Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) showed off their shiny new toys in the last few weeks, and some of the ideas were more exciting than others. In this week's episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Evan Niu dive into the new offerings for both companies and what it all could mean for their long-term health and strategy.
Apple is starting to turn some heads with its iPhone price increases. How much farther can the company push up ASPs before they hit the ceiling? Amazon's new Echo speakers are probably making pure-play Sonos (NASDAQ: SONO) nervous, and for good reason. At the same time, its new Alexa Clock and Microwave are baffling almost everyone (including us), but they could mean some exciting things for Amazon's future. Tune in to find out more.
A full transcript follows the video.
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This video was recorded on Sept. 21, 2018.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It is Friday, September 21st. We're talking about some hot new consumer tech releases from some big tech companies. I'm your host, Dylan Lewis, and I'm joined on Skype by senior tech specialist Evan Niu. Evan, it's nice to chat again! It's been a little while.
Evan Niu: Yeah, it's going well! Happy iPhone Day!
Lewis: Happy iPhone day! I wish that we could say that this was deliberate and that we wanted to do a roundup of consumer tech as these products were being unveiled and released on the same day or in the same week. That is not quite the case. We had to pre-tape an episode last week because I was traveling for a wedding. But, I am happy to have you on to talk through one of our favorite product segments, the iPhone. We're also going to touch on some recent releases from Amazon, in what turned out to be a Christmas morning-type hardware release from them. Why don't we talk Apple stuff first, though?
Niu: Today, they launched the iPhone XS and XS Max. Last week is when they unveiled the XS, XS Max, and XR. Today is launch day. As usual, people are lining up and camping out overnight at Apple stores all around the world to make the big media spectacle, the headlines. As a quick refresher, the XS is the successor to the X, has the same $1,000 starting price point. XS Max basically has the same stats as the XS, but it has a massive 6.5-inch display. It starts at $1,100 dollars. Both now come in a 512-gigabyte storage option, which pushes pricing even higher than it was last year. For example, a maxed-out XS Max costs $1,450, which is more than an entry-level MacBook Pro.
Lewis: Yeah, it's kind of wild. As we've seen, and we're going to touch on this later, the screen sizes and the storage options for these iPhones get bigger and bigger, there has been some pricing expansion for the line. It is kind of wild to think that if you're going on the budget side, you can buy three or four laptops for that price. [laughs]
Niu: Exactly. These new flagship phones are really the best they have to offer. But at the same time, the spec improvements are pretty incremental compared to last year's X. If you bought a X last year, like I did, it's not really worth upgrading to XS because of the tiny performance improvements. With what these phones cost these days? I mean, it's just not worth it. But if you bought a X and you really just need or want a bigger screen, then maybe you could justify going for a XS Max, because that's a little bit more differentiated. It's a much larger device. So, that's the big news today.
Lewis: I do understand that you have one of these devices coming to your home. That's right, yeah?
Lewis: That's right. We ordered one for my wife. We basically take turns upgrading each year. She's on the 7 Plus, so she ordered a XS Max in the new fancy gold color. It's about the same size as the old Plus models, except now it's all display instead of having the forehead and the chin bezels.
Lewis: That's a clever setup that you have with your wife. It gives you the chance to have your hands on the new iPhone every single year it comes out without having the expense of personally laying it out and paying for it every single time. It's a little bit easier to negotiate that. I'm still working with a 6s. I feel like a dinosaur for having this. But I think, given the upgrades and everything like that, and what I'm experiencing with my phone performance-wise, I'm probably going to be upgrading to the X and not going quite to the newest edition, just because of some of the reasons that you mentioned earlier.
I teed this up a little bit -- what we're seeing with the screen expansion, storage expansion, and what that's doing for pricing, this is really a continuation of the strategy that Apple has been working with for the last couple of years. I think increasingly, unit volumes are not the focus, and average selling prices are what's really driving all the iPhone revenue growth. The company is continuing to pull the levers that they have to make that happen.
Niu: Right, exactly. Basically, all iPhone revenue growth over the past year has been entirely attributable to price increases, as opposed to unit growth. To put some hard numbers to it, if you look at the past three quarters compared to the comparable quarters a year prior, iPhone units are up point 4%, about 170 million. But iPhone revenue has jumped 15% to about $130 billion. ASPs hit a record high of $796 back in December, for the fourth quarter. We're talking about almost $800. With iPhone pricing going even higher, there is a clear path to even more upside here.
