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Editorial

Despite Q2 sales dip, Apple's Macs, iPad and iPhone continue to outperform the industry

Over the past quarter, reports from all over have been belaboring the idea that Apple is on the edge of crisis because its iPhone sales--which represent the majority of its business--declined year-over-year and because China--its brightest growth territory--similarly turned in disappointing sales numbers across the board.




However, it's important to keep in mind that one quarter of iPhone sales data does not create a trend. Nowhere is that more obvious than in recent historical sales of Macs.

Macs have been eating up PCs



Apple's quarterly Mac sales have fallen year-over-year on a number of occasions since 2009, but the overall trajectory of Mac shipments has been upward, bucking the clear downward trend among generic Windows PC shipments.

Quarterly Mac revenues tripled over the last decade from $1.7 billion in Q2 2006 to $5.1 billion in the most recent Q2 2016. In contrast, PCs are back down below where they were in 2008; unit sales are just 20 percent higher than they were a decade ago, according to data from Gartner.

This is quite incredible given that Macs--with an average selling price of more than $1,200--are showing themselves both able to compete and able to increase their overall market share in a sea of commodity PCs that sell at ASPs closer to $350.

The generic PC business is performing so poorly that Apple's Mac shipments can go down for a quarter (as they did in Q2) and the company's overall market share still goes up. That's even ignoring the fact that Apple's Mac share is much more valuable, because it represents the high end (and therefore most profitable) segment of PCs.

Additionally, Apple's out-performance of the PC industry with its premium Macs isn't just a one quarter fluke; it has been maintained through varying economic and seasonal cycles very consistently over the last decade. It should not be assumed that a shrinking smartphone market will prevent Apple from increasing its sales and profits from iPhones

Not only has Apple has sustained a decade of growth in Mac shipments and profits within a collapsing PC industry, it has also simultaneously introduced a new Post-PC competitor as its PC competitors fail in both conventional PCs and tablets. This indicates that it should not be assumed that a shrinking smartphone market will prevent Apple from increasing its sales and profits from iPhones.

This is particularly true given the associated--and even more profitable--$20 billion annual Services business that Apple has introduced in parallel, one that the company's phone competitors have failed to create on their own.

Services is once of Apple's fastest growing and largest business segments. Apple's Services business alone is more profitable than Facebook. In Q2, Apple reported over $6 billion in Services revenue compared to the $5.38 billion in advertising revenue Facebook brought in. Apple's Services business was also more profitable, earning more than twice as much as Facebook.

New lyrics, same tune



Remember when PCs first experienced a year-over-year drop in overall sales? Marketing groups fell all over themselves to explain away the problem by assuring us that it was all a temporary blip that would be corrected by the release of Windows 7, then Windows 8 and then Windows 10. That went on for years, not just a single quarter.

Did anyone send out PR analysis predicting that the next release of macOS would incite demand for Macs? IDC and Gartner sure didn't.

Now that it is impossible to suggest that a new OS from Microsoft will somehow reverse the decline of conventional PC shipments, groups like IDC and Gartner have taken to claiming that new Surface hardware from Microsoft will rescue the PC in the form of "detachable" hybrid devices, even though Apple's own iPad Pro has similarly--and immediately, right out of the gate--outsold Surface Pro across its first two quarters of sales.

That's before Apple's new mainstream, lower priced 9.7 inch iPad Pro even went on sale. Apple's high end, 12.9 inch iPad Pro was the only model that's been available over the last six months, which indicates that most customers evaluating "detachables" actually did see more value in Apple's premium tablet than in the Surface, despite Microsoft's ad blitz and punditry claiming that iOS "isn't a real OS" and can't do real things.

iPad Pro



This even more noteworthy in the context of Mac growth outpacing other PCs, because most PC market analysts have stridently refused to even consider iPads to be "PCs," while they generally do count Surface and similar Windows tablets to be PCs.

Apple's computing revenues grew by 6x over the last decade



Not only has Apple increased its Mac sales dramatically over the past decade, but it has also cultivated a new Post-PC replacement for PCs that has grown to be equally as large over the past six years (iPad and Mac both generated over $11 billion over the last six months).

While iPads differ in some respects from conventional PCs, they are direct competitors for an increasing number of important markets ranging from education to the enterprise. It's obvious that iPads are indeed eating up former PC sales, and the latest iPad Pro models are only going to accelerate that trend.

