Search Results for: iwatch

Apple Watch Is And Isn’t…

 

The Apple Watch isn’t just another iDevice, a “wearables” accessory to the Apple ecosystem. It’s a bold attempt to create a new kind of wrist-worn personal computer that looks like a smartwatch.

In previous Monday Notes dealing with the putative iWatch and other “wearables”, I thought the new product would be a nice add-on to the iDevices ecosystem — a bit player that would make the iPhone more desirable —  but that it wouldn’t move the needle, meaning $10B or more in revenue. I reasoned that a watch battery would be too small to feed a computer powerful enough to offer a wide range of apps and communications capabilities.

I was wrong.

In his demonstration (76 minutes into the official video) at the Cupertino Flint Center last Tuesday, Kevin Lynch, the Adobe defector who now runs the Apple Watch software engineering effort, showed us that the Watch isn’t just a shrunk-down iPhone: It can stand on its own, it has introduced an entire new genre of user interface, and will have its own App Store. The reinterpreted watch crown, a side button, touch and pressure on the face, plus voice all combine to a potentially rich and unique set of ways to interact with this newest very personal computer.

As Horace Dediu, our disruption scholar, puts it:

“The Apple Watch is as much a Watch as the iPhone is a Phone.”

The almost overwhelming richness of the user interface and of demonstrated apps led one twitterer to express a concern I can’t suppress:

Dr. Drang Apple Software Army

Will the software overwhelm the hardware, resulting in problematic battery-life, or befuddle normal humans?

Indeed, I remember how I worried when Steve Jobs first demonstrated the iPhone on January 9th, 2007 and stated it ran OS X. Knowing Jobs’ occasionally robust relationship with facts, I feared embarrassment down the road. But, no. When the iPhone shipped almost six months later, on June 29th, hackers immediately dissected it and discovered it ran a bona fide pared-down version of OS X — later renamed iOS.

As with the original iPhone, we might be six months away from a shipping product, time for Apple to fine-tune its software and work on the S1 SoC (System on a Chip) that drives the watch… and to put in place the supply chain and retail operations for the many Apple Watch variations.

In the meantime, some choice morsels of context will help as we consider the impact of Apple’s new Watch. We’ll start with Marc Newson, the famed designer (and Jony Ive’s friend and collaborator)  who just joined Apple. If you haven’t done so already, take a look at this video where Newson flips through his portfolio of watch and clock designs, including this striking reinterpretation of a great classic, the Atmos Clock from Jaeger-LeCoultre:

Newson Atmos

(The pages that Newson surveys in the video are taken from a book published by Taschen, the noted publisher of lovingly designed art books.)

For more context, follow this link supplied by Kontra (a.k.a. @counternotions) and regard the sea of watch designs from Newson’s Ikepod days, a company Newson left in 2012.

Newson Ikepod Manatee

Turning to the Apple Watch mega-site, we see a family resemblance:

Apple Watches

Professional watchmakers and industry executives seem to appreciate Newson’s influence and Apple’s efforts, although they are quick to point out that they don’t think the Apple Watch is a threat to their high-end wares (“It’s a techno-toy more than a watch, but what a fun toy,” says Laurent Picciotto of Chronopassion Paris).  Watches by SJX provides a quick collation of What The Watch Industry Thinks Of The Apple Watch. Swiss watchmaker Eric Giroud voices the majority opinion:

“It’s a nice product; good shape and amazing bracelet – thank you Marc Newson for the resurrection of the Ikepod strap. It’s difficult to speak about its impact on watchmaking because the Apple Watch is not a watch except that it is also worn on the wrist.”

Benjamin Clymer is the editor of Hodinkee, an on-line magazine dedicated to the world of watches. In a post titled A Watch Guy’s Thoughts On The Apple Watch, Clymer provides a review that’s informed by a deep personal knowledge of the watch scene. If you don’t have time to read the whole article — it’s a long piece — the author provides a good summary in the introduction [emphasis mine]:

[…] though I do not believe it poses any threat to haute horology manufactures, I do think the Apple Watch will be a big problem for low-priced quartz watches, and even some entry-level mechanical watches. In years to come, it could pose a larger threat to higher end brands, too. The reason? Apple got more details right on their watch than the vast majority of Swiss and Asian brands do with similarly priced watches, and those details add up to a really impressive piece of design. It offers so much more functionality than other digitals it’s almost embarrassing. But it’s not perfect, by any means.

Not everyone in the watch industry is so impressed. In an article titled Apple Watch ‘too feminine and looks like it was designed by students’, says LVMH executive, The Telegraph provides the money quote [emphasis mine]:

“To be totally honest, it looks like it was designed by a student in their first trimester,” added Mr Biver, who heads up the brands Tag Heuer, Zenith and Hublot.

The article evoked general hilarity and prompted more than one commenter to dig up the infelicitous Ed Colligan quote about the iPhone:

“PC guys are not going to just figure this out. They’re not going to just walk in.”

I’ll offer a rewrite for Jean-Claude Biver and his haute horlogerie colleagues:

“We like Apple products, they provide productivity and fun in our daily lives; we respect the sense of design Sir Jony and now Marc Newson bring to the company. I wish I could say more but, try as I might, I couldn’t get the livestream of Mr. Cook’s presentation to work in my Rue de Rive office in Geneva. First, there was this Mandarin dubbing, I can understand why but it was really annoying. Then, the transmission kept breaking down. I imagine that the tons of concrete now being poured for Apple’s next headquarters will provide a suitable resting place for the individual in charge.
Again, congratulations on a well-executed global launch.”

More seriously, let’s put streaming glitches glitches aside, they won’t matter in the longer run because they don’t concern the product itself. Last week’s launch, its detailed preparations, including the no-longer mysterious white building, attest to the gravity of Apple’s long-term ambition.

As additional evidence that the Apple Watch isn’t just a hobby, recall that the iPhone was initially offered in one size and one color. By comparison, the Apple Watch is an explosion: It comes in three styles and two sizes (in millimeters, 38 and 42, because that’s the trade vocabulary), two material/finishes for each style (silver and space gray, yellow or rose gold), nine bands for the basic Apple Watch, six for the Apple Watch Sport, and at least four for the gold Apple Watch Edition — and all with matching crown buttons.  Henry Ford has definitely left the building.

The fact that Apple invited fashion editors to Cupertino (some of whom had to be told where that town is) is another Think Different sign. Nerds are still welcome, but this is a new game. Again, turn to the Apple Watch site and look at the bands/bracelets. As Ben Clymer notes in his piece, the level of detail tells us this isn’t just another iDevice.

Stepping back a little, when I see the team of watch industry execs, design luminaries, and fashion experts Apple has brought on board, I have a hard time believing that Apple is going to stop at watches. At the very least, will Mssrs. Ive and Newson bring livelier, more varied designs to the iPhone? And what does Tim Cook mean when he slyly alludes to products that “haven’t even been rumored yet…”?

But let’s not get ahead of ourselves — we’re still barely past the demo. We’ll have to wait for the actual product to come to the wrists of real users. Only then will we have the Apple Watch make-or-break moment: Word-of-mouth from non-experts.

And, still in the not getting ahead of ourselves department, for Apple, today’s make-or-break product is the iPhone 6. The Apple Watch makes great “ink” and iPhones make the money.

JLG@mondaynote.com

iWatch Thoughts

 

Unlike the almost forgotten Apple TV set, there might be a real product in the iWatch. But as rumors about the device intensify, the scuttlebutt conveniently skirts key questions about the product’s role.

As reverberations of Apple’s Developer Conference begin to die down, the ever-dependable iWatch has offered itself as the focus of another salvo of rumors and speculation. Actually, there’s just one rumor — a Reuters “report” that Quanta Computer will begin manufacturing the iWatch in July — but it was enough to launch a quick-fire series of echoes that bounced around the blogosphere. Not to be outdone, the Wall Street Journal added its own tidbits:

“Apple is planning multiple versions of a smartwatch…[that] will include more than 10 sensors to track and monitor health and fitness data, these people said.”

(“These people” are, of course, the all-knowing “people familiar with the matter”.)

The iWatch hubbub could be nothing more than a sort of seasonal virus, but this time there’s a difference.

