About Jean-Louis Gassée

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The Fantastic Apple Car

 

by Jean-Louis Gassée

Forget the iWatch, Apple Pay, and the iPhone 7…the next big thing from Cupertino will be the Apple Car.

At first, I didn’t pay much attention to the Apple Car rumors. I saw them as the another wave of clickbait along the lines of the wiped-out Apple Television Set canards.

I even thought of writing a little parody piece:

WinCar, Microsoft Disrupts The Auto Industry.

After penetrating offices and homes, Microsoft will now hitch a ride in the third most important location (and time slice) in peoples’ lives: The Car.

As part of Satya Nadella’s Mobile First – Cloud First vision, the Azure-enabled WinCar is the ultimate personal mobility and connectivity device. Quoting Nadella’s July 10th message to the troops:
“We will think of every user as a potential ‘dual user’ – people who will use technology for their work or school and also deeply use it in their personal digital life.
[…] Microsoft will push into all corners of the globe to empower every individual as a dual user – starting with the soon to be 3 billion people with Internet-connected devices. And we will do so with a platform mindset. Developers and partners will thrive by creatively extending Microsoft experiences for every individual and business on the planet.”

Microsoft’s connections to the auto industry are old and obvious: Steve Ballmer’s father was a manager at Ford; Microsoft wrote successive generations of Sync, Ford’s dashboard infotainment system; Dr. Helmut Panke, an illustrious auto industry figure and former Chairman of BMW’s Board of Management, sits on Microsoft’s Board of Directors. Bill Gates drives a Ford Focus. Ballmer? He’s a Ford Fusion man...

No.
As I saw the growing stream of Apple Car tweets and blog posts, two minutes of research took me to what seems to be the source of the reverberating fracas, a single Wall Street Journal story titled Apple Gears Up to Challenge Tesla in Electric Cars; iPhone Maker Has 100s Working on Design of a Minivan Like Vehicle. The article tells us that the project, code named “Titan”, is being shepherded by Steve Zadesky, a former Ford engineer who “helped lead the Apple teams that created the iPod and iPhone” — two products that have many, many fathers.

Most of the echoes of the rumor emanate from that one story. The Financial Times’ Apple hiring automotive experts to work in secret research lab isn’t much more than a rewrite. The always “reliable” Business Insider tells us that Tesla and Apple are poaching each other’s engineers and throws in a quote from an unnamed Apple employee: “We’re working on something that will give Tesla a run for its money”. A Mac Observer post tells us that they have it on good authority from someone who “travels in more rarefied circles” that “a lot of people at the top in Silicon Valley consider it a given that Apple is working on a car”.

The posts and reposts are quick to find “evidence” that back up the rumors. Apple’s Sr. VP Eddy Cue, who sits on Ferrari’s Board (a fact that’s omitted from Cue’s official bio), has long been a conduit between choice automobiles and highly paid company engineers and executives. Apple recently hired Johann Jungwirth, former president and chief executive of Mercedes-Benz Research and Development North America. Recent sitings of Apple’s mysterious unmarked vans fitted with a dozen cameras proves they’re building an autonomous vehicle.

The picture wouldn’t be complete without a juicy link to complaints about American cars by “design god” Jony Ive and no less divine watch designer Marc Newson, who says that American car design is on the “shit we hate” list.

(Let’s give ourselves a moment of contemplation, here. These two august industrial artists come from Britain, whose auto industry is now either German or Indian. Bentley, Sir Jony’s choice, is owned by Volkswagen; Rolls Royce is a subsidiary of über Bavarian BMW; Jag-ü-ar and Land Rover are in the competent hands of the Tata conglomerate.)

Just as in the little Microsoft parody above, the signs are unmistakable, Apple is definitely making a car.

Let’s count the ways….

The company has the money. With $178B in the bank, it could easily afford to build a car factory. The cost of doing so, a couple billion, is certainly less than the price of a microprocessor fabrication unit where costs approach $10B. And the company is no stranger to large industrial bets. As Horace Dediu notes, Apple spent close to $4B in Machinery and Equipment in the quarter preceding the launch of the latest iPhone; for the latest quarter, spending of more than $3.2B is 60% higher than a year before. As Horace tells us, large increases in Machinery and Equipment spending presage big product launches – which is a little besides today’s topic:

355_dediu
Short of building everything from the ground up, perhaps Apple is going to buy their way in. Why not acquire Tesla and enjoy a running start? Tesla’s market cap of $26B makes it an affordable acquisition. The current Model S is, in several ways, the first Silicon Valley car, built nearby in Fremont, with a modern touch-based UI, autopilot features, and regular over-the-air software updates.

An Apple car would almost certainly be out of many drivers’ budgets, but let’s recall that Apple has a history of disrupting from the top. They took over the MP3 player market and the smartphone industry by providing a more expensive product and carefully building an ecosystem of software, content, services, and retail operations that deliver user experiences that, in turn, generate higher margins. And as car technology matures, Moore’s Law will help drive down prices.

But now let’s look at the reality.

Yes, Apple has plenty of money, but the century-old auto industry doesn’t seem like a good way to make more of it. Ford, the healthiest US car company, made $835M in net income last quarter, less than 4% of their $34B in sales. Compare that number to Apple’s record-breaking $18B profit. Tesla, Apple’s supposed rival in the fantasy blogs, pulled in a little less than $1B last quarter, and it lost about 10% of that. There isn’t an inkling of an explanation for why and how a superior product designed and built by Apple would bring superior returns.

Furthermore, there is no Moore’s Law for cars. In a Tesla Model S, the computers are a small part of the bill of materials. Batteries, which contribute the most to the price, don’t double in power or halve in cost every 18 months.

A simple chart by Benedict Evans sheds light on the opportunities before us:

355-UniqueTech

The sort of money that apple has come to expect just isn’t in cars.

An autonomous car is good PR and to some it may seem like an inevitability, but as Lee Gomes, a former tech writer for the Wall Street Journal, explains in this Slate piece: The autonomous Google car may never actually happen. This isn’t because Google engineers are incompetent, but because actual, in-the-wild autonomous driving is fraught with countless intractable exceptions. What happens in heavy rain or snow, or when the software behind the camera has trouble recognizing objects that are blown onto the road?What happens when your car approaches a a last minute detour around new construction site?

