Posted on 02/09/2015 8:16:36 PM PST by Swordmaker
Apple’s 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 year’s same quarter. iPhone revenue was $51.2B, + 57%. That’s 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 I’m 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 Mae’s $84B in 2013 in the #1 spot, but Fannie’s 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 Apple’s “economy” to those of various nations.
If you’re hungry for more Apple numbers, I suggest you feast your eyes on Apple’s 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 Apple’s doings.
We have academics spewing sonorous nonsense under the color of authority, such as Juan Pablo Vazquez Sampere’s We Shouldn’t Be Dazzled by Apple’s Earnings Report, published in the Harvard Business Review. Sampere, a Business School professor, finds Apple’s 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 won’t 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 hasn’t 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, It’s Time To Admit That The Company Is Blowing It. One of Henry’s points was Apple prices were too high. It’s 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: Google’s FY 2014 revenue was $66B, +19% year-on-year; Microsoft’s was $87B, +11.5%; Apple’s $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.
We’re told that this is just a form of Stockholm Syndrome, the powerless customer held prisoner inside Apple’s 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 Apple’s 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, Apple’s loss to Windows hasn’t hurt too much:
Apple has gained PC market share in all but one quarter over the past eight years — that’s 31 out of 32 quarters.
But even that impressive run isn’t 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). Apple’s minority unit share in the mobile sector (13% to 15%) captured 90% of mobile profits this past quarter.
Small market share hasn’t killed the Mac, and it’s not hurting the iPhone — which enjoyed a much happier start than the Mac.
Law 4: Modularity Always Wins.
This is one of Clayton Christensen’s worries about Apple’s 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 didn’t kill Apple’s 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 Apple’s 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 Apple’s 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 aren’t 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 we’ll 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?
Isn't this the Law of Diminishing Returns ?
No, that's a different law. This is the law of large numbers. The law of large numbers says that to double the size of a business that is doing $100 you in $1 widgets only have to sell 100 more, but to double the size of a $10,000 business selling $1 widgets, you have to sell 10,000 widgets, a much harder proposition. The larger the first number of your large company, the harder it is to increase the size of the company. Apple broke that this last quarter.
The Law of diminishing returns applies to adding a single factor that in the microcosm may increase returns but as you increase that factor may not continue the pattern. For example, growing crops requires water. . . adding more water may give more crops or better crops. . . but too much water will give diminishing returns until you kill the crop. Another example is Oxygen. . . O2 is necessary for life. . . and if you increase it, vitality will increase. However, increase it too much, vitality will decrease until you reach a point where too much O2 is poisonous. Diminishing returns can be applied to inflation as well. . . if you subscribe to the pump priming of the Federal Reserve. A little inflationary oil in the economy is necessary to provide the currency to absorb the increased production of new goods and services. . . but too much can eventually kill value of the monetary supply. Diminishing returns.
I kinda figured with the title of the article and thread, this would be like waving a red cape in front of a bull. . . LOL!
I think it has to do with the mathematical concept of e more than anything. It's Napier's or Euler's Constant. . . it's an irrational number almost equal to 2.7182818284590452353602874713527. . . and so on, and on, and on. . . like Pi only for logarithms. (1 +1/n)n approaches e as n gets larger. It's a very geeky number, just the thing geeks would tend to put in their logos. Especially in Ne, as a pun on that formula, and a gas that glows when excited.
Are you referring to the Rodent of ObamaCare?
If so, that would be Jon Gruber, not John Gruber, who, it seems, is just a harmless computer hacker.
It's a reference to a subatomic particle which began to get really interesting in about 1906, when Lee De Forest invented the triode, a gadget for switching streams of submicroscopic e's, with the aim of transmitting information over long distances. It's been an upward trajectory ever since.
This seems to me ill posed.
It seems to me the proper question is the marginal return on investment. The law of diminishing returns says that it costs more to sell ONE more widget per day, say, if your selling 10,000 per day, than if your selling 100 per day.
No, you've got it backwards. Cost of sales per widget on 1 widget when you are selling 10,000 is probably a lot less than if you are selling only 100. That is economy of scale. Overhead for operations can remain the same. . . as the number of widgets increases, thereby the cost for overhead per widget goes down.
