About Jean-Louis Gassée

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Apple Is Doomed: The Phony Sony Parallel

In the weeks preceding the April 24th release of Apple’s quarterly earnings, a number of old canards sent the stock down by about 12%: Carriers are going to kill the iPhone Golden Goose by cutting back “exorbitant” subsidies; iPhone sales are down from the previous quarter in the US; inexorable commoditization will soon bring down Apple’s unsustainably high Gross Margin.

The earnings were announced, another strong quarter recorded, and the stock rebounded 9% in one trading session:

At least one doubter is finally convinced: Henry “The iPhone Is Dead In the Water” Blodget has become an Apple cheerleader, penning a post titled Yes, You Should Be Astonished By Apple. (Based on Henry’s record, should we now worry about the new object of his veneration?)

There has never been a dearth of Apple doomsayers. The game has been going on for more than 30 years, and now we have a new contestant: George Colony, an eminent industry figure, the Founder and CEO of Forrester Research, a global conglomerate of technology and market research companies.

Mr. Colony, an influential iPad fan, maintains a well-written blog titled The Counterintuitive CEO in which he shares his thoughts on events such as the Davos Forum, trends in Web technology and usage, and, in a brief homage, his hope that “Steve’s lessons will bring about a better world”.

We now turn to his April 25th post, Apple = Sony.

There are two problems with the piece: The application of a turgid, 100-year old “typology of organizations” that’s hardly relevant to today’s business scene, and an amazingly wrong-headed view of Sony and its founder, Akio Morita.

Colony offers the banal prediction that others have been making for a very long time, well before Dear Leader’s demise: With Steve Jobs gone, Apple won’t be the same and, sooner or later, it will slide into mediocrity. It happened to Sony after Morita, it’ll happen to Apple.

In an act of Obfuscation Under The Color Of Authority, Colony digs up (nearly literally) sociologist Max Weber to bolster his contention. Weber died in 1920; the 1947 work that Colony refers to, The Theory of Social and Economic Organization, is a translation-cum-scholarly commentary and adaptation of work that was published posthumously by Weber’s widow Marianne in 1921 and 1922.

From Weber’s work, Colony extracts the following typology of organizations:

1. Legal/bureaucratic (think IBM or the U.S. government),
2. Traditional (e.g., the Catholic Church)
3. Charismatic (run by special, magical individuals).

This is far too vague; these types are (lazily) descriptive, but they’re fraught with problematic examples, particularly in the third category: Murderous dictatorships and exploitative sects come to mind. What distinguishes these from Apple under Jobs? Moreover, how do these categories help us understand today’s global, time-zone spanning rhizome (lattice) organizations where power and information flow in ways that Weber couldn’t possibly have imagined a hundred years ago?

Having downloaded the book, I understand the respect it engenders: It’s a monumental, very German opus, a mother lode of gems such as the one Colony quotes:

Charisma can only be ‘awakened’ and ‘tested’; it cannot be ‘learned’ or ‘taught.’

True. The same can be said of golf. But it does little to explain the actual power structure of organizations such as Facebook and Google.

Instead of shoehorning today’s high-tech organizations into respectable but outdated idea systems, it would behoove a thought leader of Mr. Colony’s stature to provide genuine 21st century scholarship that sheds light on – and draws actionable conclusions from — the kind of organization Apple exemplifies. What’s the real structure and culture, what can we learn and apply elsewhere? How did a disheveled, barefoot company become a retail empire run with better-than-military precision, the nonpareil of supply chain management, the most cost effective R&D organization of its kind and size? And, just as important, are some of these marvels coupled too tightly to the Steve Jobs Singularity? That would be interesting — and would certainly rise above the usual “Charismatic Leader Is Gone” bromides.

Now let’s take a look at the other half of the title’s equivalence: Sony.This is Muzak thinking. It confuses the old and largely disproven brand image with what Sony actually was inside — even under Morita’s “charismatic” leadership.

I used to be an adoring Sony customer, bowing to Trinitron TVs and Walkman cassette players. But after I got to see inside the kitchen (or kitchens) in 1986, I was perplexed and, over time, horrified.

Contrary to what Colony writes, there was no “post-Morita” decadence at Sony. The company had long been spiritually dead by the time of the founder’s brain hemorrhage. The (too many) limbs kept moving but there had been no central power, no cohesive strategy, no standards, no unifying culture for a very long time.

Sony survived as a set of fiefdoms. Great engineers in many places. (And, to my astonishment, primitive TV manufacturing plants.) During Morita’s long reign, Sony went into all sorts of directions: music, movie-making, games, personal computers, phones, cameras, robots… For reasons of cultural (one assumes), Sony consistently showed an abysmal lack of appreciation for software, leaving the field to Microsoft, Nokia for a while, and then Google and Apple.

Under Akio Morita’s leadership, Sony took advantage of Japan’s lead in high-quality device manufacturing and became the masters of what we used to call the Japanese Food Fight: Throw everything against the wall and see what sticks. When the world moved to platforms and then to ecosystems, Sony’s device-oriented culture — and the fiefdoms it fostered — brought it to its current sorry state.

Today, would you care to guess what Sony’s most profitable business is? Financial Services:

How this leads to an = sign between Apple and Sony evades me.

This isn’t to say that Apple can’t be contaminated by the toxicity of success, or that the spots of mediocrity we can discern here and there (and that were present when Steve was around) won’t metastasize into full blown “bozo cancer”. But for those interested in company cultures, the more interesting set of questions starts with how Apple will “Think Different” from now on. Jobs was adamant: His successors had to think for themselves, they were told to find their own true paths as opposed to aping his.

From a distance, it appears that Tim Cook isn’t at all trying to be Jobs 2.0. But to call his approach “legal/bureaucratic” (in the Weber sense), as Colony does, is facile and misplaced.

If we insist on charisma as a must for leading Apple, one ought to remember that there’s more than one type of charisma. There’s the magnetic leader whose personality exudes an energy that flows through the organization. And then there’s the “channeling” leader, the person who facilitates and directs the organization’s energy.

Is the magnetic personality the only valid leader for Apple?

JLG@mondaynote.com

[I won’t let the canards cited at the beginning go unmolested. See upcoming Monday Notes.]

Nokia: Three Big Problems

Nokia’s results for Q1 2012 are in: They’re not good. (See the earnings release here, Management’s Conference Call presentation here.)

Compared to the same quarter last year, Nokia overall revenue is down 29%, to $9.7B. And the company is now losing money, $1.8B, 18.5% of revenue. [Nokia’s official numbers are stated in euros, I convert them at today’s rate of $1.32 for 1€.]

One year after Nokia’s decision to jump of its “burning platform”, this yet another bad quarter and leaves one to wonder about the company’s future. Many, like Forbes’ Erik Savitz, think The Worst Is Still To Come.

I see three life-threatening problems for the deposed king of mobile phones.

First and potentially most lethal: Nokia is burning cash. As the chart above documents, Nokia’s Net Cash went down 24% in one year. From page 5 of the Earnings Release: “Year-on-year, net cash and other liquid assets decreased by $2B…. Sequentially [emphasis added], net cash and other liquid assets decreased by $.9B”. Here, the word sequentially means compared to the immediately preceding quarter, as opposed to the same quarter last year.
Elsewhere in the document, on page 6, we learn Microsoft provided $250M in “platform support payments”. If you back this amount out, you see Nokia’s operations have in fact consumed $1.15B, a significant fraction of the company’s $6.4B Net Cash. This cannot continue for very long and leads Henry Blodget to worry Nokia could go bankrupt in two years or less.
Henry’s view might be a bit extreme; Nokia has assets they could convert to cash, thus giving itself more runway for its recovery efforts. But, as we’ll see below, the company’s prospects in both phone categories don’t look stellar. And bad things happen to cash when the market loses confidence in a company’s future: vendors want to be paid more quickly, customers become more hesitant, all precipitating a crisis.

