Skip to comments.How Many Laws Did Apple Break?
Posted on 02/09/2015 8:16:36 PM PST by Swordmaker
Apples 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 74.5M, + 57% over last years same quarter. iPhone revenue was $51.2B, + 57%. Thats 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 Im not holding my breath.
Overall company revenue grew 30% to $74.6B, 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): $18B. 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 ten list five times since Q1 FY 2012.
(The Wikipedia article on record profits and losses has Fannie Maes $84B in 2013 in the #1 spot, but Fannies categorization as a Government-Sponsored Enterprise puts it in a different race not to mention the $77.8B and $64.2B losses in Q4 2009 and Q4 2008 respectively.)
Cash: After generating $33B from operations, the company now holds $178B in cash and cash equivalents. To get a sense of the magnitude of this amount, $178B 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 Apples economy to those of various nations.
If youre hungry for more Apple numbers, I suggest you feast your eyes on Apples 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 Apples doings.
We have academics spewing sonorous nonsense under the color of authority, such as Juan Pablo Vazquez Samperes We Shouldnt Be Dazzled by Apples Earnings Report, published in the Harvard Business Review. Sampere, a Business School professor, finds Apples 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 wont 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, an 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 hasnt 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, Its Time To Admit That The Company Is Blowing It. One of Henrys points was Apple prices were too high. Its getting worse: Last quarter, the average price per iPhone rose to $687.
We now turn to law-breaking.
Law 1: Larger size makes growth increasingly difficult.
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 weighs $10M, growing by 50% means bringing in another $5M. If your company weighs $150B, 50% growth the following year would require adding $75B there might not be enough customers or supplies to support such increase. Actual numbers seem to confirm the Law: Googles FY 2014 revenue was $66B, +19% year-on-year; Microsofts was $87B, +11.5%; Apples $183B 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 $51B 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 $37B to $40B in sales, more than half a Google, and a little less than half a Microsoft.
Law 2: Everything becomes a commodity.
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.
Were told that this is just a form of Stockholm Syndrome, the powerless customer held prisoner inside Apples Walled Garden. Not so, says 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 Apples 70% revenue growth in Greater China, a part of the world where, in theory, cheap clones rule.
Law 3: Market share always wins.
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 other symbionts 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.
Well As Horace Dediu tweets it, Apples loss to Windows hasnt hurt too much:
Apple has gained PC market share in all but one quarter over the past eight years thats 31 out of 32 quarters.
But even that impressive run isnt 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). Apples minority unit share in the mobile sector (13% to 15%) captured 90% of mobile profits this past quarter.
Small market share hasnt killed the Mac, and its not hurting the iPhone which enjoyed a much happier start than the Mac.
Law 4: Modularity Always Wins.
This is one of Clayton Christensens worries about Apples 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 didnt kill Apples 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 400M units 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 Apples 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 Apples truly stupendous growth and, in the end, it always wins. No business can grow by 20%, or even 10% for ever.
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 arent 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 well 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?
Depends on how many new “laws” the administration has just cooked up that now show Apple “broke the law”.
Make some new laws to make Apple a lawbreaker.
They’re gunning for their overseas assets. Them and a lot of other companies.
I see they are not discussing govt laws. My bad. What I said though, off-topic, is true.
If you want on or off the Mac Ping List, Freepmail me.
Yes, it is. They tried to accuse Apple of Tax evasion in 2013. . . and even hauled them before the Senate claiming they paid no US Income taxes in 2012. Only it turned out they had actually paid more US Income taxes than any other corporation and 1 out of every 40 dollars every business paid in taxes in 2012 had been paid by Apple.
We don’t know...
Obama’s not through outlawing free enterprise yet.
With all of the FCC’s new fascist restrictions via “net neutrality”, we can expect apps, content, and software development to be strangled.
By Jean-Louis Gassée.
Seriously? The guy who just about killed Apple? Smacks of sour grapes.
Gassée is up there in the pantheon of Great Apple CEOS including Sculley and Amelio. That trio is the reason we dumped our Apple stock at 16 to salvage something.
They’re talking about economic and business theory ... the “theoretical laws” regarding that ... :-) ...
Interesting article. Apple has been the exception to the rule throughout its life. It is founded on different philosophical principles, but plays according to the same economic principles, as all other companies.
But those philosophical principles make for decisions that are unexpected in "traditional" business "laws".
I can't understand why people are surprised that a business that exists for the high- and mid-high end consumer market isn't ruled by the "laws" that were developed to explain the commodity market. Big "D-uh"!!
meanwhile, what were comments #2 and #4? Some nasty troll? or dupe posts?
No, it’s not sour grapes, but “praise” of Apple.
From past experience on these Apple threads, my money is on it being a troll ... :-) ...
Yeah, sadly that's probably the case. If so, I'm glad to see the Mod took them out. Too often the trolls and Apple haters get to trash the Apple threads with impunity.
I appreciate Swordmaker's resolve in continuing to bring these matters to our attention. As our economy continues to suffer under the oppressive, failed thumb of Obummer's criminal administration, it's instructive to see how an American company manages to thrive.
It's a lesson I wish more American businesses would take to heart. We have a hard enough time turning this Great Nation around; we could use the help of more successful American businesses.
For sure, Apple is a shining example.
Oh, #2 was my ping in which I made a humorous (I thought) comment about who might come running to this thread and what they might say. . . it was not appreciated by someone and the Admin Moderator agreed and sent it to Freeper Neverneverland. So I posted a more Caspar Milquetoast ping. . . #4 probably proved me correct.
Don’t worry Sword. The FUD Packers will be here. Moths to a flame type of thing.
Well, we needn't hyper-anticipate the predictable barrage from the trolls and haters. They are who they are, they'll be who they'll be. They're easy enough to ignore, and they usually eventually give up.
Anyway, thanks for posting this. I've always thought a lot of Jean-Louis Gassée, as the guy that brought BeOS to existence. There are days when I wonder what OS-X would have been like if BeOS had been chosen as the undercarriage instead of NeXTSTEP. I played with BeOS years ago, it was pretty neat.
BTW, what is it about the letter "e" that makes companies lower-case or subscript it:
BeOSAre we looking at the fingerprints of the Illuminati or something here?
If only they would incinerate themselves in the process... Maybe we could convince them of a glorious life-after-flame-out :)
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