Apple

Why Apple Won’t Give Us Real Numbers

If last week wasn’t a wake-up call that there’s something amiss in Cupertino, I don’t know what is. I’m not talking about the fact that Apple’s Chinese love fest seems to be on the rocks or that iPhone sales tanked.

Nope. It’s the fact that Apple can’t give us one meaningful statistic on how *well* all of its post-Jobs initiatives are really doing. And that the company’s efforts to feed us tiny crumbs of positive news are beginning to look more lame every earnings call.

I know you know I’m going to get to Apple Pay, which is what everyone in the payments and commerce business really cares about. But first hold on, while I share some stats on just what a horrible first quarter Apple had and what it really means about Apple’s standing.

APPLE’S REVERSAL OF FORTUNE

Compared to the first quarter of 2015, iPhone revenues were down a pretty dramatic 18.4 percent. And, it wasn’t just currency fluctuations. Actually, unit sales were down 16.3 percent – as in the number of iPhones sold. Apple made $7.4 billion dollars less on iPhones in 2016 Q1 than in 2015 Q1.

Ok, part of the plummet is due to the surge in sales in 2015 Q1 from the iPhone 6 which tapped into the pent-up demand for a larger screen phone.  But only part. iPad revenues were down 18.7 percent too, while Mac sales *only* declined by 17.4 percent.

Overall the sales of Apple’s flagship products — all products sprung from the genius of Steve Jobs — were down 17.4 percent.

Apple didn’t just have its first revenue decline in 13 years. It had a massive blowout. A holey-moly-yikes-what-in-the-world-just-happened decline. A stunning reversal of fortune. Even after you add the gains from the cats and dogs — the ones I really want to focus on — Apple revenue was down 12.8 percent quarter-over-quarter for a total decline of $7.4 billion.

APPLE’S CHINA SYNDROME

Then there’s what happened in China. Revenues in Greater China were down $4.3 billion for an overall decline of 25.8 percent.

Last week, we also learned that China, in its crackdown on even more foreign influence, shuttered iTunes and iBooks. That’s on top of a number of other things that the Chinese government is doing that should make all foreign companies trying to do business there shake in their shoes.

Like the Chinese government becoming investors in Internet companies like Tencent and Alibaba and demanding board sites to monitor them (and presumably keep them in line). Any company now that is in the media or communications business, whether foreign or Chinese, has a target on their back. The Chinese Communist Party is determined to clamp down dissent. No wonder Carl Icahn dumped all 46 million of his shares of Apple stock in a down market. His reading of the tea leaves must see it getting nothing but worse.

It’s also why we took the position last week that Ant Financial’s IPO could end up being a big fizzle.

BUT THEY COULDN’T GROW FOREVER

Now, I hear you. Apple has been so incredibly successful and innovative that there was no way the explosive growth could go on forever, you say. And I agree.

A slowdown was inevitable, particularly as the smartphone market matures and starts to shift from just upselling people to getting new customers who already have phones and are holding onto them longer – and who need a really, really good reason to dump them more quickly.

But folks, let’s be clear. We’re not talking slowdown here. We’re talking about Apple doing a complete reversal and walking way backwards. In fact, the news was so bad that I’m hoping that I’ll start getting less hate mail from Apple’s fanboys when I express skepticism about Apple’s payments strategy.

APPLE PAY’S PAIN

Speaking of which, if you thought you’d actually learn anything real about how Apple Pay is doing last week, hopefully by now you realize that you didn’t learn much at all.

Apple talks about Apple Pay a lot. They feature it in ads for the phones. They trot it out as one of their great innovations. There is a constant string of press releases about it rolling out here or there  – globally – with Amex which, we all know, has very little acceptance globally.

But I digress. Just try to get any information, at all, from Apple on how it is doing.  Just more head fakes, which I will get to soon.

Everyone in payments knows that you measure the success of a payments system by the share of the volume it’s getting.  That’s what every payments company reports.

If you want to know how PayPal or Visa or MasterCard or Discover or American Express is doing, it’s a matter of public record. They report the dollars, or whatever currency, that consumers are actually spending using that payment method and what merchants are actually receiving when they do.

Any other statistic might be interesting, but payments volume is the name of the payments game and the data point that everyone wants.

Eighteen months after the launch of Apple Pay, you’d sooner get the secret method for hacking iPhones from these guys than payment volume on Apple Pay.

It is widely known in the payments industry that the fraction of payments going through Apple Pay in the U.S. is miniscule.

The PYMNTS.com data analytics team has estimated that it is probably on the order of about six tenths of 1 percent of total card volume in the United States.

And, look, if Apple thinks that we have this wrong all they need to do is tell us, and the world, what their volume is and we’ll know whether our estimate is too high, too low, or right on the money.