Not only have Mac revenues grown by a factor of three over the last decade, but iPad sales have grown up in parallel, meaning that the non-phone computing devices that Apple sells (iPads and Macs) have grown over the past decade by a factor of nearly six: $1.7 billion worth in Q2 2006 to $9.5 billion in the most recent Q2.

... while PC revenues have collapsed



And that's Apple's computer-based revenues, not unit shipments. PC shipments are up just 1.2 times over the past decade, but PC ASPs have a collapsed in half over the last ten years, meaning those 1.2x shipments have actually generated revenues that are only 60 percent as much as they contributed a decade ago.

That means Apple's "computing device" revenues have grown by an order of magnitude greater than the rate of all other PC makers combined: 6x vs 0.6x. It also highlights the fallacy of focusing on unit sales rather than profits, because unit sales that don't generate profits are just busywork. Ask Nokia, HP or Samsung.Apple's "computing device" revenues have grown by an order of magnitude greater than the rate of all other PC makers combined

It's telling that nobody in the industry has had any interest in advertising this reality, and instead have generally focused upon the ideas that Apple's Macs are barely in the top five PC in terms of shipments, that iPad shipments are down from peak levels before the release of the larger iPhone 6, and that iPad market share is down because of an estimated explosion of tablet production occurring in Asia, even though those Android tablets are not generating any revenues for anyone and they curiously aren't showing up in anyone's weblogs.

In other words, pay no attention to the hardware maker that is consistently growing and incredibly profitable, and instead focus upon generic platforms that are maintaining "market share" of shipment busywork, even though Windows revenues are collapsing among plateauing PCs and Android earns nothing for its global network of tablet makers.

These same sources then claim that while Apple teeters on irrelevancy with sales of 4 million Macs and 10 million iPads in a quarter, the PC industry will be saved by Microsoft selling 1 or 2 million Surface hybrid devices every three months.

That's exactly what IDC and Gartner are saying, and tech blogs are eating it up without criticism, even though these groups are regularly dead wrong in their analysis.

iPhones are eating up Android



Like Macs, iPhone has experienced a similar run over the past several years, maintaining exceptional growth while even incrementally raising ASPs. That's not entirely just from developing all-new markets for iPhone, but also comes in part from eating into generic Android smartphones by convincing users to switch at a pace that is hard to explain away.

Once again, the majority of "market researchers" have incessantly worked to portray Apple's iPhone as slipping in market share, without ever acknowledging that no other smartphone maker sells any comparable number of premium smartphones at anywhere close to Apple's profitability.

Take Samsung, which has been portrayed for years as being roughly equal to Apple in terms of product while selling much higher volumes of devices: 81.9 million smartphones in the most recent quarter compared to Apple's 52.1 million, according to IDC estimates.

That sounds impressive until you look at the profitability of Samsung's entire mobile IM operations (which like Apple also includes PC, tablet and other consumer device sales). Apple earned over four times as as much as Samsung IM in the quarter. Clearly those 81.9 million Samsung phones are not high end Galaxy S7 models selling at iPhone 6s like prices.

Revenues are far more important than shipments



The rarely spoken truth is that Samsung only shipped about 9 million premium Galaxy S7 phones out of 81.9 million total smartphones in the quarter, or roughly a fifth of Apple's iPhone sales.

Most of Apple's smartphone sales are its latest model, but even the company's entry level iPhone 6 and 5s were sold at prices much higher than Samsung's overall average price of about $250 (and that's including its premium, iPhone-priced Galaxy smartphones). Even Apple's new low priced iPhone SE, which began selling after the quarter ended, will sell for almost double that of Samsung's ASP.


iPhone SE


Recall that at its peak, Samsung's premium Galaxy and Note models only represented about 1/3 of its smartphone shipments. But when iPhone 6 appeared, erasing the value of Samsung's bigger handsets, its premium sales collapsed in half and its mobile profits tumbled by 73.9 percent.

Samsung's resulting, much smaller proportion of premium handset sales has remained in place because the company has scrambled to dump cheaper handsets into the market to maintain market share and unit shipments. That's why its profits haven't recovered even though its unit sales have remained high.

The fallacy of focusing on smartphone shipments rather than profitability resulted in wildly misplaced enthusiasm for Nokia, then Motorola, then Samsung and then Xiaomi, even as Apple has been denigrated for "only" selling some minority percentage of all the world's smartphones.