Second, the dumbphone (a.k.a. “Mobile Phones”) business, still Nokia’s largest, is now in a race to the bottom:

Volume is huge, 70.8M units; it dipped 16%, not a good sign. Worse, the ASP (Average Selling Price) went down 18% to $44 (33€). Mostly in developing countries, Nokia is now losing ground to the likes of Huawei and ZTE selling feature phones and smartphones, both very inexpensive. Unsurprisingly, Nokia claims they’ll counterattack with their Asha family of mobile phones. Few, outside of Nokia, or even inside, believe they can win a brutal price cutting fight against those adversaries.

Last, Nokia’s last hope: Their new Windows Phone “Smart Devices”.

As the chart above shows, Nokia’s smartphone business keeps sinking: -51% in volume compared to the same quarter last year. And, with a $189 (143€) ASP, it can’t make any significant money as $189 is about what it costs to build one.

As for the latest Lumia smartphones, the reviews have been mixed. So are sales, according to Stephen Elop, Nokia’s CEO. Going to the earnings release, I searched for the word “Lumia” in the document. It appears 29 times. — without any number attached to it, just words like “encouraging awards and popular acclaim”. Which can only mean one thing: Actual numbers better left unsaid.

Things don’t get better when, according to Reuters, mobile carriers in Europe pronounced themselves ‘‘unconvinced”, finding the new Lumia smartphones “not good enough”. It is worth noting things could be better in the US where AT&T appears to make a real effort selling Lumias, and where Verizon recently stated its interest in fostering a third ecosystem with Windows Phone devices.

Unfortunately, we also hear a puzzling rumor: Existing Lumia phones wouldn’t be upgradable to the next OS version, Windows Phone 8, code-named Apollo. Both Mary Jo Foley, a recognized authority on things Microsoft, and The Verge, an aggressive and often well-sourced blog, support that theory.

So far, in spite of the potential damage to their business, neither Microsoft nor Nokia have seen fit to comment. Should it be true, should current Lumia buyers find themselves unable to upgrade their software, Microsoft would be about to commit a massive blunder.

But why would they do this? Apparently, the current Windows Phone OS is built on the venerable Windows CE kernel. Setting veneration aside, Microsoft would have decided to use a more modern foundation for Windows Phone 8. And said modern foundation would not run on today’s hardware. For Nokia’s sake, I hope this is incorrect. The company already convinced its customer Symbian-based phones had no future. Sales plunged as a result. Doing the same thing for today’s Lumia devices would be even more dangerous.

A little over a year ago, in February 2011, Nokia’s brand-new CEO, Stephen Elop issued his ‘‘memorable” Burning Platform memo. In it, the ex-Microsoft executive made an excellent point: Having no doubt observed the rise of Google’s Android and of Apple’s iOS, he concluded Nokia was no longer in a fight of devices but in a war of ecosystems. Elop next drew an analogy between Nokia’s jumbled smartphone product line and a burning North Sea oil-drilling rig. To him, the company had no choice: instead of staying on the platform and dying in the blaze, he suggested plunging in freezing waters — with a chance of staying alive. Which, as he soon revealed, meant jumping off Nokia’s Symbian and Meego software platforms and joining the Microsoft Windows Phone ecosystem.

Today, Nokia bleeds cash, its dumbphone business in a race to the bottom, and its plunge into the Microsoft ecosystem isn’t off to a good start. What’s next for the company? Can it turn itself around, and how?

With hindsight, it appears the premature announcement of the jump to Windows Phone osborned Nokia’s existing smartphones. Their sales dropped while the market waited for the new devices running Windows Phone. Some, like Tomi Ahonen, an unusually vocal — and voluminous — blogger, think Elop should be fired, and Symbian and Meego restored to their just place in Nokia’s product line. This isn’t very realistic.

Closer to reality is Microsoft’s determination to get back in the smartphone race, almost at any cost. (For reference look at the billions the company keeps losing in its online business. $449M this past quarter.)

At some point in time, if Lumia sales still barely move the needle, Microsoft would have to either drop Nokia and look for another vehicle for Windows Phone. Or it will have to assume full control of Nokia, pare down what it doesn’t need, and do what it does for the Xbox, that is be in charge of everything: hardware, software, applications.

JLG@mondaynote.com

iTunes’ Windows Problem

The best thing that happened to Apple in the last two decades was Steve Jobs’ 1997 return to power after he reversed-acquired the company he’d co-founded 20 years before.
And the best thing that has happened in the Apple 2.0 era is iTunes.

Without iTunes’ innovative micropayment system and its new way of selling songs one at a time, the iPod would have been just another commodity MP3 player. Instead, the iPod became Apple’s “halo product” and the genre’s king, with a lasting dominant market share (70% or more) and, in 2006, surpassing the Macintosh in revenues: $7.7B vs. $7.4B.

The iTunes-powered iPod rescued the company’s image. Then teetering on the edge of insignificance, Apple came to be perceived as a serious contender.

This was nothing compared to the contribution iTunes was about to make to the iPhone. A song is simply a string of zeroes and ones, so is an app; the only difference is the destination directory (I am, of course, simplifying a bit, here). The well-debugged iTunes infrastructure turned out to be a godsend for the new Jesus Phone: The smartphone became an “app phone” and the rest of the industry followed suit. iTunes App Store downloads now surpass music traffic:

But…

Today, the toxic waste of success cripples iTunes. There are times when I feel that iTunes has reached Windows Vista bloatware proportions: Increasingly non-sensical complexity, inconsistencies, layers of patches over layers of patches ending up in a structure so labyrinthine no individual can internalize it any longer. (Just like the Tax Code.)

iTunes’ metastasis happened naturally as it tried to incorporate new packaging and delivery systems. The media — music, videos, apps — is no longer the message. iTunes gives you TV seasons, college courses, audiobooks, podcasts; it passes files between Macs and iPads, syncs devices, uploading and downloading everything through the Cloud…and should we mention Ping, the unfortunate attempt at “social”?

iTunes has turned into an operating system — kludgier and uglier than many — a role it was never meant to fill.

This criticism might sound excessive. Apple is doing obscenely well, Mac and iDevices show impressive growth, the stock keeps climbing. Why worry about iTunes? Business is great!

That’s the line RIM and Nokia execs once took.

On the music side, do we like looking for music, managing it, fixing inexplicably broken playlists? Do we care for bizarre recommendations from the Genius? (No connection with the really helpful ones in Apple Stores.) Buying music from Amazon is easier, more informative, more pleasant — and downloads drop right into my iTunes library.

Admittedly, managing apps has become much easier…if you use WiFi sync to a Mac or PC where the larger screen helps when you’re sorting through dozens of programs (I’ll confess that I hoard a mere 170 apps…). But it still feels like it falls short of what an independent module, with its own tools and UI, should be able to do.

Things take a turn for the worse when it comes to transferring files between, say, an iPad and a Mac. The It Just Works motto doesn’t apply. While Keynote documents sync automagically between an iPad and an iPhone, there’s no such love between the iPad and the Mac. iTunes offers a kludgy solution, semi-hidden at the bottom of the Apps section, although I doubt anyone uses this method. E-mail and DropBox are faster.

The rumors of a new iTunes version (perhaps called 11, a versioning number increment that signals a major update) have rekindled criticism of the aging giant and invited suggestions for fixes or more radical structural changes. For a sampling, see iTunes: Time to right the syncing shipErica Sadun’s TUAW post, and a counterpoint by Scott P. Hall who thinks ‘iTunes is well structured, and easy to use’. Most of us agree with pointed put-downs such as these (from Jason Snell):

Apple has packed almost everything involving media (and app) management, purchase, and playback into this single app. It’s bursting at the seams. It’s a complete mess. And it’s time for an overhaul.

….