At the WWDC three weeks ago, Apple previewed HealthKit, a toolkit iOS developers can use to build health and fitness related applications. HealthKit is a component of the iOS 8 release that Apple plans to ship this fall in conjunction with the newest iDevices. As an example of what developers will be able to do with HealthKit, Apple previewed Health, an application that gives you “an easy-to-read dashboard of your health and fitness data.”

The rumor that Quanta will soon begin “mass production” of the iWatch — the perfect vehicle for health-and-fitness apps — just became a bit more tantalizing… but there are still a number of questions that are left unanswered.

Foremost is iWatch “independence”. How useful will it be when it’s running on its own, unconnected to a smartphone, tablet, or conventional PC? My own guess: Not very useful. Unless Apple plans to build a monstrosity of a device (not likely), the form factor of our putative iWatch will dictate a small battery, which means the processor will have to be power-conserving and thus unable to run iPhone-caliber apps. Power conservation is particularly important if Apple wants to avoid jibes of the ‘My iWatch ran out of battery at the end of the day’ type. Such occurrences, already annoying with a smartphone, could be bad publicity for a “health and fitness” watch.

So, let’s settle for a “mostly dependent” device that relies on a more robust sibling for storage, analysis, and broad overview.

That raises another question: Will the iWatch be part of Apple’s ecosystem only, or will it play nice with Windows PCs or even Android smartphones? If we take Apple’s continued tolerance of the Android version of Beats Music (at least so far) as an example, the notion of an Apple device communicating with a member of the Android tribe is less heretical than it once was. Again, my own guess: Initially, the iWatch will be of restricted to the Apple ecosystem. We’ll see what happens if the device catches on and there’s a demand for an “non-denominational” connection.

As for what role the iWatch will play in the ecosystem, those of us ancient enough might recall the example set by the Smart Personal Objects Technology (SPOT) that Microsoft launched a decade ago. No need to repeat that bit of doomed history by targeting too many platforms, by trying to make “Smart Objects” omniscient. Instead, Apple is likely, as it insisted at its early June WWDC, to tout its Continuity ethos: Let each device do what it does best, but don’t impede the flow of information and activities between devices. In plainer English: Hybrid devices are inferior.

So, besides telling time (perhaps in Yosemite’s new system font, a derivative of Helvetica Neue) what exactly will the iWatch do? The first part of the answer is easy: It will use its sensors to collect data of interest. We’ve already seen what the M7 motion processor and related apps can do in an iPhone 5S; now imagine data that has much finer granularity, and sensors that can measure additional dimensions, such as altitude.

Things quickly get more complicated when we turn to the “other side of the skin”. Heart rhythm and blood pressure measurements look banal, but they shouldn’t be taken for granted, especially if one wants medically reliable data. Oxymetry, the measurement of your oxygen saturation, looks simple — you just slide a cap onto your fingertip — but that cap is actually transmitting lightwaves through your finger. A smartwatch can’t help the nearly 18 million US citizens who suffer from Type II Diabetes (a.k.a Adult Onset Diabetes)  because there are no non-invasive methods for measuring blood sugar. And even as the technical complications of collecting health data are surmounted, device makers can find themselves skirting privacy issues and infringing the HIPAA charter.

The iWatch will also act as a receiver of data from a smartphone, tablet, or PC. This poses many fewer problems, both technical and ethical, than health monitoring, but it also offers few opportunities. Message notifications and calendar alerts are nice but they don’t create a new category, and they certainly haven’t “moved the needle” for existing smartwatches. In a related vein, one can imagine bringing the iWatch close to one’s face and speaking to Siri, asking to set up a calendar event, or sending a text message… but, as with the trend towards larger smartphone screens, one must exercise care when fantasizing about iWatch use cases.

Then we have the question of developers and applications — where’s the support for iWatch app creators? When the iOS App Store opened in 2008, the iPhone became an app phone and solidified the now universal genre. What iWatch rumors fail to address is the presence or absence of an iWatch SDK, of iWatch apps, and of a dedicated App Store section.

Meanwhile, Google has already announced its Android Wear platform and has opened a “Developer Preview” program. Conventional wisdom has it that the Google I/O convention next week will focus on wearables. Samsung has been actively fine-tuning and updating the software for its line of Galaxy Gear smart watches (the watches originally ran on an Android derivative but now use Tizen – until next week).

Finally, we have the question of whether an iWatch will sell in numbers that make the endeavor worthwhile. As the previously-mentioned WSJ story underlines, the smartwatch genre has had a difficult start:

“[...] it isn’t clear how much consumers want the devices. Those on the market so far haven’t sold well, because most wearable devices only offer a limited set of features already found on a smartphone.”

The most ambitious rumors project 50 million iWatches sold in the first 12 months. I think that’s an unrealistic estimate, but if a $300 iWatch can sell at these numbers, that’s $15B for the year. This seems like a huge number until you compare it to a conservative estimate for the iPhone:  50 million iPhones at $650 generates $32B per quarter.

Taking a more hopeful view, let’s recall the history of the iPad. It was a late entrant in the tablet field but it coalesced and redefined the genre. Perhaps the the iWatch will establish itself as The Smartwatch Done Right. But even if it succeeds in this category-defining role, it won’t have the power and flexibility or the huge number of apps of a true trouser pocket computer. As a result, the iWatch will be part of the supporting cast, not a first order product like the iPhone. There’s nothing wrong with that — it might help make high-margin iPhones even more attractive — but it won’t sell in numbers, dollar volume, or profit comparable to the iPhone or iPad. The iWatch, if and when announced, might be The Next Big Thing – for the few weeks of a gargantuan media feast. But it won’t redefine an industry the way PCs, smartphones and tablets did.

JLG@mondaynote.com

 

Wearables Fever

 

While Google, Motorola, and Samsung seem eager to jump into the wearables market, Apple characteristically keeps its counsel – and wisely so: Smartwatches and other wearables produce more pageviews than profits.

Wearables are a danger to your health – your mental health, that is. Smartwatches and sensor-laden bracelets aren’t so new anymore — see Microsoft’s 2004 SPOT Watch — but the vernal equinox seems to have triggered a bout of Wearables Fever the likes of which we haven’t seen since the Tablet Fever of January, 2011, when 76 tablets were announced at the Consumer Electronic Show in Las Vegas. As so often happens with pandemics, there was a smaller outbreak, called the Dawn of the Tablet PC, days before the January 2010 iPad launch.

In this year’s derangement, we are witnessing the birth of another epoch-making class of product — the Wearable. As Wired sees it, for example, Jawbone Is Now the Startup Apple Should Fear Most.

In one respect, Jawbone’s devices are a lot like Apple’s. The company admires minimalism…[b]ut Apple’s minimalism is cold — all brushed metal and glass — while Jawbone’s is warm, squishy, and textured… There’s a chance Apple has designed itself into a corner. But for Jawbone, the future is full of possibility.

Then there’s this analysis, quoted and mocked by John Gruber [emphasis mine]:

Cadie Thompson, writing for CNBC, “Time Is Ticking for Apple to Announce an iWatch, Say Analysts”. Apple needs an iWatch sooner rather than later, or the company will risk losing its innovative edge to rivals, analysts say.

They only have 60 days left to either come up with something or they will disappear,” said Trip Chowdhry, managing director at Global Equities Research. “It will take years for Apple’s $130 billion in cash to vanish, but it will become an irrelevant company… it will become a zombie, if they don’t come up with an iWatch.

I’m guessing the ellipsis denotes when he paused for another line of coke.

Parenthetically, it would be wrong to imply that Mr. Chowdhry might be “incentivized” to shout from the rooftops by rewards more satisfying than pageviews — no allegations of stock manipulation complicity here — but I wonder about the games that he and other anal-ists play. As Philip Elmer-DeWitt pointedly noted in a CNN Money column last year, Mr. Chowdhry urged his clients to unload Apple stock for eight months and then blamed the CEO and CFO “for destroying Apple’s shareholder value”.

