Apple’s Q3 2014 numbers

Apple’s Q3 2014 numbers are in. My observations on Apple’s financial data –

  1. iPhone rules the company. Product revenue was up by 9% as compared to the last quarter but dropped 24% sequentially. People around the world held on to their battered and scratched phones for a few more months and wait for the next version of Apple’s flagship product.
  2. Retail store sales are flat as compared to last year. This surprises me. Given Apple’s focus in this area, I expected a healthy growth in retail sales as compared to last year.
  3. Sequentially, revenues from Greater China and Japan fell by 35% and 36% respectively. The early adopters pool has dried out in these markets.
  4. The iTunes/Software/Services revenue remained flat sequentially. Apple customers did not buy more content and services than last quarter. Next quarter numbers will tell whether this is a one off case or the content consumption has peaked in Apple’s ecosystem.
  5. The Mac had a good quarter, almost equalling its so called disruptive nemesis in revenue. Yosemite announcement and Macbook Air price drop worked as the Mac reported a healthy 18% units growth compared to last year.

At my home, the iPad is used as the goto device for routine stuff. It is also the device my kid uses the most. I use the iPad mainly used for browsing and see no reason to upgrade to a new one within the next one year. My iPad is two years old and still works like a charm.

I believe the iPad will follow the TV replacement cycle. Still, only 13 million units sold in this quarter should worry Apple. Maybe IBM can fix this problem. We will see.

Beats with Apple

Apple’s acquisition of Beats Music and Beats Electronics has perplexed the inter webs. Some say this is a clear indication that Apple’s best days are over. Others say this is proof that Apple is getting smarter. Many have admitted that they have no idea why Apple would acquire Beats as there is nothing about Beats that Apple can’t manage on its own.

My perspective is a bit different. I looked at Apple’s Press Release announcing the acquisition and their reason is clear.

“Apple® today announced it has agreed to acquire the critically acclaimed subscription streaming music service Beats Music, and Beats Electronics, which makes the popular Beats headphones, speakers and audio software…”

OK.  So you buy a company for $2.6 billion. What do you say when you announce the deal? Why you bought it, right?

Apple wants Beats for it’s subscription service. Everything else is just icing. Beats Music is a very small part but gets the first mention in the press release. Ahead of the headphones, and ahead of Iovine.

Yes, there is $400 million more, but it vests over time, so relax.

No? Not convinced? Here is another example. This is the opening line in Satya Nadela’s statement on the Microsoft – Nokia acquisition.

“Today we welcome the Nokia Devices and Services business to our family. The mobile capabilities and assets they bring will advance our transformation…”

It is clear why Apple bought Beats. They wanted a music subscription service. So they bought one. But can’t Apple just build a service like Beats Music instead of spending the monies? Yeah, of course. Here are a few reasons they bought instead of built.

A stitch in time

Apple needs a music subscription service. The likes of Spotify and Pandora have proved there is a market. Apple’s data shows that the “buy” music model is on a decline. Apple wants to retain its position as the top destination for Music lovers. And Apple has run the numbers. Such a service will work. Apple will give it prime real estate on the iOS home screen.

But Apple already has a brand in the music space, iTunes. And brand iTunes works not only for music, but also apps, movies, podcasts and much more.

If Apple has to enter the music as a subscription space, it needs a new brand. And Apple has to enter the music as a subscription space.

A good option

Beats Music was the only viable option for Apple. It is run by industry veterans and not software entrepreneurs. The founders understand the music business better than most and have connections inside the industry. The Beats Music service uses a personalization algorithm that is a mix of digital innovation and musical passion. 300 years of experience in the music industry comes with this acquisition. This rich team cannot be built just by snatching Jimmy Iovine and offering him a lucrative contract to bake this within iTunes. Plus, Beats has fantastic relationships with some of the big artists, a mandatory requirement after the Ping debacle.

A trojan horse

Whenever Apple is compared with Google, the following quote is never far behind in the discussion. That Google is getting better at design faster that Apple is getting better in services. Maps and mail are cited as proofs.