And let’s be honest: iTunes is at its worst when it comes to app management. The app-management interface in iTunes is ridiculously slow. iTunes can fill up your hard drive with tens of gigabytes of iOS apps that can easily be downloaded from Apple. Syncing apps frequently destroys folders and makes apps disappear. The interface that shows where the app icons will appear on your iOS device is unstable, unreliable, and inefficient.

…and from Erica Sadun (emphasis added):

iTunes is an unwieldy behemoth, slowly suffocating from its own size and age.

….

Forget about launching iTunes: music browsing and playlist selection (not to mention creation) needs to migrate into Spotlight (or some similar always-on feature). Tunes should be part of the computing experience, not a separate app.

Let’s hope that “iTunes 11” does more than move furniture around and add another layer of patches. Personally, I’d vote for breaking it down into separate modules such as Music, Video, and Apps. This wouldn’t rub against the Apple grain: There’s the everything-in-one-app Outlook philosophy, and then there’s the Apple practice of separating Mail, Address Book, and iCal. Also, breaking up the iTunes “monopoly” would make fixes and upgrades more manageable.

But there are two possible flaws in this line of thinking.

First, it assumes that the iTunes problem is confined to the client app, to the software we run on our desktops and devices. This isn’t likely to be the case. We’re no longer in the era of PC desktop software where patiently redoing the Mac OS foundation got us OS X. It’s almost certain that many of the iTunes problems we experience in the client actually come from poorly designed applications in Apple’s Cloud, running on noble but out-of-date architectures such as WebObjects.

A possibly more significant impediment is Apple’s “Windows problem”. As Allen Pike explains on his blog (pointed to by John Gruber), Windows is iTunes’ ball and chain (emphasis added):

[…] they can’t split iTunes into multiple apps because many, if not most iOS users are on Windows. iTunes is Apple’s one and only foothold on Windows, so it needs to support everything an iOS device owner could need to do with their device. Can you imagine the support hurricane it would cause if Windows users suddenly needed to download, install, and use 3-4 different apps to sync and manage their media on their iPhone? It’s completely out of the question.

I remember my surprise when I bought my first iPod mini and saw iTunes software running on Windows. Imagine, Apple writing Windows software! Good UI, runs well, doesn’t feel like a dragging-one’s-feet port. But there’s a price: Some of the iTunes problems might stem from its use of cross-platform development tools, an approach that encourages (and sometimes insists on) a least common denominator experience. (I just checked, iTunes on Windows is very close to the Mac version.)

Allen Pike is right: iTunes, or its successor, must run on Windows. But I don’t see how that’s an unbearable burden on Apple, especially in light of the economics involved. If cross-platform tools are too limiting, Apple could develop “separate but equal’’ versions of iTunes as a way to keep selling iDevices to Windows users. (On this topic, the iPhone/iPad maker has done a much better job catering to Windows users than what RIM/Blackberry and Nokia have done for Mac users.)

Let’s hope Apple doesn’t become complacent, that they aren’t blinded by iTunes’ spectacular numbers. Let’s hope they deliver a really Apple-like iTunes experience. Paraphrasing a grand departed French politician, I like iTunes so much I want five of them.

JLG@mondaynote.com

Apple: The End Is Nigh

The end of iPhone/iPad One Size Fits All, that is. So far, Apple has managed to sell more than 300M iOS devices using only a single size for the iPhone and another for the iPad. I’m becoming convinced this can’t last much longer. Soon, I believe, we’ll see a range of physically distinct iPhone and iPad models.

I’m coming to this conclusion from three angles.

Let me start with an analogy by anecdote. It’s 1974, I’m sitting across the street from Burberry’s Haymarket emporium in London watching a gaggle of tourists come out of the store, each wearing the same dark blue raincoat and distinctive Burberry scarf. Once an icon of British gentility (as perceived by non-Brits), the commissariat of trench coats, scarves, and other country squire accoutrements, Burberry had lost their cachet by sticking to a taste-numbing repetition. The company that had invented a true 20th century oxymoron — the mass-marketing of exclusivity – had lost the plot.

Louis Vuitton, on the other hand, is the epitome of the oxymoron. Vuitton stays on top of its game by ceaselessly coming up with product permutations that combine the differentiation customers need without losing the brand identity they crave.

For the past three weeks I’ve been traveling in the US, France, and Spain. In Spain, particularly, I was struck by the number of iPhones I saw in street cafés, airport lounges, hotels, and restaurants. One high-end eatery in Palma de Mallorca equips its waiters with iPod Touches on which they show pictures of dishes to patrons and, with a tap, take their orders. I’m generally careful about drawing conclusions from such anecdotal samplings –they might not be representative of a broader reality — but when I returned to the Valley, I heard a Marketplace® story (audio and transcript) that confirmed my observation: Spaniards are so taken with their iPhones that they’d rather cut other expenses amid the severe economic crisis than go without this indispensable component of their identity.

How long before customers look left, look right, see everyone with the same phone or tablet and start itching for something different? My friend Peter Yared contends that the trend has already started in the UK where the “18-25 class” now favors the smorgasbord of Samsung devices as a relief from the iPhone uniform.

And, lest we think this preoccupation with fashion identity is beneath Apple’s Olympian taste, a look at the shelves of Cupertino’s Hypergalactic Company Store will bring us back to Earth:

We can argue that one-size-fits-all simplicity has served Apple well. I hear one European retail magnate deplore Apple’s inflexible (he actually said ‘‘totalitarian’’) policies even as he marvels at the low number of SKUs (distinct product references) that have produced Apple’s monstrous revenue. (A connoisseur, he also envies Apple stores where, as he put it, the cash register follows the customer.)

But Apple has long ceased to be marginal, on the brink of disaster, imprudently challenging established giants. Apple has become a dominant brand whose rise to ubiquity now requires a differentiation it didn’t need in pre-iOS years.

For the iPhone, how will differentiation manifest itself without veering into capricious, superficial variation?

Screen size? We know the key argument against a significantly bigger screen: Our thumb needs to reach across the entire surface for one-hand operation, a requirement widely held as non-negotiable. As for a smaller screen, the loss of functionality, app compatibility trouble, and touch-UI difficulties make “downsizing” improbable.

Shape? The elegant iPhone 4/4S industrial design is by no means obsolete. I personally consider it a classic, more so than the earlier, less innovative design. Still, alternatives will expand the iPhone’s appeal, communicate newness and differentiation.

Another angle concerns the iPad. Unit sales are climbing faster than the iPhone and sameness is — or soon will be — an issue. There’s an “obvious” solution: Our old friend, the rumored 7” tablet (measured on the diagonal).

In an August 2009 Monday Note discussing Apple tablet gossip, I went so far as to measure the width of men’s jacket pockets (5.5” to 6”, typically) and concluded that a 7” (diagonal) tablet would be nice. But I’m prejudiced, I like small computers. I loved my Toshiba Libretto and yearned for a similarly-sized MacBook. I’d given up on the prospect of a “MacBook Nano,” but I still had hopes for a pocketable tablet.

Wiser minds prevailed and we got the 9.7” iPad.

Still, the yearning for a smaller tablet wouldn’t die. In October 2010, when queried about a smaller iPad during the Q4 earnings conference call Q&A, Steve Jobs famously dismissed the idea, saying “7-inch tablets should come with sandpaper so users can file down their fingers.” Behold the nerve — and the lack of same in the audience! No one thought of asking about the iPhone’s even smaller screen.

Seriously, what Jobs probably meant was that a simple reduction in the size of the tablet screen would mean a proportional diminution of the size of UI elements, a brute force solution Apple had avoided by allowing – and encouraging — device-specific resources. (As we know now, no one really uses iPhone apps in 2X mode on an iPad.)

Also, we ought to remember notable Jobsian ‘‘statements of misdirection’’: No video on the iPod; No body reads anymore (pre-iPad). And the vintage 2007  category winner: No native apps on the iPhone, use Web 2.0 technology!

