Apple: The iPhone Reality Distortion Field

Feb.13.16 | About: Apple Inc. (AAPL)

The iPhone has not only changed the definition of success for Apple (NASDAQ:AAPL), but has altered the perception required to properly sense reality. Similar to the dynamic that exists between rivaling siblings, having the iPhone become the single-most successful consumer technology product in history has produced an environment in which every subsequent Apple product decision has failed to meet the expectations set by iPhone. As a consequence, questions and doubts surrounding new Apple products and services have emerged even though there are tangible signs of success and progress being made. The iPhone has produced a new type of reality distortion field around Apple.

Reality Distortion Fields

What was once a term used to denote Steve Jobs' charisma and ability to turn the seemingly impossible or improbable into something achievable, the term "reality distortion field" has taken on a few meanings over the years. One of the more recent examples was used by competitors to negatively point out Apple's ability to seemingly compete under different, more hospitable terms. While the term usually took on a negative tone, it always contained positive connotations related to Apple either winning or succeeding in some form. However, in recent years, a new kind of reality distortion field has taken shape and unlike every version before it, this one has negative connotations. The iPhone has produced a type of twisted reality where perception does not accurately measure the amount of success being achieved with new products. Much of this augmented reality is experienced by those closely involved with Wall Street and Silicon Valley.

The Older Sibling

The iPhone's sheer success has changed the way we perceive new Apple products, services and apps. Similar to the rivalry that may exist between siblings, the iPhone is the older sibling who has achieved a multitude of milestones and successes, altering the very definition of success for others following in its footsteps. The major takeaway isn't that the bar has been lowered for new products, but rather that progress and achievement are not being accurately measured and milestones are not being recognized.

Path to Success

It is difficult to argue the iPhone shouldn't change the definition of success for Apple. If management's singular goal is to remain relevant, then a natural extension of that goal is for Apple to build off of the iPhone's success. Some may call this a burden. Others will say it is a gift. However, the dilemma that has formed over the years is that the iPhone's sheer success has altered the way we perceive success and the path needed to achieve greater success. People want Apple to introduce new products just as successful as the iPhone only without the multi-year timeline and version reiterations that the iPhone went through.

Even though the iPhone was released only nine years ago, much of the product's history has been rewritten through subsequent stories and tales. Many now think the iPhone was a raging success out of the gate, adopted by the masses overnight as everyone from high school students to corporate executives saw the device's potential at first sight. Reality was vastly different.

The iPhone was introduced at a time when it was still taboo to own a Mac on a college campus. The Blackberry (NASDAQ:BBRY) was just beginning to take off as the luxury of having work email on a phone was too much for people to pass up. The average consumer was only starting to think about whether it was worth paying for a mobile data plan each month. After launching with one carrier in one country in 2007, it took three years for the iPhone to hit the mainstream with the iPhone 4 launch, highlighted in Exhibit 1.

Exhibit 1: iPhone Unit Sales (Quarterly)

As a sign of the iPhone Reality Distortion Field in full effect, when looking back at the iPhone's nine year journey, observers often shorten and condense the long path to success into a much shorter timeline and then look for new products to follow a similarly quick path to mainstream success.

Case Studies: iPhone Reality Distortion Field

We have three case studies for how the iPhone Reality Distortion Field has impacted perceptions of new Apple products: Apple Watch, Apple Music, and Apple accessories.

Apple Watch

Even though the Apple Watch has been compared to the iPhone for most of its short life, the true extent of this juxtaposition has been underestimated. In reality, pretty much every single aspect of Apple Watch has been judged through an iPhone filter. From the moment the Watch was introduced in September 2014, the device has been compared to the iPhone all the way down to management's keynote slides being judged as less clear than those found in the iPhone keynote introduction seven years earlier.

When the initial wave of Watch reviews were published, the device was panned as being less useful as an iPhone and not bringing up the same kind of feelings that people apparently had when the iPhone was introduced. Circling back to the older sibling example, the Watch was born into a world where early expectations were nearly impossible to meet.

