This week's sponsor
May 2, 2016 • 1 hour, 36 minutes
This week on Upgrade, Jason and Myke are joined by follow-up guest Scott McNulty to review the Kindle Oasis (including its Kindle hump), then switch gears to break down the complexities of Apple’s quarterly results, Dropbox’s infinite solution to an old conundrum, and Jason’s review of USB audio interfaces.
May 1, 2016 4:52 PM PT
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By Jason Snell
April 29, 2016 11:25 AM PT
The last couple of quarters, Apple has made an effort to highlight their growing Services revenue line, which includes the App Store, Apple Music, and iCloud. In January, the company provided an unusual supplement to their results, half of which highlighted how Services revenue was growing strong. CFO Luca Maestri spent quite a long time talking about Services during the post-release conference call with analysts, too:
The vast majority of the services we provide to our customers, for instance apps, movies, and TV shows, are tied to our installed base to devices, rather than to current quarter sales. For some of these services, such as content, we recognize revenue based on transaction value. For some other services, such as the App Store, we share a portion of the value of each transaction with the app developer, and only recognize revenue on the portion we keep.
My thought at the time was that Apple was interested in highlighting Services because it was the one part of its business that was showing major growth, at a time when iPhone sales were flat year-over-year and about to go down for the first time ever. I’m not saying it was intended as a distraction, but it definitely seemed like an attempt to give the answer when someone asked where Apple’s future growth might come from.
That’s fair. But I was also a little concerned about what it might have said about Apple’s future product strategy. Apple’s a company that’s all about selling people a premium product that delights them. Relentlessly grinding your installed base for extra cash is not an Apple move. My concern at seeing Apple highlight Services to the degree it did was the possibility that Apple would begin to see its growth path in terms of nickel-and-diming the users of its existing billion devices.
Take iCloud storage, for instance. The existing 5GB of cloud storage that’s granted to users for free is insufficient for most users for backup, especially if they have more than one device. I don’t dispute Apple’s need to charge for storage, but a reasonable amount of storage should be supplied for free as a thank-you for purchasing a new Apple device. The 5GB limit causes people to be prompted with scary “failed to backup” errors that immediately turn into a conversion attempt to a larger, paid iCloud storage account. It’s one of the places where it feels like Apple is prioritizing revenue over the user experience. I don’t want to imagine a world where that’s the norm, and my iPhone becomes a device that constantly asks me to pony up for another extra feature because the product wasn’t good enough to begin with.
I was relieved, then, to see that analyst Steve Milanovich of UBS had some of the same concerns that I did. On the post-release call with analysts, Milanovich asked Tim Cook point blank about this issue: “How do you view services? You’ve obviously highlighted it the last two quarters. Do you view it going forward as a primary driver of earnings? Or do you view it [as] more creating ecosystems that support the high margins on hardware, as opposed to independently driving earnings.”
Here’s Cook’s response:
The most important thing for us, Steve, is that we want to have a great customer experience. So overwhelmingly the thing that drives us are to embark on services that help that and become a part of the ecosystem. The reality is that in doing so, we have developed a very large and profitable business in the services area. And so we felt, last quarter and working up to that, that we should sort of pull back the curtain so that our investors could see that services business, both in terms of the scale of it and the growth of it. As we said earlier, the purchase value of the installed-based services grew by 27 percent during the quarter, which was an acceleration over the previous quarter. And the value of it was just shy of $10 billion. And so, it’s huge, and we felt it was important to spell that out.
This is exactly what I wanted to hear. It allows Apple to signal loud and clear that while they want to trumpet Services revenue as a growth area, it is an area that grows as a result of Apple’s hardware and the customer experience. Cook’s first two sentences make that clear.
As the platform owner, Apple has the advantage of deeply integrating its services with iOS in ways that competitors can’t. I don’t begrudge them their ability to make money off of additional services, so long as it doesn’t get in the way of a fundamentally good user experience. I feel a bit more optimistic about that after this week.
Dan Moren for Macworld
April 29, 2016 11:02 AM PT
My latest project has been cleaning out my home office, and you know what I’ve found?
Cables. Lots and lots of cables.
USB cables, mini-USB cables, micro-USB cables, 30-pin dock connector cables, monitor cables, and what I can assume is only a rat king constructed entirely of power cables.
I would like nothing more than to dump the lot of these cables into the fires of Mount Doom and watch them melt slowly away, and though I’ve tried to at least excise the ones that I probably won’t ever need again—when the heck am I ever going to use an internal IDE cable?—I find myself keeping many of them because…well, because it never hurts to be prepared.
But more importantly because, despite the seeming promise of our wireless future, we’re not quite there yet.