When thinking about the insistent 7” iPad rumors, I start to worry that iOS developers will have to write or adapt their apps to a third target, the “iPad Nano”. (Don’t hold me to that monicker, I was sure the latest iPad would be called iPad HD, for its high definition Retina screen…) But when I consider the foreseeable volume for a smaller iPad, I become a bit more optimistic: Would multiples of 10M units sold in the first year induce a developer to invest in a new version? Very likely, yes.

Even more encouraging is this clever twist unearthed by A.T. Faust III in a March 21st blog post. If you shrink the original 9.7”, 1024×768 iPad display to a 7.8” diagonal screen, you end up with a 163 ppi (pixels per inch) display, higher than the original, lower than the new iPad (264 ppi), and exactly half the iPhone 4/4S (326). Most relevant, according to A.T Faust, 163 ppi is the exact pixel density of the first iPhone…which means that app developers won’t necessarily have to retool everything in their UI libraries. And the hypothetical 7” iPad would easily fit in a 5.5” -wide jacket pocket:

Lastly, there’s another reason for Apple to forget the sandpaper and, instead, throw sand into Amazon’s and Google’s (purported) 7” tablet gears. From the very beginning of the iPad and its surprising low $499 entry price, it’s been clear that Apple wants to conquer the tablet market and maintain an iPod-like share for the iPad. Now that Apple has become The Man, the company might have to adopt the Not A Single Crack In The Wall strategy used by the previous occupant of the hightech throne.

JLG@mondaynote.com

While we wait, futilely perhaps, I’ve decided to do a bit of field research and bought a Samsung ‘‘phablet’’, the Galaxy Note, this after giving my 7” Kindle Fire to one of our children. The Note’s screen is a mere 5”, an attempt to combine a phone and a tablet — with an “unmentionable” stylus. I’ll report back in a few weeks.

RIM’s Future: Dead, Alive, Reborn?

Much has been written about RIM’s gloomy quarterly numbers, most of it sensible (with one brain flatulence exception). The attention is a testament—an apt word—to the place RIM once occupied. From its humble pager origins, the BlackBerry, rightly nicknamed CrackBerry, became the de rigueur device of enterprise users. Like most former BlackBerry fans, I have my own fond memories of its world-class mail/contacts/calendar PIM service and of the impeccable OTA (Over The Air) synchronization that freed my wife from her Palm USB cable and HotSync travails.

As always, Horace Dediu digests the numbers for us, adds insight, and comes up with a somber conclusion (emphasis added):

The selection of tools for workers by a group that claims to understand their needs better than they do is an archaic concept.
This was true even in 2005 when RIM began targeting consumers. It was then that they saw the writing on the wall–that their enterprise business was being commoditized. All of RIM’s growth since has been in consumer segments. By abandoning that trajectory RIM is effectively giving up on growth. And giving up on growth is simply giving up.

For the first time in seven years, RIM lost money, $125M; revenue is down 25% from a year ago; unit volume decreased by 11% from the previous quarter. The only somewhat positive sign is that cash increased by $610M leaving RIM with $2.1B in its coffers, a fact preeminently featured in their press release. The message is clear: Look, we’ve got plenty of cash to last us until “late 2012” when we’ll be back with new BB10-powered smartphones.

This is a dubious proposition.

RIM will undoubtedly undergo another two or three quarters of marketshare erosion and losses. Last quarter’s combination of positive cash flow in spite of losses can’t be repeated indefinitely, there’s only so much inventory you can liquidate—at a loss—before you see the bottom of the cash register.

This isn’t to say that Thorsten Heins, RIM’s new CEO, isn’t making an effort, starting with housecleaning: Much to everyone’s relief, former co-CEO Jim Balsillie is “severing all ties with the BlackBerry maker” after a brief stay on the Board when dethroned in January. Jim Rowan, the former co-COO (Heins was the other half before becoming CEO), is also leaving RIM. More significantly, software CTO David Yach is sailing away after 13 years at the helm. Nobody accused RIM of making poor quality hardware, it’s the outmoded and late software that fell the smartphone leader.

For too long, RIM execs (and not just David Yach) didn’t heed the software threat from Google and Apple, they thought their enterprise franchise was impregnable. But by 2010, reality could no longer be ignored; RIM panicked and looked for an OS to replace their aging software engine. They found QNX, a UNIX-like system hatched at the University of Waterloo next door and used by its then-owner, Harman International, for real-time audio and infotainment embedded applications. Dating from the early eighties, QNX is mature and well-tested — but no more adept as a smartphone OS than a vanilla Linux distro. Certainly, you’ll find Linux code at the bottom of the Android stack, but what makes Android successful are its thick, rich layer of frameworks that are indispensable to application developers.

When RIM bought QNX from Harman, the OS offered little or nothing of such vital smartphone app frameworks. David Yach’s team had to build them from the ground up (or, perhaps, adapt some from the Open Source world). This doesn’t happen quickly—ask Google why they acquired Android, or look at Apple’s years of stealth iOS development based on its own OS X. The difficulty in engineering a fully-functional foundation on which to build competitive apps explains why RIM’s “Amateur Hour Is Over” PlayBook tablet lacked a native email client when it was released last spring. And this is why the new BB10 phones are slated for ‘‘late 2012”. By that time, Samsung and Apple will have newer software and hardware—and an even larger market share.

The trouble for RIM is simply stated: Too little too late, while the money runs out. If only the cure were as easily put.

We won’t dwell on the contrast between what Heins said in his first press conference as CEO in January (“Stay the Course”) and the changes he now claims are necessary. He has had time to assess the situation and has declared “We Can’t Be All Things To All People”, by which he means abandoning consumer-oriented multimedia initiatives, a retreat Horace Dediu equates to a wholesale giving up on growth, to becoming hopeless.

For my part, I can’t help but wonder: What did Thorsten Heins see, say, and do since he joined RIM in 2007, right when the Jesus Phone came out? At the time, as his bio points out, he was Senior VP of the BlackBerry Handheld Business unit…

Today, RIM’s new CEO isn’t looking away. In public statements last week, he made it clear that all options are on the table. We can ignore the possibility that RIM might find licensees for its OS (what OS?). This leaves RIM with a single option: Sell the company…but to whom? Asus, Samsung, HTC? Why not ZTE and Huawei while we’re at it? None of this makes sense, these are not necrophiliac companies, they’re happily riding Android.

Disregard the talk of buying RIM for its alleged patent portfolio. This is the company that, after years of fight, had to pay NTP more than $600M, and Visto more than $260M in patent settlements. In any event, as the Nortel example shows, one can buy patents without getting saddled with the company.

Of course, there is one intriguing possibility left: Microsoft could do to RIM what it did to Nokia. They could convince RIM to abandon its unlikely-to-succeed “native” software effort and become the second prong in Microsoft’s effort to regain significance in the smartphone wars. We can picture the headlines: RIM Joins Nokia in Adopting Windows Phone, Microsoft Now Firmly Back in the Race…

We’ll soon know if Microsoft, after toying a few times with a RIM acquisition, now finds a more realistic management team and Board sitting across from them at the negotiating table.

JLG@mondaynote.com

Apple Phlebotomy

The treatment for the blood disease called Polycythemia Vera (the name means “too many red cells”) goes back to the Dark Ages: Lance a vein and relieve the patient of a pint of blood. Phlebotomy treats the symptom but not the condition. There is no known cure; the blood-letting must be repeated indefinitely.

This is what comes to mind when I see how Apple intends to treat its Polycashemia Vera, its “too many greenbacks” problem. Over the next few years, Apple will bleed off $45B of excess cash through a combination of dividend payouts of $2.65/share per quarter and stock repurchase of $10B over three years. (Also, as Tim Cook has stated, the buyback is a means to “undilute” Apple employees’ stock grants. Horace Dediu has a perceptive analysis here.)

But why get rid of the excess cash? How dangerous is it? And what exactly is “excess”?

This is a matter of animated (and occasionally silly) debate.

