable smartphone) prefer a tablet as their large screen device.
It's also the case that people in developed markets where among the first to buy iPads and aren't in a rush to upgrade them, whereas people in developing markets are really just starting to get in on the tablet craze.
It will be interesting to see how this trend plays out over the next few quarters, especially as Apple releases larger iPhones. I don't think we've seen peak-iPad yet, but it's clear that current tablets aren't yet capable of replacing the PC market. If iPad sales are going to return to growth Apple will need to focus on making them more capable for basic productivity tasks and getting them into the enterprise.
Thoughts and questions about Apple reportedly buying Beats for $3.2B
Last night The Financial Times reported that Apple was in the final stages of talks to acquire Beats for $3.2B with the deal being announced as soon as next week. Acquisitions of this size are completely out of character for Apple. Like many journalists and bloggers, the more I think about this the less sense it makes. Assuming the report is accurate and a deal is inevitable, I've got a ton of questions without any obvious answers...
Is Apple interested in the headphones, streaming music, or both?
My gut reaction is that they're really interested in the streaming music service. The Apple engineers don't need help tuning speakers and device EQ to make things sound better. If they wanted to they could design a pair of headphones or a docking station to compete with Beats. Apple already tried speakers with the iPod HiFi, which was quickly discontinued. Music has always been important to Apple, from iTunes to iPods to GarageBand. There have been a number of rumors about the future of iTunes lately, and perhaps this is part of Apple's answer to Spotify and Pandora.
Why not just buy Pandora or Spotify or Jawbone?
The Beats streaming service is not that successful yet. Assuming the $3.2B price is accurate, they could spend another few billion to acquire Pandora (current market capitalization of $4.65B), which is the leading music streaming service in the US. They could buy Spotify too, although that would probably be much more expensive.
If they're interested in the Beats hardware, a company like Jawbone seems like a more natural fit. They make nice bluetooth speaker systems and headsets, and of course the UP wristbands. All of those would fit into Apple's product lineup more naturally than Beats would in my mind.
Will they keep the Beats brand?
I can't imagine Apple doing any co-branded products with the Beats logo on an iPhone, iPad, or Mac. They could continue to sell the headphones and speakers under the Beats brand though. Most consumers probably wouldn't realize that Beats was owned by Apple anyway.
It's got to be about the people
I think the acquisition has got to be about the people, not the products themselves. Apple is hellbent on staying cool and fashionable. They want those creative marketing minds that turned big plastic headphones into a fashion accessory. Another possibility is they want access to Jimmy Iovine's music industry contacts and expertise to build out the next generation of iTunes and iTunes Radio.
They're still focused on music
Whatever their motivation, as a music lover and Apple fan I'm happy to see they're still focused on music. I'm more hopeful of unique Apple hardware and software that makes the experience of discovering and listening to music more effortless and enjoyable.
The great mobile irony: What Google and Apple do well and how they make money
Google's Android operating system had a phenomenal year of growth in 2013. In the third quarter Android accounted for about 81% of smartphones and 67% of tablets shipped worldwide. The press seems to concentrate on these Android and iPhone unit sales and market share, but there's another report that I find equally interesting: Android vs iOS usage statistics. A recent report analyzed the hourly usage and data consumption of various handsets in the US and Europe. Unsurprisingly, the iPhone dominated. I say unsurprisingly because every time one of these reports is released Apple comes out on top, and usually by a wide margin. Another analysis shows how iPhone users shop more and spend more than Android users. Obviously, there are plenty of tech-savvy Android users, but they make up a small portion of all Android users.
The great mobile irony
Apple makes most of its money, and I'd guess virtually all of its profits, off of device sales. That is, they make money when we buy iPhones and iPads. Google, however, gives away Android for free in the hopes that it will increase the number of mobile internet users and people using Google's services like search, Gmail, Maps, etc. Google makes money when we click on ads in Google search results, or on websites that feature Google ads (like this one.)
The irony is that Google makes its money off of usage, which Apple dominates, and Apple makes its money off of device sales, which Google's Android partners dominate.
What does that mean for the mobile industry?
I believe Apple is trying hard to monetize all of that usage. They not only want to make money off of device sales, but throughout their life as we use them every day. Apple created its own mobile advertising network, and then diverted a lot of those resources to selling ads for the iTunes Radio music streaming service. I'd expect more initiatives like that in the future. I wouldn't be shocked if we saw Apple build or acquire a movie streaming service or try to monetize Podcasts.
Meanwhile, Google will continue making Android more intuitive and easy to use and working with its hardware partners on premium Android devices. Part of the reason Android dominates market share figures is due to the low cost of Android handsets.
Another interesting note from the hourly usage figures was that after the three most recent iPhones and Samsung Galaxy phones, the next most used device was a Blackberry. Maybe there's hope for them yet if they can make software apps for iPhone and Android and monetize their usage.