[Old] What’s making Apple lose its brand value so quickly?

[Old] What’s making Apple lose its brand value so quickly?

Just this past year, Coca-Cola’s brand value was measured by Interbrand to be $77.8 billion with Apple chasing bright behind in second place with a brand value of $76.5 billion. But many don’t see Apple surpassing Coca-Cola’s brand anytime soon, with myself and others predicting the brand to fall a few more places on Interbrand’s ratings.

What’s making Apple lose its brand value so quickly?

That was from March of this year.

This was from a year ago by Eurobrand (not Interbrand):

Apple still the world’s top brand as value jumps 44% to a whopping $130.6 BILLION: Report

This is today by Interbrand:

The report estimates the value of the Apple brand at $98.3 billion, up 28 percent from the 2012 report.

So why did Apple file an 8-K? Re: @theloop

The Question

So, I’ve been trying to figure out why Apple filed a Form 8-K that literally is just bragging about good sales numbers. Jim Dalrymple had a particularly snarky take on it that I think is misunderstood:

Sales are so over-the-top great, the company has to tell the SEC.

That would be pretty over-the-top great but it sort of fails the smell test, especially given how Apple of a year ago was repeatedly beating the pants off of their guidance numbers every quarter without filing similar 8-Ks. (I’ll define similar in a moment. They definitely filed lots of 8-Ks if you look.)

Why did Apple really file an 8-K?

Some History

In recent years, Apple’s earnings typically went like this:

• Apple issues guidance predicting modestly improved earnings of X.
• The Analysts would all predict Apple would actually come in at about X plus 15-20%.
• 3 months later: Apple would report earnings per share of X plus 27-58%!

And that’s how it was. Gargantuan beats of their own guidance every quarter, for 10 consecutive quarters!

Meanwhile this lead to a fair number of complaints, some from pro-Apple pundits like Dalrymple and John Gruber who complained that The Analysts didn’t know how to do their own job and that Apple stock was punished for their ignorance, but also from the finance pundits saying that Apple was not really issuing serious guidance at all, but rather just sandbagging to drum up more hype about the company’s incredible success. (Interesting fact: you’ll never find a nasty word from John Gruber written about Peter Oppenheimer issuing wildly inaccurate guidance for 10 straight quarters!)

While the pro-Apple pundits will probably never admit Apple was pitching themselves softball estimates for 2 and a half years, somebody convinced Peter Oppenheimer to knock it off. In 2012 Apple’s run of incredible guidance self-beats suddenly tapered and The Analysts were now holding up bars higher than Apple could leap. Yet again, pro-Apple pundits slammed The Analysts for not being able to do their jobs as the stock tanked by 25% in a few months.

In January 2013, Apple changed the way they issued guidance completely. Apple has been much less conservative and has offered a range of guidance it expects to fall within, instead of a single, sandbagged “lower limit”. Their guidance has also been much less impressive in terms of percentage growth than it was in the past, which has held the stock back from a major rebound. Apple has been a growth stock, and it’s just not growing like it used to.

Answering The Question

To try and see what Apple’s legal responsibility for filing a Form 8-K was, I looked at Apple’s 8-K and the SEC’s FAQ to explain why a company must file an 8-K.

First, Apple’s 8-K is incredibly short. There is exactly one subheading: Section 8 Other Events which describes that Apple sold 9 million phones in a weekend and will come in “near” the high end of their guidance range. I interpret that to mean Apple has exceeded the high end of their guidance but Apple does not say that’s what it means.

There are no other sections.

In the SEC’s explanations for when companies are required to submit a Form 8-K, most are materially related to the actual running of the company. Changes such as leadership, impaired elements of the business, acquisitions and divestments are all material. Events that would impact finances are very material.

Beating your own future estimates? Not so much, actually!

Section 8, according to the SEC:

Other Events (The registrant can use this Item to report events that are not specifically called for by Form 8-K, that the registrant considers to be of importance to security holders.)
emphasis added

Apple files lots of 8-Ks and they include lots of Section 8’s, but I don’t know if I’ve ever seen one that consists of only a Section 8. According to the SEC there would be no specific requirement to do so; you could just issue a press release (and they do).

As a shareholder, I appreciate knowing that Apple did something cool and that they want to tell me about it. That is why I read all their press releases. But I don’t understand why Apple felt the need to file this report.

A wild-eyed theorist could look back and presume that somebody gave Apple hell for issuing crappy guidance. Maybe they were going to fire Peter Oppenheimer!? That would be a pretty cool made-for-TV movie, except that all of Apple’s–and indeed the entire world’s–earnings guidance is surrounded by the caveats that all forward-looking statements are estimates, are therefore probably wrong, and Apple feels no need to update them. And also nobody cares about accurate earnings guidance except maybe me and the stock analysts.