Jason Snell for iMore
April 29, 2016 9:24 AM PT
In Garfield Minus Garfield, Dan Walsh removes Garfield from his own comic strip, transforming Jim Davis’s strip about a fat cat who hates Mondays into a bizarre story of a man riddled with existential despair. It’s amazing what can happen, and how your perspective can shift, when you take the weightiest part of something — sorry, Garfield — out of the equation.
So now imagine Apple without the iPhone.
By Jason Snell
April 28, 2016 10:23 AM PT
I’ve never liked writing things by hand. My handwriting has always been terrible,and the moment I could switch from writing to typing for school assignments, I did.
But if the joy of putting pen to paper never left you, and you dislike having to type all your thoughts on an iPad software keyboard, you might want to check out the free MyScript Stylus “keyboard” extension for iOS. It replaces the keyboard area with a blank writing area, ready to be used by your finger or a stylus or, better yet, an Apple Pencil.
When you pause in writing (most likely because you’ve reached the end of the line), Stylus slides your writing over to the left, allowing you to continue as if you were dropping down a line on a piece of paper. Eventually your digital ink is transformed into text, but it’s still editable—you can swipe backward with two fingers to see previous words you’ve written and edit or correct them with gestures.
Software keyboards are hardly a panacea. Some people use them effectively, others begrudgingly. It would seem that writing in longhand on an iPad would be a bad productivity move, but for some people it might actually be a more comfortable experience. And I really do believe that writing style can change dramatically when you take it slow.
With all that said, I don’t think I can recommend MyScript Stylus today. That’s mostly because some of its shortcut buttons—including the delete key—are located at the very bottom of the screen, and are too easily triggered by a stray touch of your palm when you’re writing. I started writing this article on my iPad Pro using an Apple Pencil—the things I do for you people!—and twice I lost whole paragraphs when the keyboard seemingly interpreted some stray touch of my hand as a signal to press the delete key hundreds of times. I watched as whole paragraphs, painstakingly handcrafted, vanished from view.
If MyScript can figure out a way to move that stuff out of the way, though, I think this keyboard extension will have some serious appeal for the Apple Pencil crowd.
Jason Snell for Macworld
April 28, 2016 9:08 AM PT
The thing about Apple’s financial results is that they lag a month behind reality, so the hottest just-released new products often have little or no impact in the first quarterly report after their release. All of the products Apple introduced on March 21 began shipping on March 31, while Apple’s fiscal second quarter ended March 26. So if you’re looking for a sign that the 9.7-inch iPad Pro or the iPhone SE is doing well in the numbers, you won’t find them.
But it’s not all about the numbers. Sometimes it’s about the forecast for next quarter, tidbits of information that Apple executives let out in interviews or during their quarterly conference call with analysts. And on Tuesday we got a hint that Apple has a surprising hit product on its hands: the iPhone SE.
April 28, 2016 • 41 minutes
Once again, the team does the impressive work of predicting Apple’s financial results in an episode recorded before the company’s quarterly earnings but released after them. We accept no liability for any errors. We also discuss a year of the Apple Watch, streaming TV, and Eddy Cue’s penchant for…bold…apparel.
Jason Snell for Macworld
April 27, 2016 8:28 AM PT
So, that was quite a quarter Apple had-and not in a good way. But just after the raw financial results, Apple gets a chance to tell its story, to add “more color” to the proceedings, in an hourlong conference call with financial analysts. Here are the highlights from this quarter’s party line with Apple CEO Tim Cook and CFO Luca Maestri.
By Dan Moren
April 27, 2016 6:47 AM PT
As I was typing up the many statements of Tim Cook during yesterday’s quarterly financial call, one in particular—about Apple Music—caught my attention:
Tim: Feel good about success of Apple’s *first* subscription service. (emphasis added)— Six Colors liveblog (@sixcolorsevent) April 26, 2016
Even at the time it stood out to me—hence the added emphasis. It seemed like an odd thing for the usually cautious Cook to say.
Who’s on first?
Many people responded to say that clearly Apple Music wasn’t the company’s first subscription service. What about iCloud? iTunes Match? Mobile Me? Dot Mac?
True enough, those are all subscription services—but they aren’t really what Cook was talking about. None of those were marquee services designed to be products in and of themselves. Rather they were ancillaries for those who had already bought into the Apple ecosystem. People don’t buy an iPhone or Mac because of iCloud, but if Apple and Cook have their way, people will buy into the ecosystem to get Apple Music.1
That’s not to say that Apple Music isn’t still about selling some devices, but there’s a reason that one of the major thrusts of this quarter’s call was about services. Apple’s realized that it can’t purely depend on growth in device sales: sometimes device sales weaken; staggering growth doesn’t last forever. Building up a robust services platform keeps recurring revenue coming in even when sales dip.