The curveball is Apple's iPhone XR, which is not launching today. The iPhone XR launches in a month, and it looks like an incredibly strong product. It basically offers the same vision of the smartphone that Apple outlined last year, except at a much more affordable price. I mean, the main parts being the edge-to-edge display with no bezels, no home button, TrueDepth camera with face ID, and all the things that enables. The XR also has the same A12 bionic chip. But that phone starts at $715, as opposed to $1,000. A lot of the other spec differences are pretty minor. It's a lower-resolution LCD panel instead of an OLED panel, there's no 3D touch, it's slightly less water resistant, a tiny bit, it's aluminum instead of stainless steel, there's a single rear camera instead of the dual camera. But it does come in six colors, which are fun, and people will inevitably love because it offers greater personalization. If that phone commands really strong demand, since it starts at a lower price, that could offset any of the upside that investors are hoping to see an ASPs.
Lewis: I guess this is something that they have to be doing, because not everyone is going to be willing to lay out $1,100 dollars for a phone. It used to be that the different storage tiers would get you somewhere in the neighborhood of $650-850 or something like that for a phone. Even though there was a pricing spread, it was a relatively tight one. As you start reaching up to $1,100-1,300 for a phone, it makes sense that you have to really build out the lower part of your line, the lower-priced point on your line.
Niu: Right, exactly. That's one key point they drove home, like, "We want to basically bring this vision of what we think a smartphone should be to more affordable price points so that more people can access this technology and have it." The TrueDepth camera system, I was kind of surprised they brought that to the line because that's such a cool feature. You would think that they would keep it exclusive to the highest-end phones. But those modules aren't super expensive. They're like $5, in terms of the content inside those, for some of these sensors. It's not a big cost driver. They certainly can justify bringing it to the more affordable phones because it's not going to really hurt their profitability. I was just kind of surprised strategically, because you could get a lot more people to buy the higher-end phones if you kept that feature only to them. But, I mean, good for them. This technology is really great. Getting it to more people is certainly a good thing, too.
Lewis: We also got an update on what is going on with the Apple Watch segment. We don't have as much clarity into what's going on with that business segment. But at least we got an update on the product side with what the company is going to be doing,
Niu: Right. They also unveiled Apple Watch Series 4, which arguably was the most exciting thing they unveiled last week. That also launches today. Demand seems to be pretty strong for this new model, because shipping times are already really pushing out quite a bit. This generation really represents the most meaningful redesign they've had on this product ever since launching it three years ago in 2015. It has a thinner case, a much larger display, with rounded corners and smaller bezels. You can see a lot more information on your Watch now. The headline new feature is, they've added electrical heart sensors to the bottom of the Watch and embedded into the digital crown that allow you to take an ECG from your wrist, which is pretty wild. If you think about stand-alone ECG machines, they can cost thousands of dollars. Of course, the more full-featured ones have more contacts that you put on your skin, and they have greater accuracy.
One thing that I'm really curious about is what the accuracy of these ECG readings looks like. I've seen some heart and health experts already express some skepticism around how reliable and useful this data will be. It's really too early to call. That ECG functionality is not going to be available at launch. Apple says that they're going to release it later through a software update. We can't really say yet for sure how it's going to play out, in terms of accuracy and reliability. That's definitely something to keep an eye out for. But, the users that really value taking the ECG and are buying it for that feature -- people with health issues or older people -- it's going to be incredibly important for Apple to get that part right.
Lewis: Yeah, and actually, this is a part of device functionality that other wearables companies have struggled with. I want to say it was Fitbit, I'm not 100% sure, had a dedicated heart rate monitor. There were some issues with the monitoring that was going on with that at one point. This is definitely, as healthcare functionality goes, a little bit of a tougher nut to crack. I think it's good to see that these companies are getting into this space a little bit more. As you build out functionality, I think the use case comes very clear, especially for a lot of people that are doing some sort of disease management or condition management and want to be able to use the device for more than just communicating.
Niu: Right, exactly. Healthcare is so important that people make really important medical decisions based on the data that you give them from these things. Not that Apple is anything like Theranos. They're completely different companies, and obviously, Apple's a very ethical company. But Theranos did all this unethical stuff, and people were acting on these really terrible blood test results, and they just didn't care. The point being, people are going to make important health decisions, so you really need to make sure you get this right. I'm confident that Apple is doing everything they can. But there's not a lot of public peer-reviewed data on how these things perform, so we'll just have to see how they do. But I'm pretty confident they're going to do it. They have the money to invest right in developing it properly, and make sure that they can really get this to the point where people aren't going to be making bad decisions.