So the answer is simple: they didn’t need to tell the SEC but they issued a report anyway. Apple is bragging. They had some genuinely good news, they were genuinely surprised by it and they genuinely wanted to make sure that some analysts went back and upgraded the stock after the pounding it took two weeks ago.

Basically, that Form 8-K is Peter Oppenheimer shouting, “Law of Large Numbers my ass!”

Misinformation Week, starring @phonescooper

Eric Zeman writes for Information Week:

The bill of materials for the 16-GB iPhone 5s comes to about $191. The device costs about $8 to manufacture, bringing the total to $199. The 64-GB model costs Apple only $19 more to make, for a total of $218. The full retail price of the 16-GB 5s is $649, while the 64-GB 5s goes for $849. It’s a shame Apple is only marking the price up by (a minimum of) 326%. (emphasis added)

It’s common to read about Bill Of Materials costs in the news, but you never see the caveat that these numbers are basically all BS. It is kind of fun to read about the raw price of an LCD panel or a few gigabytes of ram but it becomes absurd once you start trying to draw conclusions about Apple’s business model from them as the author does here. It is neither correct nor informative to use a third party component estimate to make wild claims about huge markup. These guys don’t know how much Apple pays for their custom silicon, and they don’t know how much Apple is paying to retool and ramp up massive factories on short notice. If you want to calculate how much it actually costs Apple to produce iPhones, you need to find out the Cost Of Goods Sold (COGS), not BOM.

Sale Price, COGS and Markup are all related to Gross Margin with a few simple equations:

(Sale Price - COGS) / Sale Price = Gross Margin
Markup = Gross Margin / (1 - Gross Margin)

The purpose of the Cost Of Goods Sold (COGS) accurately represents how much Apple is paying to produce the sum total of all iPhones. It won’t include research and development costs, marketing, or other indirect expenses but it will factor in all the costs directly related to manufacturing the phones. Parts, labor, inventories, factory overhead are all direct costs of mass-producing iPhones and you cannot ignore them. These costs are standardized, they must appear on all G.A.A.P. income statements and you have to include them if you want to talk about the “markup” of the product because markup has a real definition.

Due to court filings, we know that iPhone gross margins ranged from 49-58% over the past couple years (but before the iPhone 5 was released), which means that iPhone markups ranged from 96% to no more than 138% over the same period. To claim that Apple has suddenly pushed iPhone markups to “(at minimum) 326%” without a single accompanying price increase exceeds the bounds of credible argument.

Doing some further checks you might discover that in 2012, the 16 GB iPhone 5 had the same $199 BOM cost that the 16 GB iPhone 5S, that the 2011 iPhone 4S BOM was reported at $188, and the 2010 iPhone 4 BOM was $187. It stands to reason that the iPhone 5 and 5S Gross Margin are even lower than any of those reported in Apple’s filings since it has a higher BOM cost but the same price tag.

If you work at a company named ‘Information Week’, you might work on incorporating some information into your writings.

The markup on the 16-GB 5c is a more palatable 317%.

Argh. No it goddamn isn’t, Eric!

“Why Record iPhone Sales Might be Rotten for Apple”

Why Record iPhone Sales Might be Rotten for Apple

But the reason I am voicing a bit of doubt is that it seems like Apple is now trying to squeeze every last bit of profit it can out of an aging, shall we call it, iStone. […]

Steve Jobs wouldn’t have been satisfied to only pocket billions upon billions on tweaked products alone.

I often question the reasons I’ve bought AAPL and whether it’s still a good investment. As long as jackasses like this are the norm for articles about Apple, I feel pretty good.

No matter whether they have good sales or bad sales, it’s still bad news.

No matter whether a product is new or old, it’s still cliché.

No matter whether they have the world’s fastest mobile processor and the world’s best fingerprint scanner and the first implementation of 64 bit ARMv8, it’s still incremental.

No matter the facts, the narrative does not change.

Hasn’t Apple seen how the competition makes fun of these events in commercials?

This writer thinks it hurts Tim Cook’s feelings when people make fun of Apple. There seems to be no end to this parade of infantile punditry.

And this is just bad on a bunch of levels. Squeeze profit out of an aging iStone? Holy mixed metaphors!

Inquiring minds want to know, Dear author. Do young rocks contain more or less profit than old rocks? Maybe tell us in your next article.

Back To The iPhone

In wearables, I explored all of the wearable technologies that Apple has experimented with, and tried to list the “jobs to be done” of wearable technology. Despite the decline of the MP3 player market, Apple has been including fitness sensors in their single-function devices since the 6th Generation iPod Nano. They appear to have found some success with that job and Tim Cook wants to keep pulling on that thread. While most commenters perceive iPod as a dead product line (because the iPod Classic hasn’t changed materially in since 2007) Apple seems to use the iPod product lineup as an test lab for wearable technology, in accord with their stated belief how wearables function best: as “single purpose” devices.