Apple’s life today is relatively simple. It sells small devices that are easily transported back to the point of sale for service if needed. No brake lines to flush, no heavy and expensive batteries and cooling systems, no overseeing the installation and maintenance of home and public chargers. And consider the trouble Tesla faces with entrenched auto dealers who oppose Tesla selling cars directly in some states. Apple doesn’t need these headaches.

There is a simpler and regrettably less grand explanation for the rumors.

Johann Jungwirth, the Mercedes Benz R&D exec that Apple hired last September, worked on infotainment systems, which makes him a natural for Apple’s work on CarPlay. The mystery vans are most likely part of the company’s Maps product.

Apple has made a commitment to better in-car systems, not in and for themselves in isolation, but as a reinforcement of the iOS ecosystem. If the large number of engineers that they’ve “poached” from Tesla seems a bit much, consider again the enormous size of iPhone (and iPad) revenue for this past quarter: $60B – compared to GM’s $40B for the same period. To Apple, anything that helps the iOS ecosystem is well worth what looks like oversized investments to outsiders.

Cars have always excited humans, they are a way to extend the reach of our bodies. As Roland Barthes once said about the Citroën DS 19 [emphasis mine]:

“I think that cars today are almost the exact equivalent of the great Gothic cathedrals; I mean the supreme creation of an era, conceived with passion by unknown artists, and consumed in image if not in usage by a whole population which appropriates them as a purely magical object.”

An Apple car feels good: design, quality, service, trust. A winner. I’ll buy two. It’ll work because it’d be really great if it did… but a small matter of implementation – actually the larger Moore’s Law intrudes.

The fantastic Apple Car is a fantasy.

JLG@mondaynote.com

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How Many Laws Did Apple Break?

 

by Jean-Louis Gassée

Apple’s most recent quarterly numbers broke all sorts of records and, as we shall see, a number of laws.

Apple just released its numbers for the quarter ending last December, the first quarter of its 2015 Fiscal Year. The figures are astonishing:

iPhones:  Apple sold 74.5M, + 57% over last year’s same quarter. iPhone revenue was $51.2B, + 57%. That’s enough iPhones for 1% of the world population, 9.4 iPhones for every second of the past quarter. I hope to see some day a documentary movie on the supply chain heroics leading (parts manufacturing, assembly, transportation logistics) required to achieve such numbers. But I’m not holding my breath.

Overall company revenue grew 30% to $74.6B, with the iPhone representing a never-before 69% of total sales. This why some now call Apple the iPhone Company.

Profit (a.k.a. Net Income): $18B. This appears to be the highest quarterly profit ever achieved by a company:

Apple Largest Quarterly Profit Ever Edited

Record quarterly profits is becoming commonplace for Apple. The company has broken into the top ten list five times since Q1 FY 2012.

(The Wikipedia article on record profits and losses has Fannie Mae’s $84B in 2013 in the #1 spot, but Fannie’s categorization as a Government-Sponsored Enterprise puts it in a different race – not to mention the $77.8B and  $64.2B losses in Q4 2009 and Q4 2008 respectively.)

Cash: After generating $33B from operations, the company now holds $178B in cash and cash equivalents. To get a sense of the magnitude of this amount, $178B represents $550 for every US citizen, or $25 per human on Earth. The World Bank has more data here on income levels and other such numbers, and the Financial Times has a helpful blog entry, If Apple were a country…, that compares Apple’s “economy” to those of various nations.

If you’re hungry for more Apple numbers, I suggest you feast your eyes on Apple’s 10-Q (its quarterly SEC filing), especially the meaty MD&A (Management Discussion & Analysis) section starting on page 24. Management also discusses the quarterly numbers in its customary conference call; the transcript is here.

But not everyone thinks highly of Apple’s doings.

We have academics spewing sonorous nonsense under the color of authority, such as Juan Pablo Vazquez Sampere’s We Shouldn’t Be Dazzled by Apple’s Earnings Report, published in the Harvard Business Review. Sampere, a Business School professor, finds Apple’s display of quarterly numbers unseemly:

Announcing boatloads of money, as if that were point, makes us think Apple no longer has the vision to keep on revolutionizing.

John Gruber offers a reasoned retort to the professor, but it probably won’t sway the likes of Joe Wilcox, a Sampere defender who writes: Atop the pinnacle of success, Apple stands at the precipice of failure.

Or consider Peter Cohan, an habitual Tim Cook critic, who recently told us there are “6 Reasons Apple Is Still More Doomed Than You Think”.

Apple… always one foot in the grave. But in whose grave?

This last quarter hasn’t been kind to the Apple doomsayers. A bundle of their lazy, ill-informed or poorly reasoned — and often angry — predictions are offered here for your compassionate amusement. Or we can turn to the ever reliable Henry The iPhone Is Dead In The Water Blodget for morsels such as this one, from November 2013: Come On, Apple Fans, It’s Time To Admit That The Company Is Blowing It. One of Henry’s points was Apple prices were too high. It’s getting worse: Last quarter, the average price per iPhone rose to $687.

We now turn to law-breaking.

Law 1: Larger size makes growth increasingly difficult.
This is the Law of Large Numbers, not the proper one about probabilities, but a coarser one that predicts the eventual flattening of extraordinary growth. If your business weighs $10M, growing by 50% means bringing in another $5M. If your company weighs $150B, 50% growth the following year would require adding $75B – there might not be enough customers or supplies to support such increase. Actual numbers seem to confirm the Law: Google’s FY 2014 revenue was $66B, +19% year-on-year; Microsoft’s was $87B, +11.5%; Apple’s $183B in revenue for 2014 was a mere +7%.

And yet, last quarter, Apple revenue grew 30%, breaking the Law and any precedent. iPhone revenue, which grew 57%, exceeded $51B in one quarter — close to what Google achieved in its entire Fiscal 2014 year.

Right now, Apple is “guiding” to a next quarter growth rate that exceeds 20%. For the entire 2015 Fiscal Year, this would mean “finding” an additional $37B to $40B in sales, more than half a Google, and a little less than half a Microsoft.