If you’re curious enough to look at Mr. Chowdhry’s spartan Global Equities Research site, you’ll see he claims to have Commission Sharing Agreements with Goldman Sachs, Merrill Lynch, Barclays, Jefferies, Morgan Stanley and JP Morgan. As the Wikipedia article points out, such agreements “ask that broker to allocate a portion of the commission directly to an independent research provider.” Here, one wonders what the word independent really means…

Back to Wearables: The announcements pile on.

Samsung tells us they’re moving their smartwatches away from Android to a version of Tizen, itself based on a version of the ubiquitous Linux.

Google announces Android Wear, a version of Android for smartwatches.

Motorola, soon to be a Lenovo brand, announces that its moto 360 smartwatch is “Coming Summer 2014 in a selection of styles” and provides these artful renderings:

Moto Wrist Edited

and…

Moto Modern

(I write renderings because, as the Android Wear intro video indicates, these are simulated pictures. This doesn’t mean that the final product won’t be better looking– but we’re clearly not there yet.)

Why the haste? Did Tim Cook succeed in misdirecting Apple’s competition when he pronounced wearables a “very key branch of the tree? Or is there a giant business to be had?

We have many unanswered questions.

First, paraphrasing Horace Dediu, there are the twin questions of For What and By Whom: For what job is a smartwatch “hired”, and by whom? If we look at phones as a model, we see two “employers”: Carriers hire smartphones to increase their ARPU; normal consumers use them as small, ubiquitous, always-connected personal computers.

Will this model work for smartwatches? We can almost certainly eliminate carriers from the equation: Subsidies are out of question because a watch is unlikely to generate carrier revenue.

For us users, a smartwatch collects sensor data, connects to our smartphone, displays alerts, responds to touch and voice commands… and even tells us the time. These are all worthwhile functions that make for neat promo videos, but to keep users interested after the novelty wears out, smartwatches will have to do more than log the miles we’ve run, give us weather updates, and show us the name of the person who’s ringing the smartphone in our pocket. Put another way: We’re willing to pay a premium for our smartphones (whether directly or by contract) because of the huge range of features they provide, the enormous number of apps in the app stores. Will we be as durably aroused – and willing to part with substantial amounts of money – by (yet another) pulse rate app?

Another batch of questions: Since we no longer need a dedicated timepiece to tell us the time — our smartphone does that — Who wears a (dumb) watch these days, How, When, and Why?

Simplifying a bit, younger people don’t wear watches at all and older generations use them as jewelry — and gender-specific jewelry, at that. Furthermore, how many veteran watch-wearers wear the same watch all the time? Many of us own more than one watch, and select the appropriate timepiece (or two — or none at all) for the occasion. These aren’t trivial issues, they’re uncharted territory for mobile device makers and marketers.

Next question: How will smartwatch makers handle the delicate equilibrium between computing power and battery power? As smartwatches evolve and offer more features, a better display, and a more responsive user interface, they’ll need more computing power — and more computing power means a quicker battery drain. Will we put up with watches that run out of power at the end of the day? Will designers retard functionality in order to extend battery life to 24 hours and beyond… or make a smartwatch so big it’ll look like a miniature phone?

The power equilibrium question is why Samsung moved to a dedicated (and pared down) version of Tizen, and why Google did the same for Android Wear. All without giving much information of battery life.

Finally: Is there a business, there? Here in the Valley, Pebble CEO Eric Migicovsky claims to have sold 400,000 watches since January, 2013. At around $150 each, that’s $60M in revenue — a real tribute to Eric’s long-standing belief in wearables (he’s been working at it for six years).

But even if you multiplied this number by 10, it would barely nudge the needle for a large companies such as Samsung, Motorola/Lenovo, or Apple, which means these devices will be confined to the role of smartphone companion. They’ll help make money by enhancing the main product; they’re not going to be a $10B business in themselves.

As Charles Arthur writes in The Guardian, there are fewer than half a million smartwatches in use in the UK: “Wearable computing faces an uphill battle breaking through to the mainstream…”. Similarly, the Register doesn’t see any good, large-scale answers to the question. It calls Google wearables “A solution looking for a rich nerd”.

These challenges might explain why Apple doesn’t seem to have caught this Spring’s Wearables Fever. Smartwatches are destined to be ecosystem extensions, not The Next Big Thing.

JLG@mondaynote.com

One last thought before we close: Not all Ecosystem Extensions are equal. The no-longer-a-hobby Apple TV now brings substantial revenue and growth:

“Sales of the Apple TV are estimated to have grown by 80 percent in 2013, reaching around 10 million units for the calendar year, or some $1 billion worth of set-top boxes sold to end users.”

Horace Dediu puts a “Fortune 130” label on iTunes. By itself, with yearly gross revenue of $23.5B and growing 34%, iTunes is large enough to rank #130 in the Fortune list of the 500 largest US companies:

On a yearly basis iTunes/Software/Services is nearly half of Google’s core business and growing slightly faster.”

While music sales are on the wane, apps and video (mostly Apple TV) show healthy growth. Compared to an Apple TV, how much would an iWatch add to the iTunes business? Apps? Content?

Apple seems wise to stay out of the game until it can make something more lasting than a novelty.

The Apple Game: New Categories vs. Ecosystem Development

 

Putting hopes for Apple’s future on a magical New Category misunderstands the company’s real direction. Instead, Apple stays the course and continues to play its Ecosystem Game. Many interpret this as a company in death throes.

The iPhone is 7 years old. The iPad was introduced 4 years ago. Since then… nothing.
Apple’s growth is gone: a mere 9% revenue uptick in 2013; only 6% for the last quarter.

It’s time to acknowledge the painfully obvious truth: Innovation has deserted Apple. Something must have gone seriously wrong if the company can no longer break into new categories.

This is the refrain that echoes through the Web… and this is the toxic waste of success.

It started back in the early 80’s when all we wanted was a better Apple ][ (or a working Apple ///)… and we were stunned by the Macintosh. We were unable to imagine a mouse + a bit-mapped display + moveable windows + pull-down menus, all the things that came to define the next iteration of personal computers. We couldn’t imagine it because we didn’t have the right words to think with.

The Mac created a template for what we’ve come to expect from Apple: A breakthrough. Now we’ve had two epochal hits in rapid succession — the iPhone and iPad — and, once again, we’re hooked. We need another fix, another burst of excitement, something New and Different. We’re no longer satisfied with the boring New and Improved.

The desire for Something New is understandable, but breakthroughs don’t happen on demand… and a “breakthrough” isn’t always necessary.

Consider the PC. In rough numbers, the PC is 40 years old. In that time, it has matured into what we now enjoy through gradual improvements to hardware and software: Better graphics, sound, displays, user interface, network connectivity.

Why don’t we take as much pleasure in the continuous flow of improvements to our smartphones and tablets?

When we regard the new categories that Apple has “failed” to create (or join) we face a number of problems.

We’ll make short work of the fantasized Apple TV set. We all know what we want: à la carte content served to us as apps through an Apple-grade device. We’ve had enough of the Soviet-era set-top boxes and tiered pricing foisted on us by cable companies.

Even if Apple wanted to head in that direction — and step into the quagmire of exploitative relationships between content creators, distributors, and de facto carrier monopolies — the impact on the company’s top and bottom lines, revenue and profit, would be moderate. Ten million set-top boxes at (say) $299 makes “only” $3B — that’s less than 2% of last year’s revenue.

(A short digression on the curse of large numbers: At Apple’s size, which is approaching $200B in yearly revenue, a “breakthrough” product would need to generate at least 5%  — $10B — in order to move the needle. That’s approximately one Facebook.)

What about wearables? It’s a lively category and will get livelier as sensors get more sophisticated, consume less energy, and benefit from software refinements. Microsoft had one years ago; Pebble, Samsung, and many others offer “smartwatches”; Fitbit and Jawbone Up manufacture “fitness bracelets”.

My take on smartwatches and bracelets (The Next Apple TV: iWatch, More iWatch Fun and Apple’s Wearable Future) is that Apple is already in that category – with the “Always With Us” iPhone and motion sensing, and with apps such as Azumio’s Instant Heart Rate app.

We now turn to cars. The CarPlay announcement at the Geneva Motor Show follows the iOS in the Car presentation at last year’s WWDC (Apple’s Developers Conference).