Yet over the past decade, Apple has clearly profited the most from smartphones. And moving forward, Apple is best positioned to grow within both the PC and smartphone industries than its competitors, which are now weaker than ever.

Apple's competition is so anemic that only unflattering comparison one can make is to contrast Apple's 2016 performance against Apple 2015, rather than the performance of any of its real competitors.

Popularity vs desirability



If Apple were actually facing pricing pressure from Android makers like Samsung, it wouldn't be able to sell five times as many premium smartphones every quarter, as well as more premium smartphones than the total number of basic smartphones flogged by each of the currently leading Chinese vendors, Huawei, OPPO and vivo, not to mention former favorites like Lenovo and Xiaomi that currently sell fewer than 14 million phones in a quarter.

The only way to suggest that Android is actually rivaling Apple's iOS--rather than just serving as an onramp that merges Android switchers into Apple traffic--is to speak of Android as a composite platform of aligned competitors, even though collectively, Android licensees are failing to make any money as Apple continues to inhale the vast majority of the industry's profit.


Android is a feeding tube for iOS. Source: Ericsson


Android is "more popular" than iOS only in the sense that Communism is "more popular" than free market capitalism just because the population of Russia and China lead that of the West.

However, there's a reason why expecting affluent Chinese mothers routinely travel to San Francisco to give birth, while Americans rarely attempt to switch their citizenship to China. Like Android, Communism is popular in terms of representative units but not popular at all among individuals with the mobility and freedom to choose what they actually want.

This all happened before



The idea that Apple's iPhone faces certain doom because of competing shipments and flattening sales is not new. A decade ago, certain pundits were claiming that because Apple was now the "iPod company" it should just dump the Mac. Since then, Mac revenues have grown 600 percent.

Another take on doom related to iPods was the 2005-era prediction that MP3-playing smartphones would eat up all demand for a standalone music player, destroying Apple's core profit center.

In hindsight, it's spectacularly bizarre that these people didn't consider that Apple might create its own smartphone. And of course, once Apple did--and it was a much smaller Apple back then--the phone industry began a rapid implosion and turned into a funnel that ultimately channeled 94 percent of its profits to Apple's new iPhone ("the best iPod ever," as Steve Jobs remarked).

A couple years later in 2008, a brief flurry of low end netbook sales caused punditry to demand that Apple sacrifice its premium Mac business and begin building cheap, chicklet keyboard Mac netbooks for $300. Instead, Apple introduced iPad in 2010 and began developing two computing platforms in parallel, each of which became the top seller of premium laptops and tablets. Netbook sales imploded.

A couple years later, pundits insisted that cheap 7 inch tweener tablets from Blackberry and Android licensees would kill the iPad. Apple introduced its own iPad mini, and immediately took over all profits in that category. Today, nobody--not even Samsung with its mile wide array of different tablet offerings--sells as many tablets as Apple.

A couple years later we were assured that big screen fablets would suck attention away from iPhones. Yet in 2014, Apple's 4 inch iPhone 5s continued to outsell big screen phones from Samsung, HTC, Motorola and others. And once Apple introduced its own larger iPhone 6 models the next year, Samsung and other big-screen pioneers saw their unit sales plummet into the basement, never to recover to their former shipment volumes.

At the same time, pundit chatter regarding Apple's "lack of innovation" suggested that the company was missing out on the wearables market, where Google, Samsung and others had spent years trying to introduce Android Wear and Tizen watches to a skeptical audience.

Apple Watch appeared and instantly obliterated its competition while generating billions of dollars. Other smartwatches haven't gained any real traction at all.


Apple Watch has no ad banners


Apple's consistent ability to "fail its way to the top" should create some skepticism of the current outlook of pundits who are today scribbling up three stories per day gravely reminding us that iPhone sales in Q2 were below those from the previous year, and interpreting this to mean that Apple is falling down a rabbit hole of doom and deserves a valuation less than Google, the company who actually did commercially fail at MP3 players, failed at Nexus, failed at netbooks, failed at tweener tablets, failed at fablets, failed at big tablets, failed at detachables, failed at wearables and doesn't have Apple's $20 billion Services business. Last year, Google's mobile search and display ads brought in less than $10 billion.

But unlike Macs, iPod, iPhone and iPad, Google's ads won't ever go away, right?