Then at All Things Digital 11, we also saw Tim Cook make three statements:

1. Cook indicates “sensors” and “fashion” are key jobs to be done for wearables.
2. Cook denying the existence of a “general-purpose” wearable device that’s any good. (“Yet” is implied.)
3. Cook agreeing that wearables will be “a new branch of the tree”.

Cook seems to have focused on these jobs without delivering an iWatch. While Apple will certainly have the ability to experiment further on single-purpose wearable devices with the iPod line, this week Apple revealed some very fashionable designs and new “sensor” experiments in their flagship device line: the M7 motion coprocessor and Touch ID.

M7 and Touch ID are innovative new sensors, and the possibilities for them are incredibly exciting. It’s easy to imagine these fingerprint sensors and motion trackers as new methods of user input that could find themselves in a future single-purpose device. A one touch “credit stick” that’s keyed to your fingerprint? Yes please!

And speaking of the “fashion”, Apple also broadened their new lineup out to a total of EIGHT different colors (from 2), and even discontinued the iPhone 5 to directly market the iPhone 5C heavily on nothing more than a new plastic case around last year’s internals. I want to think about the sanity of this decision, because you need some serious brass balls to re-release year-old hardware in a heavier, unapologetically plastic shell without an accompanying price cut in this industry.

Predictably, Wall Street thinks Tim Cook has gone insane. Four analysts downgraded the stock today as punishment for not tackling the China situation. I can’t say it’s any less of a punishment than Tim Cook has earned by playing the cards so close to his chest, but maybe it was the right play. Maybe the iPhone 5 was already plenty good enough internally, and what was really holding people back was something trendy, something new on the outside? People buy $2000 watches because they’re beautiful.

So when will Apple’s iWatch be released? That is all very speculative, unfortunately, because the Jobs To Be Done of a general-purpose device vs a wearable device–the two roles an “iWatch” must fulfill–may be something you just can’t combine. We don’t know whether Jony Ive can ever make a watch that isn’t both too big and too small. If not, Apple must tackle the problem a different way. Rolling the jobs of a wearable back into the iPhone will be much easier than trying to invent the iWatch that isn’t a piece of junk.

Wearables: The Next Big Thing

There’s been loads of speculation from analysts about an iWatch and an iTV in recent memory. Everybody thinks that when Apple does something, it’ll be the Next Big Thing.

Well, I want to weigh in on this. Here’s my opinion:

Yes, this is a Samsung ad. No, I don’t think Samsung is the Next Big Thing (except for the Note, which is definitely both Big and the Next Thing. Why isn’t Apple competing with the Note?!) but I do agree with the sentiment. The next big thing may not be a radical departure from what we’ve already seen.

Apple has already shown us the Next Big Thing.

Many people don’t consider iPods to be a line of wearable devices, but I do.

In the iconic Silhouette ads, you always saw people wearing the iPod’s distinctive earbuds, and frequently saw the iPod Classic itself in a shirt pocket or clipped to a belt. It was clear that your iPod and headphones were fashion accessories. You wore them or carried them like a fashion accessory. They became part of your digital lifestyle.

When the 2nd generation iPod Shuffle came out, wearability was the feature of the keynote.

“The Number 1 thing that came back from customers using the first generation shuffle was wearability. … This is the most wearable MP3 player we know of.”

–Steve Jobs, 2006

Apple’s fascination with wearability did not go away, even though the iPod began to decline immediately after the iPhone was unveiled. Years later, Apple expanded wearability to the 6th generation iPod Nano.

“It’s so small we put a clip on it too… so it’s instantly wearable.”

–Steve Jobs, 2010

Apple’s fascination with iPods is most puzzling, when you try to put it in context. iPods have been declining steadily in revenue for years and now make up just a tiny portion of Apple’s portfolio, meanwhile the iPhone is rocketing ahead with 100% annual growth! But yet iPods (with the exception of the Classic) are revamped and radically redesigned almost as often as the iPhone.

Pretend you’re Steve Jobs for a Minute

Why bother? Why not just leave the iPod to die of neglect?

It’s a very important question, since the MP3 player market is basically dead. Estimates for the size of the global MP3 player market are hard to come by (nobody really cares anymore) but one report says that by 2017, the global market will range from 300 million dollars to 40 million.

Why keep innovating in the MP3 player market if it’s dead?

I think Apple saw a new opportunity.

Back to History. In 2011, Phil Schiller came on stage and declared that Apple had released “the best iPods we’ve ever made”, again pointing out the Nano. “A clip so you can wear it wherever you go.” It also found a new niche:

“Fitness is one of the most popular uses.”