It's also worth pointing out that they're also pushing Apple Watch pricing higher, too. Now, the new models start at $400, and if you want cellular, they start at $500. That's up from $329 and $400 respectively last year. There is some more upside here for ASPs, particularly considering that with prices going up and demand looking pretty good, the Watch business looks pretty promising right now.
Lewis: Thinking about all the different pricing mechanics that are going on here, Evan, do you get a sense that maybe this isn't a lever that Apple is going to be able to continue to pull indefinitely? I look at what's going on the iPhone side in particular, and the Watch side to a certain extent. The idea that people will pay $1,600-1,800 for a phone at a certain point, it gets a little ridiculous, doesn't it?
Niu: Yeah. There's definitely some type of ceiling somewhere on what people will pay. But I do think that Apple's going to keep testing, and try to push that limit, to try to find out where that limit is. I think part of it is that unit volumes have been plateauing for a couple of years now. Apple knows. The smartphone market is so mature, the products are so mature and so good, that upgrades cycles have been getting longer. So, that's their next best lever to pull to try to squeeze growth out of it. It used to be, everyone upgrade every year, every two years. Now, we're seeing people push that to two or three years, maybe even three to four. So, it's a different way for them to pull the same amount of money out of you on an annualized basis. You buy a $1,500 phone every three years, vs. a $1,000 phone every two years, they're still getting about $500 from you every year. I think that's why they're trying to push the limit on pricing. We'll see how high they can go. [laughs]
Lewis: If you're thinking about how all this factors into the thesis for Apple, so much of our time spent talking about Apple earnings really centers on the Services segment, this high-margin business that they've really built out to impressive scale. That is certainly going to be a big thing for them. But when the company makes 60% of its revenue from one product segment, the pricing power that they have with that product is ultimately going to drive the business results. So, if you're looking at how these product releases impact the Apple investing thesis, if they're able to continue to find growth in average selling prices with the products that they're releasing, then you know that they're going to be able to post iPhone segment growth, which will be good for the top line. If they hit that ceiling, I think as an Apple investor, that's when you have to be a little worried.
Niu: But I think another part of the Services aspect is, that's also another way that they've figured out that they can change the investing narrative. It moves the thesis away from this iPhone hardware, which of course will always be a big part of the picture. But, as they've been emphasizing Services over the past couple of years, not only is Services profitable, but there's no seasonality to it at all. Obviously, with consumer products, your business is very seasonal. In your fourth quarter, you get tons of sales for holidays. But Services, if you chart it out, which I've done many times, there is no seasonality whatsoever. It's just a steady climb up, particularly as they build more and more subscriptions into this business.
I think that's a big part of it, too. With iPhone units plateauing, they're pushing pricing on iPhone to get growth there, and also pushing the Services narrative.
Lewis: We had a pretty good sense of what Apple was going to be announcing, so this part of the rundown was a little bit easier for us to do. In the second half of the show, we're going to switch gears and talk about Amazon's device event, which had some things that could be expected and maybe some things that were a little bit out of left field. We're going to have that discussion in a minute.
The Apple event typically has a lot of fanfare. I think we are just now getting used to the idea that Amazon, too, has some device fanfare when they launch new stuff.
Niu: Yeah, they're pushing even deeper and deeper into hardware. They had an event yesterday, and they announced a ridiculous number of devices. They had 14 things, including one services thing, which we'll touch on later. 14 new things to announce, compared to Apple's three, [laughs] for reference. They had a bunch of Echo stuff, they expanded into a bunch of new product categories. I don't even know where to start.
Lewis: Amazon went with some stuff that was kind of the next logical step with a lot of their hardware ambitions. They also unveiled some stuff that seemed like a head scratcher. Do you want to share with the logical stuff? Or do you want to start with the fun stuff?
Niu: Let's do the easy, logical stuff that everyone was expecting -- or, not expecting, but it makes perfect sense. They had a new Echo Dot, which is their small $50 little puck. A refreshed version of that, it's supposed to be louder. Standard spec bumps, same price. Has a new design, has fabric on the outside. Then, the Echo Plus, which is the bigger one. Also a new fabric design. That's their more higher-end Echo that has smart home functionality. Same $150 price. Echo Show, which is their display one. At this time, has a much bigger display. Their first version had a seven-inch display. This one has a 10-inch display. Looks a lot nicer. Also fabric design. Are you catching the trend here? Same $230 price. Those are the standard, what-you-would-expect upgrades.