What’s on second?
But, of course, what I was really focusing on in the quote above is first. First subscription service. Because, to my mind, why say “first” if you don’t have a “second” and a “third” coming down the pipe? (And if you’re going to claim that this was a slip of the tongue, well, I suppose that’s possible, but not very likely given the careful choreography that Cook and Maestri usually practice.)
Rumors have, of course, long suggested that Apple will get into the subscription TV (and possibly movie) business, especially as everybody and their dog has entered the market. Apple hasn’t quite gotten this locked down yet: negotiations with the major content providers have stalled repeatedly, though all involved seem to believe that an Apple service is inevitable; it just remains to be seen what such a service looks like. Meanwhile, rumors also say that Apple is going to produce its own video content as well, putting it up with the likes of Amazon, Hulu, and Netflix.
I’m pretty confident that an Apple subscription TV service will materialize—and I’m on the record as enthusiastic about the idea if Apple can bring some of its trademark elegance and design to the arena. Though from what we’ve seen of Apple Music, that’s hardly a a foregone conclusion. Or, as our friend and colleague Joe Rosensteel put it:
I don’t want to harsh anyone’s mellow about Cook’s “1st subscription service” remark but if the 2nd is “TV & Movies” they better step it up…— Joe Rosensteel (@joesteel) April 26, 2016
So can Apple learn from its travails with Apple Music and deliver a quality TV and movie subscription service? Honestly, I don’t know.2
By Jason Snell
April 26, 2016 7:18 PM PT
So that’s what a bad quarterly result looks like for Apple.
Here are a few ways in which it was not bad:
- It was a bad quarter in which Apple made $10.5 billion in profit. That makes it Apple’s 10th most profitable quarter of all time—it’s just that Apple’s five previous financial quarters were all better. If you ignored Apple’s staggering calendar-year 2015, in which it made $54 billion in profit, it was actually pretty great. The last time Apple made less money in a quarter was only a year and a half ago. Seasonally speaking, it’s Apple’s third most profitable second quarter of all time. Unfortunately, 2015 was more profitable, as was 2012.
- It was a bad quarter in which Apple generated $50.6 billion in revenue, a number that’s been eclipsed in the second quarter only once before… again, last year.
- Apple sold 51.2 million iPhones, a number that would have been record setting as recently as early last year. It’s the most iPhones Apple has ever sold in a quarter—other than three of the previous five quarters.
Apple’s Services revenue line increased 20 percent over the year-ago quarter, showing the power of Apple’s installed base of a billion devices to generate money for the company outside of hardware sales.
Bolstered by Apple Music, Apple’s music business reached “an inflection point” after several quarters of shrinking, and the company suggested that they expect music revenue to resume growth in forthcoming quarters.
Apple Watch sales “met expectations,” Cook said, while scrupulously avoiding any actual sales figures. He did suggest, however, that Apple believes the Apple Watch will be a seasonal product in the vein of the iPod, with a lot of holiday sales.
Revenue in Japan was up 18 percent versus the year-ago quarter!
Apple entered the quarter with $233 billion in cash and only $72 billion in long-term debt.
Okay, so there’s the silver lining. Now let’s look at the dark cloud:
- Growth is the most important metric to Wall Street, and Apple didn’t grow this quarter. Revenue was down $7.5 billion versus the year-ago quarter. It’s the first time Apple has gone down in revenue versus a year-ago quarter since… well, my spreadsheet only goes back to 2006. I’m going to guess it was roughly around the time the iPod came out. A long time.
- All of Apple’s product lines shrunk year-over-year. The iPad’s been down in the dumps for a while now, but Mac sales have been down for two consecutive quarters, this quarter by nearly 12 percent. And the iPhone’s growth, which stalled last quarter, went into reverse for the first time ever, with sales down 16 percent over last year’s second quarter.
- I almost put this under “not bad,” but I can’t bring myself to do it. iPad sales only fell 19 percent over the year-ago quarter, perhaps giving some sign that while it hasn’t necessarily reached rock bottom, it perhaps can see the bottom from where it is now. During his phone call with analysts Tuesday, Apple CEO Tim Cook suggested that “in the June quarter we expect to see our best iPad revenue compare in over two years,” which is worth analyzing despite the horrifying use of compare as a noun. (Is “comparison” too highfalutin?) Cook also said, “We expect seasonal sequential declines in… iPad sales.” Hmm. In the third quarter of 2014, iPad revenue only declined 8 percent, the best it’s done in ages. So I suspect Cook is really saying that iPad revenue will be down by single digits for the first time in two years. That’s still not quite hitting bottom, but it beats the yawning abyss.