On one side, you have die-hard company supporters who argue that there’s no such thing as too much cash, you never know what the future holds. Management should ignore the “evil Wall Street speculators” who call for dividends and stock buybacks, jeopardizing the company’s future just to line their pockets.

On the other side, shareholders (or, more accurately, the Wall Street fund managers who represent them) get nervous when a company’s cash reserves far exceed its operational needs (plus a rainy day fund). Management might develop a case of “acquisition fever,” an investment banker-borne contagion that breeds a lust to buy shiny objects for ego aggrandizement.

It’s a rational concern, and while Apple’s performance and cautious spending habits gives management a great deal of credibility, a cash reserve that’s rapidly approaching a full year of revenue (let alone operating expenses) became “really too much” and led to last week’s $45B announcement.

The $45B figure is impressive…but will it be enough to treat this chronic condition?

In Fiscal Year 2011, Apple grew its cash balance by $31B. Using very conservative growth estimates — well below the rates we’ve come to expect from Apple —we’ll assume an additional $40B for FY 2012, $50B in 2013, $60B in 2014…that’s another $150B. Even after the $45B phlebotomy, Apple’s mattress will swell by another $100B in the next three years, to a total of about $200B.

The patient will require repeated blood-lettings.

A gaggle of observers would like to remind us of their version of the Law of Large Numbers; not the statistical LLN, but the one that says, using a simple example, that while 50% growth is relatively easy for a $10M business, it’s nearly impossible at the $100B level. And, yet, this is very much what’s in store for Apple in FY 2012. With Q1 revenue of $46B already in the books we can expect the annual figure to peg at roughly $180B. (This isn’t a wild guess: AAPL pretty much sticks to the FY 20ZZ = 4 x Q1 FY 20ZZ formula.)

$180B would be an astonishing 70% increase in revenue compared to FY 2011 ($108B). Astonishing but not surprising; it simply continues a trend: 2011, the first full year of the iPad, was 66% above 2010, which was 52% above 2009. Even in the midst of the financial cataclysm, Apple’s 2009 numbers showed a 14% increase over 2008, which showed a “customary” 52% increase over 2007, the year of the Jesus Phone. FY 2007, in which the iPhone contributed a smallish $483M, generated a “mere” 28% revenue increase above 2006, the memorable year when iPod revenue surpassed Macintosh sales, $7.7B vs. $7.4B.

One conclusion sticks out: Apple has escaped the lay version of the LLN because it repeatedly breaks into new categories. The “foundation” Macintosh business couldn’t fuel such growth.

Can this last? Can Apple create (or co-opt) another $100B category, add a fourth member to its iTrio: iPod, iPhone, iPad? The rumored Apple iTV (whether it’s the black puck or a “magical” HDTV set) is offered as a candidate for another iPhone/iPad disruption. I’m skeptical. As discussed here and here, I don’t believe Apple can turn TV into another $100B iMotherlode. Unless, of course, Apple comes up with a $650 ASP (Average Selling Price) black puck that will be enticing enough to be bought in iPhone numbers and renewed as frequently. This would require content and (cable) carrier deals for which Apple’s cash might bend the wills of content and transportation providers.

Another possibility, advanced by a friend of mine, would be for Apple to disrupt the digital camera business. Not in the way the iPhone has already eaten into the “snapshot” market, but by offering a real, non-phone camera, with bigger sensors, lenses, and, as a result, bigger body. While technically far from impossible, a look at Canon’s and Nikon’s books shows this isn’t a $100B sector. Canon’s total revenue, including printers and professional non-camera optics, is $44B, with fairly thin margins (COGS in the 70% neighborhood); Nikon’s revenue is about $1B. Too small to move Apple’s needle.

So where does Apple turn for the next big iThing? Perhaps they don’t need to “turn,” at all. Recall Tim Cook’s oft-repeated party line: All our businesses have plenty of headroom.

Read the transcripts of past conference calls (here, here and here, courtesy of Seeking Alpha) or assay Cook’s recent appearance at a Goldman Sachs conference. The mantra is clear: We have a small market share in the huge smartphone segment; iPad sales are growing even faster than the iPhone’s; Mac revenue is growing at a healthy 25% pace in the (still) huge traditional PC market.

Up to the advent of what I can’t help call the Apple Anomaly, we had two bins for companies.

Bin One held stable companies, businesses with modest, predictable growth rates. As they didn’t require huge amounts of money to feed the engine, much of their cash flow was returned to shareholders as dividends. And, when they needed cash for inventories or plants, they could borrow it, issue bonds providing ‘‘guaranteed’’ income (I simplify).

Bin One stocks are boringly/pleasantly predictable.

Bin Two companies are ‘‘hot’’, fast-growing high-tech businesses. They require lots of cash, most often harvested on the stock market. Cash-flow and future requirements are such they rarely issue a dividend.

Bin Two stocks are pleasantly/dangerously hot.

Apple straddles both bins: it generates obscene amounts of cash and it still grows much faster than the rest of the high-tech world.

Summarizing Tim Cook’s position: Yes, we’ll pay dividends and buy shares back. And No: We have no intention of becoming a stodgy Bin One company.

Apple’s CEO implicitly assumes the people he leads will continue to come up with winners in each category, an assumption respectively disputed and wholeheartedly endorsed by the usual suspects. So far, doomsayers haven’t had a great run. But just you wait, they say: In The Long Run Apple Will Fail. They will be right, of course, but when?

In the meantime, the company is still left with a $100B cash “problem.”

This must be by design: Apple’s Board could dial cash down to, say, a healthy $40B. Why not do so?

One possible explanation is that Apple is playing a game of “projection,” they’re creating the perception that they can buy or do anything they want: Wage a price war against Samsung, corner the supply of critical components and force competitors to pay more, create a second source for key modules, buy major distribution channels.

The problem with such speculations is that Apple is already doing some of the above. For example, keeping the intuitively more expensive (display, battery, LTE module) new iPad at the same price points as the iPad 2 continues the price war Apple started with the original iPad’s surprising $499 pricetag.

Also, Apple has already disclosed that it has committed some of its cash as forward payments to suppliers. And strategically creating or even buying a semi-conductor plant to cut Samsung off won’t cost tens of billions. For reference, the latest Intel fabs cost in the neighborhood of $5B each. In any event, one can’t see Apple’s culture adapting to the esoteric semi-conductor manufacturing sector.

This leaves distribution. Could the company acquire, say, Best Buy or an international equivalent? These companies are (relatively) inexpensive: Best Buy’s market cap is less than $10B —for a reason: lousy margins that, in theory, Apple could prop up. But, in reality, hese are complicated businesses and would be a nightmare to restructure: Imagine getting rid of all the brands, pruning and retraining staff. Highly implausible.

We know Apple’s business model: Make and sell high-margin hardware, rinse and repeat every year, everything else is in service to the elegant hardware experience of the Dear Customer. If we stick to our search for places to invest $100B, we’re left with a big question mark.

The only scenario left for the big number is a hedge against political risk in China or against an economic Nuclear Winter. Apple would use its cash reserve to pull through and reemerge even stronger than its competitors.

JLG@mondaynote.com

App Cameras

In an August, 2010 Monday Note titled Smartcameras In Our Future?, I wished for smartphone-like apps running on a nice compact camera such as Canon’s S90 (now replaced by the S100). At the time, in-camera photo processing was limited and wireless connectivity required accessories like Eye-Fi, a clever but not so easy-to-use SD card with a Wi-Fi radio.

On the smartphone side, connectivity (Wi-Fi and 3G) was simple and mostly good (AT&T exceptions hereby stipulated) and, as a bonus, GPS geolocation worked. But when it came to picture quality, smartphones couldn’t compete with dedicated compact cameras. The phones’ inadequate sensors had trouble with high contrast scenes. Pictures in low light? Forget about it.

