Monday Note

Let me start with an important caveat. For this I’ll refer you to a post from my favorite high-tech blogger, David Pogue. “Don’t pass judgment until you’ve tried it!” Wise counsel: three years ago, industry sages “knew” Apple had no business making a phone. Normal humans voted with their wallet.

Customers come in two categories: cats and dogs. Put new cat food before your feline companion, she’ll walk around the dish, indifferent to your entreaties, suspicious, bidding her time. Dogs aren’t that complicated: they jump on the new dog food and greedily scarf it down.
I’m a dog, I’ll try (almost) any new high-tech product. But, as the advertising lore likes to say: Will the dog come back to the dog food? That’s how you know you have a viable product. We’ll see in a couple of months if I keep my new iPad or if our daughter Marie resells it for me on eBay - for a fee, she’s a businesswoman.

In the meantime, five thoughts.

First, we have no idea of what the iTunes App Store will do for the iPad. As usual, the temptation is use derivative thinking: The iPad is like ___ only bigger, or smaller. A bigger iPod Touch is the more common thought. So, yes, most iPhone or iPod Touch apps will scale nicely. But this much bigger XGA (1024 by 768) screen is “more enough” for iPad applications to be genuinely different as opposed to mere derivations of iPhone apps. Apple comes up with their own iWork apps showing but one example of uses that aren’t just an extension of the iPhone world.

Gizmodo has one of the few posts, among the tens of thousands of iPad-related blog entries, focusing on in-app purchases. Last Summer, a new iPhone OS release introduced the ability to make purchases from within an application, without jumping out to a Web site. As a counter-example, look at the current iPhone Kindle app: when you want to buy books you leave the app and go to a dedicated page on Amazon’s site to order the book and direct its digital delivery to your iPhone. Apple offers a simpler mechanism: buy what you need, weapons or lives in a game, virtual reality clothes, furniture or buildings from within the gaming or VR app. Apple smoothes out the transaction, billed to your iTunes account, takes 30% for its services. This is great for some merchant but Amazon doesn’t see it that way.
This is relevant to Frederic’s point about newspapers and magazines in today’s note: the Financial Times could deploy a free FT app on the iPad, complete with teasers for today’s paper or for a special research report. Click and you download the paper, or a magazine. See here what the Swedish group Bonnier thinks of the new possibilities afforded by powerful tablets. The Mag+ demo is very Apple-like, I’ll even say Jon Ive-like, complete with a veddy Briddish accent.
I can’t wait for the things I can’t imagine coming out of the brains and loins of my fellow geeks.

Second, real users, paying customers, as opposed to geeks and braying critics.

I’m going to get in trouble for this, but hear me out.

Apple has sold 40 million iPhones or so in less than three years and is likely to sell 50 million this calendar year. (Frankly, I don’t care much about Dear Leader’s latest posturing:  according to Him, Apple is now the largest “mobile” company in the world. How about the best one, to start with? And do Apple would-be customers get up in the morning and say to themselves: Let me look for the biggest mobile company and, once I find it, I’m gonna buy their stuff?)

Back to critics.

Do real users really care about the Apple Store approval process? Are they bothered by Apple being “closed”, lacking Flash or multitasking? Some might, but Apple’s latest revenue and profit numbers don’t seem to say they are in the majority.
I watch what normal humans do, I have one or two in my family. My wife Brigitte designs, builds and sells houses. As a result, after mastering Skype and Facebook, browsing the Web for parts, appliances and materials, she bravely downloaded Google’s (free) Sketchup. She taught herself 3-D design because she was motivated. She grew tired of pencil, paper and ruler and did want to control the dialog with contractors, suppliers and even, hope springs eternal, the People’s Republic of Palo Alto.
But she hates dealing with the plumbing under the apps, the way and places where files are stored, named, duplicated. She doesn’t care about the directories, smart folders and the like.