Law 2: Everything becomes a commodity.
Inexorably, products are standardized and, as a result, margins suffer as competitors frantically cut prices in a race to the bottom.

Exhibit 1: The PC clone market. As mentioned, the iPhone ASP (Average Selling Price) moved up, from $637 in Q1 FY 2014 to $687 last quarter. Moving the ASP up by $50 in such a competitive market is, to say the least, counterintuitive. At the risk of belaboring the obvious, a rising ASP means customers are freely deciding to give more money to Apple.

We’re told that this is just a form of Stockholm Syndrome, the powerless customer held prisoner inside Apple’s Walled Garden. Not so, says Tim Cook in a Wall Street Journal interview:

“…fewer than 15% of older iPhone owners upgraded to the iPhone 6 and 6 Plus…the majority of switchers to iPhone came from smartphones running Google Inc.’s Android operating system.

This correlates with Apple’s 70% revenue growth in Greater China, a part of the world where, in theory, cheap clones rule.

Law 3: Market share always wins.
Why this one still has disciples is puzzling, but here we go. With the bigger market share come economies of scale and network effects. Eventually, the dominant platform becomes a gravity well that sucks application developers and other symbionts away from the minority players who are condemned to irrelevance and starvation. Thus, just as the Mac lost to Windows, iOS will lose to Android.

Well… As Horace Dediu tweets it, Apple’s loss to Windows hasn’t hurt too much:

Dediu Losing PC War

Apple has gained PC market share in all but one quarter over the past eight years — that’s 31 out of 32 quarters.

But even that impressive run isn’t as important as the sustaining number that really does matter: profit share. Despite its small unit share (around 7% worldwide, higher in the US), Apple takes home about half of all PC industry profits, thanks to its significant ASP ($1,250 vs $417 industry-wide in 2014, trending down to $379 this year). Apple’s minority unit share in the mobile sector (13% to 15%) captured 90% of mobile profits this past quarter.

Small market share hasn’t killed the Mac, and it’s not hurting the iPhone — which enjoyed a much happier start than the Mac.

Law 4: Modularity Always Wins.
This is one of Clayton Christensen’s worries about Apple’s future. In the end, modularity always defeats integration:

“The transition from proprietary architecture to open modular architecture just happens over and over again. It happened in the personal computer. Although it didn’t kill Apple’s computer business, it relegated Apple to the status of a minor player. The iPod is a proprietary integrated product, although that is becoming quite modular. You can download your music from Amazon as easily as you can from iTunes. You also see modularity organized around the Android operating system activity that is growing much faster than the iPhone. So I worry that modularity will do its work on Apple.”

This was written in May 2012. Three years later, the iPod is all but gone. The music player that once generated more revenue than the Mac and paved the way for the iPhone by giving rise to the iTunes infrastructure has become an ingredient inside its successor. With 400M units sold, Apple no longer even reports iPod sales. One could say integration won.

Christensen rightly points out that in the PC clone market, modularity allowed competitors to undercut one another by improving layer after layer, smarter graphic cards, better/faster/cheaper processing, storage, and peripheral modules. This led to the well-documented PC industry race to the bottom. But Christensen fails to note that the Mac stubbornly refused (and still refuses) to follow the Modularity Law. And, as Apple’s recent numbers show, the iPhone seems just as immune to modularity threats.

I have no trouble with the Law of Large Numbers, it only underlines Apple’s truly stupendous growth and, in the end, it always wins. No business can grow by 20%, or even 10% for ever.

But, for the other three, Market Share, Commoditization, and Modularity, how can we ignore the sea of contradicting facts? Even if we set Apple aside, there are so many “exceptions” to these rules that one wonders if these so-called Laws aren’t simply convenient wishful thinking, a kind of intellectual Muzak that fills an idea vacuum but has no substance.

As Apple continues to “break the law”, perhaps we’ll see a new body of scholarship that provides alternatives to the discredited refrains. As Rob Majteles tweeted: “Apple: where many, all?, management theories go to die?

JLG@mondaynote.com

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Microsoft Makes Clever Moves

 

by Jean-Louis Gassée

While Microsoft Office for mobile is a satisfying success, the company can’t seem to create — or even buy — a mobile operating system that can compete with iOS and Android. Perhaps they’ve been looking in the wrong direction and can return to their “trusted” Embrace and Extend tactics.

Microsoft published its numbers for its Fiscal Year 2015 2nd quarter ending in December 2014. While the company isn’t the money machine it once was, it is healthy: Revenue grew 8% to $26.5B, Operating Income declined only a bit (- 2%) at $7.8B, there will be another $.31 dividend for the quarter, and cash reserves stand at $90B.

Such numbers give Satya Nadella the space he needs to implement the Mobile First – Cloud First vision he outlined last year. A key component of this plan is to spread Office applications across all platforms and devices: PCs, tablets, and smartphones – native apps as well as Web versions. Last week, Microsoft took another step in this direction with the release of its historic Outlook PIM (Personal Information Manager) app for Android and iOS.

While the Outlook release was warmly received, I’ve learned to take enthusiastic press reviews with caution. I prefer to “play customer”: I buy and use the product in klutzy ways engineers can’t foresee and, as a result, I get a better idea of how the product will fare in the real world. So, I installed Outlook on my iPad mini and, not to pour salt on some wounds… It Just Works. It runs my Exchange account at work, and it speaks Gmail and iCloud as well. No ifs, no buts.

Perhaps the most interesting aspect of the release is that it completes the core components of the native MS Office bundle: Word, PowerPoint, Excel, and now Outlook. It doesn’t matter which platform you use — Windows, Mac, Android, or iOS — you now have the full complement of Microsoft’s productivity apps built specifically for your device.

I used to think that if Apple could get its software house in order and work out the  (numerous) bugs, iWork could easily displace Microsoft Office on Mac, iCloud, and iOS. After all, iWork is free… Now, I’m not so sure. With this release, MS Office provides a fit and finish, a safe and effective cross-platform solution that’s worth the price of admission, particularly in the Enterprise world.

But Apple isn’t the competitor Microsoft worries about. Cross-platform Office is a powerful countermove against Google Apps. Microsoft doesn’t have a dog in the old Web vs. Native Apps fight, it offers both everywhere.