Since then, sensor technology has made incredible progress. A few years ago, ISO 3,200 was considered extreme; today, the Canon 1 DX and Nikon D4 reach ISO 204,800 sensitivity. Granted, these are big, expensive high-end cameras — and heightened sensitivity doesn’t always yield the best picture — but the new top number is 64 times the previous maximum. A low-light scene that once required a blur-friendly 1/2 second exposure can now be safely captured in 1/128th of a second.

Such progress stems from the silicon industry’s relentless progress, particularly, in this case, in silencing electrical noise. Stray electrons that are introduced by the camera’s circuitry are intelligently rejected; “authentic” electrons that capture the sparse photons in a low-light snapshot are no longer drowned in an electrical hubbub.

As expected, these improvements have ‘”dribbled down.” The advancements in silicon technology that have given us the 24x36mm sensors in our pro cameras are finding their way into the tiny sensors in our smartphones. ‘The Best Camera Is The One That’s With You’ is truer than ever. Esteemed photographers such as Annie Leibovitz have fun showing off what they can do with a smartphone.

But improved sensor technology is only one of the reasons why smartphones have eaten compact cameras alive. The other reason is software. Smartphone app stores now sport a huge number of photo apps. Search for ‘‘photo editor” in Google play (née Android Marketplace) and you’ll get more than 1,000 hits. The iPhone App Store yields an absurdly high number as well. Not all of these apps are useful — or even good — but the gamut is impressive. From collage to special effects, from panorama stitching to HDR processing (coaxing highlight and lowlight details into a “viewable” picture), smartphone camera software makes these better sensors even better.

Now add in the smartphone’s connectivity with its natural affinity for easy and automatic upload/download, such as what Photostream does for Apple devices… Compact cameras – which, by comparison to smartphones, don’t seem quite so compact anymore — are at an ever-growing disadvantage.

“It won’t last,” says Samsung. In the eyes of many, the Korean electronics giant has become the new Sony, or, better, the new Panasonic. Well-known for smartphones and tablets, Samsung also reigns in the HDTV market, they make PCs, refrigerators, cameras, all very good ones. As the king of Android phones, it’s no surprise to hear rumors that Samsung is preparing to launch Android compact cameras. It’s a terrific idea: Compact cameras have bigger sensors, better optics and zoom lenses. With better apps and connectivity (Wi-Fi at least), they’ll make great travel companions.

Canon and Nikon should pay heed…or risk sequestering themselves in the ultra high-end camera ghetto.

JLG@mondaynote.com

Carriers Whine: We Wuz Robbed!

[First: No (new) iPad report, yet. In the meantime you can feast your eyes, or nurse your dyspepsia, by googling “iPad 3” or “new iPad”. This will tell you almost everything (minus the Fingerspitzengefhül, the all-important gut-feel) about the product, and definitely everything about the kommentariat. If we thought we’d plumbed the nadir with the iPhone 4S…]

Dictionary.com unfolds the historical and linguistic links to We Wuz Robbed, and translates: We were cheated out of a victory; we were tricked or outsmarted.

The gist of the carriers’ lament is this: We do the hard work and someone else is making all the money. And by someone else they mean a certain interloping personal computer company that has, without the slightest experience in the technical (and deal-making) intricacies of the mobile phone industry, inexplicably lucked into the smartphone business and pocketed an unfair share of the cash.

The PR flacks go to work and give us this “rich” WSJ article, “How the iPhone Zapped Carriers”, from which I extract a few of its many gems:

Americans are glued to their mobile devices, obsessively calling, texting, emailing and downloading applications. So why is the U.S. wireless industry in such straits, as shown by AT&T Inc.’s crucial but failed plan to buy T-Mobile USA?
A big reason is that carriers are losing power to the device and software makers riding the smartphone boom.
…..
For the most part, it’s really been a wealth transfer from AT&T shareholders to Apple shareholders…
…..
Device makers and app developers are having the fun, while the carriers are doing the grunt work.

Nowhere does the churnalist entertain anything other than the carrier party line. Not a word from users, from Google, from the device makers and software freeloaders who are “riding” the boom and having all the fun.

The article’s bias is clear, in its language and innumeracy. First, AT&T’s “crucial but failed” attempt to buy T-Mobile was a bid to restrict competition and raise prices. Had the merger gone through, customers would be the ones crying “We wuz robbed.”

Second, the article mentions a decrease in the sacrosanct monthly ARPU (Average Revenue Per User) to $46.09, down $2 from the previous year. Behold once more the lack of respect for the reader exhibited by the fake four-digit precision. But beyond the attempted intimidation, what is the meaning of the $46.09 average, what ingredients does it mix together?

Curious, I ask the oracle a simple question: ATT ARPU. The first hit is a happy — triumphant almost — AT&T press release for Q4, 2010:

AT&T Reports Record 2.8 Million Wireless Net Adds, Strong U-verse Sales, Continued Revenue Gains in the Fourth Quarter
…This marked the eighth consecutive quarter AT&T has posted a year-over-year increase in postpaid ARPU.

And the news gets better. The Q4 2011 investor presentation (download it here) yields these morsels:

…and…

The average ARPU for smartphones on AT&T’s network is 1.9 times that of the company’s non-smartphone devices.

The $64 ARPU is for all wireless devices, smart (with their 1.9x revenue premium) and dumb. Two years ago, AT&T CEO Randall Stephenson pronounced himself happy with the “over $100” ARPU from iPhone subscribers. So how much does AT&T get for its iPhones today?

From Apple’s latest earnings release, we know the iPhone ASP (Average Selling Price) is about $660. AT&T subscribers pay $200, plus $20 or more in accessories, directly to Apple. This leaves $440 to be fronted by AT&T. Subtract that $440 number from $2880 (the customary 24 month x $120 agreement), and there’s $2440 left — or about $100 per month of “real” iPhone ARPU.

But there’s a problem with my back-of-the-envelope calculations. Data consumption makes up 40% of AT&T’s service revenue; I can’t prove it, but I suspect that iPhone subscribers are more ‘‘generous”, they consume more data, than AT&T’s other customers. In Q4 2011, that probably worked out to a nice ARPU of about $120 per iPhone.– and users will pay even more now that the “unlimited’’ plans are no longer offered.

What about Verizon? Are they being “zapped,” too? The oracle obligingly responds to “Verizon ARPU” with a few good links, such as this one, trumpeting Verizon’s robust health:

US carrier landscape in Q3: Verizon records biggest ARPU

Jumping to Verizon’s Q4 2011 numbers and to the January 24th earnings call transcript (courtesy of Seeking Alpha), we needn’t shed tears. The company’s smartphone business is doing well:

Ever since the iPhone barged in, we’ve heard carriers cry extortion; they complain that Apple’s prices — to them — are too high. But they took the iPhone and its prices for two simple reasons: higher ARPUs and fear of losing subscribers to a competitor, the cost of watching your most “productive” subscribers — the ones who contribute to the 1.9x ARPU factor — go elsewhere. It’s better to bet the company on the iPhone than on not having it.

Sprint agrees. According to our WSJ story, Sprint has committed $15B to the purchase of iPhones for a period ending in 2014. (Another WSJ story says $20B, but what’s $5B these days?) As obverse evidence, we have T-Mobile’s simple explanation for its subscriber losses: No iPhone.

Carriers subsidize smartphones because it’s what their customers want, and they put up with the iPhone’s higher price because it’s what their customers want most. Just last week, a T-Mobile exec called for an end to smartphone subsidies — but refused to go first. When/if the iPhone becomes less desired, the carrier subsidies will subside.

I introduce this thought by way of providing context for another statement in the WSJ article:

‘’… subsidizing a customer buying an iPhone would cost 40%, or about $200, more than another kind of phone, on average.”

(Let’s see: $200 divided by 24 months, that’s about $8 a month. Will an iPhone customer yield the extra $8 in monthly ARPU? The carriers’ accountants seem to think so.)

