A Nod To Greg Packer. For those who were tuned in, June 29^th 2007 lived up to the hype. Apple had been aggressive with TV advertising going into the iPhone launch, resulting in average lines of 350 people at the three stores we surveyed on iPhone launch day in New York, San Francisco and Minneapolis. News media was everywhere leading up to the release, often interviewing Greg Packer (pictured below) who camped out at Apple’s flagship 5^th Avenue store for several days to be the first iPhone buyer. Since then, Apple has sold 1.204 billion iPhones (includes our Jun-17 estimate).  Lots has been written about how the iPhone has impacted our society. We simply think of it as an extension of our hands.  Industries have crumbled under the weight of the iPhone: Phones (Blackberry, Nokia, Palm), cameras (point and shot cameras, video cameras, Flip Video, which was purchased by Cisco), MP3 players (iPod, Creative, Samsung, and the Zune), GPS (Garmin and TomTom), and the Taxi industry, to name a few. More importantly, almost every industry that was not destroyed by the iPhone was made better by it.

The Early Disappointment.  All of the hype going into the iPhone launch led to analysts, present company included, inching up expectations for the opening weekend sales of around 500k units. Investors were hoping for even more. On Monday, July 24^th, AT&T (iPhone’s exclusive carrier) reported activations of 146K in the iPhone’s first two days, well below expectations. Shares of AAPL traded off 4% in the next two days as investors asked “is the iPhone DOA?”.

The Slow Road To 100m.  It took Apple 4 years to sell a total of 100m iPhones. 2012 was the breakout year, with the company selling 136m phones. The iPhone was here to stay. At least for now.

Embracing The Innovator’s Dilemma: iPhone’s Handoff To Apple Glasses. The near-term outlook for the iPhone is bright. We expect the next iPhone cycle to see growth of 15% and iPhone will account for 63% of Apple’s revenue in 2017. Then things slowly change; in 2019 we expect iPhone revenue to be up just 1% y/y. For FY20-FY22 we have iPhone revenue declining by 3-4% and accounting for 48% of overall sales in FY22 as Apple Glasses slowly gains market adoption. In 10 years, we expect the iPhone to be around, but it will be a much smaller part of Apple’s business as Apple Glasses grows. This handoff between iPhone and Apple Glasses will be choreographed by Apple as the company once again embraces the innovator’s dilemma and upgrades consumers to a superior device.

Apple Glasses In FY20. Our best guess is that Apple Glasses, an AR-focused wearable, will be released mid FY20. This is based on the significant resources Apple is putting into AR, including ARKit and the recent SensoMotoric Instruments acquisition. We believe Apple sees the AR future as a combination of the iPhone and some form of wearable(s). With an average sale price for Apple Glasses of $1,300 we expect initial demand to be limited at just over 3m units compared to 242m iPhones that year. This equates 2% of sales in FY20, increasing to 10% ($30B) in FY22 when we expect the ASP to be about ~$1,000. Early on, our Apple Glasses growth curve is based on the iPad’s early growth curve. Eventually, we expect a steeper growth curve for Apple Glasses vs. the iPad, and we believe the product line will continue to increase as a percentage of sales for the next ten years.