malvasia bianca

Over the last few years, I’ve become more and more interested in Apple from a business point of view. Some specific questions that I’ve been wondering about are:

• How is Apple going to defend and extend its place in the current phone ecosystem as the capabilities the iPhone provides become more and more mainstream?
• What’s the next area that Apple is going to be moving into?
• Are they going to stick with having their key product releases occur within a couple of months at the end of the year?

I tend to think about the first two of those through the lens of Christensen’s disruption theory: the first is the question of when their phone will be good enough and how Apple will react to that (and possibly the question of what the next disruption will be within phones); the second is largely the question of what disruptions will happen outside of phones/tablets. And the third makes me wonder from a lean point of view: a one year cycle time already seems a little long to me (though maybe not for major hardware—that’s the cycle Toyota works on, after all!), and Apple’s demand isn’t at all balanced within that cycle time.

And this year’s iPhone launch has gotten me thinking again about all three of these questions, answering them in different ways than I would have before the launch; so it is, perhaps, time for another installment my biannual foray into uninformed Apple punditry.

 

Before the announcement, I assumed that the 5C was going to start attacking the prepaid market in ways their current product line doesn’t: but, of course, it didn’t. Instead, it took their previous strategy of making the last year’s model available at a $100 discount, and made that model significantly more attractive. (Both from a purchaser’s point of view—the guts may be the same as last year’s 5, but the style is new—and (presumably, though probably to a less significant degree) from the point of view of Apple’s margins.)

So: Apple is still not addressing a large part of the phone demand as segmented by price. (Here’s an article written right before the announcement that gives a good example of thinking from that point of view. Though they did take one step in that direction: in China, they’re now selling three-year old phone models instead of just going back two years, bringing their floor price down to somewhere around $350.) Instead, the 5C announcement is about recentering the iPhone line: there are two variants instead of one variant plus old models, and the slightly cheaper variant is the more attractive one.

Here’s an article from Asymco about the 5C/5S split; I agree with Horace Dediu that this split signals that Apple thinks the iPhone 5 was good enough from a technology point of view, that the technology is mature enough in important ways.

 

This sets up an analogy with their Mac product line: we can think of the 5C as being like the lower-end Mac line (formerly MacBook, now MacBook Air), and the 5S is like the MacBook Pro. And, if I had to predict, I would suggest: Apple will switch to an iPhone price segmentation strategy that looks quite a bit more like the MacBook segmentation strategy than their current “sell old models” strategy. Right now, the two new phone models are only $100 apart (or only 20% apart, though the 5S also offers larger memory configurations that can increase that); that price difference too small to me, I expect that to grow in future years, perhaps with the 5C going down to around $500.

Given that, I don’t think that the “sell old models” strategy is going to be around for too much longer: it’s not the sort of thing that Apple does in their longer-established product lines, and I don’t think it will stick around here, either. Which brings me to the third point that I mentioned above: the product cycle timing. There was a very interesting post on Asymco last December called Does S stand for Spring?, suggesting that Apple might switch to a semi-annual release cycle; that has turned out not to be true (at least in 2013), but there was a lot in the post that made sense.

Having said that, I think it’s natural enough to accept that hardware refreshes for a single line won’t happen more often than once a year; the big problem from a level-loading point of view is having them all happen at the same time. So: why are they all in the fall? Because that’s the key buying / gift season, so you want to be selling your most attractive product then, which means it should be new.

And I think that reasoning continues to hold for the mainstream line (the 5C and its successors). It’s not clear to me, however, that it holds for the pro line (the 5S and its successors), however: that line is more target at people who want the latest and greatest from a technology point of view, and I don’t see any reason why that audience wouldn’t buy the phone whenever it is released during the year.

So: what if the S line moved to a spring launch, while the C line stayed on a fall launch? That would help level out the demand; and, from a technology point of view, it would also let Apple put a bit more room between price segments. Assuming the technology shifted in lockstep from the S down to the C (which I’m not convinced is the case), it means that the C would either be half a year or a year and a half behind the S; given that we’re entering the “good enough” phase, I think the latter would be much more likely. And, at a conversion rate of 1 year = $100, that means that we would have a $150 price spread between the two models: the C line could move down to a $500 price point (or potentially $450 if Apple wanted to shave margins), or the S line could potentially go up to $700. (Incidentally, I think the same sort of split and changed calendar schedule makes sense for the iPad as well.) And, with that wider gap, the need to sell older models diminishes.