Still on subsidies, try this thought experiment: You walk into an AT&T or Verizon store with a fully-paid unlocked phone. Will you get a lower monthly deal? I asked and, in both cases, the answer is a polite no. See this on-line chat with a Verizon person:

No deal on an unsubsidized phone. The logic is impeccable: We complain about subsidies while using them to tie customers up.

Carriers want to imagine a world in which the ‘‘excess’’ $200-per-iPhone subsidy moves back to its rightful home: the carriers’ coffers. With 180 million iPhones sold so far, that’s $36B of pure carrier profit…and Apple would still enjoy an ASP of more than $400 for its iPhone. Cosmic order would be restored.

Back in this reality, carriers complain about excessive subsidies and threats of disintermediation, of attempts to make them ‘‘dumb pipes’’. But nowhere do we see a discussion of the ratio between the cost of an additional cell tower and the new revenue it generates. We can be sure carriers know this number, but they’re not sharing. It must be a good one: We now see carriers eager to offer their new LTE infrastructure as data pipes for the (unsubsidized) new iPad.

As a final offering, regard this handy chart from Fierce Wireless:

Some observations and a little math, in no particular order.

  • The first four carriers, Verizon, AR&T, Sprint, and T-Mobile, have 295M subscribers, 90% of the total US market.
  • If we multiply each carrier’s ARPU by its number of subs, sum the results, and divide by the 295M, the overall ARPU works out to about $50 (our journalist would write $49.69).
  • For the two leading carriers, the churn rate (people leaving) is quite low, about 1%. Compare this to the iPhone-less competitors: Before Sprint got the iPhone 4S, Sprint’s churn was about twice AT&T’s; T-Mobile’s is close to three times that of Verizon’s.
  • AT&T continues to benefit from its early bet on the iPhone and, in Q3, added more subs than Verizon.
  • Both Verizon and AT&T get about 40% of their service revenue from data.

JLG@mondaynote.com

The Apple TV Set — Not Again!

It’s the rumor that refuses to die and the myth that keeps on giving…pageviews. Serial Apple-rumorist Gene Munster is at it again: In a 15 minute Bloomberg Radio program (obligingly summarized here by Business Insider’s Henry Blodget and here by 9to5Mac) the PiperJaffray analyst issues his umpteenth version of the prediction:

Apple’s TV is real. It will be ‘The Biggest Thing In Consumer Electronics Since The Smartphone’.

As if this weren’t bold enough, Munster also predicts that Apple’s TV set will be announced this year and will ‘freeze the market for five months’. Naturally, the design will be bold: ‘… just a sheet of glass, no edges or bevels’.

Let’s start with a bow to the power of desire and the company’s reputation: Wouldn’t it be grand to have a magical TV-done-right? A Jony Ive hardware design, a UI purified of the ugliness and complexity foisted upon us by operators (cable or satellite) and set-top designers (Motorola, General Instruments), iOS-based, controlled via Siri, fed by a completely remodeled iTunes and App Store…

Apple keeps barging into existing markets it didn’t invent — MP3 players, smartphones, tablets — and manages to go home with a big share of the game. It does this by skillfully rethinking the device, inside and out. With the iPod, the iPhone, and the iPad, Apple offered sleek, elegant, cohesive form factors…and it did more: It provided a new ecosystem. The process started with iTunes (selling separate songs and micro-payments), which provided a debugged foundation that made the iPhone the first ‘‘app-phone’’ and paved the way for the iPad.

Why can’t Apple do something similar for its hypothetical TV set? Is it just a lovely, comforting fantasy?

Today’s TV experience is far from magical. A few weeks ago, I bought a 47” LG Smart 3D HDTV on post-Xmas sale at Fry’s. At $990, the thin, easy-to-install, internet-connected TV sounded good.

WiFi set-up isn’t too hard:

Using the Web browser is another story (although, to be fair, in a world of smartphones and tablets, why would you browse the Web on your TV?):

Still, there are plenty of embedded applications…

…and the “management’’ UI is cheerful, if a little disorganized:

For the Skype application circled above, you can buy a dedicated webcam. I did, it’s expensive — it adds 15% to the TV’s price — but its really Plug-and-Play, no software added.

All the parts are there…but a $49 or $79 Roku, a $179 Boxee Box, a $179 Xbox, or the $99 Apple TV offers more content, flexibility, and modularity, to say nothing of a more accessible UI.

Does this make a case for yet another category reinvention by Apple?

Not so fast.

As discussed in previous Monday Notes (here and here), there’s one strong, clear reason to bet against an integrated or smart Apple TV set: To perform the expected magic, a computer must inhabit the otherwise “dumb” TV. Very quickly, in a year or two, Moore’s Law will obsolete that computer. To get a new computer — more powerful, more fun –  you’ll need a whole new TV set. We might be willing to buy a new phone, tablet, or laptop every other year, but not a new 47” HDTV.

I believe Apple TV’s magic will be performed by a separate box, a descendant of today’s $99 Apple TV black puck, perhaps in combination with a new version of Time Capsule. This will enable the no-longer-a-hobby Apple TV to bring its magic to the millions of HDTVs already in homes all over the world — and to be replaced with better/faster hardware without drama.

(While we wait for the grand new Apple TV, we’re likely to get an updated version of today’s black puck Real Soon Now: The vintage 2010 model is no longer available online at Amazon, Best Buy, or Radio Shack — I just checked. If, as I hope, the upgrade outputs real 1080p HD — 1920 by 1080, versus today’s 720p — 1280 by 720, it’ll be an easy sell. Especially as an AirPlay companion to something like an iPad HD with twice the linear resolution of today’s tablet, 2048 by 1536 versus the original 1024 by 768.)

So, no grand integrated device…but the next-gen Apple TV, the next black puck, will certainly have that iOS/Apple Store magic, right? With three success stories in the books, the process of writing and distributing iOS apps is well understood, billions of dollars have changed hands through the App Store, developers and customers are standing by!

Again, not so fast.

Most of what we do with our PCs, smartphones, and tablets is related, it’s one form or another of personal computing. Yes, we also play games on our phones, but our posture is primarily ‘‘lean-forward’’: productivity, communication, organization, learning.

A TV, even when running iOS, isn’t a personal computer. We won’t be typing The Great American Novel or answering email, but we will play games, tune into channels-as-apps, video-chat with our friends and families running Skype or FaceTime. The TV is entertainment, it’s a ‘‘lean-back’’ experience. As one wag put it, the PC helps us think; the TV relieves us from our thoughts.

To gain acceptance, the Apple TV ecosystem will have to offer a library of entertainment apps tailored for TV. The company has made inroads in the genre – see the 60 Minutes iPad app, or MLB.tv for Apple TV (a great boon for naturalized fans who occasionally spend time in repatriation). But most entertainment content providers – TV networks, event producers, movie studios – are proceeding with caution. They know the history: Steve Jobs managed to convince music ‘‘majors’’ to let Apple distribute the content. Over time, the content distributor became more important than the content owner, giving sharper meaning to the old Hollywood saying, “If content is king, distribution is King Kong.”

No one knows if, when, and how Apple will succeed in building an Apple TV App Store that will have enough content to displace the old set-top box, its bundles, and its “lovely” navigation.

But can we, at least, hope for a separate, “dumb” TV set from Apple, elegance we can hang on the wall?

Here we run into the business model question. For Apple, only hardware margins matter. Everything else — software, content, stores — is there to serve the topmost goal. It’s doubtful that Apple can “maintain the hardware lifestyle to which it is accustomed” with such a product.

Today, the TV hardware business shows signs of desperation with its gimmickry and price wars. Even at the high end where Bang & Olufsen makes “exclusive” sets that sell for 3 to 4 times as much as technically comparable Samsung devices, life isn’t too comfortable. Take a look at B&O’s latest investor presentation and you’ll see that TV sales make up less than half of their $500M revenue, and show a slight decrease year-to-year. Operating profit is a modest 4% or so.