The iPhone introduced a much simpler way of using what Apple once calls pocket computers. Well, the iPad doesn’t fit in a pocket, but it certainly fits the iPhone simplicity model where there is much less plumbing to contend with. This “limitation” is experienced (not an expressed thought, just a feeling) as a strength.
Many critics make the same mistake Microsoft did when they thought of their smartphone OS as Windows Mobile. Apple didn’t do a Mac Mobile, they did the iPhone. Even if the iPhone OS shares some parts with Mac OS X, real users don’t see it.

Third, the price. $499 for something that so clearly costs more than an iPod Touch says one thing: subsidies. Yes, the $130 supplement for an added 3G radio looks like an attempt to recoup a better average margin, assuming many buyers will take the $499 bait and switch to the more expensive 3G model. Still, priced as it is, without a carrier contract (the 3G $30/month deal is month-to-month, no ugly ETF, Early Termination Fee), the iPad isn’t going to make the kind of money the iPhone brings to Apple’s shareholders.

Without carrier subsidies, we’re left with iTunes revenue. This could be a new bet, a change from the established iTunes business model. So far, see the iPod and the iPhone, iTunes is an investment Apple makes to prop hardware margins up; iTunes costs money to run but doesn’t have to make tons of it. The famous 3 billion App Store downloads don’t change that. More than half of those are free: why would Apple, the noted philanthropist, go through the pains of approving those free apps, updating and downloading them?
For the paid ones, take your pick: $1 average price, $2? That’s still “only” $2B or $3B gross revenue. Take 30% of that for the past 18 months, subtract the operating expenses, people and servers and you’re not left with something that moves the needle.

Now, let’s say I take 50% of what I spend on books, newspapers and magazines and apply it to iPad Store revenue. A conservative $50 a week divided by 2, times 30%, times 52 weeks yields $390/year in net revenue (before expenses) to subsidize my iPad. Over time, the net content revenue could represent billions of dollars. (Don’t hold me to this number, my actual habits “deviate” from it, I’m just trying to get a feel for the subsidy model.)

Fourth, the AT&T 3G problem. Oh my god, they’re doing it again! Apple is staying with the lousy AT&T network, the wireless data connection performance is going to be terrible. Well, I’m not a fan of AT&T myself and constantly endure disconnected calls. But we’re mixing two topics here: voice and data. Digitized voice calls need the bits to arrive exactly at the right time, otherwise the call fails, our brains need what is call isochronous connections. Browsing the Web, getting email, downloading content does accommodate stuttering links, the uneven data transmission is invisible, it is smoothed by the connection protocol, by a buffer. I’m not enchanted by AT&T’s data performance but it’s not nearly as bad as their voice service.

Further, let’s look at numbers: in your mind’s eye, do you picture lines going five times around the Apple stores the day of the iPad’s release? No. If iPhones sell in tens of millions, iPads will do well to sell a small number of millions this year, worldwide. Nothing that will create insurmountable wireless data performance problems.

Fifth and lastly for today, the mysterious A4 processor. A couple of years ago, Apple acquired PA Semiconductor, for their processor design expertise. The iPad comes with the first visible result from that investment. In some ways, this isn’t earthshaking: the ARM architecture is the basis for many designs and Apple’s own processor is an ARM derivative, current ARM-based apps from the iPhone run on the new chip.

Is cost the motive? Probably not. Apple’s purchasing power does get the best prices from silicon foundries making ARM processors. Apple isn’t manufacturing its new processors, just designing them.
One factor is integration, getting as many subsystems, graphics, memory management, power management and other features all on a single chip. This could help explain the unusual (to be verified) battery life numbers.

Security is a very likely motive. Security as in protecting from unwanted processes such as viruses. Security as in DRM, as in securing content, something that will help Apple’s dealings with content providers. And security as in payment systems.
In truth, no system is 100% immune to penetration. It’s a percentage game. A fully open system where anyone can install any application on your machine, PC or smartphone, has a much higher percentage chance of being compromised. Think key loggers, for example, surreptitious programs that record and transmit your keystrokes as you make purchases, enter passwords.
We still don’t know much about this new chip, it is said to contribute mightily to the iPad’s “lightning fast” performance. We’ll see if we find it, or a derivative, inside this year’s iPhone. Remember, one iPhone a year, that’s all we ask…

—JLG@mondaynote.com

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