We have to ask: How does the CarPlay money pump work, and in which direction? Does Mercedes Pay Apple, or the other way around? On the technical and User Interface levels, how does the tightly controlled and consistent Apple experience survive the wide range of UI cultures and cost constraints so painfully obvious in today’s cars? On its CarPlay webpage, Apple makes broad promises:

“To activate Siri voice control, just press and hold the voice control button on the steering wheel.”
“If your CarPlay-equipped vehicle has a touchscreen, you can use it to control CarPlay.”

and..

“CarPlay also works with the knobs, dials, or buttons in the car. If it controls your screen, it controls CarPlay.”

We’ll have to wait and see how “the apps you want to use in the car have been reimagined” and how automakers play one smartphone ecosystem against another.

In any case, CarPlay isn’t a product that’s meant to stand on its own. In Apple’s own words, it’s part of the iPhone ecosystem:

“CarPlay is a smarter, safer way to use your iPhone in the car. CarPlay takes the things you want to do with your iPhone while driving and puts them right on your car’s built-in display.”

A not-so-surprising  pattern emerges: Rather than play the New Category game, Apple stays the Ecosystem Development course it’s been on since the advent of the truly epoch-making iTunes. Tim Cook may claim that the $99 Apple TV black puck Tim Cook is no longer a hobby”, but its yearly revenue is in the $1B range, less than 1% of the company’s overall number. Apple may make a wearable someday, but will everyone want an iWatch the way they want an iPhone? And let’s not expect direct revenue upticks from CarPlay, just a more pleasant iPhone experience in “selected” vehicles.

This gets us to Apple’s deeply rooted fixation: From its April 1st, 1976 founding to this day, Apple has been in one and only one business: personal computers. Today, they come in three sizes: Macs, iPads, and iPhones. Everything else Apple creates — iTunes, the App Store, the physical Apple Stores, Apple TV pucks, CarPlay, the mythical iWatch — these are all part of the supporting cast, and they have a single mission: Prop up the volume and margins of the star products.

This isn’t to diminish the importance of the supporting cast. iTunes begat the iPod, a product once so successful it generated more revenue than the Mac in 2006. iTunes also introduced the distribution mechanism and micro-payment system that unleashed the iPhone’s full power, that made it an “app-phone”. As our friend Horace Dediu points out, iTunes by itself would rank #130 in the Fortune 500 list (yearly gross revenue of $23.5B, + 34% growth in 2103).

Nonetheless, iTunes doesn’t have a separate P&L (Profit & Loss) statement in Apple’s financials because there’s only one P&L for the entire company. There are no “line of business” numbers because there’s only one business.

As the Macalope explains, ecosystems are put to very different uses by Amazon and Google, on the one hand, and Apple:

“Amazon and Google sell tablets at cut rates in order to get people to use their ecosystems. It’s less crucial for them that people buy tablets; they just want people to use tablets to buy stuff and look at ads. Apple makes money off its ecosystem, too, but unlike Amazon and Google that’s not where it makes most of its money.”

Still, there is another possibility. Apple could get into an entirely new business, as opposed to one or more of the ecosystem-supporting products/services mentioned above. One such example is Amazon Web Services (AWS). Instead of opening another line of product sales, fresh produce or wine, Amazon got into the business of renting servers to companies large and small. It’s not Amazon’s biggest line, it weighs less than 3% of total revenue, it’s thought to be very profitable (unlike the main lines) and grows very fast. Gartner thinks AWS is now larger than its next five competitors combined. An amazing success.

Amazon did it because it developed a superior computer services infrastructure  for its core business and decided to offer similar services to any and all.

Back to Apple, could one imagine the company using some of its hard-earned expertise to branch in a different, non personal computers business? For a not-too-serious example, Porsche makes cars and there is a Porsche Design business. But I don’t see Tim Cook telling Sir Jony to open a design studio business. And Porsche Design weighs nothing compared to the Porsche car maker. Such branching out sounds very remote.

So is it true that Apple has given up on developing its business? In 2013, Apple increased its R&D spending by 32% (you can download Apple’s entire 10-K report here); 2012 was + 39%. In the previous two fiscal years ending last September — and without entering any new category — Apple increased its R&D spending by 83% to $4.5B, 3% of revenue. And then it increased it by another 33% in the December, 2013 quarter.

Accelerated R&D spending can only mean one thing: Apple is widening the range of products under development. Let’s just hope company execs continue to be as good as they’ve been in the past at saying No, at not shipping everything they engineer.

JLG@mondaynote.com

 

Amazon and Apple Business Models

 

Amazon “loses” money, Apple makes tons if it. And yet, Wall Street prefers Jeff Bezos’s losses to Tim Cook’s. A look at the two very different cash machines will help dispel the false paradox.

The words above were spoken by an old friend and Amazon veteran, as three French émigrés talked shop at a Palo Alto watering hole. The riposte would fit as the epigraph for The Amazon Money Pump For Dummies, an explanation of Amazon’s ever-ascending stock price while the company keeps “losing money”.

(I don’t like the term Business Model, and Bizmodel even less so. I prefer Money Pump with its lively evocations: attach the hose, adjust the valves, prime the mechanism, and then watch the flow of money from the customer’s pocket to the investor’s purse).

Last quarter, Amazon’s revenue grew by 24% year-on-year, and lost about 1% of its net sales of $17B. This strong but profitless revenue growth follows an established pattern:

AMZN No Profit Growth copy
Despite the company’s flat-lined profits, Wall Street loves Amazon and keeps sending its shares to new heights. Since its 1997 IP0, AMZN has gone from $23 to $369/share:

298 share 21x
How come?

[Professional accountants: Avert your eyes; the following simplification could hurt.

Profit isn't cash, it's merely an increase in the value of your assets. Such increase can be illiquid. Profit is an accountant's opinion. Cash is a fact.]

Amazon uses its e-commerce genius to prime the money pump. The company seduces customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer attention. What keeps the pump going is the lag between the moment they ding my credit card and the time that they pay Samsung for the Galaxy Note tablet I ordered. Last quarter, Amazon’s daily revenue was about $200M ($17B divided by 90 days). If it waits just 24 hours to pay its suppliers, the company has $200M to play with. If it delays payment for a month, that’s $6B it can use to invest in developing the business. Delay an entire quarter…the numbers become dizzying.

But, you’ll say, there’s nothing profoundly original there. All businesses play this game, retail chains depend on it. Definitely — but what sets Amazon apart is what it does with that flow of free cash. The company is relentless in building the best services and logistics machine on Earth. Just this week, we read that Amazon has hired the US Post Office to deliver Amazon packages (only) on Sundays.

Amazon uses cash to build a better Amazon that keeps bringing in more cash.

Why do suppliers “loan” Amazon such enormous amounts of cash? Why do they let the company grow on their backs? Because, just like Wall Street, they trust that the company will keep growing and give them ever more business. Amazon might be a hard taskmaster, but it can be trusted to pay its bills (eventually) — the same cannot be said of some other retail organizations.

Amazon doesn’t care that it doesn’t make a “profit” on the sale of a box of Uni-Ball pens that it ships for free. Rather, it focuses on pumping enormous amounts of cash into the virtuous spiral of an ever-expanding business. Wall Street rewards the company with an equally expanding market cap.

How long can Amazon’s expansion last? Will the tree grow to the sky? If we consider a single line of business — books, for example — saturation will inevitably set in. But one of the many facets of Bezos’ genius is that he’s always been able to find new territories. Amazon Web Services is one area where the company is now larger than all of its competitors combined, and shows no sign of slowing down or of approaching saturation.

In the end, we mustn’t be fooled by the simplicity of Amazon’s money pump. Bezos’ genius is in the implementation, in the details. Like a chef who’s not afraid to disclose his recipes, Bezos writes to his shareholders every year — his missives are all here — And he always appends his first 1997 letter, thus reminding everyone that he’s not about to lose the plot.

The other friend in this conversation, an old Apple hand, happily nodded along as our ex-Amazon compatriot told stories from his years in the Seattle trenches. When asked about the Apple money pump and why Wall Street didn’t seem to respect Apple’s huge profits, he started with an epigraph of his own:

The simplest encapsulation of Apple’s business model is the iPod.