When management announced that Apple Watch sales revenue would not be broken out in financial statements, the natural next thought among many was that such an action was due to the Watch not being as big of a deal as the iPhone, the single-most financially attractive product in Apple's history. Initial Wall Street sales estimates for Apple Watch were based on iPhone user numbers. Initial Watch upgrade cycle estimates were based on iPhone upgrade cycles. Launch weekend Watch sales were based on launch weekend iPhone sales. As each one of these events turned out to be quite different for Apple Watch, disappointment soon took the place of excitement.

We know Apple sold at least 10 million Apple Watches in the first eight months on the market, with a high probability of that number being closer to 11 million, highlighted in Exhibit 2. But many haven't stopped comparing Apple Watch to the iPhone long enough to add much-needed perspective to those sales numbers.

Exhibit 2: Apple Watch Sales (Above Avalon Estimate)

One way of reframing Apple Watch sales is to consider that Apple sold at least 10 million wrist watches, with an average selling price of approximately $475, at at time when large swaths of the population had tuned out watches, let alone spent a few hundred dollars on one. In just eight months, Apple is selling 50 different Watch models grouped into four collections. Add in extra bands and watch faces, and Apple literally offered millions of unique Watch combinations...at launch. Despite these facts, much of this success has been brushed aside because the Watch doesn't have an app experience like an iPhone and was not a good "replacement" for an iPhone. The word "replace" does a poor job at explaining the whole point of Apple Watch in relation to the rest of Apple's product line.

Apple Music

In just 18 months, Apple went from buying Beats for $3 billion to having a music streaming service available in 113 countries with more than 10 million members paying for music content that is available for free elsewhere. Apple recently launched Apple Music in China and on Android, which will add to that 10 million figure. Despite this success, many have written off Apple Music as a buggy Apple service that shouldn't even exist.

It may be difficult to see, but Apple Music has also fallen victim to the iPhone Reality Distortion Field. The service's path to success has been warped to such a degree that reality is no longer viewable. Whereas Spotify took eight years to reach 10 million paid users, Apple did it in six months. Many respond that Apple Music's membership total is the result of being a default app on iPhone and Apple having stronger brand recognition. This is evidence that the iPhone Reality Distortion Field is in full effect. Any Apple service that is found on an iPhone is expected to turn to gold overnight with few bugs or problems.

Apple Accessories

In recent months, Apple has released a series of accessories for Apple Watch, iPad and iPhone. Positioned to play off the intangibles associated with luxury, accessories are meant to make something more useful or versatile, while also helping to create a different kind of emotion that would otherwise cease to exist. However, there has been pushback against some of these accessories as people wonder why Apple is dedicating resources to such minor products that will not sell at the same magnitude as iPhone. Whether it is a $79 Apple Watch charging dock, $99 Apple Pencil, or $99 iPhone battery case, Apple's motivation isn't to sell tens of millions of each accessory, or drive significant amounts of revenue, but to enhance the experience. The iPhone Reality Distortion Field is at the root of the problem as people tend to discount minor products with a small financial impact as nonessential and irrelevant.

Management's Response

How should management work around the iPhone Reality Distortion Field? Instead of spending time in Luca Maestri's office going over Apple financials, the best way to counter this twisted sense of reality is to spend time in Jony's lab. By focusing on product and not financials, it is easier to assess product development success and milestones.

The root cause of the iPhone Reality Distortion Field is found with the iPhone's immense success. The stronger the iPhone becomes, the more it resembles a black hole, where reality and perspective are twisted. Fortunately for Apple, the immense level of success and opportunity provided by iPhone represents a gift. The more successful the iPhone becomes, the stronger the motivation for Apple to recognize the success but then work to move beyond the iPhone.

Back in 2012, Jony Ive discussed the motivation behind the work taking place at Apple: "Our goal isn't to make money. Our goal absolutely at Apple is not to make money. This may sound a little flippant, but it's the truth. Our goal and what gets us excited is to try to make great products. We trust that if we are successful people will like them, and if we are operationally competent we will make revenue, but we are very clear about our goal."

Jony's comments demonstrate Apple's strategy for dealing with the iPhone Reality Distortion Field: let the products do the talking. By focusing on product, Apple can create a development framework for reiteration and improvement, two ingredients for long-term success.