Next quarter’s not going to be better. Apple is predicting revenue between $41 billion and $43 billion, which will be another decrease from the $50 billion in sales during the third fiscal quarter of 2015. That’s not surprising given the fact that the third quarter has been 17 percent smaller than the second quarter, on average, over the past three years.
Citing the current economic environment, Apple’s reducing inventory—iPhones in particular—worth about $2 billion. I assume this will mean making fewer high-end iPhones and possibly doing more promotional pricing in order to sell what they’ve got. As a result, Apple suggests that the average selling price of the iPhone will drop next quarter, thanks to the inventory reduction and the introduction of the iPhone SE, which is the cheapest iPhone on the market.
So in other words, if you like profits and strong sales, Apple has that. They’re not what they were last year—and that’s not a great sign for Wall Street. But don’t let someone tell you that Apple’s in trouble, or that it lost money, or that iPhone sales are cratering, because none of that is true. What is true is that after many years of growth, some of it staggeringly inflationary growth, Apple didn’t grow this quarter. If you’re an investor, that may be quite painful. If you’re a user of Apple’s products, it probably won’t affect you much at all.
One final little silver lining: If you pretend 2015 didn’t happen at all, this quarterly result looks entirely boring. During the call with analysts, Apple executives pointed out that the iPhone 6S upgrade cycle is actually a little bit better than the one for the iPhone 5S. The iPhone 6, however, was a spectacularly huge upgrade cycle. Perhaps Apple finally embracing a larger phone drove a massive amount of sales all at once? Regardless, if I delete 2015 from my spreadsheets and look at the numbers, nothing crashes to earth—it just shows the continued cooling off of the iPhone’s previously rapid growth.
Which is not to excuse this quarter—2015 happened, the iPhone 6 happened—but to recall that it’s going to be very difficult, all year, for Apple to compare its 2016 business to 2015. The silver lining is that, come 2017, Apple won’t be comparing its business to 2015—but to this year. And at that point, 2015 may be seen more as a remarkable aberration than a portent of future explosive growth to come.
Jason Snell for iMore
April 26, 2016 3:39 PM PT
By Jason Snell
April 26, 2016 1:50 PM PT
It was a tough quarter for Apple, at least as tough as a quarter can be for a company that made $10.5 billion in profit on $50.6 billion in revenue.
Sales were down year-over-year across product categories and in many regions, including the previously high-growth region of Greater China. iPhone sales sagged year-over-year for the first time. Three months ago, Apple warned that it was going to be a tough quarter, and they weren’t kidding.
We’ll have more, and coverage of the conference call with analysts, in a while. Meanwhile, have some charts!
By Jason Snell
April 26, 2016 12:37 PM PT
Back in 2014, I wrote about the strange fact that my Dropbox storage allocation is bigger than my hard drive, making it impossible for me to sync the entire contents of my Dropbox with my computer1.
On Tuesday at an event in London, Dropbox previewed a new feature it calls Project Infinite, which aims to solve a familiar problem:
The amount of information being created and shared has exploded, but most people still work on devices with limited storage capacity. While teams can store terabyte upon terabyte in the cloud, most individuals’ laptops can only store a small fraction of that. Getting secure access to all the team’s data usually means jumping over to a web browser, a clunky user experience at best.
With this new feature, Dropbox users on Mac or Windows will be able to double-click on a file that’s not stored locally, and it will be downloaded and opened in place. You’ll be able to browse an entire Dropbox storage area without having it all stored locally, right in the Finder, and even control-click on files and folders to force them to be stored locally for offline access. Files that are stored locally have a green checkbox badge, while files that are in the cloud have a little cloud badge.
This is good. I want this feature.
It’s unclear about who will get this feature, and when—it’s “already deployed with a select number of sponsor customers,” whatever that means. Its introduction at a Dropbox Business conference and in the Dropbox Business blog makes you wonder if this is even intended as a feature for non-Enterprise Dropbox users. But it seems far too useful to be limited to just the biggest-ticket Dropbox customers—it’s a feature that improves Dropbox’s core product. It needs to be everywhere.
For more, check out Dropbox’s video on the subject, which features a funny throwback to old-school attitudes about the Mac: “Ah, but graphic design. They’re still on—they always use OS X. It works on OS X, too.” Now that’s a narrator who is committed to the old narrative that it’s just designers who are “still on” the Mac and haven’t yet seen the light and converted to Windows… Sigh.
There are other options, of course, that offer more flexibility—BitTorrent Sync and SpaceMonkey come to mind, though I’ve really grown accustomed to Dropbox and would like to keep using it. ↩