Now, here’s the head fake. Tim Cook did claim that Apple Pay was doing great because it was getting a million user activations a month. Wow, you say. That means that by the end of this year, Apple Pay will have more than 50 million active users!

Holy Apple Pay and mobile payments, Batman! But here is where those numbers might be coming from.

When you upgrade your iOS operating system, which you are prompted to do like three times a day now, you are also reminded how easy it is to save your iTunes card to the Apple Wallet if you haven’t already. All one has to do is enter the CVV and, voila, their Apple Pay wallet is “activated” and ready for use.

Activated and active by those standards is quite different than how most everyone else in the world defines active – which equates to usage, and usually more than once.

Of course, since Apple controls the operating system, and much of what goes on the phone, it can really push Apple Pay in a way no other third-party wallet could.  At the end of the day though, even Apple can’t make a consumer whip out their phone to pay.

The consumer needs to decide that. In fact, it doesn’t matter whether every single one of the millions of Apple iPhone users “activates” their Apple Pay account if they don’t actually use it when they are standing at a terminal that takes Apple Pay.

Or anywhere else.

THE REAL APPLE PAY USAGE

Our PYMNTS.com data analytics team, based on a series of surveys we’ve done of iPhone 6/6S users for the last 18 months, knows the answer to that.

The odds that a person with an iPhone that supports Apple Pay, standing to pay, facing a terminal where they could use Apple Pay, actually puts that transaction on Apple Pay is a stunningly low 4%.

To put it more bluntly, 19 out of 20 people that could pay with Apple Pay choose not to when given the opportunity. And that figure hasn’t budged much over Apple Pay’s first 18 months.

In fact, if anything, the propensity of use of Apple Pay has actually declined. People are actively choosing not to use Apple Pay. Again, this is based on surveys, and are therefore estimates. But Apple has the real data on how many times people who have activated Apple Pay use it to pay.  All they have to do is share the facts and then no one will need to actually estimate things.

But right now, the company hype over Apple Pay, combined with the utter lack of transparency on how it is doing, should give investors a lot of concern, especially since it was presented as that “One More Thing” that was going to propel Apple forward.  And especially when combined with quantifiable evidence that it’s not doing all that great.

THE APPLE MUSIC MEDLEY

But this seems to be a pattern.

Take Apple Music. It has clearly done well because, unlike Apple Pay, Tim Cook crows about numbers that mean something — like how many people actually subscribe to Apple Music.

After only nine months, it has gotten 13 million paid subscribers. By comparison, it took Spotify about five years to get that many paid subscribers.

According to Cook, Apple Music got 2 million new paid subscribers in the last two months.  This is great news for Apple.

Today the Swedish streaming company has about 30 million paid subscribers so Apple is likely to be at least half as big as Spotify in its first year of operation.

So then why am I being such a crank?

Well, Apple started Apple Music, in part, because its paid download business was getting creamed. It needed a streaming music service to account for the shift in music consumption from downloading to streaming. It’s why it spent $3 billion to buy Beats in 2014. But what really matters is how Apple’s digital music business is doing. Are the gains from Apple Music more than enough to compensate for the decline in music downloads?

Funny thing. Apple doesn’t report that in its financials either. Instead, Apple Music sales are clumped with revenues from the Apple App Store, iTunes, Apple Pay and other in a big “Services” group.

Now, Apple Services is doing great, with a 19.9 percent increase from 2015 Q1 to 2016 Q1. Apple picked up about $1 billion of extra revenue quarter over quarter from Services. But more than half of that ($548 million) came from a one-time patent litigation settlement from Samsung while the rest came from an increase in Apple App Store and Apple Care revenues. So it’s hard to know from the financials whether Apple is growing its digital music business, holding its own, or easing the decline.

But listening carefully to Tim Cook on the earnings call last week let on what was really going on: “… our Music revenue has now hit an inflection point after many quarters of decline.”

So what that says is that Apple Music has managed to reverse the free fall of Apple’s flagship music business that Jobs started in the early 2000s.

That’s a great “we’ve stopped the decline” story, but not such a hot “we have an engine of growth” story.

WATCHING THE APPLE WATCH

Then there’s the Apple Watch. More so than Apple Pay, this was supposed to have been the killer new product for Apple and a driver of future growth.  It’s been in the market now for about a year. And darn if you can find out from Apple, really, how it is doing.

What we’ve observed is that Apple has discounted the Watch a number of times – something Apple never does with its products, suggesting that it needs to discount the product to get it to move.