To paraphrase: The iPod is the movie star, it brings the audience flocking to the theatre; iTunes is the supporting cast.

iTunes was initially perceived as a money-losing operation, but without it the iPod would have been a good-looking but not terribly useful piece of hardware. iTunes propelled iPod volumes and margin by providing an ecosystem that comprised two innovations: “music by the slice” (vs. albums,) and a truly new micro-payment system (99 cents charged to a credit card).

That model is what powers the Apple money pump today. The company’s personal computers — smartphones, tablets, and laptops/desktops — are the movie stars. Everything else exists to make these lead products more useful and pleasant. Operating systems, applications, stores, Apple TV, the putative iWatch…they’re all part of the supporting cast.

Our Apple friend offered another thought: The iPod marked the beginning of the Post-PC era. By 2006 — a year before the introduction of the iPhone — iPod sales had exceeded Mac revenue.

Speaking of cash, Apple doesn’t need to play Amazon’s timing games. Product margins range from 20-25% for desktops and laptops (compared to HP’s 3-5%), to 65% or more for iPhones. With cash reserves reaching $147B at the end of September 2013, Apple has had to buy shares back and pay dividends to bleed off the excess.

Far from needing a “loan” from its suppliers, Apple heads in exactly the opposite direction. On page 37 of the company’s 2013 10-K (annual) filing, you’ll find a note referring to “third-party manufacturing commitments and component purchase commitments of $18.6 billion“. This is a serious cash outlay, an advance to suppliers to secure components and manufacturing capacity that works out to $50 for every person in the US…

Wall Street’s cautious regard for Apple seems ill-advised given Apple’s ability to generate cash in embarrassing amounts. As the graph below shows, after following a trajectory superficially similar to Amazon’s, Apple apparently “fell from grace” in 2012:

298 fall from grace
I can think of two explanations, the first one local, the other global.

During Fiscal 2012, ending in September of that year, Apple’s Gross Margins reached an unprecedented high of 43.9%. By all standards, this was extremely unusual for a hardware company and, as it turned out, it was unsustainable. In 2013, Apple Gross Margin dropped by more than 6 percentage points (630 basis points in McKinsey-speak), an enormous amount. Wall Street felt the feast was over.

Also, Fiscal 2013 was seen as a drought year. There were no substantial new products beyond the iPhone 5 and the iPad mini announced in September and October 2012, and there was trouble getting the new iMacs into customers’ hands during the Holiday season.

More globally important is the feeling that Apple has become a “hits” business. iPhones now represent 53% of Apple’s revenue, and much more (70%?) of its profits. They sell well, everything looks rosy…until the next season, or the next round of competitive announcements.

This is what makes Wall Street nervous: To some, Apple now looks like a movie studio that’s too dependent on the popularity of its small stable of stars.

We hear that history will repeat itself, that the iPhone/iPad will lose the battle to Android, just as the Mac “lost” to Windows in the last century.

Our ex-Apple friend prefers an automotive analogy. Audi, Tim Cook’s preferred brand, owns a small portion of the luxury car market (about 7.5%), but it constantly posts increasing profits — and shows no sign of slacking off. Similarly, today’s $21B Mac business holds a mere 10% of the PC market, but Apple “uses” that small share to command 45% of market profits. The formula is no secret but, as with Amazon’s logistics and service, the payoff is in the implementation, how the chef combines the ingredients. It’s the “mere matter of implementation” that eluded Steve Ballmer’s comprehension when he called the MacBook an Intel laptop with an Apple logo slapped on it. Why wouldn’t the Mac recipe also work for smartphones and tablets?

JLG@mondaynote.com

 

Apple Under Siege

 

Two years after Steve Jobs left us, Apple now wears Tim Cook’s imprint and, for all the doubt and perpetual doomsaying, seems to wear it well. One even comes to wonder if the Cassandras aren’t in fact doing Apple a vital favor.

Last Friday, Tim Cook issued a somber remembrance to Apple employees:

Team-
Tomorrow marks the second anniversary of Steve’s death. I hope everyone will reflect on what he meant to all of us and to the world. Steve was an amazing human being and left the world a better place. I think of him often and find enormous strength in memories of his friendship, vision and leadership. He left behind a company that only he could have built and his spirit will forever be the foundation of Apple. We will continue to honor his memory by dedicating ourselves to the work he loved so much. There is no higher tribute to his memory. I know that he would be proud of all of you.
Best,
Tim

I am one of the many who are in Steve’s debt and I miss him greatly. I consider him the greatest creator and editor of products this industry has ever known, and am awed by how he managed the most successful transformation of a company — and of himself — we’ve ever seen. I watched his career from its very beginning, I was fortunate to have worked with him, and I thoroughly enjoyed agreeing and disagreeing with him.

I tried to convey this in an October 9th, 2011 Monday Note titled Too Soon. I just re-read it and hope you’ll take the time to do the same. You’ll read words of dissent by Richard Stallman and Hamilton Nolan, but you’ll mostly find praise by Barack Obama, John Stewart, Nicholson Baker in the New Yorker, and this elegant image by Jonathan Mak:

steve_silouhette

Two years later, we can look at Apple under Tim Cook’s leadership. These haven’t been an easy twenty-four months: Company shares have gone on a wild ride, execs have been shown the door, there was the Maps embarrassment and apology, and there has been a product drought for most of the last fiscal year (ending in September).

All of this has provided fodder for the Fox Newsstands of the Web, for netwalkers seeking pageviews. The main theme is simple and prurient, hence its power: Without Steve, Apple is on the decline. The variations range from the lack of innovation — Where’s the Apple TV?, the iWatch?, the next Big Thing? — to The Decline of The Brand, Android Is Winning, and Everything Will Be Commoditized.

Scan Philip Ellmer-DeWitt’s Apple 2.0 or John Gruber’s Daring Fireball and treat yourself to intelligent repudiations of this incessant “claim chowder“, discredited pontifications. I’ll extract a few morsels from my own Evernote stash:

Apple’s press conference showed a brand unraveling, or so said VentureBeat in March, 2012. Eighteen months later, Apple passed Coca-Cola to become the world’s most valuable brand.

How Tim Cook can save himself (and Apple), subtitled, for good measure: What the confused Apple CEO can do to avoid getting canned and having to slink away with nothing but his $378 million compensation package as comfort. Penned by a communications consultant who “teaches public relations at NYU”, the article features an unexpected gem: Cook should buy a blazer. You know, “to break the deleterious chokehold of the Steve Jobs’ [sic] legacy”.

Apple: The Beginning of a Long Decline? (note the hedging question mark.) This LinkedIn piece, which questions the value of the fingerprint sensor, ends with a lament:

There was no sign of a watch. So those of us in Silicon Valley are left watching, wondering, and feeling a little empty inside… Jobs is gone. It looks like Apple’s magic is slowly seeping away now too.

Shortly thereafter, Samsung’s iWatch killer came out…and got panned by most reviewers.

Last: Apple’s Board of Directors are concerned about Apple’s pace of innovation, says Fox Business News Charlie Gasparino, who claims to have “reliable sources”.

Considering how secretive the company is, can anyone imagine a member of Apple’s Board blabbing to a Fox Business News irrespondent?

Despite the braying of the visionary sheep, Tim Cook never lost his preternatural calm, he never took the kommentariat’s bait. Nor have his customers: They keep buying, enjoying, and recommending Apple’s products. And they do so in such numbers — 9 million new iPhones sold in the launch weekend — that Apple had to file a Form 8-K with the Security and Exchanges Commission (SEC) to “warn” shareholders that revenue and profits would exceed the guidance they had provided just two months ago when management reviewed the results of the previous quarter.

In Daniel Eran Dilger’s words, Data bites dogma: Apple’s iOS ate up Android, Blackberry U.S. market share losses this summer:

Apple’s increase accounted for 1.5 of the 1.6 percentage points that Android and Blackberry collectively lost. This occurred a full month before the launch of Apple’s iPhone 5s and 5c and the deployment of iOS 7.