Niu: Then, the new stuff, some of the new interesting stuff that we had heard rumors about, so, not too surprising. There's Echo Auto, which is this little dashboard mounted thing you put in your car. It's $50 bucks. It basically brings Alexa to your car, which is kind of cool, because you can ask Alexa do things while you're driving. A lot of automakers actually integrate Alexa directly nowadays, but this allows people to, for pretty cheap, bring Alexa to your car. Obviously, you don't upgrade your car very often. You're not going to go upgrade your car as soon as your car maker puts Alexa in their newest model.
Lewis: Yeah, the upgrade cycles on cars are a little different. That seems like something that is truly useful. You are in the car, and having a voice-activated, hands-free device seems to me lot of sense, especially if you're driving something that predates the popularity of a lot of that technology.
Something that is kind of new-ish, but well within the category that they'd been working with, was their new Echo Sub.
Niu: Right. That's an add-on. It's a 16-inch subwoofer, amplifiers the base of your Echo setup. You can actually pair it with multiple Echo devices and get a 2.1 stereo system going. That one's about $130. Not too expensive, kind of what you'd expect for a stand-alone sub.
They also started offering these new high-fidelity music offerings. There's an Echo Link, which basically allows you to connect your system to a receiver and amplifier. There's an Echo Link Amp which, includes an integrated amplifier. Same thing, you're streaming high fidelity music. The Echo Link is $200, the Echo Link Amp is $300.
If you look at it, between these amplifiers, the Sub, Amazon is pushing more into this higher-end audio experience. That really competes with players like Sonos, who are known for that -- multi-room, high fidelity audio. They're really expanding it to all these different areas.
Lewis: If you're Sonos and you've been trading on the public markets for all of, what, two months?
Niu: A couple of months. [laughs]
Lewis: [laughs] A month and a half? You've got to be like, "You've got to be kidding me." You know? That was actually something that came up in the show that Vince Shen and Asit Sharma did on Sonos, doing a rundown of their S-1 prior to their IPO. Listeners, if you want a primer on that, just email in. They were saying that the big risk for them, the big red flag for this company, is: what if Amazon continues to invest in this space? What if they continue to get into upper-level audio? What will that do? Because this company has a history of entering a space, undercutting the existing competitors out there. Jeff Bezos is famous for saying, "Your margin is my opportunity." That's exactly what they've done here. I think this Echo Sub comes in at about half the price of a comparably specced Sonos device.
Now, we'll have to see what the audio quality looks like and how they stack up. Audiophiles might still decide, "We want the Sonos device." But I think for the lay consumer, something that comes from Amazon connects with all of these other devices they already have, and that's going to be compelling, especially if it's at a lower price point.
Niu: Right. If you look at the broader speaker market, everything is shifting to these smart speakers with virtual assistants very rapidly. This market is, like, tripling every quarter. It's just growing so fast. Sonos now has to try to navigate that transition. And yeah, they have some products, they've been introducing them incrementally into their lineup, that integrate with Alexa, Google Assistant, etc. But for now, those products are still a relatively small part of their overall mix, whereas that's all Amazon does. Amazon, like you mentioned, they also have no problem competing with their partners. Even though Sonos has partnered with them to integrate Alexa, that's not going to stop Amazon from coming into your space and undercutting you with much lower prices. It might not be as good, but it's going to be good enough for a lot of people.
Lewis: Let's switch gears from the helpful and functional to the frivolous, and talk about some of the more fun devices that maybe surprised some people. We got two what-the-heck things. One of them is the new Alexa Microwave, and the other one is the new Alexa Clock. Evan, will you be buying either one of these?
Niu: [laughs] No. I mean, there were rumors about this microwave. They launched this new microwave, it's under their Amazon Basics brand. It's $60. It's basically just a microwave that you can control with your voice. It includes a dedicated dash button. You can order popcorn, which sounds kind of silly to me, to have a dedicated button. The whole thing sounds kind of silly. Everyone's obviously mocking this thing already -- including me, I'll be honest -- because it's kind of like, why do you need a voice-controlled smart microwave? You have to physically put things in the microwave, obviously. By definition, you're standing right there. It's not like I'm going to be upstairs and say, "Hey, Alexa, turn on my empty microwave." I'm just struggling to see the real value-add here, the use case where people are going to be like, "Oh, this is really useful, it adds so much convenience to my life."