In other matters, however, things aren’t entirely rosy for Microsoft. Its smartphone hardware business isn’t doing well. A look at the recent 10-Q and at the slide presentation for the Earnings Release shows hardware revenue of $2.3B, for 10.5M Lumia phones and 39.7M on-Lumia devices:

Phone Hardware

Microsoft’s smartphone business is still dealing with the Nokia acquisition trauma, so these numbers are less reliable than in a stable business. But even if we proceed with caution, when we divide the $2.3B revenue number by 50.2M (the total number of devices), we get a meager ASP (Average System Price) of $46.

One could argue that the computation is misleading because it throws Non-Lumia phones — such as the Nokia X running Android — into the same pot as worthier Lumia devices. So let’s take take another stab at the numbers: Let’s imagine that all non-Lumia phones are simply given away, $0 ASP. That leaves us with 10.5M Lumia phones divided into $2.3B revenue for a yield of $219 ASP. Compare this to the $687 ASP Apple got for its iPhones last quarter. Playing with numbers a bit more, if you assume a $20 ASP for non-Lumia “dumbphones”, the ASP for Lumia smart devices comes to $143.

As discussed here last December, even with “forever” cash reserves, why bother? Big enterprises such as Bank of America and Chase that have discontinued Windows Phone support agree.

After fruitlessly jumping into a Broad Strategic Partnership with Nokia and then promptly Osborning it, Microsoft acquired the company’s smartphone business rather than letting it die. It’s still not working and, as the most recent industry numbers show, there’s little hope that Microsoft’s phone hardware business, while saddled with the hapless Windows Phone OS, will be anything other than a waste of time, money, and reputation. Many have suggested that Microsoft drop its OS efforts and fork Android, returning, in Ben Thompson’s words, to “its roots of embracing and extending”.

That brings us to Cyanogen. In the grand tradition of Homebrew Computing that gave birth to Microsoft, Apple and countless others, developers have taken the Open Android operating system and opened it even more, creating a raft of improved versions.

Initially, many thought these variants were just for the hacker who wanted to play with his Android device, reflash its ROM, and grow hair on his chest. But one Android strain, CyanogenMod, exhibited such vitality hat it spawned an organized, for-profit company. In 2012, Benchmark and Redpoint led a $7M Series A investment in Cyanogen, Inc. (“Series A” is typically the first serious VC money, after a Seed Round.) In December, 2014, there was a more substantial $23M Series B round, led by another member of the Valley’s VC nobility, Andreessen Horowitz. And now, there is talk of a $70M round…  in which Microsoft might be a “minority” player.

Kirk McMaster, Cyanogen’s CEO, has been unusually candid about the company’s goal [emphasis mine]:

“I’m the CEO of Cyanogen. We’re attempting to take Android away from Google.”

and…

We’ve barely scratched the surface in regards to what mobile can be. Today, Cyanogen has some dependence on Google. Tomorrow, it will not. We will not be based on some derivative of Google in three to five years. There will be services that are doing the same old bulls— with Android, and then there will be something different. That is where we’re going here.”

Ambitious words, indeed, but they’re backed by some of the Valley’s smartest money.

Microsoft’s role in Cyanogen is probably just a minor one; perhaps it will help with the patent portfolio it unleashes on Android OEMs. But the company’s involvement at all could be seen as part of its long battle with Google. Recall that “Google acquired Android in 2005 as a defense against Windows Mobile dominating smartphones just as Windows dominated PCs.” Later, in 2008, Microsoft acquired Android founder Andy Rubin’s previous company Danger, whose Sidekick design inspired Google’s pre-iPhone G1 devices.

Cyanogen has long been in Google’s cross-hairs. In its early days, CyanogenMod (since renamed to Cyanogen OS) was perceived as such a nuisance — or a threat — that its users suddenly found that they needed to perform contorted workarounds to load Google’s proprietary apps (Google Map, YouTube, GTalk, and so on). Can Microsoft resist the temptation to aid this Google irritant?

Tantalizing as the Cyanogen investment is, it might not be enough to keep Microsoft in the brutal smartphone hardware business, but it’s consistent with the company’s efforts to undermine Google’s ecosystem by any means necessary. Including gathering allies to do to Android what Bill Gates once did to Lotus 1-2-3.

Let’s keep in mind that the mobile industry is no more mature than the PC industry was in the mid eighties. Things could get interesting as Cyanogen reveals more of the business model its muscular investors have bought into. And they will become particularly interesting if the company can corral support from industry players who are eager to get out from under Google’s thumb.

JLG@mondaynote.com

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Forking Apple Brands

 

by Jean-Louis Gassée

After last week’s lengthy discussion of Apple’s software foibles, today’s fare is lighter but intriguing: The Apple logo is a stamp of excellence that’s proudly worn by the Mac, iPhone, iPad, Watch… why is it withheld from one of Apple’s other major group of products?]

Naming a computer company Apple was a true stroke of genius, the kind that sits beyond the reach of consciousness. With the name came a visual representation. The first, unofficial logo evoked Isaac Newton’s famous epiphany:

unnamed

(Source: Edible Apple)

Not a stroke of genius. It was a too kitschy, too busy, and failed to provide an easily memorized and recognized image, a signpost to the company’s products. It was quickly replaced with the simple Apple bite logo that we know today:

unnamed-1

(Source: Graphic Design 1)

Theories of the the logo’s meaning and construction occupy a corner of Apple mythology. Some are misguided (it’s an homage to Alan Turing, it’s a blasphemous reference to the forbidden fruit), while others are playful: A fellow named Barcelos Thiago points out the use of the Fibonacci series in the Apple logo (and in just about everything else).

Apple’s reputation, products, and imagery have coalesced into a brand, a mark that’s burned (as in the word’s origin) into the collective consciousness. Last year, Forbes called Apple the world’s most valuable brand. It’s impossible to measure contribution of the name and logo to the company’s success, but a peek at the Forbes’ list shows how little Apple spends advertising its products compared to Microsoft, Google, Samsung, or less technical companies such as Coca-Cola or Louis Vuitton:

unnamed-2

A brand exists in a circular relationship with the promises that it makes to the customer. If the products and services deliver on the pledge, the customer is more inclined to swear loyalty to the brand. A close examination of some of these circles brings up apparent paradoxes. Burberry’s, for example, was once credited for inventing the oxymoronic “mass-marketing of exclusivity” – a trick that Louis Vuitton now performs at the highest of levels, a feat that requires an advertising budget more than four times Apple’s.

