Apple’s ecosystem is massive. Approximately a billion people are using more than 1.4 billion Apple devices. Even as iPhone sales decline, Apple is bringing tens of millions of new people into its ecosystem each year. However, we are getting to a point where it is prudent to begin thinking about what user growth actually means to Apple.

Number of Users

Estimating the total number of Apple users is a relatively straightforward exercise. This past January, Apple disclosed that there were more than 900 million iPhones in the wild. Given that iPhones are not typically shared, Apple’s disclosure implied that there were approximately 900 million people using iPhones. Since the exact number of iPhones in the wild likely now exceeds 925 million, there is some wiggle room in that 900 million user total for the rare instances of people using more than one iPhone.

Apple also disclosed that there were 1.4 billion active devices in the installed base as of January 2019. The total was up by 100 million devices over the preceding 12 months and up by 400 million devices over the preceding three years. This tells us that there are 500 million Apple devices being used that aren’t iPhones. A majority of those 500 million devices are iPads. The Mac represents another 110 million devices, and a collection of wearables and home accessories make up the remaining devices. Given my Mac and iPad installed base estimates, a conservative estimate is that there are at least 100 million people who use either an iPad or Mac but not an iPhone. Adding these 100 million users to the 900 million people with iPhones leads to a billion Apple users.

A billion users is quite the accomplishment for Apple considering how the company does not give away or subsidize hardware. For context, Amazon has approximately 100 million Prime users. Twitter sells a “free” product and has 125 million daily users. A “free” Google service is widely considered a success once it surpasses a billion users. WeChat recently surpassed a billion daily users. Facebook sells a “free” product and has 1.6 billion daily users.

Revenue Per User

Using Apple’s current revenue run rate and my estimate for the total number of users, the company earns on average $258 from every user per year. There are limitations found with relying on averages. Apple’s ecosystem strength is dependent on geography. In addition, other factors like the gray market distort averages. Accordingly, it makes sense to segment Apple’s user base to gain additional insight into revenue per user figures.

There are approximately 200 million Apple users who have never purchased a new product from Apple or a retailer. Instead, these users rely on Apple products acquired or obtained via the gray market. The overall contribution to Apple’s revenue from these users is likely not too great - a few dollars per month, if that.

On the other end of the spectrum, the U.S. represents Apple’s stronghold when it comes to ecosystem strength. Add to hardware revenue various subscriptions such as Apple Music, paid iCloud, and various third-party subscriptions through the App Store. It is not unreasonable to assume that approximately 50 million to 75 million users spend an average $500 per year on Apple products and services. There are then other pockets of “core” Apple users in various countries including China, Japan, the U.K., and Australia.

Based on Apple’s installed base disclosure, we know there are at least 400 million Apple users who use only one Apple device: an iPhone. The actual number could be much higher. Given an iPhone upgrade cycle of four years and an iPhone ASP of approximately $750, this tells us that at least 400 million people are likely spending somewhere around $200 per year.

Accordingly, Apple’s billion users can be broken into the following groupings:

200 million people spending an average of $25 per year (people in the gray market).
620 million people spending an average $260 per year (includes 400M iPhone-only users upgrading every four years).
180 million people spending an average $500 per year (Apple’s core users in the U.S. and a handful of other countries buying a number of Apple products and paying for various services and subscriptions).

Growth Driver

The iPhone has been Apple’s primary vehicle for bringing people into the ecosystem. No other Apple product has come close to the iPhone in this respect. Exhibit 1 includes my estimates for the number of users purchasing their first new iPhone directly from Apple or a third-party retailer. This serves as a rough proxy for the number of people entering Apple’s ecosystem.

Exhibit 1: Number of Users Buying Their First New iPhone

Above Avalon Number of Users Buying Their First New iPhone

More information and discussion behind how I derived the preceding estimates is available here.

Based on recent iPhone sales trends, there is evidence of fewer users buying their first new iPhone. For example, my expectation is for 52 million people to buy their first new iPhone in 2019. This total is 60% less than the peak number seen in 2016.

After the iPhone, the iPad has been the second-largest driver bringing new users into the Apple ecosystem. However, given that the iPad installed base is a third of the size of the iPhone installed base, the new user totals just don’t compare to those of iPhone.

Putting all of the pieces together, Exhibit 2 includes my estimates for how Apple’s overall ecosystem has grown in terms of the number of users.