Lewis: Yeah, I think this one feels a little gimmicky, almost like the kind of thing you would see on the CES trade floor if you were walking around the industry expo. I will say, though, knowing Amazon's track record -- obviously, they've had some misses -- we could look back on this tape four years from now and be like, "That was the beginning." [laughs] You know? Like, "This is where they launched into this whole new category that we didn't even know existed."
Niu: To be clear, I checked last night, it is already the No. 1 best-seller in the microwave category.
Lewis: Oh, my God!
Niu: [laughs] This is their first home appliance that they've gone first-party hardware on. Like you mentioned, this is probably just the signal of the first step into this home appliance market. Of course, they're going to be adding Alexa and voice controls and connecting it with anything they do going forward. I would not be surprised if they come out with a blender, a toaster, whatever it is in your kitchen. I would not be surprised if they do that in the future now that they've done this.
Lewis: The clock that we mentioned before, that costs $30. It's kind of a nice minimalist design. It looks like it's something that would fit into almost any living room. I think the main functionality here, the main use case, is being able to visualize timers and alarms. I think it's relatively simple at this point. Again, kind of an odd choice. But to your point about Amazon's strategy of slowly building things, I think back to what they did with Echo and Alexa very early on. They started with very simple functionality, and I think nailed it, in a lot of ways. Then, they slowly built out the skills and the use cases for this stuff. It would not surprise me if they are putting stuff out there, getting consumers somewhat used to the idea of a smart clock, a smart microwave, and almost wading into these more integrated, more smart home devices.
Niu: The clock is basically an accessory that goes with your Echo. If you have an Echo in your kitchen like I do, and you're setting multiple timers when you're cooking, it is kind of frustrating. I think they've probably heard this feedback from consumers -- you don't know where each timer is at if you have multiple timers. Managing this interface with just your voice is a little cumbersome. So, being able to visually see the timers --obviously, they have Echos with displays. If you have those, you can see all your timers and see how long these things are that you're cooking. I think this is a cheaper alternative to fill that specific gap in the usage of it, to have that visually represented. If you're in your kitchen cooking, you can see each timer, without having to ask her, which is cumbersome.
Lewis: Big picture for Amazon here: I think this is really them bolding and underlining a strategy that we have seen them focus on for a while -- getting into hardware and getting into people's homes. You look at the Echo and Alexa Push. That really has been so big for them as a business. The data has proven out that the more touch points that consumers have with Amazon, whether it's being a Prime member, being an Echo owner, the more you buy from Amazon.
Niu: Yeah. With the original Echo and Alexa, they had this really strong entry point into your house. They've just been expanding so aggressively since then. Once you're invested into their ecosystem, it's really hard to break out of that. We've seen Apple make this play so many times in the past. But now that Amazon has this in with the smart home with Alexa, they're doing the exact same thing, except they're doing it much more affordably and they're not trying to make as much money off you. But if you outfit your entire home with all of these Echo devices, you're spending hundreds or thousands of dollars on all these devices to put all over your home, the switching costs to move to Google Home or any other smart home platform are so high. Not that Apple has a really strong presence in the smart home quite yet. They've failed on execution there. Amazon had this momentum, and they're investing heavily in maintaining that momentum.
Lewis: And they can really afford to do this at cost on the hardware side because the benefits are so strong for them. CIRP, this research firm, puts out this spend study fairly often. They look at the average Amazon consumer, the average Prime user, and the average Echo owner. The average Amazon consumer spends $600 annually. The average Prime user spends $1,400 dollars annually. The average Echo owner spends $1,700 dollars annually on the platform. If you're getting into someone's home at cost, or even making a slight margin on the devices you're selling, if it leads to that type of annual difference, just imagine what it does over the lifetime of that customer.
Niu: Yeah, exactly. I've never been seen the whole voice purchase use case, but I know that that is one thing that's happening. There are lots of studies that show a lot of people are buying stuff with their voice. That was the initial obvious thing that Amazon wanted you to do, buy stuff on Amazon with your voice by talking to Alexa. That's still a big opportunity. It's still pretty early for that functionality. As they build it out and evolve and iterate, I think that there's some opportunity there.
Lewis: Evan, I think we're going to wrap things there. Thanks for hopping on the show!
Niu: Thanks for having me!
Lewis: Listeners, that does it for this episode of Industry Focus. If you have any questions or if you just want to reach out and say hey, you can shoot us an email at email@example.com, or you can tweet us at @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or check out The Fool's family of shows over at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today. For Evan Niu, I'm Dylan Lewis. Thanks for listening and Fool on!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Alphabet (A shares), Amazon, and Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Amazon, Apple, and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.