The late Fred Hoar, an erudite Harvard graduate who once served as the head of Apple’s Marketing Communications, likened brand advertising to urinating inside one’s dark-blue flannel suit: It makes you feel warm but no one sees anything.

No such waste at at Apple. The product, not the brand, is the hero. Apple’s ads focus on the product, on what it does, on the feats that it allows unnamed customers to perform. The brand ascends to where it belongs, above specific products and promotions.

Apple ads are also (mostly) free from celebrity endorsements. The imprimatur of a noted figure can be effective — I’m thinking of George Clooney second banana persona in Nestlé’s tongue-in-cheek Nespresso ads. But we usually feel the use of endorsements as an admission that the product needs stilts, that it lacks differentiation.

If Apple ever hires a spokesperson for its iPhones, even if it’s Andrew Wiles or, in a couple of years, a happily retired Barack Obama, you should look elsewhere: The brand has started to unravel. (Apple does, of course, occasionally use celebrities — this ad featuring the Williams sisters for example — but as Adweek points out, it’s rare.)

Given this thinking, what do we make of Apple’s other brand, Beats?

Beats was acquired last year, for $3.2B. The reasons behind the price are still a bit unclear, but we already see ads that aren’t much more than mini-movies of celebrity athletes (Colin Kaepernick, Cesc Fabregas, LeBron James) shutting out the noise of irate fans and implications of social injustice by donning the company’s headphones.

Does the Beats lines needs stilts in order to achieve differentiation and justify its high pricetag? The quality of Beats headphones is a contested subject. One study shows they’re preferred by teens, other painstaking reviews claim there are many better headphones. On this, because of my old ears, I don’t have much of an opinion beyond Sound Holiday Thoughts written in December 2013.

It’s a novel situation: Apple Thinks Different about the two brands it now owns. The personal computing brand is carefully nurtured, pruned, protected, now at the pinnacle. The other is just as carefully kept apart.

Walk into an Apple store and you’ll see Beats headphones and speakers next to Bose, B&O, and Logitech products. Before the acquisition, this was no surprise, Beats products were just third party accessories. Now, they’re Apple products, even if they don’t carry the Apple logo. They sit on the shelves next to their competitors, such as the $999.95 Denon Music Maniac Artisan headphones. Can you imagine the Apple Store selling Surface Pro hybrids, stocking them right next to the iPads?

You won’t find Apple logos on Beats headphones, and you won’t find any Apple references in a Beats headphone commercial. The headphones are part of the Beats Music streaming music ecosystem whose goal is to play everywhere, including the Windows Phone Store.

But there’s a problem. As Horace Dediu notes, Apple’s music business has stopped growing, vastly overwhelmed by apps:

unnamed-3

The Beats acquisition raised many questions still unanswered: Why get into the headphones and loudspeakers business? What is the Job To Be Done here?  Same queries for the Beats Music streaming service, one that might benefit from its bundling with Apple hardware, but whose curation “sounds” less than enthralling thus far, notwithstanding Tim Cook’s enthusiasm.

As the year unfolds, we’ll see how Beats products and services grow the brand, if its isolation from the Apple brand merely is prophylactic caution, or part of a bigger plan to stay on top of the music world.

The Apple Watch won’t be the only development to… watch this year.

JLG@mondaynote.com

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Apple Software Quality Questions

 

by Jean-Louis Gassée

A flurry of recent software accidents in iOS and OS X raises questions about Apple’s management of its relentless increase in R&D spending.

For the past six months or so, I’ve become increasingly concerned about the quality of Apple software. From the painful gestation of OS X 10.10 (Yosemite) with its damaged iWork apps, to the chaotic iOS 8 launch, iCloud glitches, and the trouble with Continuity, I’ve gotten a bad feeling about Apple’s software quality management. “It Just Works”, the company’s pleasant-sounding motto, became an easy target, giving rise to jibes of “it just needs more work”.

I felt this was an appropriate Monday Note topic but kept procrastinating. Then the Holidays break came, including time on a boat with worse than no Internet – meaning frustratingly unpredictable and slow when on.

Coming back to the Valley, I read Marco Arment’s January 4th, 2015 post titled Apple has lost the functional high ground:

“We don’t need major OS releases every year. We don’t need each OS release to have a huge list of new features. We need our computers, phones, and tablets to work well first so we can enjoy new features released at a healthy, gradual, sustainable pace.

I fear that Apple’s leadership doesn’t realize quite how badly and deeply their software flaws have damaged their reputation, because if they realized it, they’d make serious changes that don’t appear to be happening. Instead, the opposite appears to be happening: the pace of rapid updates on multiple product lines seems to be expanding and accelerating.”

(Unfortunately, this well-meaning, reasoned critique from a respected Apple developer became fodder for the usual click-baiters, leading Arment to regret that he wrote it. This is sad.)

Arment isn’t the only one lamenting Apple’s software quality. See Glenn Fleishman’s well-documented list of nontrivial issues, or Michael Tsai’s compilation of comments from developers and engineers, such as this one from Geoff Wozniak (no relation to Woz):

“At this point, my default position on Apple software in OS X has moved from ‘probably good’ to ‘probably not OK’. They seem more interested in pumping out quantity by way of more upgrades. It’s death by a thousand cuts, but it’s death nonetheless.”

I’m late to this discussion but I’d like to add a few detailed observations of my own, examples of questionable design decisions, poor implementation, and other “broken windows”. Boredom may ensue.

We’ll start with Apple’s Pages word processor. When it was introduced ten years ago, I found it mostly pleasant, easy for my limited use, progressively improved over a succession of releases, with welcome features such as Google Search, Wikipedia, and Dictionary/Thesaurus integration.