Regarding the “Apple no longer innovates” myth, Jay Yarow tells us why Apple Can’t Just ‘Innovate’ A New Product Every Other Year. His explanation draws from a substantial New York Times Magazine article in which Fred Vogelstein describes the convergence of company-wide risk-taking and engineering feats that resulted in the iPhone:

It’s hard to overstate the gamble Jobs took when he decided to unveil the iPhone back in January 2007. Not only was he introducing a new kind of phone — something Apple had never made before — he was doing so with a prototype that barely worked. Even though the iPhone wouldn’t go on sale for another six months, he wanted the world to want one right then. In truth, the list of things that still needed to be done was enormous. 

It’s a great read. But even Vogelstein can’t resist the temptation of inserting a word of caution: “And yet Apple today is under siege…” 

This is something I heard 33 years ago when I signed up to start Apple France in 1980, and I’ve heard it constantly since then. I’ll again quote Horace Dediu, who best summarizes the concern:

“[There's a] perception that Apple is not going to survive as a going concern. At this point of time, as at all other points of time in the past, no activity by Apple has been seen as sufficient for its survival. Apple has always been priced as a company that is in a perpetual state of free-fall. It’s a consequence of being dependent on breakthrough products for its survival. No matter how many breakthroughs it makes, the assumption is (and has always been) that there will never be another. When Apple was the Apple II company, its end was imminent because the Apple II had an easily foreseen demise. When Apple was a Mac company its end was imminent because the Mac was predictably going to decline. Repeat for iPod, iPhone and iPad. It’s a wonder that the company is worth anything at all.”

I recently experienced a small epiphany: I think the never-ending worry about Apple’s future is a good thing for the company. Look at what happened to those who were on top and became comfortable with their place under the sun: Palm, Blackberry, Nokia…

In ancient Rome, victorious generals marched in triumph to the Capitol. Lest the occasion go to the army commander’s head, a slave would march behind the victor, murmuring in his ear, memento mori, “remember you’re mortal”.

With that in mind, one can almost appreciate the doomsayers — well, some of them. They might very well save Apple from becoming inebriated with their prestige and, instead, force the company to remember, two years later and counting, how they won it.

JLG@mondaynote.com

 

Apple’s Wearables Future

 

Wearable technologies have a huge future. For Apple, they’ll create a new product category with an iPhone-like revenue stream! No so fast. Smartwatches and other wearable consumer products lack key attributes for breaking out of the novelty prison. 

‘I Think the Wrist Is Interesting’ Thus spake Tim Cook on the opening night of last May’s D11 conference.

When pressed to discuss his company’s position on wearable technologies, Cook was unusually forthcoming: Instead of pleading Apple’s Fifth, Cook launched into a substantial discussion of opportunities for his company to enter the field, calling wearables “a very key branch of the tree”.

But when asked about the heavily publicized Google Glass he parried the question by suggesting that people who don’t otherwise wear glasses might be reluctant to don such an accoutrement.

I don’t find Tim Cook’s dismissal of eyewear very insightful: Just go to a shopping center and count the eyewear stores. Many belong to the same rich Italian conglomerate, Luxottica, a company with about ten house brands such as Oakley, Persol, and Ray-Ban, and a supplier to more than twenty designer labels ranging from Armani to Versace. (As the perturbing Sixty Minutes exposé on Luxottica pointed out, the company nicely rounds out its vertical dominance of the sector through its ownership of EyeMed, a vision insurance business.)

Eyewear, necessary or not, is a pervasive, fashionable, rich product category, a fact that hasn’t escaped Google’s eye for numbers. The company is making an effort to transmute their geeky spectacles into fashion accessories. Courtesy of Counternotions I offer this picture of Sergey Brin and fashionista Diane von Furstenberg proudly donning the futuristic eyewear at the NY Fashion Week:

Glass Fashion Brin

On a grander scale, we have a Vogue article, Google Glass and a Futuristic Vision of Fashion:

Glass en Vogue 2

The company’s efforts to make Google Glass fashionable might be panned today for pushing the envelope a little too far but, in a not-too-distant future, they stand a chance of being viewed as truly visionary.

If eyewear doesn’t excite Tim Cook, what does? To him, the wrist feels more natural, more socially acceptable. We all wear one or more objects around our wrist(s).

The wristwear genre isn’t new (recall Microsoft’s 2004 Spot). Ask Google to show you pictures of smartwatches, you get 23M results and screen after screen like this one:

smartwatch_ggl

The genre seems to be stuck in the novelty state. Newer entries such as Samsung’s Gear have gotten mixed reviews. Others contend a 2010 iPod nano with a wristband makes a much nicer smartwatch.

Regardless, by comparison, pre-iPod MP3 players and pre-iPhone smartphones were getting better press – and more customers. Considering the putative iWatch, the excitement about Apple getting into this class of devices appears to be excessive.

The litmus test for the potential of a device is the combination of pervasiveness and frequency of use. Smartphones are a good example, they’re always with us, we look at their screens often (too often, say critics who pretend to ignore the relationship between human nature and the Off button).

The iWatch concept makes two assumptions: a) we’ll wear one and, b) we’ll only wear that one.

Checking around we see young adults who no longer wear watches — they have a smartphone; and middle-agers use watches as jewelry, possessing more than one. This defeats both pervasiveness and frequency of use requirements.

Then there’s the biometry question: How much useful information can a wearable device extract from its wearer?

To get a better idea about what’s actually available (as opposed to fantasized), I bought a Jawbone UP wristband a little over a month ago. With its accelerometers and embedded microprocessors, UP purports to tell you how many steps you took, how long you’ve been inactive during your days, it logs your stretches of light and deep sleep, and even “makes it fun and easy to keep track of what you eat”.  Once or twice a day, you plug it into your smartphone and it syncs with an app that displays your activity in graphic form, tells you how well you’re doing versus various goals and averages. It also suggests that you log your mood in order to “discover connections that affect how you feel.”

At first, I found the device physically grating. I couldn’t accept it the way I’m oblivious to my watch, and I even found it on the floor next to my bed a couple of mornings. But I stuck with it. The battery life is as promised (10 days) and I’ve experienced none of the first versions troubles. I traveled, hiked and showered with it without a hitch other than the cap covering the connecting pin getting a bit out of alignment.

Will I keep using it? Probably not.

Beyond the physical discomfort, I haven’t found the device to be very useful, or even accurate. It’s not that difficult to acquire a useful approximation of hours slept and distance walked during the day — you don’t need a device for these things.

As for accuracy, the other day it declared that I had exhibited a substantial level of physical activity… while I was having breakfast. (I may be French, but I no longer move my hands all that much as I speak.)

The app’s suggestion that I log my food consumption falls into the magical thinking domain of dieting. A Monday morning step on a scale tells us what we know already: Moderation is hard, mysterious, out of the reach of gadgets and incantations.

For a product to start a new worthy species for a company as large as Apple, the currency unit to consider is $10B. Below that level, it’s either an accessory or exists as a member of the ecosystem’s supporting cast. The Airport devices are neat accessories; the more visible Apple TV supports the big money makers — Macs, iPads and iPhones — by enhancing their everyday use.

With this in mind, will “wearables” move the needle, will they cross the $10B revenue line in their second or third year, or does their nature direct them to the supporting cast or accessory bins?

Two elements appear to be missing for wearable technologies to have the economic impact that companies such as Apple would enjoy:

  • The device needs to be easily, naturally worn all the time, even more permanently than the watch we tend to take off at night.
  • It needs to capture more information than devices such as the Jawbone do.

A smartwatch that’s wirelessly linked to my smartphone and shows a subset of the screen in my pocket…I’m not sure this will break out of the novelty category where the devices have been confined thus far.

Going back to Tim Cook’s oracular pronouncement on wearables being “a very key branch of the tree”, I wonder: Was he having fun misdirecting his competition?

JLG@mondaynote.com

—————————————–

PS: After two July Monday Notes on the company, I’ll wait for the Microsoft centipede to drop one or two more shoes before I write about the Why, When, How and Now What of Ballmer’s latest unnatural acts. There in an Analyst Day coming September 19th — and the press has been disinvited.

