We live in a world of extreme noise. So many stories, and so many competing narratives vie for our attention that what rises above the noise is perhaps the closest proxy to actual truth.
With that backdrop, and without restating ad nauseam the numbers behind another blowout Apple quarter, let me state the truth about Apple’s March Quarter Earnings as I see it:
- It’s About Value: Every quarter, the prognosticators wait for the mythical other shoe to drop, be it the ‘inevitable,’ ‘unstoppable’ onslaught of Android, the depletion of fanbois, the resolve of carriers or the exhaustion of those who’ve yet to purchase an iPhone or iPad. But, on this topic, I would turn to the one quote that has swirled in my head continuously since I first heard it, and it’s from Ron Johnson, JC Penney’s new CEO, and Apple’s former head of Apple Retail, who says quite cogently that, “Customers will not pay literally a penny more than the true value of the product.” You can parse this any number of ways, but what it means to me is that when a consumer looks at an iPhone vs. an Android Phone, they see something real, that is supported, that is readily understandable and for which their investment will be rewarded. By contrast, with Android increasingly they grok that they are buying ‘Not Exactly.’ The efficacy of this truth is never more evident in the Tablet segment where, despite Android’s success in smartphones, and in spite of Apple’s clear proof that there is indeed a massive tablet market, Android Tablets are utterly stillborn. It’s about value, which simply can’t be smoke-screened. This truth is especially clear in the case of Carriers, who would no doubt love to reduce subsidies on iPhones (and other smartphones for that matter). But as Apple CEO Tim Cook sagely noted: A) The Subsidy is 'not that large' relative to the 24 months of revenue that the carrier is securing via subsidy; B) The Delta of the iPhone subsidy relative to other smartphones’ subsidy is not material; C) The Churn of iPhone buyers to other carriers is the lowest of any phone that the carriers sell; D) iPhone is the number one trigger for carriers upselling feature phone customers into smartphones – i.e., their largest untapped market; and E) Carriers want to sell what customers want to buy, and that’s iPhone. In other words for all of the puffery and noise about competition, commoditization, pricing pressure, etc., it’s fairly simple. Apple wins because its value is tangibly real, and for no other reason.
- It’s About Integration: I blogged on this point yesterday, so read that post, but suffice it to say Apple’s success is best understood by looking at how an iPhone or iPad integrates beautifully designed hardware with iOS, iTunes, App Store, iCloud, Apple Retail and App Developers into one unified set of outcomes and experiences. Then, contrast that with how Android doesn’t (or even the sluggish rate of innovation on the slightly more integrated Amazon Kindle Fire). Integration vs. DIS-Integration. It’s the distinction between the restaurant where the food, service and dining experience is orchestrated into a synchronous whole vs. the Mongolian barbecue, where the whole never quite adds up to the sum of the individual parts. I'll leave the digestive visuals to you.
- It’s Global: I think that the most YOWZA takeaway from the call was when Tim Cook talked about how Greater China has grown 3X year-over-year to $7.9 Billion on the most recent quarter (i.e., 20% of Apple’s total sales). Here Cook noted that there’s a massive, emerging middle class in China that (un) surprisingly aspires to the same products and experiences that consumers do in the US. For all of the easy quips about China being the land of knockoff imitation products, they want the same real products, and are willing to pay the real value for it. Apple has only brushed the tiny surface of this market, not just in China, and not just across the globe, but across industry segments (enterprise, education) and product categories as well (i.e., iOS is a scale-able platform for other types of devices, accessories and price points). In other words, the Apple 'halo' is global, and just getting started.
Mind you, that for all of the Apple accolades, the same company that grew earnings by 94%, that generated 77% of its revenue from iOS devices, which generated gross margins of 47.1% and which dropped another $14 billion into its coffers still trades at a mighty 20% discount to its gold-standard peers. Govern yourself accordingly.
Related Posts:
- DIS-Integrated Systems: A parable for acolytes of Apple, Google and Amazon
- It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Apple’s Q1 Earnings Call
- What is Apple Worth? The Gold Standard Thesis
- Is Google doubling-down on a losing hand with Android in Tablets?