Analysts have given it a rather backhanded compliment, too, by saying that it’s the best seller in a category that overall, isn’t setting the world on fire. At the earnings conference Cook revealed that they sold more Apple Watches in the first year than they sold iPhones in the first year, but he didn’t give any hard numbers. I guess that’s supposed to suggest that the Apple Watch could do as well as the iPhone, but the comparison seems a bit off base.

When Apple first introduced the iPhone it was really only appealing to hardcore early adopters. The Internet was slow on the phone because cellular networks hadn’t upgraded yet to 4G, there weren’t very many apps and the app ecosystem was just getting started. The battery life was horrible and the phone wasn’t even very good for making phone calls. Not many other than the hardcore would put up with those rather significant tradeoffs.

By contrast, the Apple Watch was introduced as a complement to the iPhone — something that every iPhone user should want to have — at a time when there is a highly developed app ecosystem and millions of Apple lovers eager for the next big thing from Apple.

Things have not exactly gone according to that plan. A year is too quick to write off the Apple Watch. Maybe someone will develop a killer app for it. Or some subsequent version will tickle the fancy of people. But look around. There aren’t a lot of people wearing Apple Watches – (Silicon Valley residents excluded, of course).

Many of those gifted or received last Christmas, I’ll bet, are neatly tucked away in dresser drawers — an expensive novelty (and trendy gift) that was fun for a while.

THE FUTURE?

We’re seeing a pattern with Apple. Apple introduces a new product. The hype machine goes into overdrive.

Early evidence points to problems with sales. A cone of silence over actual data on adoption comes down combined with dribbles of positive but largely irrelevant information.

Apple’s fans in the media start talking about how the adoption of the iPhone, or iPod was slow too, and they became successful so this or that new product will too.

But I suspect that last week’s earning bust will put an end to the denial that there’s something amiss in Cupertino.  It’s not just this or that product that’s been a disappointment; it’s been the whole string of them. It’s becoming increasingly clear that Apple can no longer draft off the genius of Jobs. His roadmap has run its course – as it was bound to do — and is no longer capable of keeping the revenue engine humming the way it once did.

Device sales are only as good as the utility that its apps and ecosystem delivers. The vision that drove Apple to think differently about what would really “make a dent in the universe” seems to have gone missing.

IT’S TIME TO “MAKE A DENT” IN THE UNIVERSE

Apple Pay, I think, illustrates this best. It was introduced in 2014 as Apple’s big hope – a cure for the many failed attempts by many others before it that tried to get consumers to use mobile devices to pay for things in a physical store.

That experience, Apple and Tim Cook surmised, would make the iPhone an elegant and essential solution for the group of customers who drive a disproportionate amount of consumer spend. And Apple Pay is elegant and is a very slick way of integrating payment into a mobile device. But there’s just one problem.

Apple misjudged the degree to which in-store and plastic cards weren’t very big consumer payments pain point. And how merchants activating NFC was. Apple also whiffed on what really did cause consumers pain – and still does: buying online and via mobile devices, also largely ignoring the field of very powerful players with traction and clever ways to help consumers solve that problem.

Recognizing that, if successful, these players could use that base of digital accounts to redefine how the on and offline worlds of commerce would converge and reinvent how consumers and merchants engage anywhere.

They also forgot what matters most to merchants – getting consumers to buy from them – full stop.

Physical merchants have way bigger problems facing them right now then whether consumers are using Apple Pay at the register. Foot traffic is down dramatically and retailers are closing right and left. According to a report in The Wall Street Journal last week, for department stores to get back to the productivity levels of 2006, they would need to close about one-fifth of all anchor stores in malls – that’s about 800 stores.

Instead Apple Pay introduced friction to a consumer that didn’t have any problems paying for things in a store – solving Apple’s problem – how to sell more devices – but not one that many consumers or retailers do.

APPLE’S ME-TOO M.O.

Steve Jobs once said that he’d rather gamble Apple’s vision than create “me too” products – something, Jobs said, he’d rather leave for everyone else.

But “me-too” seems like Apple’s product M.O. today – Streaming Music, News, Watches, and Apple Pay – are all more or less Apple’s versions of things that others are doing or have done for a while and for which Apple had to play catch up – but doing so lacking that killer app (or App store, more precisely) that caused people, in droves, to ditch their beloved Blackberries for the iPhone.

As the next decade begins the shift to connected devices – billions and billions of them – capable of conducting commerce, the endpoints capable of playing music and getting news and reading email, and paying for things will become more and more diverse.

Just ask Alexa and the voice-activated ecosystem that she is powering. Or Facebook or Amazon or Google who are bringing more and more apps into their ecosystems that can go anywhere any device or endpoint will take them. And payments apps like PayPal that are becoming the enabling payments and financial services rails for apps and ecosystems worldwide.

Apple, now wouldn’t be a bad time to show us that “One More Thing.”

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