PPS: In coming days, to keep your sanity when trying to drink from the Apple kommentariat fire hydrant, you can safely direct your steps to three sites/blogs:

  • Apple 2.0 , where Philip Ellmer-DeWitt provides rational news and commentary, skewers idiots and links to other valuable fodder.
  • Asymco, where Horace Dediu provides the absolute best numbers, graphs and insights into the greatest upheaval the tech industry has ever seen. Comments following his articles are lively but thoughtful and civilized.
  • Apple Insider. You might want to focus on learned, detailed editorials by Daniel Eran Dilger such as this one where he discusses Microsoft and Google (partially) shifting to an Apple-like business model. Daniel can be opinionated, animated even, but his articles come with tons of well-organized data.

More iWatch Fun

 

When looking at the potential for a really smart watch, the idea of an Apple iWatch looks almost sensible. Still, there is a long way between the attractive idea and stuffing the required computer power in a wristwatch.

As I somberly contemplate the death of personal privacy, our being spied upon everywhere, at all times (for our own good, you understand), a tweet from an ex-coworker known for his stiletto wit evokes a welcome smile:

Frank is referring to Nick Hayek Jr., the cigar-wielding head of Swatch Group AG (and Zino Davidoff doppelgänger):

In a Bloomberg article (from which the above photo is extracted), Hayek dismisses the iWatch rumors:

“Personally, I don’t believe it’s the next revolution,” the chief of the largest Swiss watchmaker said at a press conference on annual results in Grenchen, Switzerland. “Replacing an iPhone with an interactive terminal on your wrist is difficult. You can’t have an immense display.”

Hayek’s pronouncement triggered many sharp reactions, such as this history lesson from another sharp tweeter:

As Kontra (a “veteran design and management surgeon”) reminds us, Palm CEO Ed Colligan once famously pooh-poohed the unannounced iPhone

We’ve learned and struggled for a few years here figuring out how to make a decent phone, […] PC guys are not going to just figure this out. They’re not going to just walk in.

Colligan’s brush-off wasn’t the first time, or the last, that Apple’s “unauthorized intrusions” were decried by industry incumbents and arbiters of business taste:

  • The iPod: A doomed foray into the saturated, profitless market of commodity MP3 players.
  • iTunes: Single tracks for 99 cents? Not a chance against free online music sites.
  • Apple Stores: Another folly, zero experience in the cutthroat and manpower intensive retail business.
  • iPhone: The status quotidians scoff.
  • Homegrown ARM-based processors: A billion dollar mistake.
  • iPad: Ridiculous name. Steve Ballmer derides its lack of keyboard and mouse.

This isn’t to deny that the Apple Midas Touch is occasionally fat fingered. Prior to its launch, Steve Jobs touted MobileMe as Exchange For The Rest of Us; afterwards, he told the MobileMe team they should “hate each other for letting each other down”. Last year, Tim Cook had no choice but to apologize for the iMaps fiasco (and then showed a couple Apple executives the door).

So how would this hypothetical iWatch play out? Can Apple re-invent a known device à la the iPod, or are they venturing into territory without a map (or, one can’t resist, with an iMap)?

First, a brief look at today’s watches, smart and not.

After five centuries of improvements to their time keeping mechanisms (or movements), mechanical watches are no longer judged for their temporal accuracy, but for their beauty and, just as important, for the number and ingeniousness of their complications — what non-horologists would call “additional functions”. It’s not enough to just tell the time, watches must display the phases of the moon and positions of the planets, function as a  chronograph, provide a perpetual calendar… The moniker grande complication is applied to the most advanced, such as this one from the Gallet company (founded in 1466):

These complications come at a price: For $300k you can pick up the double-faced Patek Philippe Sky Moon Tourbillon with its 2800-star celestial chart. The Franck Muller Aeternitas Mega 4, which holds the record with 36 complications and 1400 parts, will set you back $2.7M:

These luxury watches function more as engineering marvels than utilitarian timepieces, and, accordingly, they’re worn as adornments — and status symbols.

The more common electronic watch, which uses a precise quartz oscillator and typically has no moving parts, hasn’t entirely killed the mechanical watch, but it hasn’t been for lack of trying. Electronic watchmakers, aided by the tiny microprocessors embedded in many of these devices, have piled on even more more functions — calculators, multiple repeating alarms, even circular slide rules…it’s simply an exercise in the proverbial mere matter of software.

But each new function introduces UI complexity, as this page from the instruction manual for my Seiko multi-function watch establishes:

Most of the manual’s 33 pages are in the same vein. As a result, normal humans find these electronic complications baffling and leave most of the functions unmolested.

And now we have the smartwatch, a true computer that’s strapped to your wrist. Today’s smartwatch will tell you the time and run some rudimentary applications, but its primary role is to act as an extension of the smartphone that you’ve paired through Bluetooth. A phone call comes in, your watch shows you the number; an email message arrives, your watch scrolls the sender’s address; if the music you’re streaming on your phone is too quiet, just tap your watch to turn it up…at least in theory.

These are all good ideas, but, as the NYT’s David Pogue found after test driving a sampling of these devices, their execution leaves something to be desired. His conclusion:

…you have to wonder if there’s a curse on this blossoming category. Why are these smartwatches so buggy, half-baked and delayed?
The Casio and Martian watches are worth considering. But if you ask the other watches what time it is, they’ll tell you: too soon.

So, again, where does the putative iWatch fit into all of this?

Let’s start with the UI. If we just regard the traditional chronological functions (date and time formats, alarms, stopwatch) an iPhone-like touch interface, albeit on a smaller screen, would easily eclipse the clunky buttons-along-the perimeter controls on my Seiko. For the more advanced “smart” functions, one assumes that Apple won’t be satisfied unless the user experience far exceeds the competition. (Of the five smartwatches that Pogue reviews, only one, the Cukoo, has even a hint of touch screen capability.)

Then there’s the matter of overall style. This isn’t a fair fight; there’s something viscerally compelling about a traditional mechanical watch with exposed movement. Even on the low end of the market you can find a mechanical watch that displays its inner beauty. Nonetheless, we can trust Sir Jony to rise to the challenge, to imagine the kind of style we’ve come to expect.

There’s also the battery question. Will the iWatch suffer from having a two or three days battery life as suggested by “[s]ources close to Apples [sic] project team”? Leaving aside conjectures about the anatomical location whence emerged these sources’ information, two thoughts come up…

First, it’s a safe assumption that the target audience for the iWatch are iDevice owners that Apple has “trained” (subjugated, critics will say) to charge their devices at night. For them, charging the iWatch, as well, won’t be a dealbreaker. The Lightning connector and charger for an iPhone or iPad should be small enough to fit a largish watch. Or perhaps the addition of the iWatch to the iDevice constellation will convince Apple to incorporate wireless charging (despite the diffidence of Phil Schiller, Apple’s VP of marketing).

Second, some electronic watches don’t need batteries at all. In Seiko’s Kinetic line, the kinetic motion of the wearer’s hand drives a tiny generator that feeds electricity into a capacitor for storage. (For the inert watch wearer, stem winding works as well. In a clever twist, some of newer models preserve the stored charge by halting the motion of the hands when the watch isn’t being worn.) It’s unclear whether the energy captured from hand movements will suffice to feed an ambitious Apple smartwatch, but the technology exists.

Turning to more advanced functionality: Will the iWatch be an iOS device? I think it’s very likely. That doesn’t mean that the iWatch will be an iPhone/iPod Touch, only smaller. Instead, and as we see with today’s Apple TV, the iWatch will enrich the iOS ecosystem: Reasonably useful on its own, but most important as a way to increase the value/enjoyment of other iDevices…at least for now.

Eventually, and as I’ve written here several times, I believe the Apple TV will become a first class citizen, it will have its own versions of apps that were written for the iPhone/iPad, as well as apps that are for TV alone. With iOS as the lingua franca, the iWatch could be treated with the same respect.

There are plenty of examples of apps that would work on a very small screen, either in conjunction with existing data (calendar, address book, stock market, iMessage, weather) or as a remote for other devices, including non-Apple products (the Nest thermostat comes to mind).

