The center of financial gravity in the computing world—the Center of Money—has shifted. No longer directed at the PC, the money pump now gushes full blast at the smartphones market. One of my colleagues, Bob Ackerman, calls smartphones the very personal computers. Measured by size and potential, they’re both smaller and bigger than today’s PCs.
Consider the numbers: HP, the world’s foremost PC maker, sold $10B of “Personal Systems” in its last reported quarter:
(turn “on” display image in your mail reader
to see the graphics)
Despite their premier position, HP isn’t making much PC money: $500M, 5% Operating Profit. (The full HP Q1 report in PDF can be found here.)
Now let’s turn to Apple’s most recent quarter. Smartphones constituted 40% of the company’s revenue:
When we add up the numbers, we see that the iPhone = Mac + iPods. And this rough calculation “misunderestimates” the weight of the iPhone OS. In the more mature iPod category, the iPod Touch (the iPhone without a phone) grew by 63% year-to-year according to Apple COO Tim Cook in the most recent earnings conference call. (Full Q2 2010 SEC filing available here.)
Subtract an estimated $180 for manufacturing cost and another 12% for Operating Expenses…
..and we get 58% Operating Income for iPhones.
I realize I’m taking a bit of arithmetic license—I’m assuming Operating Expenses are uniform for all product categories, and so on. But the essence remains: Apple makes $3B of profit from its iPhone while HP takes in a mere $500M on its PCs—that’s a 6x difference. The Center of Money has shifted.
(As an aside: If we divide iPhone revenue by the number of units, we arrive at a $622 for each device. Accounting connoisseurs can search for “Retrospective Adoption of New Accounting Principles” in the SEC filing and decide for themselves how much iPhone revenue is accounted for at the time of sale, and how much is kept in reserve and parceled out in 24 monthly installments)
HP’s low margins are a symptom of the mature PC sector. The personal computer has reached the S-Curve’s shoulder while very personal computers are still at the S-Curve’s knee, poised for the type of growth the PC has enjoyed over the past 30 years:
When we stare at the curve and consider that steep upward slope, when we consider what it will take to keep the ball rolling uphill, our thoughts turn to software platforms and operating systems. Is it a good idea to use a mature OS in this new genre? Will the layers upon layers of software silt that have accumulated over decades provide the proper environment for the growth of this new species? Until now, OS makers had to struggle to stay compatible with existing applications as they piled on additional modern features. Microsoft and Apple were prisoners of the past. But with the smartphone… Free at last! The smaller size provides an escape from backwards (and that is the right word) compatibility.
The smartphone isn’t just a new genre, it’s nothing less than a reboot of personal computing.
Google agrees. The very successful Android OS has been adopted by a rapidly growing number of handset makers. Recent AdMob statistics place Android ahead of the iPhone in US Web traffic. The cynics may disagree, rebutting with contrary Comscore stats and the supercilious observation that AdMob is being acquired by Google…but it doesn’t really matter. Android is ascending, and will soon show up in tablets (unless its close relative, Chrome OS, ends up as the chosen engine).
Google and Apple have seen—and have comprehended—the same opportunity. They’ve jumped on the next wave of very personal computing, in two form factors…or more…let’s see what happens with TVs.
(I’m not ignoring RIM, the maker of the very good and very successful Blackberry. It’s still the #1 smartphone in the US market, but it’s not apparent that they see what Google and Apple see. RIM seems to want to stay focused on what they do well. I’ll look more closely at RIM in a future note.)
Realists will object that the new devices aren’t as capable, as powerful, or as useful as traditional PCs. Yes…for now. We always hear this objection when a new genre emerges. What, minicomputers? They can’t do what our mainframes do. Microcomputers? You must be joking. Look at how puny they are, they don’t even have a real operating system. The interloper does less, but it also costs less—sometimes much less. It’s lighter on the wallet, and it’s also lighter on the mind, easier to live with. The incumbent fights by adding features that reinforce its dominant status, but by moving upwards it makes room for the new device which, over time, gains more power and acceptance, and firmly establishes itself.
The upstart doesn’t signal the end of the previous generation. We still have mainframes, and we’ll have PCs for a long time. But give it time and, as stated at the beginning of this note, the Center of Money will shift as customers become more comfortable with the new, lighter, sexier model, as the nascent devices gain muscle and polish. This is the future Google and Apple have in mind for their Android/Chrome and iPhone platforms.
(If you’re interested in a more in-depth discussion of Google’s Android, take a look at Andreas Constantinou’s blog. Especially “Wintel future for mobile operators” and “Is Android evil?” The comments are worth your while as well. Or see Dr. Constantinou’s meaty 65-slide deck surveying “Mobile Megatrends”. One take-away: Google wants carriers to be mere bit pipes, wireless ISPs and nothing more. They want to drive the price of smartphones to less than $100 in order to take the carrier out of the subsidy business and, as a result, loosen the carrier’s control over handsets. Free, again, at last.)
As I was researching this note, something happened: HP jumped back into the smartphone game. The premier PC company announced that it was buying Palm for $1.2B. Their own smartphone platform, the iPaq line, has been losing ground. (See the recent NY Times article, H.P., Tech Powerhouse, Stumbles in Smartphones which points out iPaq’s “steady slide into irrelevance.”) Despite Palm’s obvious woes, its WebOS isn’t one of them—au contraire, the software platform was universally praised. So, here we go, let’s write a check and get ourselves a good engine for the new race.
In a previous MondayNote, I wrote that no one would buy Palm.
I was wrong. Perhaps I should stick to predicting the past. My mistake stings even more as I wake up and realize I failed to pick up a clue lying in plain sight: Todd Bradley, the senior exec running HP’s PC business, used to be Palm’s CEO. In private conversations, he was too disciplined to be critical of Palm (even after he left) but…from marketing to system software, he exhibited an impressive command of the company’s issues. Ah well…
Acquisitions are difficult affairs that often fail for cultural reasons, and the HP/Palm deal (Palm CEO Jon Rubenstein hails it as a merger) has been questioned here and here. But Todd Bradley’s unique insights, supported by HP’s technical, financial, and market access resources, could combine to prove the skeptics wrong.
And, there’s more…
Right after the HP/Palm announcement, we heard that Microsoft killed its Courier tablet project, quickly followed by news that HP cancelled its own Slate, initially touted, by Microsoft and others, as an “iPad killer”. HP’s Slate was to run a keyboard-less version of Windows 7.
Apple, Google, and now HP have seen the past and the future: The PC business is mature and graying; the growth is with the new very personal computers. Relying on Microsoft (or even Google, unless you’re Google) for the operating system puts you in a fast race to the bottom, to meager margins, to having key decisions for your business made in Redmond or Mountain View.
The Center of Money has definitely shifted.