Curiously, however, Pages did some things differently. Hyperlink creation, for example, was inconsistent with Apple Mail, TextEdit, and Microsoft Word conventions. With these “older” products, you select some text, press cmd-K, paste the URL of the desired destination, and you’re good to go:

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In the new Pages, no cmd-K joy. You have to bring up the Inspector, paste the link in the URL field, and press Enter.

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It’s not overly complicated, but why abandon the simple ⌘-K convention used elsewhere on the Mac?

With each Pages update I hoped for a return to the ancient ways, and when Pages 5 came out in late 2013, I thought my prayers had been answered. I select some text, type ⌘-K, and up pops the link editor:

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I paste the target URL into the Link field, press Enter, and I’m done, right? I’ve just created a link to a MacWorld story.

But, no. If I go back to the link I just entered, I see this:

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The MacWorld URL I entered is gone, replaced by the “helpful” default, www.apple.com. I also try clicking on Go to Page; indeed, it takes me to www.apple.com.

This can’t be right…I click Edit and go through the process again, the intended link sticks this time. Out of fear of having stumbled on an unreproducible phantom quirk, I carefully step through the procedure several times from different angles.

If I tiptoe to the File menu and click Save after I’ve pasted the URL but without pressing Enter, the intended link stays; it’s not replaced by www.apple.com:

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However, this only works if I Tab into the Link field and paste my URL. If I double-click on the pre-filled www.apple.com, paste the URL, and Save from the File menu, the link is gone. (Again, I carefully reproduced the procedure.)

This is madness.

But it doesn’t stop there.

Befuddled users found they couldn’t send Pages 5 files through Gmail. It’s now fixed, as the What’s New in Pages screen proudly claims…

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…but how could such an obvious, non-esoteric bug escape Apple’s attention in the first place?

Then we have “deprecated” features. Gone are the convenient Writing Tools:

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Search with Google is still there, but it’s harder to find; a Look-Up function bundles the Dictionary and Wikipedia but, believe it or not, there’s no Thesaurus. I also liked the Search function in Pages 4.3:

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It’s gone in Pages 5. Admittedly, this might not be a big deal for most users, but it allowed me to have kremlinology fun with executive abuse of words such as “incredible” and other platitudinous phrases.

We know the official excuse for removing features: iOS compatibility. It’s a noble goal on paper, and it sounds good on stage and in Keynote slides, but iWork on iOS is far from a godsend. Creating even a moderately complex document on an iPad is an unpleasant, frustrating experience.

Even if we concede that iOS compatibility may mean some amount of “dumbing down” (and we’ll note that the MacWorld review was careful to call Pages 5 a different product rather than a mere update), why didn’t Apple catch more of the obvious bugs? I’d like to have a quiet on-on-one with the Pages product manager to hear his/her explanations for the state of the product.

I can’t leave Pages without a stop at the iCloud version. (Apple, probably taking a page from Google’s old playbook, labels all three iWork products “beta”.) I tried writing a Monday Note article in iCloud. Impossible, no links. If I turn to the version of Microsoft Word on their One Drive service…It Just Works:

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Imagine Microsoft running an ad campaign: I’m One Drive, You’re iCloud…

To be complete, Microsoft’s Office Online isn’t without its own quirks. It loves me so much it refuses to sign me out:

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We now turn to iTunes. Pages might not concern a majority of Mac users, but iTunes sure does, and it presents an even sorrier spectacle than Apple’s productivity apps.

A good product allows its users to build a mental model of what it does and how it does it. Paraphrasing Alan Kay, the user forms a what/how idea at the product’s door, then walks in and finds an Ali Baba cave full of pleasant surprises. How this applies to iTunes is left to the reader. iTunes is a mess, an accumulation of debris and additions without a discernible backbone. I won’t go as far as the Valley wag who calls iTunes Apple’s Vista, but iTunes reflects poorly on a company that takes prides in the fit and finish of its products.

For example, this is what I see when I open iTunes on my Mac:

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If you squint, you’ll see the same Bach Orchestral Suites repeated six times, and Mozart’s Requiem four times. Entries in the Playlist are duplicated for no apparent reason. And let’s not even try to make and manage folders to group playlists by artist or other criteria. Nor can I make sense of the presentation of TV Show episodes. On my Apple TV, iTunes sometimes shows episodes in natural order, but then reverses them for no reason.

No need to continue the litany, the One Cockroach Theory tells us there are many more under the sink. Such as, I can’t resist, iMessages inconsistencies between devices.

Of course, making bugs lists is easier than finding solutions, particularly if we want to avoid “all you have to do” bromides. So, we’ll proceed with caution and look at some numbers.

In 2012, Apple revenue grew by 45% to $156.5B and R&D went up by 39% to $3.4B.
In 2013, revenue grew 9% to $171B but R&D went up 32% to $4.5B.
In 2014, revenue went up 7% to $183B while R&D grew 35% to $6B.

Such relentless increase in R&D spending isn’t “free”, it means hiring lots of people and starting many projects, or, worse, piling more people onto existing ones. This results in management problems, less visibility over a larger number of teams and, vertically, more opaque layers, less ability to diagnose people problems.

Another consideration is priorities. The received wisdom is that Apple engineers hail from Lake Wobegon: They’re “all above average”. But in a fight for resources, where do you put your best soldiers, on iOS or OS X? On Pages or Mail?

Apple execs aren’t indifferent to the company’s software quality problems, and they’re not unaware of the management pitfalls in fixing them. Take Apple Mail: For several years (close to five by my memory of conversations with Bertrand Serlet, then Apple’s head of OS development), Apple Mail had been a painful, many times a day irritant. It consumed so much computing power that the Activity Monitor on my MacBook Pro sometimes showed a CPU usage number as high as 257%, with fans spinning loudly, and general mail operations getting mysteriously stuck. Messages would disappear from a mailbox and yet be found by Spotlight, the Mac’s internal Search engine.

A recent OS X update seems have fixed these problems. A better manager was put in charge, people decisions were finally made, and Apple Mail is now (almost) boringly normal, receiving, sending, deleting, and sorting junk without fuss.

Let’s just hope that the all-important iTunes development team gets the “cure” it deserves, and iWorks after that.