–Phil Schiller, 2011

Phil was really selling it here, because when we think about ultraportability and wearability we need to understand why we wear things. It must have multiple “jobs to be done”. The first is music and the second is fitness. These two go together synergistically. But then something really quirky happened.

Phil Schiller unveils the Mickey Mouse iPod Nano

An iWatch!

It wasn’t made by Apple but they put it on their store. As usual, they sold a bunch at christmas but the world promptly yawned. iPods are dead, you know?

Still, Apple kept experimenting. The September 2012 event was overshadowed by Steve Jobs’ failing health (he died the following afternoon), and some of the presentations were very visibly affected by the loss of their friend. But Apple introduced a handful of interesting new technologies with important wearability potential: a Voice interface (Siri), a Wallet interface (Passbook), and probably the most significant and important piece of technology today: iCloud. They also dipped their toe into wearability with an iOS product for the first time.

The Loop!

The iPod Touch Loop was a very low-key experiment with wearability as a new job: keeping a hold on your devices.

“We’ve added a wrist strap. For that added security when you’re taking pictures, or just walking around.”

–Greg Joswick, 2012

Interestingly, they also announced a new iPod Nano that was much less wearable. No clip, no watch at all, no clock faces. It traded up for better multitouch, widescreen video support, but and surprisingly… bluetooth.

“One of the biggest requests we’ve had is for bluetooth.”

–Greg Joswick, 2012

Apple claims this made the Nano the most portable ever, but their examples of using bluetooth in your nano were that you could now use it to connect to your car or big bulky bluetooth headphones. Does your car count as “portable”?

Wearability: Apple’s “Other” Hobby

When Tim Cook went on stage at All Things Digital 11 this year, investors were clamoring for information about the iTV. There was very little interest on the iPod lineup. And so, perhaps he felt that he was comparatively safe to talk about Apple’s struggles. Indeed, the only segment he really talked about was the wrist and eyeglasses, which Apple has either abandoned or, in the latter case, publicly written off.

On Google Glass: “The likelihood that it has a broad range appeal, that’s tough to see.”

On Wearables: “It’s incredibly interesting. It could be a profound area. … Lots of gadgets, wearables in this space now. I would say that the ones that are doing more than one thing, there is nothing great out there. … [Wearables are] a very key branch of the tree in the post-pc area.”

What jobs to be done is Tim Cook interested in? “I’m interested in a great product. … Fashion, style. … The sensor field is going to explode.”

As we look towards the future, it’s clear that Apple has so far been doing innovative experiments with their iPod lineup. Rather than neglecting an area of their company that is dying in relevance, Apple has instead used it as a crucible to help form new ideas. And they have tried to explore the “jobs to be done” of wearable technology in an open way, but the rest of the world has not really taken notice. Suffice it to say that if any of these ideas starts to take off, if Apple can find a killer app for wearable tech, it would suddenly become very interesting.

But for now, it’s just another hobby.

Oh, but just for the sake of argument, compare that with the other hobby of theirs.

Television: The Device that’s Getting Good Enough

I love my Apple TV. I have a second generation model, and at the time I bought it they sold just one point four million in a Christmas quarter. It was a very, very small hobby. But still a big success compared to the Apple TV1.

In the first quarter that the AppleTV3 was released a year later, with 1080P video but little else in the way of new features, it sold 2 Million.

AppleTV is a low cost device that has a lot of jobs to be done, new services being added all the time, and near-50% unit growth year over year.

Beyond Hobbies

This is what the growth of a new “branch of the tree” could feel like. Once you can find the jobs to be done (Movies, Netflix, Hulu, Airplay, Sports) for a post-PC device, it becomes a land grab as competitors rush in. If Apple suddenly announces a growth in iPod units around the lines of wearable technology, I think it will be the beginning of a new gold rush.

I was sure that the 6th Gen iPod Nano was the direction of the future. It’s a big disappointment that they abandoned that design and went back to a nonwearable, but I suspect that they realized connectivity was holding the technology back (echoes back to 1997, when the Newton died because you had to sync it to do anything useful).

Apple has been prodding at wearability for 6 years now, and they seem as close now as they ever did. Wearability means convenience, fitness, entertainment, portability, fashion, security, and sensors–the ability to record yourself and interact with your environment. One of those sensors can be a microphone, interacting with Siri. Another could be a fingerprint reader; your personal computer can literally identify you by touch. The environment can be a commercial environment, with authentication and payments taking seconds instead of minutes. Wearability can mean zero friction.

The Next Big Things are already here. It’s just that we can’t visualize them yet because they aren’t familiar.

What COULD the next big wearable invention look like?