 

That assumes that we stick with two lines, but I don’t expect that to be true in perpetuity. I wouldn’t be at all surprised if we saw a larger iPhone as an option in the next S launch: that feels entirely consistent with its hypothesized pro positioning. More interesting is the price gap beneath the C line: Apple could continue to fill that with older models, and I think they’ll do that for another year, but that strategy feels like it’s going to get harder and harder to fit into Apple’s positioning.

One option is for Apple to continue to not attack the cheaper market; that’s what they’ve done with the Mac, so it would be consistent enough. But it’s not what they did with the iPod; assuming they can find a way to carry it off without significantly decreasing profits in countries where non-prepaid sales mask the true product price, I think Apple will want to go cheaper.

So: when will we see a new, significantly cheaper product line? I’ll propose that we stick with the idea that the iPhone 5 is good enough, and that “significantly cheaper” means “at least $200 cheaper than the 5C”. (Both because a $200 difference will reach a much broader market and because it will justify significant product design differences.) If we put those two together, then maybe we’ll see a third iPhone product line two years from now: reusing a variant of the iPhone 5 guts yet again, coming it at around $350.

Putting this all together, here’s a picture that makes sense to me two years from now:

• A $300 line, probably released in the summer or fall.
• A $500 line, evolving from the 5C, probably released in the fall or summer.
• A $700 line, probably released in the spring.
• A larger screen variant in at least the expensive line, possibly also in the middle line.
• Similar differentiation and timing for the iPad, though probably with only two lines instead of three

 

That addresses the first and third of my bullet points above; what about the second one? Honestly, I have no idea; like everybody else, I expect something wearable and something TV-related to show up soonish, but who knows exactly when.

The 5C/5S launch didn’t shed any real light on that; but Tim Cook went out of his way to talk about how forward-looking the new products were. Assuming that we treat that seriously, I’ll once again follow Asymco and suggest that the M7 coprocessor is pointing in the wearable direction: its appearance in the 5S is mostly a sideshow. I have no ideas about what the new wearable product will look like, but I’d be quite surprised if the M7 or its successor didn’t play a prominent role in it.

Then there’s the A7 chip. It mostly feels like an obvious evolution—chips get faster, and even given that today’s products don’t benefit much from 64 bits, we’re only a year or two away from wanting the larger address space. But there is once product category that Apple might move into that could use a 64-bit address space right now: if a new Apple TV is going to make a serious play at attacking the traditional game console space, then more memory would be welcome. (Not my idea, though I can’t remember where I heard / read that suggestion.)

Having said that, while I do expect an Apple TV with apps at some point, I’m not convinced it will attack current game consoles quite that directly. (Though it might: right now, the Apple TV is priced like an iPhone accessory, so they may have to make it more expensive for an app platform version to make sense, and traditional games might be part of that.) Clearly Apple is going to disrupt the game console space, but they’re already doing that; I’m not sold on the idea of running games on your iPad / iPhone and streaming them to the TV (my personal experience with that has been quite unsatisfactory), but I certainly wouldn’t rule that out as the route for disruption to play out.

And it’s probably a sign that more chips are coming; I heard speculation somewhere recently (I can’t remember where) that voice processing was a natural next place for Apple to get a boost from custom silicon. After all, wearables, the TV, and car integration all need different methods from the iPhone/iPad, and an evolution of Siri is an input route that would work in all of those contexts. (Horace Dediu has made that point repeatedly on The Critical Path over the last year.)

So, if I were to move beyond the iPhone/iPad the vision of what the product line will look like two years from now, I’ll suggest:

• Some sort of wearable product, using something in the M7 family and potentially using still more custom silicon.
• Some well-thought-out solution for apps on the TV; I tend to think that a souped-up Apple TV with a 64-bit processor (and perhaps with custom silicon for voice input) is likely, but I’m honestly not sure.
• The former will be more surprising than the latter, but I would be surprised if I were wowed by either of them. Who knows, though; one point of disruption is that it’s hard to imagine in advance…