Ah, yes... I once knew a Hawaiian girl named Nene, who glowed when excited. She was a gas. :)
The cost to DOUBLE sales is far more expensive when you are selling 10,000 widgets, than if you are selling 100 widgets, not to just sell one more widget. There is where you are making your error. trust me.
Ah, but it was not until the invention of the pentode ("e" being the fifth letter of the alphabet) that the transmission trajectory really took off. Numerous valve vendors repackaged their pentodes as tetrodes (a smoke-screen, especially if you took the screen above its rated voltage). The pinnacle of this technology was reached with the 807, which forced the anode to move to the top of the envelope (whence the term "pushing the envelope"). The "e" particles were never higher than in that fine component's plate cap.
All kidding aside, many years ago I had an RCA audio theater amplifier that used four 807's in AB push-pull-parallel. It was awesome.
Hmmm. The Wikipedia article on Diminishing Returns uses the example of adding workers to a factory, consistent with your statement. But what about building more factories? According to the “workers per factory” concept, there should be no problem with filling the earth and the entire solar system and galaxy with factories, but adding factories to the earth is like adding workers to the factory, is it not? There is always a saturation point.
However, to double your patient load to 2000 patients, you will have to increase your advertising, patient outreach, really up your game. . . and it may actually cost you a lot more to get to 4000 patients in advertising costs. However, your office expenses don't necessarily go up to service those patients. However, your per patient cost to bring them in the door went up to $250 because of the increase in all the effort you put in to double your patient load. Cost to get that extra 1000 patients was $250,000 . . .
One patient = $200 and little effort.
1000 patients = $250,000 and a lot of effort.
Do you see?
Now suppose you only had ONE patient. It still costs $200 to bring a new patient in the door. But you DOUBLED your patient load for $200. . . and you can perhaps do it in one day.
If you had 1000 patients, it would cost you $250,000 to DOUBLE your patient load. . . and it may take you a year or two.
That's the law of Large Numbers.
Then you have to look at the ability of being able to supply the factories with raw materials. . . law of diminishing returns. At some point you will run into it.
BAAANNNNNKKKKK! I am Doctor of Philosophy! In Physics! As I explained some years ago on this forum, this was an appellation assigned to me by a coworker, circa 1980, which was meant as a sort of a dig, but I liked it.
One patient = $200 and little effort.
1000 patients = $250,000 and a lot of effort.
Do you see?
Yeah, I see! $200/patient vs. $250/patient ... the Law of diminishing returns as expressed in patients per dollar !
Only because you have to put more effort to DOUBLE. Each patient will be easier to get when the office gets larger because word of mouth grows. . . but the law of diminishing returns hits when the doctor's time gets too saturated to do a good job with each patient and they stop coming so billable visits go down. . . and patients flee to other offices. Diminishing returns.
The basic point is that it is easier and cheaper for the small office to double its business than it is for a large one to double its business. However a large business gets to take advantage of economies of scale in sales of widgets. . . but not necessarily on advertising. But advertising to bring in patients is NOT what a doctors' office is selling and is not what their sales are based on. THAT is billable services. Getting patients, customers, is a cost of doing business to sell services. Overhead. Patients are not the product.
That is actually true. . . the low hanging fruit is cheaper to get, then it get's more expensive to get more. The first patients might only cost you $1 per patient (the cost of handing out business cards) and the last few might cost you $1000 per patient (Expensive banquets for specific procedures in which you dine 10 and get 1 patient signed on). However, the law of large numbers still applies in that getting from one patient to two is a hell of a lot easier than getting from 1,000 to 2,000. , but BOTH movements in numbers are a doubling of patient loads.
E.g., around the time De Forest invented the triode, Reginald Fessenden was inventing AM radio. "AM" stands for "amplitude modulation", wherein you vary the strength of a radio signal to conform to a wave form from an audio source.
Fessenden's solution to the modulation problem was admirably brute-force: Generate a radio signal using a really fast (and heavy) alternating current generator and modulate the generator's output with a water-cooled carbon microphone!
In 1904, he got his alternator from General Electric. It was a 50kw model, designed by Ernst Alexanderson, operating up to 100khz. It was more powerful and a lot quieter than the spark-gap contraptions he'd tried earlier (with limited success, however). And, on Christmas Eve, 1906, it sufficed to produce the world's first AM radio broadcast.
De Forest's invention paved the way both for better ways to generate RF and better ways to modulate it.
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