A new, independent brand will give Apple the flexibility to launch the service on Android and Windows. It will open the market and bring the Apple experience to many more users. Since the smartphone market is getting saturated quickly, growth can come only from customers jumping ship. What better way to start than with Music? Email and maps are covered. But Music is still wide open.

And the headphones? Yeah, they are important. They sell a lot and are profitable. Apple will shore up this part of Beats, and introduce another accessory for its devices. So there’s that.

Most of the data and facts in this blog post come from Apple Press Release announcing the acquisition. Here it is.

Facebook buys WhatsApp

The big news this week was Facebook acquiring WhatsApp for a cool $19 billion dollars.

That is $19,000,000,000. In full glory.

For perspective, it is exactly 19 times what Facebook paid for Instagram a while ago, or just a fraction of Facebook’s current market cap. Whichever way you look at it.

Here is my take on the deal size.

Another way to look at this deal is to think that Facebook got a huge discount on WhatsApp valuation. WhatsApp would surely have gone public within the next few years and enjoy a market cap of at least $50 billion, if not more.

WhatsApp has got a lot of things going for it to support this kind of market valuation. Here are a few :-

  1. Crazy Growth : It has a huge reach with 450 million users. A good chunk of these are active every single day. And a million new users join the service everyday. This makes WhatsApp one of the fastest growing companies, ever. Pinterest who?
  2. Usage : People use WhatsApp on their mobile phones way more than any other app or service. As mobile phones take away more and more share of everyday time, this will only increase.
  3. Phone Numbers : The social graph at play in WhatsApp is already a validated and real graph. People join WhatsApp using their very real phone numbers. This social graph is as sticky as it gets.
  4. Opportunity : WhatsApp plays in the mobile messaging space, with data volumes rivaling telecom SMS traffic. As more users join the service and move to better phones, the volume of data will increase manifolds. All of this information put together, including text, voice, photos and videos, presents a treasure trove of information for an internet/mobile advertising company.

Facebook can become the Google Adwords of mobile, without selling a single ad on WhatsApp. All this data is golden for advertisers.

Considering these points, one can argue that WhatsApp got a fair price for what it has built and where it is today. Whether this price was fair for Facebook, only time will tell.

New iPads

Its been a while since Apple announced the new iPads. I just got a chance to put together my opinions about the event. Not much in novelty, but here are my observations about the new launches.

Designed By Apple

1. Things started off with a repeat of the video we saw at WWDC. Nothing wrong with that, but it seemed more like “Me, Apple” talk rather than the usual “You, User” videos we are used to seeing. The video is great for a developer conference, but could have been put aside for an announcement event. We do see a couple of user centric videos later in the event though.

2. The iPhone blockbuster opening weekend, followed by iOS adoption numbers and iTunes Radio numbers were in line with expectation. All three points demonstrate the huge difference between iOS & Android ecosystems in terms of users, usage and adoption.

3. A million apps. 60 billion app downloads. $13 billion paid to developers. Apple has a good thing going with the App Store. App discovery is a real problem now and I had hoped Apple would do something about that. No luck on that front.

4. Mavericks recap and demo was really good. Craig Federighi has made a name for himself presenting at these events.

5. Apple is the only company that puts in decent efforts on improving performance of already sold hardware. Increased performance and improved battery life are a gift to the people running old hardware. This is a case study in brand building, customer loyalty and retention. Apple’s effort to improve performance, battery life and graphics through a software update is commendable and unprecedented.


6. iBooks and Maps app come to the Mac. A tighter integration between OS X and iOS rewards loyal Apple customers who run both of the operating systems.

7. Working on the Mars project, responding to a personal message during a live demo, add a fantastic touch to the demo. Nobody understands their users more than Apple. And they are gutsy enough to show this. Clearly when hiding behind the spec sheet is an easy way out.

8. Mavericks is not free, but a free update. Not being cynical here, but that is true. OS X update pricing was on a free fall anyways. Getting most of your users onto the latest and greatest software is very beneficial, something Apple has learned from iOS experience. This is in contrast to Microsoft, who relies on OEM OS license sales for its revenue. And, making older hardware better through a free software update, is a blow to the gazillion Android devices that get obsolete within months of release to the market.

