Guess which word Apple CEO Tim Cook said five times on his earnings call last night? (And it’s not an Apple brand name.)
Before I answer that question — and explain why it’s so interesting — you’ll need the context:
Apple stock fell off a cliff today as investors decided that the blockbuster iPhone 6 sales announced by Cook last night were the peak for Apple, and that there would only be tougher times ahead.
This is what Wall Street analysts call the “comps” problem: The better Apple performs now, the harder it becomes in the future to show more growth. The comparable numbers — “comps” — get worse, and that makes investors sell the stock.
That’s what happened today: AAPL was down 2% at the time of writing on the back of a bunch of analyst notes warning of “tougher comps coming”, as the folks at Wells Fargo put it.
These analysts are probably wrong.
Here’s why: They didn’t listen to what Cook was actually trying to tell them on the call last night.
Dawn of the “switchers”
On the call, Cook said the word “switcher” five times, unprompted and not. The word has become a recent obsession of Cook’s over the last few earnings calls, and I have charted their growth in this little ranking:
No. of times Tim Cook says the word “switcher” on recent Apple earnings calls:
- Q3 2014: zero
- Q4 2014: one
- Q1 2015: three
- Q2 2015: five
Cook said “switcher” or “switchers” five times on his earnings call last night. He is talking about people who are buying iPhone 6 after switching from Google’s Android phones. There are three main sources of new iPhone 6 buyers for Apple. Old customers re-upping into new iPhones, new customers, and Android “switchers.”
Three places Apple will get growth that it didn’t get before
What the “tough comps” crowd didn’t note from the call last night is that all three of those sectors are currently on fire for Apple:
- Only 20% of Apple’s existing iPhone customers have bothered to get an iPhone 6. That means iPhone still has 80% of that market to grow into.
- Apple is now selling more phones in China than it is in the US. That is staggering: Apple has basically just added another America into its business model — and this America is much bigger than the old one and growing much faster! The iPhone has gone from nowhere to become the No.1 brand in China in just a couple of years.
- New customers will be on-boarded from both the Apple Watch (a lot of people will receive them as gifts) AND from Apple’s enterprise partnership with IBM, which most people — and a lot of Wall Street analysts — don’t understand very much about. The Apple-IBM deal involves supplying companies with custom-made iPad apps. It is complicated. But it is not until you get a look at the project with your own eyes — as I did recently in London — that you realise just how massive that new business could be. It is going to lock a whole new generation of employees into Apple products. Oddly, most Wall Street analysts have very little to say about it.
Cook announced a new record for Android losses
Those factors will overlap and reinforce each other. Chinese iPhone buyers will want Apple Watches. IBM partners buying iPads will end up needing iPhones. And the existing customers who have yet to upgrade will want all of the above.
It was illuminating that Cook last night went into some depth on the matter of switchers and Chinese iPhone buyers, and why he thought they were a big deal: “We continue to see a higher rate of switchers than we have seen in previous cycles, and so we’re extremely excited about that,” he said last night.
On the previous call, he had said, “The current iPhone line up experienced the highest Android switcher rate in any of the last three launches in the three previous years.”
Taking him at his word, iPhone 6 again appears to have put up another record for persuading Android users to drop their Google phones and come to Apple.
iPhone 6 is fundamentally different from previous phones
Business Insider has been arguing for a while that iPhone 6 is fundamentally different than previous iPhones, in terms of its effects on the market, and because of that Apple now represents an existential threat to Android when it previously did not.
Briefly, the logic of that argument is that historically Apple was content to take the top 15% of users – the richest, most lucrative users on the planet. The people who could afford to pay $US700 for a phone. Android got the rest, and on most of the planet Google’s phones have about 80% of users. The division of the market seemed logical and stable: Apple got all the profits from the richest users; and the Android makers made money by selling much larger quantities of phones at lower margins.
But since iPhone 6 was launched, Apple has dramatically added market share for its iOS phone platform. It is now No.1 in US and China, and is threatening to become No.1 in Korea, Samsung’s stronghold. All the signs are saying that Apple isn’t just creaming off the rich, it is taking market share in the middle classes and among the poor.
Benedict Evans: a “shot in the back of the head to Android”
I asked Andreessen Horowitz partner Benedict Evans about this today. Is Apple interested in taking Android market share? He said (and forgive me for vastly truncating his answer here), “[if Apple entered the] mid-range it could be another shot in the back of the head to Android. But it’s not clear Apple has to do that.”
So what did Cook say on that topic? Android and China “screams” opportunity because Apple wants to go “beyond the middle class”, globally:
There’s a lot of people that haven’t upgraded to a 6 and 6 plus. And so as I look at that, it screams that there’s significant opportunity there. And that’s before thinking about switchers and first time buyers.
… [on growth in China], it’s clear to me that it has to be coming from the middle class, because the upper income earners, there’s only so many of those. And you can’t grow those kind of numbers without getting significantly into the middle class. And so I think that’s where we are. I hope we’re also beyond the middle class, but I don’t have the data to suggest that that’s the case or not the case. But it’s clear to me that the middle class statement has to be true.
“Beyond the middle class” is Android’s territory.
The switchers will take care of the comps
China, until a year or so ago, was virtually 100% Android territory. Apple didn’t even have a store in China until 2008 and only expanded aggressively there after 2010. This is what Apple can do when it wants to.
Which is why I believe Cook’s new enthusiasm for Android “switchers” is going to make the iPhone 6 sales cycle radically different from the iPhone 5/iPhone 5S cycle, which crushed AAPL when those comps did indeed make Apple look like it had run out of steam.
In the iPhone 5S cycle, Apple didn’t have China, didn’t have the iBM-iPad partnership, didn’t have the watch, and wasn’t aggressively pushing into Android territory. (It also didn’t have the new iTunes/Beats product, which hasn’t even fully rolled out yet!)
Bottom line: Screw the comps. Watch the switchers.