Monday Note

Apple will licence the iOS. An unexpected disturbance is apparent in Apple’s vaunted Supply Chain. It’s not what’s there, but what isn’t: In the past, each new iPhone was preceded by an increase in orders for displays, batteries, memory, cases, etc. But now, as we approach the September/October launch of the new iPhone 5, the manufacturing pipeline is only modestly full.

Concerned by the underflow, I put in a call to a friend at DigiTimes. Is this just a test run that portends a delayed release? According to my friend’s usual sources: No, the launch hasn’t been pushed back. The parts aren’t on order because Apple intends to produce the new iPhone in much smaller numbers offered through online sales only, plus a small subset of the Apple Stores worldwide (no more than 44 stores, says the rumor). But there will, nonetheless, be much rejoicing at the launch, because…

…Apple will announce a broad iOS licensing program.

This is great news for “rational” business people: Apple has finally come to its senses. I imagine the explosion in the media:

Apple sees the light at the end of the tunnel, and it’s the Android locomotive with Samsung at the controls.

…or…

Years ago, I told Apple’s CEO: ‘Mr. Jobs, break down that wall’. Thank Heaven, Tim Cook is a reasonable man: the Walled Garden is now open to all.

But I couldn’t help but ask: Why launch a new iPhone at all, why not leave the field fully open to Apple’s new partners? My friend was ahead of me; he had already asked the same question. The answer: Apple must set the proper hardware standards for the iOS platform while leaving room for its OEMs. The iPhone 5 isn’t an ordinary iPhone, its a design point.

As I put down the phone, I spin out the rest of this story:

In order to compete with Android, which is free but for the occasional payoff to the Redmond Patent Troll, the iOS license is forced to essentially zero, as well. Before its epiphany, Apple made about $400 per iPhone. Now enlightened, Apple’s margin for each design point iPhone is around $50 per unit, and the company makes nothing on the huge number of iOS clones sold by Samsung, HTC, Huawei and ZTE, RIM and Nokia (just kidding about these last two).

Within weeks (days?), the big Wall Street funds that own most of AAPL dump their shares and the most valuable high-tech company in history loses 90% of its market cap.

Let’s stop the fiction here and consider the very real peril in switching business models. Once you choose a path, you stick to it for the rest of your life, whether brutish and short, or long and prosperous.

In the mid-nineties, Apple tried to correct the errors of its un-licensing ways and almost paid with its life as Power Computing and Motorola siphoned gross margin money out of Apple’s P&L. When Jobs reverse-acquired Apple, one of the first things he did was stanch the bleeding by canceling the Mac OS licenses. It was met with noisy disapproval –  for a while.

With this in mind, let’s look at two other companies that are trying to finesse difficult business model moves: Microsoft and Google.

Microsoft announces its Surface tablets…pardon…Tablet PCs, and quickly finds itself between two business models: Are they offering a vertically integrated device, a la Xbox; or are they licensing a software platform, as in Windows/Office? As remarked upon by Horace Dediu and others, one day Ballmer says:

“We are working real hard on the Surface. That’s the focus. That’s our core.”

and the next, with equal strength of conviction:

“Surface is just a design point.”

Ballmer isn’t delusional, he knows he can’t dump his OEM vassals and become a vertically integrated tablet maker overnight, setting up manufacturing, distribution, and support for 100 million or more units a year. Also, PC+ wars of words aside, he sees that these annoying “media tablets” are gaining on Windows PCs.

The solution: Announce Tablet PCs that he hopes will spur HP, Dell, and Lenovo to imitate and even outdo Microsoft own Surface devices. In a perfectly Nixonian explanation, Ballmer promises that after years of forcing PC clone makers into a race to the bottom by constantly eating into their margins — and then condemning them for their shoddy products — the new, open Microsoft won’t cheat its business partners, they won’t withhold some of that “openness” for exclusive use by Microsoft’s own devices.

As with the presidential precursor, this could be a very shrewd move…and ultimately doomed.

If it works, Microsoft will have succeeded in “reimagining” Windows.

If it doesn’t work, Ballmer will have a “neither-nor” business model on his hands: He’ll have chased away partners without gaining the time and talent to create a Microsoft tablet business the size of Google’s and Apple’s. Perhaps, in Brian Hall’s words: “Someone should tell Microsoft that PC+ is about as likely as Minicomputer+“.

So far, traditional Windows OEMs have been quiet, with the (perhaps transitory) exception of HP which announced that it won’t make a Windows RT tablet. (That’s the ARM-based variant, as opposed to the more conventional Intel-based one.)

All subject to change, as we know from Ballmer’s constant zigs and zags.

With Google we see what could be the beginning of several contortions. Just like Microsoft, Google seems to have become impatient with their own subjects: “No one seems to be able to do a proper tablet…we’ll have to do it ourselves.” (We know what “proper” means, here: It’s a grudging recognition of the great degree of complexity that belies the iPad’s benign surface.)

So now we have Google’s 7″ Nexus tablet, the first such device to receive the highest of honors — A Tablet To Rival the iPad — bestowed by reviewers from the NYT, the WSJ, Ars Technica, and others.

(I’m getting mine. Here’s my order number: 15731260465432498277.1587861291707893. Thirty-six digits. They must be kidding, right? Or they’re making room for a lot of orders from exoplanets. Not enough for a Googol, though.)

Is Google’s “vertical” move into designing, manufacturing, selling, and supporting its own tablets the same as Microsoft’s? Probably not. In the past, they tried with phones made by HTC, but the experiment didn’t last. Because Amazon was able to pick Android’s lock and create the Android-based yet non-Android Kindle Fire, Google’s current move could be much more serious.

And it could carry serious risks, as well: The gentle folks at Samsung are not going to take this with a smile and a quick genuflection. If they’re not cowed by Apple, they certainly aren’t going to let Google eat into their tablet business. As for phones, there’s Google’s $12.5B subsidiary, Motorola Mobility, another irritant for Samsung and other Android smartphone makers.

Like Microsoft, Google now faces the toxic waste of its own licensing formula: A good, enthusiastically-adopted platform that launches a race to the bottom. With few exceptions, the low margins and the haste to produce model after model have starved engineering teams of the budgets and time they need to to come up with “proper” products. Google becomes unhappy, decides to “do something about it” — and thus pushes itself closer to a business model change in which it competes with its own partners.

For the first Nexus tablet, Google can sell it at cost (or close to it), just like Amazon. But Google doesn’t have Amazon’s ecosystem, its vast store of physical products and digital content that the Kindle Fire helps sell. Sooner or later, this could force Google to make tablets “for their own sake”, as a money-making business unit.

Or they could stick with the current Android strategy: An OEM platform that runs zillions of devices, all with the same goal: Expose the consumer to Google services, to the radiation of its advertising business, all the time, everywhere, on any device.

Or , like Microsoft, end up in a neither here nor there crack of the business model space.

This is going to be interesting.

– JLG@mondaynote.com

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