Last, there is the mixed bag of comparisons. One side of the coin is Apple’s numbers are splendid. The quarterly results that will be disclosed next week (January 27th) are likely to show strong iPhone 6 sales and a continuation of Mac progress. And despite my bug list, Apple software still compares favorably to Windows 8 and Android offerings.

The other view is that the quality lapses we observe are the beginning of a slide into satisfied mediocrity, into organizations and projects that “run themselves”, that are allowed to continue for political reasons without regard for the joy of customers.

I know what I hope for. I don’t expect perfection, I’ve lived inside several sausage factories and remember the smell. If Apple were to spend a year concentrating on solid fixes rather than releasing software that’s pushed out to fit a hardware schedule, that would show an ascent rather than a slide.

JLG@mondaynote.com

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The iPhone’s 8th Anniversary

 

by Jean-Louis Gassée

Smartphones existed before Steve Jobs introduced the iPhone on January 9th, 2007. But by upending existing technology platforms, application distribution, and carrier business models, he kickstarted a new era of computing whose impact is yet to be fully understood.

I knew one of the victims of the Charlie Hebdo massacre: Bernard Maris. We weren’t friends, just pleasantly casual acquaintances through the in-law side of my family. Typical Parisian dinner conversations “rearranging the world” led to a Palo Alto visit and an interview for a small Charlie Hebdo piece, complete with the requisite risqué drawing.

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[Bernard Maris]

After several false starts writing about the events in Paris, I’ve come to the conclusion that I’m too angry at too many targets, starting with certain cowards in the media who don’t understand that the fear of antagonizing oppressors perpetuates their power, that no good culture can exist without a dose of bad taste, that the demand to never be offended is inhumane. As Cardinal André Vingt-Trois, archbishop of Paris puts it: ‘A caricature, even in bad taste, criticism, even extremely unfair, cannot be put on the same plane as murder.

(Lovers of ironic detail will note that Cardinal Vingt-Trois was once the titular bishop of Thibilis, Algeria. In partibus infidelium.)

Instead, I will turn to a more positive train of thought: The beginning of the Smartphone 2.0 era.

Eight years ago, Steve Jobs walked onto the stage at MacWorld San Francisco and gave a masterful performance. His presentation is worth revisiting from time to time, a benchmark against which to evaluate a PowerPoint-addled CEO pitch or a product intro cum dance number.

In his talk, Jobs tells us that the iPhone is one of these products that, like the Mac and the iPod before, “changes everything”. He was right, of course, but one wonders… even with his enormous ambition, did Jobs envision that the iPhone would not only transform Apple and an entire industry, but that it would affect the world well beyond the boundaries of the tech ecosystem?

If the last sentence sounds a bit grand, let’s look at the transformation of the smartphone industry, starting with Apple.

In 2006, the year before the iPhone, Apple revenue was $19B (for the Fiscal Year ending in September). That year, iPod revenue exceeded the Mac, $7.7B to $7.3B…but no one claimed that Apple had become an iPod company.

In 2007, revenue climbed to $24B, a nice 26% progression. Mac sales retook the lead ($10.3B vs. $8.3B for the iPod), and iPhone sales didn’t register ($123M) as shipments started late in the Fiscal Year and accounting’s treatment of revenue blurred the picture.

In 2008, revenue increased to $32.5B, up 35%. iPhone revenue began to weigh in at $1.8B, far behind $9B for the iPod and $14.3B for the Mac (a nice 39% uptick).

In 2009, revenue rose by a more modest 12%, to $36.5B — this was the financial crisis. iPod declined to $8B (- 11%) as its functionality was increasingly absorbed by the iPhone, and the Mac declined a bit to $13.8B (- 3%). But these shortfalls were more than compensated for by iPhone revenue of $6.8B (+ 266%), allowing the company to post a $4B increase for the year. This was just the beginning. (And even the beginning was bigger than originally thought: Due to a change in revenue recognition esoterica, 2009 iPhone revenue would be recalculated at $13.3B.)

In 2010, iPhone revenue shot up to $25B, pushing Apple’s overall revenue up by a phenomenal 52% to $65B. The iPhone now represented more than 1/3rd of total revenue.

In 2011, growth accelerates, revenue reaches $108B (+ 66%), more than five times the pre-iPhone 2006 number. iPhone reaches $47B (+ 87%), now almost half of the company’s total.

For 2012, sales shoot up to $156.5B (+ 45%), and the iPhone reaches $80.5B (+ 71%). At such massive absolute numbers, 45% and 71% growth look almost unnatural as they appear to violate the Law of Large Numbers. As this happens, the iPhone crosses the 50% of total revenue threshold, and accounts for probably 2/3rd of Apple’s total profit.

Apple’s growth slowed in 2013 to a modest + 9%, with $171B overall revenue. The iPhone, weighing in at $91.3B (+ 16%), provides most ($12.6B) of the modest ($14B) overall revenue increase and 53% of total sales.

Last year, growth slows just a bit more: $182.8B (+ 7%) with the iPhone reaching $102B (+12%). Once again, the iPhone contributes most of the total revenue growth ($10.7B of $11.9B) and fetches 56% of the company’s sales. Notably, the iPad shows a 5% decrease and, at $2.3B, the iPod is becoming less and less relevant. (Although, how many companies would kill for $2.3B in music player revenue?)

The excellent Statista portal gives us picture of the iPhone’s emergence as Apple’s key product:

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While the company is about ten times larger than it was before the iPhone came out, the smartphone industry has become a nearly trillion dollar business. Depending on how we count units and dollars, if we peg Apple at 12% market share, that means the worldwide number across the smartphone industry reaches $800B. If we grant Apple just a 10% share, we have our $1T number.

For reference, still according to Statista, the two largest auto companies, Toyota and the Volkswagen Group, accounted for $485B in revenue in 2013:

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However we calculate its size, whether we place it at $800B or $1T, what we mustn’t do is think that the smartphone industry merely grew to this number. Today’s smartphone business has little in common with what it was in 2006.

Consider that Motorola “invented” the cell phone. Now Motorola is (essentially) gone: Acquired by Google, pawned of to Lenovo, likely to do well in its new owner’s Chinese line.