With this in mind, could Apple achieve its ‘‘customary’’ 37% Operating Profit selling a “dumb” TV? For help in answering the question, let’s compare the price of Apple’s 27” Thunderbolt Display to its competition. The Thunderbolt is “more than HD” (2560 by 1440) and has some features that aren’t found on other monitors — power to another device; extra USB, Ethernet, Firewire, and Thunderbolt ports; an integrated 720p camera — but at $999 it’s selling in middling quantities even though it demands a significant premium. At Amazon, a Samsung 27” (1920 by 1080) monitor sells for $329. Some competitors go as low as $250.

Now imagine a 47” or 55” 1080p TV set version of the Thunderbolt Display with fewer ports and better sound, perhaps. Today, Samsung’s top-of-the line 46” sets sell for $1,800; the 55” model is $2,000. Would Apple get a 50% premium over those prices?

But even more than price and margins, there’s volume. Going back to Gene Munster’s ‘Biggest Thing In Consumer Electronics Since The Smartphone’ claim, would Apple’s elegant, slightly better connected, webcam equipped, but nonetheless dumb set sell in iPhone or iPad quantities? I seriously doubt it.

If Apple succeeds in building the right content-and-apps ecosystem around a next-gen Apple TV box, the new device will be in a position to eclipse today’s ungainly set-top boxes, it will have a chance to sell in large quantities at good margins — and thus stop being a ‘‘hobby.” Then, yes, Apple might also sell a few (almost) dumb but definitely elegant sets on the side — as a recreation.

JLG@mondaynote.com

HP’s PC Addiction

Why is HP still in the PC business? It must be for the sport, because the money isn’t there. Looking at the quarterly figures released this past week, we see PC revenue down 15% year-to-year, with a low 5.2% Operating Profit:

HP can explain. In the earnings release conference call (transcript obligingly provided by Seeking Alpha), CFO Catherine A. Lesjak invokes the floods in Thailand and their impact on hard disk production as one excuse for the PC revenue shortfall. For her part, CEO Meg Whitman ‘‘opens the first envelope”: She (subtly) blames her predecessor for his PSG spin-off announcement and the ensuing on-again-off-again business disruption.

But the Thailand floods didn’t seem to have much of an impact on Dell, whose latest quarterly numbers show 3% Y/Y growth for Desktop PCs, let alone on the Cupertino neighbor where the Mac business grew by more than 20%. And as a member of HP’s Board of Directors at the time, didn’t Whitman approve the decision to dump the PC?

None of this answers the question: Why stick with a declining product line within a declining industry? Part of the answer lies in the weight of PSG:

The PC is still HP’s biggest business…and its least profitable. The only explanation for staying in the game, to quote Meg Whitman in her conference call remarks:

‘It gives us great return on invested capital and a lot of synergies.’

Perhaps, but what happens to the enjoyable cashflow if the PC business continues to deteriorate, as an industry in general, and as a challenged product line at HP?

Personal computing now comes in three flavors: traditional, tablets, and smartphones. The latter two are dynamic and thriving while the traditional segment stagnates. HP has failed to gain any presence in tablets and smartphones, and now finds itself the biggest player in a market that’s in a race to the bottom.

HP’s absence from the tablet/smartphone segment isn’t for want of trying. When then-CEO Mark Hurd decided to acquire Palm, he was making a clear strategic move for HP to become a major player in smartphones and tablets, to gain independence from stodgy Microsoft, to control its destiny in the newer and more promising personal computing segments. The move was reinforced last August when HP’s Board supported Léo Apotheker’s decision to exit the unprofitable PC business, a gambit inspired by IBM’s similar decision years earlier.

Unfortunately, not-so-small matters of implementation compromised the grand design. Palm’s WebOS tablets and smartphones didn’t fly; Apotheker’s exit-without-an-exit-path announcement was followed by a hasty retreat and Léo’s no less hasty exit. Epaulette mate.

All HP can do now for its PSG business is pray. And, indeed, Meg Whitman bows to the Microsoft altar:

‘So we’re rooting for a fantastic Windows 8 product that’s delivered on time that we can get to the market before the holiday season.’

What does HP have to say about tablets? Not a word. Browse the conference call transcript; CMD-F, ‘tablet’, Enter… Nothing in Whitman’s prepared presentation, no T-word in the Q&A section. (A bonus finding: The silence of the analysts. Let the record show how lamely choreographed these Q&A sessions are. No analyst even dared to ask HP’s CEO about, you know, iPads, Kindle Fires, Android tablets… For once, the elephant-in-the-room metaphor applies: For Apple’s most recent quarter, iPad revenue rose to $9.15B vs. $8.87B for HP’s PSG. Definitely not worthy of a discussion for the benefit of HP’s concerned shareholders.)

At a WSJ event the same day, HP’s CEO finally admits the existence of the iPad…and gives it a patronizing pat on the head:

The iPad is terrific; I have one. I use it to read books or watch TV but I don’t use it to really get work done.

In another interview, as reported by Business Insider, Whitman recycles the old Blackberry enterprise security argument:

‘I think our sweet spot has to be around security. This whole security thing is a big worry, not just for big enterprises but also for medium enterprises and small and medium businesses. So if we can provide devices that consumers really want — and by the way, employees are consumers, too — and we can provide a tablet offering, then we have an opportunity to solve problems for the enterprise and small- and medium-business segments, with products that their employees like and are also secure in terms of protecting the enterprise’s data.’

The S-word paranoia stopped working for the BlackBerry some time ago. Enterprise users have embraced the iPad because, thanks to Apple’s ‘‘control freakery’’, the new tablets are more secure than laptops. I know of one giant oil company that deploys thousands of iPads (and iPhones), complete with the corporation’s own internal App Store, chock-full of homegrown applications for its office workers and road warriors.

It sounds like HP’s CEO is aping the best-of-both-worlds posture affected by Microsoft for its upcoming tablet software: We give you the productivity of a traditional PC plus the portability/fluidity of a touch-friendly tablet. She seems to have ignored the reason for the iPad’s success in business: Be better at less. The iPad doesn’t try to do everything a PC can do, it’s simply better at the things it does.

Business users have figured this out on their own, without waiting for the market research – or the blessings of their IT departments. In this post, TechCrunch reviews a new Forrester report on mobile and personal devices at work:

[T]he report notes that today’s I.T. departments think they have only a handful of devices out in the field: a PC and smartphone for most users, and maybe a tablet for a handful of execs. But in reality, one-half of info workers report using multiple devices, often behind I.T.’s back.

These workers prefer a set of tools to a Swiss Army knife.

Later in the same TechCrunch post:

Employees today are bringing their own devices largely outside of BYOD programs, Gillett says. While 73 percent of workers pick their own phone, 53 percent their own laptop, 22 percent their own desktop, and 66 percent their own tablet, significant numbers of workers report paying for the devices themselves. In the case of smartphones, for example, 57 percent report paying the full price for the device themselves, and 48 percent report paying full price for their own tablet.

There was a time when HP, Dell, and others could sell fleets of PCs because employees had to take what IT gave them. Today, users/workers are more inclined to decide for themselves which devices they want and, in many companies, management supports the initiative because it improves productivity without an increase in risk or cost.

Does HP stand a chance to become a viable supplier of the kinds of devices business users choose for themselves? We know the official answer: We’ll try harder; we’ll eliminate silos and inefficiencies in the supply chain; we’ll innovate again. Some of that may work for a while…but will it work faster than the competition? Also, with the exception of the departed CEO, most of the people who got HP in its current situation are still there. Will the same crew cause the same effects?

I still think HP’s initial intuition was right, that the PC business, as driven by Microsoft and Intel, will increasingly become a race to the bottom — with the two Wintel allies sucking all the profits. Instead of ‘‘rooting for a fantastic Windows 8”, HP should root around for a buyer for its PC business.

JLG@mondaynote.com