9. Mavericks gives you a feeling of the impending integration of the two OSes down the line. OS X is waiting at number ten, running through all California location names, patiently waiting for iOS to catch up to release 10. I am not a betting man, but I would be willing to put down a decent wager for that to happen.

10. Supporting hardware as old as that sold in 2007, is a fantastic effort for which Apple needs to be applauded. Kudos fruit company.

11. Price drops and spec upgrades on the new MacBooks is a welcome move. For me, 11-inch MacBook Air is the best laptop out there. It is interesting to see that their is a $100 price difference between the 11 and 13 inch Air, but a whopping $700 difference between the 13 and 15 inch MacBook Pros with Retina display.

12. Mac Pro is not of much interest to me, except that it goes to show that Apple still does a lot of things because it likes doing them, not optimizing on markets or product lines.

13. Eddy Cue’s rock poster in Pages was a surprise. Normally, you expect Apple to take on something the users can associate with. What makes this even weirder was that Eddy was not the guy making the poster.

14. iWork going free was not a surprise. Apple’s productivity suite has a good following in its own community. If free productivity software helps Apple sell more hardware then so be it. Its not that more people will buy Macs now that iWork is free. Most probably, more people will stay in the Apple ecosystem because of the free software. It would have been great had these apps been made available to existing Mac customers as well.

15. It would have been completely OK to disclose that a few features did not make the cut, and the new versions are not at feature parity with the older apps. And running out of time is not an excuse Apple can make. The power users found out pretty quickly, especially since the apps were made available on the same day as the event. Maybe everybody is due a slip once in a while. This furor could have completely overshadowed all the other goodies Mac users got in this release. I am sure a few people would have moved camp to Microsoft’s Office, as a wait for the regressed features is not practically possible if you have a presentation to make. I do not think there will be any impact of this move on sales of Microsoft Office on OS X (for new Mac customers).

Life on iPad

16. With 170 million iPads sold. Apple is leading in tablet usage share and customer satisfaction ratings. I think we have just begun in this form factor but the iPad has already had a devastating impact on notebooks and PC sales. And they are definitely used more. My parents for one, see no need to power up the desktop/laptop at home now, with the iPad at their disposal.

17. The iPad Air and iPad Mini with Retina display are awesome. Making the iPad Air thinner, lighter and faster without impacting the battery life is MAGICAL. New colors were a nice touch, providing a physical differentiation to the new devices.

18. The last generation is sticking around, with a price drop. Not by much, but it breaks the psychological barrier of $300. And helps Apple cover more price points. New covers help beef up the margins.

18. The iPad 2’s perseverance in the lineup is very surprising. And it is the only iPad with a number against it. iPad Air, iPad Mini with Retina, iPad Mini and then there is iPad 2. And I believe atleast the dock connector on the iPad 2 could have been updated to ease cable hell.

19. The “Air” monicker is apt for use with the new iPad.

20. The fact that Apple has the same specs on iPad Mini with Retina and iPad Air, indicates that Apple thinks the customer categories do not overlap due to the form factor. They could have easily gone in for some harder differentiation, but chose to get all the latest chips across the range. This consolidation is a pretty good tell that something new is in the pipes. God knows what.

iPad Air TV Ad – Pencil

21. The new iPad Air ad is good. “Assembled in China” is conspicuous by its absence at the back.

That’s it! These are my observations from the event. What did you think about the event? Mention in comments below…

All images courtesy of Apple, Inc.

New iPhones

Its been a few days since Apple’s iPhone event. Apple introduced two new iPhones, 5C & 5S, and discontinued the iPhone 5.

Surprisingly, all the rumors related to fingerprint scanner, colors and even the names of the new iPhone were true. It looks like the Jobsian era of secrecy has come to an end.

