Apr 2016 – Naofumi Kagami

How Large Can Apple’s Services Grow?

In a recent post, I discussed that Apple has to grow outside of tech to continue growing. I also mentioned that the reason why Google and Amazon continue to grow is because, although they are tech companies, what they are selling is actually non-tech products to non-tech audiences (they are selling stuff like advertising slots, books and diapers).

So even as we see Apple’s services growing at 20%, and that it makes more money from services than from Macs, I think the more important trend to look for is how much they are positioned to earn from non-tech products.

To clarify,

Sales from the App Store are nice, but we have to be aware that the vast majority is from games, and most money comes from a small number of “whales” (online game junkies). It is overly optimistic to expect this segment to continue 20% growth in the mid-term. More likely, we will see a flattening of growth from games and maybe a slight increase do to healthy growth of the non-game segment (which will however not contribute too much to the total).
Music is unlikely to grow rapidly.
Other cloud business (probably mostly additional iCloud storage) may grow rapidly for a short time, but few people really need Terabytes of storage, and prices are likely to drop heavily with competition.
Apple Pay is more interesting because people might use it to pay for all kinds of stuff, including non-tech stuff. It is easy to envision Apple Pay being used to purchase advertising slots, books and diapers for example. We know that VISA has revenues of almost 14 billion USD (and obviously, from its business model, a lot of that is profit).

In summary, to understand the growth potential of Apple’s services, I think it is important to look at the non-tech markets and to see how Apple could add a thin layer of their services on these. Apple Pay is a typical case, but I would not be surprised if they decided to play a more direct role in e-commerce, for example. In the long term, I expect that these will be the main contributors to Apple’s service revenue, not the App nor Music stores.

Update

Matt Richman has done a similar but much better analysis of the non-tech service opportunities for Apple.

Is India Really The Next Big Opportunity In Tech

A lot has been made about how important India is to tech, and what a big opportunity the 1.2 billion population is.

While that maybe true, I think it is also important to contemplate the possibility that this may not actually be the case; that despite its huge population, India may not yet be an attractive investment.

Rakuten Ventures had this to say at Tech in Asia Singapore 2016.

While India has a population of 1.2 billion, there are only about 40 million to 50 million people who actually have “real” smartphones – and not those weird Android permutations – and who are at least in the middle class, earning about US$10,000 a year.

If you’re looking at ecommerce alone, you’re talking about a demographic that has been shrunk from 1.2 billion to 40 million or 50 million. That’s basically the addressable market […] For us, when we look at a market, we ask ourselves: ‘Can we get in at the price point we want? Can we actually see a lot of these platforms accrue the value that they want?’ We don’t see that yet.

Objectively, the International Monetary Fund puts India’s GDP per capita for 2015 at 6,162 international dollars, which is less than half of China’s at 14,107. While obviously growing quite quickly, it isn’t necessarily growing that much faster compared to other countries with similar absolute levels. Although macro data obviously does not tell the full story, it does support Rakuten Venture’s view to a certain extent.

If we do accept Rakuten Venture’s view that ‘while India has a population of 1.2 billion, there are only about 40 million to 50 million people who actually have “real” smartphones’, then it does seem like other markets which aren’t receiving as much hype, might actually hold larger potential.

I think this is something worth thinking about. It might be more important to look at metrics of usage like Web usage or Twitter usage to understand how many people do have “real smartphones”, or use the ones they have as such.

iPhone SE Early Statistics

We now have some early statistics on iPhone SE sales in Japan from BCN Ranking. Note that BCN Ranking only provides data from their partners, which include Amazon and major retail outlets, but does not include the Apple Store for example. Also note that the current data is for the March 28th to April 3rd time period whereas the iPhone SE was only released on March 31st.

For clarity, I am only listing iPhones, and I am listing by carrier.

The interesting observation is that unlike the iPhone 6s where the 64GB model sells better than the 16GB model on all carriers, the reverse is true for the iPhone SE; on all carriers, the 16GB iPhone SE model sells better than the 64GB model. This suggests that iPhone SE users intend to use their phones more casually, and are more driven by price. Importantly, we have to understand that the data is only for the opening weekend which is typically skewed towards early adopters, who we would expect to prefer higher capacity models. It seems that the trend for iPhone SE users to be casual owners might be very strong.

Of course, we do not know the product mix of the items in stock, so this might simply be a result of inventory skew. However, assuming that this trend holds true, then we can make the following tentative conclusions;

The iPhone SE appeals more to users who are more considerate of price, and who do not intend to use their smartphones very heavily.
These users would typically only replace their current smartphones after they have completed their 2-year contract. A strong opening day turnout of this segment suggests that these users were holding onto old phones (either old iPhones or Androids).

This is an interesting dynamic.

As we get more data, we should be able to make an assessment of the popularity of the iPhone SE relative to other iPhone models and to Android phones. Given that the majority of smartphone users are not techies nor social media junkies but plain ordinary citizens, I tentatively expect quite strong performance.

Update

The data for the first full week of sales in Japan (Apr-4 to Apr10) are now available on BCN Ranking, and I have used the new data to plot a chart.

We see the same trend as the opening weekend that I previously discussed in the above post. However, with the improved visualisation, we can see some additional points.

The 16G iPhone 6s actually sells quite well on all carriers. Techies have ridiculed the 16G model as not having nearly enough capacity. While that may be true in use, many of the people who purchase even the flagship model do not seem to care. However, users of the iPhone 6s Plus model do seem less eager to purchase the 16G model.
The iPhone SE clearly skews heavily towards the 16G model, and as I have said in the above article, this suggests that current iPhone SE buyers are more price conscious, and do not seem to be heavy users of smartphones. The new chart shows that this trend mirrors that of the iPhone 6. Hence it looks like the segment that purchased the one-year-old iPhone 6, is similar to the segment that has purchased the iPhone SE so far.

Considering that the iPhone SE (16G: ¥52,800) is significantly cheaper that the one-year-old iPhone 6 (16G: ¥74,800) and that both are probably attracting the same price conscious buyers, we can expect iPhone 6 sales to rapidly decline and be picked up the the iPhone SE. Of course we can also expect an acceleration of Android users switching to iOS.