Exhibit 2: Number of Apple Users

Slowing New User Growth

There is no question that Apple’s user growth is slowing. Much of this is due to Apple running out of premium smartphone users in key markets like China and India.

Some people are convinced slowing user growth represents a warning sign for Apple. The concern is that Apple will once again look to milk existing users with higher-priced products and services in an effort to offset slowing hardware sales. Much of this fear is based on how lack of new user growth nearly killed Apple in the 1990s. Instead of focusing on new user growth, Apple milked existing Mac users for as much money as possible. The end result was a complicated product line that lacked focus and vision.

In my view, this is an incorrect way of thinking about today’s situation.

Much has changed with Apple over the past 25 years. During the mid-1990s, Apple’s user base was a fraction of the size of today’s user base. Apple had around 25 million users in the mid-1990s. Simply put, Apple’s user base wasn’t large enough to reach sustainability. Instead of focusing on bringing in new users, Apple took the easy route and simply kept selling to existing users. Today, Apple has 40 times the number of users and is bringing in 25 million new users roughly every six months. Apple’s billion users comprise a self-sufficient ecosystem. The company is in a strong position to sell additional devices and services to these billion users without jeopardizing the long-term health of the ecosystem.

New User Plateau

While new user growth is slowing, it’s not a given that Apple will reach some type of user plateau. As Apple continues to move into more personal devices such as wearables, the company’s addressable market will expand, especially in emerging markets. In countries like India and Brazil, products like iPhones, iPads, and Macs may not be the best tools for bringing new users into the ecosystem. Instead, lower-priced wearables may eventually open the doors to tens, if not hundreds, of millions of new Apple users in markets that up to now have been largely out of reach.

Opportunity

Apple is a design company tasked with developing tools capable of improving people’s lives. Such a mission plays a critical role when figuring out how best to judge Apple.

Apple doesn’t think about financial items such as revenue or profit margins when developing products. The same principle applies to new user growth. Jony Ive and the industrial design group don’t sit around a table and come up with products for the purpose of bringing new users into the ecosystem or increasing revenue per user. Such motivation would have manifested itself in a less focused product line over time.

However, Apple does consider and think about how new products may fit within the existing product line. For example, Apple Watch was launched out of the gate as an iPhone accessory. A pair of smart glasses will likely be similarly positioned as an accessory out of the gate as well. These considerations are part of Apple’s long-standing goal of making technology more personal and having new products serve as simpler alternatives to existing products.

The implication found with this product strategy is that one of Apple’s key opportunities going forward is found with developing and then selling new tools to existing Apple users. A feedback loop can then be created as new tools and services drive higher user loyalty and engagement and subsequently even higher tools and services adoption. This will likely manifest itself in higher revenue per user over time as Apple users rely on additional Apple tools in their lives. As Jony has said in the past, financial items like revenue and profit end up being byproducts of a successful product strategy.

This brings us back to the Apple revenue per user calculations from up above.

200 million people spending an average of $25 per year (people in the gray market).
620 million people spending an average $260 per year (includes 400M iPhone-only users upgrading every four years).
180 million people spending an average $500 per year (Apple’s core users in the U.S. and a handful of other countries buying a number of Apple products and paying for various services and subscriptions).

With wearables, Apple is in a good position to drive a portion of the 400 million users who likely only have an iPhone to begin using another Apple device. One way of measuring this opportunity is that if 200 million people spend more like $350 per year versus $260 per year, Apple could see an additional $18 billion of revenue per year. Another opportunity is found with the 200 million users who are part of the Apple ecosystem via the gray market. Assuming Apple can sell additional tools to a portion of those users, Apple would see something in the neighborhood of $12 billion of additional revenue per year (100 million people spend more like $150 per year versus just $25 per year). These are huge numbers that speak to how much room the company has for existing Apple users to become more engaged with the ecosystem. In the mid-1990s Apple simply tried to milk its limited number of users of more money. Apple is now engaged in expanding its users’ tool arsenal while continuing to add new users to the ecosystem.

While Apple will continue to face various risks when it comes to maintaining user loyalty and engagement, especially when it comes to factors outside of its control like economic and geopolitical developments, the big picture is that Apple’s billion users is a game changer. The company has reached a level of ecosystem strength that still hasn’t been fully digested by the marketplace.

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