Apple is the clear leader in the smartphone market, with over 70% of profits. With the new phones, the flagship model from the leader has just shed a cool $100 from the price tag, effectively bringing down the high water mark in the market. While Apple will recover the margins with a cheaper to manufacture 5C, iPhone 5S and accessories, Samsung will probably lose some market share from its Galaxy top range.

The new phones crown bluetooth as king for sharing and connections, making NFC’s mass adoption a distant dream now. When the leading provider does not carry the technology, its future is truly limited.

Cases and docks are once again in vogue for Apple. This will help Apple regain some lost margin. Cases are typically bought along with the phone. Even though the phone is cheaper, the overall impact considering the carrier subsidy, might be minimal. The phones are being launched in more countries, with Japan & China (not announced yet, but expected) being notable additions. This will add more volume in product distribution. Without a doubt we will see more iPhones sold this holiday quarter than ever before.

More money. Less impact on margins. I am going long on Apple.

I understand that from a portfolio perspective, the iPhone 5 had to be discontinued. People like to buy a newly released phone, and the new design preserves this notion even though the internals are all the same. Does this also hint at a iPhone 5X in the near future? Only time will tell.

iPhone 5C

Everybody agrees that the iPhone 5C is the new flagship model from Apple. It is the first one listed on the carousel at It is also the first one available for pre-order. This despite the fact that it is essentially one-year-old internals in a new plastic skin. Personally, I would have loved to see a darker blue or a blood red option in the colors available. Maybe Apple would release them later. White color looks all alone, without its usual friends black and grey. It is understandable that the black & grey might overlap with the colors from iPhone 5S, but the curves and glossiness is a good enough difference to offer black & grey colors for the 5C.

The iPhone 5C is still not a product for the prepaid or unsubsidized market. It is a product focused on the top rung. Apple as a company has always focused itself on the high end of the market. The subsidy system hides this fact very well, a fact corroborated with iOS’s high market share in the US. The cases get people who are either against glossy finish or like rubbery textures on board. The logo error is a rare mistake in design from Apple. I expect it will be fixed before the holiday season.

The 5C screen is the same as its predecessor. This might aid developers with app layouts, but probably points to Apple thinking the screen is good enough for most tasks. Apple customers are the carriers. I would not be surprised to see some more price drops on contracts, making them free on two year contracts. And you cannot offer cheaper than free. iTunes gift cards could also be used by various retailers to bring the price down even further.

iPhone 5S

The iPhone 5 is a very good phone. I use it everyday. iPhone 5S doubles its performance and sports a new camera. But this performance boost has to suffice till the next round of phones are introduced. Quad core was not mentioned anywhere. Apple must have realized the processors are not the bottleneck on the phone performance. The iPhone 5 was in a way over-serving the market, and there was no point in adding more power and over-over-serving it. This bucks the current trend on Android phones with more processing power, bigger screens and more megapixels on the camera.

The new technology on the 5S indicates what Apple has in store for future. 64-bit architecture, M7 chip, iBeacon and fingerprint sensor are features that will become more powerful with time. They hint at the overall plan Apple has with the iPhone. These features cannot be imitated easily by the competition.

The new tech also tells us how clueless other players in the smartphone market are, with the notable exception of Nokia. We have seen two apps running simultaneously, multiple user accounts, face detection etc, but nothing along the lines of what Apple has introduced in the 5S. “Forward thinking” tagline is a huge hint for things to come. The fingerprint sensor is a welcome advancement. Unlocking the phone is now easier, and more secure. Same with iTunes purchases. Because of password length requirements, this saves typing at least 8 characters for everyone. On colors, Gold was probably the only color option that could be introduced. It is expected to be a huge draw in certain markets.

The iPhone camera sees an improvement on the sensor front, cementing its position as the best camera on smartphones for a few more months. A few other software features like slow motion recording & burst shooting mode will keep things interesting for the casual shooters.

These are my initial thoughts on the phone launch. iOS 7 has a few tweaks since last seen. Apple has listened to the feedback and made the font a bit more readable. I am planning to update to iOS 7 on my iPhone 5 as soon as it is available. I will write about the new OS experience soon!