We should also consider biometric applications. The intimate contact of the iWatch makes it a natural carrier for the ever-improving sensors we find in today’s health monitors, devices that measure and record heart rate and perspiration during a workout, or that monitor sleep patterns and analyze food intake. What we don’t find, in these existing gadgets, is the ability to download new apps. An iWatch with health sensors coupled with the App Store would open whole new health and wellness avenues.

Finally, there’s (always) the money question. Would our mythical iWatch sell in sufficient volume — and with a high enough margin — to make it a significant product line for Apple? Given that watches easily sell for hundreds of dollars, and that we would almost certainly use an Apple iWatch more often and for more purposes than an Apple TV, the volume/margin question isn’t too hard to answer.

Back to reality, translating a fantasy into a real product is by no means a sure thing. A pleasant, instantaneous user experience requires computing power. Computing power requires energy; energy means battery drain and heat dissipation. These are challenges for real grown-ups. And sometimes a grown-up has to make the vital No We Won’t Do This decision that separates bloated demi-failures from truly elegant genre-creating breakthroughs.

JLG@mondaynote.com

The Next Apple TV: iWatch

 

Rumors don’t actual Apple products make, see the perennial Apple TV — and the latest iWatch rumors. This is an opportunity to step back, look at Apple’s one and only love –personal computers — and use this thought to sift through rumors. 

Every week brings new rumors of soon-to-be-released Apple products. The mythical Apple TV set is always a favorite: Gossip of an Apple buyout of troubled TV maker Löwe has sent the German company’s stock soaring. We also hear of a radio streaming service that will challenge Pandora and Spotify, and there’s the usual gaggle of iPhone, iPad, and Mac variations. More interesting is the racket surrounding Apple’s “stealth” projects:  an iWatch and other wearable devices (and “racket” is the right word — see these intimations of stock manipulation).

There is a way to see through the dust, to bring some clarity, to organize our thoughts when considering what Apple might actually do, why the company would (or wouldn’t) do it, and how a rumored product would fit into the game plan.

The formula is simple: Apple engineers may wax poetic about the crystalline purity of the software architecture, execs take pride in the manufacturing chain and distribution channels (and rightly so), marketing can point to the Apple Customer Experience (when they’re not pitching regrettable Genius ads or an ill-timed campaign featuring Venus and Serena Williams). But what really floats their bots, what hardens Apple’s resolve is designing, making, and selling large numbers of personal computers, from the traditional desktop/laptop Mac, to the genre-validating iPad, and on to the iPhone — the Very Personal Computer. Everything else is an ingredient, a booster, a means to the noblest end.

Look at Apple’s report to its owners: there’s only one Profit and Loss (P&L) statement for the entire $200B business. Unlike Microsoft or HP, for example, there is no P&L by division. As Tim Cook put it:

We manage the company at the top and just have one P&L and don’t worry about the iCloud team making money and the Siri team making money…we don’t do that–we don’t believe in that…

Apple’s appreciation for the importance and great economic potential of personal computers — which were invented to act as dumb servants to help us with data storage, text manipulation, math operations — may have been, at first, more instinctual than reasoned. But it doesn’t matter; the company’s monomania, it’s collective passion is undeniable. More than any other company, Apple has made computers personal, machines we can lift with our hands and our credit cards.

With these personal computer glasses on, we see a bit more clearly.

For example: Is Apple a media distribution company? Take a look at Apple’s latest 10-Q SEC filing, especially the Management Discussion and Analysis (MD&A) section starting page 21. iTunes, now reported separately, clocked $3.7B for the last quarter of 2012.  Elsewhere, Horace Dediu sees $13.5B for the entire year. A big number indeed, and, certainly, iTunes is a key to Apple’s success: Without iTunes there would have been no iPod, Apple’s “halo product“, proof that the company could come up with a winner.  Later, iTunes begat the App Store, a service that solidified the App Phone genre.

Some misguided analysts look at the numbers and argue that Apple ought to spin off iTunes. They use the old “shareholder value” gambit, but the “value” simply isn’t there: Horace Dediu puts iTunes margins in the 15% region, well below Apple’s overall 38%. iTunes is a hugely important means to the personal computer end, but it’s not a separate business.

How about Apple as a retail company? The success of the Apple Store is stellar, a word that’s almost too weak: The Apple Stores welcomed three times more visitors than all of the Disney parks, and generated more than $20B in revenue last year — that works out to an astonishing $6000 per square foot, twice as much as the #2 shop (Tiffany and Co.). But Apple’s 400 stores aren’t a business, they only exist to create an experience that will lead to more sales, enhanced customer satisfaction, and, as a consequence, increased margins.

Apple as a software company? No. The raison d’être for OS X, iOS, iWork, and even Garage Band is to breathe life into Apple hardware. By now, the calls for Apple to see the error of its ways, to not repeat the original sin of not licensing Mac OS, to sell iOS licenses to all comers have (almost) died.
During my first visit to Apple’s hypergalactic headquarters and warehouse in February 1981, I was astonished at the sight of forklifts moving pallets of Apple ][ software. The term “ecosystem” wasn’t part of the industry lingo yet, but I had witnessed the birth of the notion.
Apple had a much harder time building a similarly rich set of applications for the Macintosh, but the lesson was eventually learned, partly due to the NeXT acquisition and the adoption of object oriented programming. We now have a multi-dimensional macrocosm — a true ecosystem — in which our various forms of personal computing work together, share data, media, services.

Where does the current Apple TV device (the black puck, not the mythical TV set) fit into this scheme? Apple TV runs on a version of iOS, and it knows how to communicate with a Bluetooth keyboard — but that doesn’t mean the device is a personal computer. Perhaps Apple will (someday) provide a TV Software Development Kit (SDK) so developers can adapt existing iOS apps or write new ones. But I still see it as a lean-back device, as opposed to a lean-forward PC.

In any case, sales of the $100 black puck don’t move the needle. Four million Apple TVs were sold in 2012; even if ten million are sold this year — and that’s a very optimistic estimate — it won’t make a noticeable difference, at least not directly. Apple TV is a neat part of the ecosystem, it makes iPhones, iPads, Macs and our iTunes libraries more valuable, but it’s still just a member of the supporting cast.

This brings us back to the putative iWatch. Computer history buffs will recall the HP 01 watch. Buoyed by the success of its handheld calculators, including the programable HP 65 with its magnetic card reader, HP convinced itself it could make a calculator watch, introduced in 1977:

A technology tour de force, fondly remembered by aging geeks, but a market failure: too expensive, too hard to use, ill-fitting distribution channels.

Apple is in a different spot. Today, you can find a number of iPod watchbands such as this one:

It’s hard to imagine that Apple would merely integrate an existing accessory into a new iPod. Sales of the iPod proper are decelerating, so the iPod-as-iWatch could give the line a much needed boost, but it’s difficult to reconcile the rumors of “100 people” working on the project if it’s just a retrofit job. Is Apple working on an iWatch that can be experienced as an Even More Personal personal computer — an “intimate computer”? If so, many questions arise: user interface, sensors, iOS version, new types of apps, connection with other iDevices… And, of course price.

This would be much more interesting than the perennially in-the-future Apple TV set. Of course, iWatch and Apple TV aren’t necessarily mutually exclusive. If the Löwe buyout rumors are true, Apple could do both — the company could develop its own watch device and repurpose Löwe’s TV. (I still doubt the TV set part, as opposed to enhancing the black puck.)

But once we understand what Apple’s only business is, and that the related software, retail, and services are simply part of the supporting cast, Apple’s attitude towards big acquisitions becomes clearer. Apple isn’t looking at buying a big new business, it already owns The Big One. So, no movie studio, no retail chain or cable company, no HP or Dell, or Yahoo!. (But… a big law firm, perhaps?) Integrating a large group of people into Apple’s strong, unbending culture would, alone, prove to be impossible.

A small acquisition to absorb technology (and talented people) makes sense. The cultural integration risks remain, but at a manageable scale, unlike what happened to Exxon in the early eighties when it burned $4B (that was real money, then) in a failed attempt to become an information systems company — you know, the Oil of the Twenty-First Century.

Let’s just hope Apple doesn’t talk itself into a “because we can” move.

JLG@mondaynote.com