Nokia: The Finnish company stole the crown from Motorola when cell phones became digital and once shipped more than 100M phones per quarter. Since then, Nokia was Osborned by its new CEO, Stephen Elop, an ex-Microsoft  exec, and is now owned by Elop’s former employer. With 5% or less market share, Nokia is waste of Microsoft resources and credibility… unless they switch to making Android phones as a vehicle for the company’s  “Cloud-First, Mobile-First” apps.

Palm, a company that made a credible smartphone by building on their PDA expertise, was sold to HP and destroyed by it. They’re worse than dead, with a necrophiliac owner (TCL), and LG humping other parts of the corpse for their WebOS TVs and a WebOS smartwatch.

And then there’s the BlackBerry. Once the most capable of all the smartphones with a Personal Information Manager that was ahead of its time, it was rightly nicknamed CrackBerry by its devoted users. Now BlackBerry Limited is worth less than a 1/100th of Apple, and is trying to find a niche – or a seeker of body parts.

The change in the industry is, of course, far from being solely Apple’s “fault”. In many ways, Google destroyed more incumbents than Apple. Google acquired Android in 2005, well before the iPhone appeared. According to the always assertive Tomi Ahonen, China now sports more than 2000 (!) phone brands, all based on some Android derivative. And let’s not forget the voraciousness of Apple’s giant Korean frenemy Samsung, which acts as both a supplier of key iPhone components and a competitor.

But is the industry now settled? Are any of the current incumbents, including Apple, unassailable? Market-leading Samsung appears to be challenged by both Apple at the high end and Xiaomi from below, and has announced more recent troubles. Our friend Tomi argues that Xiaomi isn’t the new Apple but that Lenovo and Huawei are the ones to watch. And, of course, Apple is seen as a “hits” company, a business that lives and dies by its next box-office numbers — and the numbers for the new iPhone 6 aren’t in, yet They’re likely be very strong.

Regardless of any individual company’s business case, the overall of impact of the smartphone on the world is what counts the most. In a blog post titled Tech’s Most Disruptive Impact Over the Next Five Years, Tim Bajarin argues that the real Next Big Thing isn’t the Internet of Things, Virtual Reality, or BitCoin. These are all important advances, but nothing compared to the impact of smartphones [emphasis mine]:

“Another way to think of this is that smart phones or pocket computers connecting the next two billion people to the internet is similar to what the Gutenberg Press and the Bible were to the masses in the Middle Ages.”

As Horace Dediu notes, we’re on track to 75% US smartphone penetration by the end of 2014. The big impact to come will be getting the entire world to reach and exceed this degree of connectivity, especially in areas where there’s little or no wired connectivity.

This is what Steve Jobs started eight years ago by upending established players and carrier relationships.

JLG@mondaynote.com

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MSFT Hardware Futures

 

(Strangely, the WordPress software gives me a “Bad Gateway 502″  error message when I fully spell the name of the Redmond company)

by Jean-Louis Gassée

Microsoft’s hardware has long been a source of minor profit and major pain. In this last 2014 Monday Note, we’ll look at the roles Microsoft’s hardware devices will play — or not —  in the company’s future.

Excluding keyboards and the occasional Philippe Starck mouse, Microsoft makes three kinds of hardware: Game consoles, PC-tablet hybrids, and smartphones. We’ll start with the oldest and least problematic category: Game consoles.

Building on the success of DOS and its suite of business applications, Microsoft brought forth the MSX reference platform in 1983. This was a Bill Gates-directed strategic move, he didn’t want to leave the low-end of the market “unguarded”. Marketed as “home computers”, which meant less capable than a “serious” PC, MSX-branded machines were manufactured by the likes of Sony and Yamaha, but its only serious impact was in gaming. As the Wikipedia articles says, “MSX was the platform for which major Japanese game studios, such as Konami and Hudson Soft, produced video game titles.”

For the next two decades, gaming remained a hobby for Microsoft. This changed in 2001 when the company took the matter into its own hands and built the Xbox. Again, the company wanted to guard against “home invasions”.

With its Intel processors and customized version of Windows, the first iteration of the Xbox was little more than a repackaged PC. The 2005 Xbox 360 was a heartier offering: It featured an IBM-designed Power-PC derivative processor and what some call a “second-order derivative” of Windows 2000 ported to the new CPU.

Now we have the Xbox One. Launched in 2013, the platform is supported by a full-fledged ecosystem of apps, media store, and controllers such as the remarkable Kinect motion sensor.

Success hasn’t been easy. The first Xbox sold in modest numbers, 24 million units in about five years. Sales of the second generation Xbox 360 were better — almost 80 million through 2013 — but it was plagued with hardware problems, colloquially known as the Red Ring of Death. Estimates of the number of consoles that were afflicted range from 23% to more than 54%. Predictably, poor reliability translated into heavy financial losses, as much as $2B annually. Today’s Xbox One fares a little better: It lost only $800M for the first eight months of its life, selling 11.7M units in the process.

Microsoft’s latest numbers bundle Xbox game consoles and Surface tablet-PCs into a single Computing & Gaming category that makes up $9.7B of the company’s $87B in revenue for the 2014 Fiscal Year. This means Xbox console contribute less than 10% of total sales, which is probably why Satya Nadella, Microsoft’s new CEO, has carefully positioned the Xbox business as less than central to the company’s business:

“I want us to be comfortable to be proud of Xbox, to give it the air cover of Microsoft, but at the same time not confuse it with our core.”

In other words, the Xbox business can continue… or it could disappear. Either way, it won’t have much effect on Microsoft’s bottom line or its future.

For the moment, and with the assistance of a holiday price cut, Xbox One sales are topping those of the Sony PS4, but that shouldn’t take our attention away from a more important trend: The rise of mobile gaming. Smartphones are gaining in raw computing power, connectivity, display resolution, and, as a result, support from game developers on both Android and iOS platforms. Larger, more capable game consoles aren’t going away, but their growth is likely to slow down.

The history of Xbox problems, Nadella’s lukewarm embrace of the series, the ascendency of mobile gaming… by comparison the Surface tablet should look pretty good.

It doesn’t.

When Steve Ballmer introduced the Surface device in June, 2012, he justified Microsoft’s decision to compete with its own Windows licensees by the need to create a “design point”, a reference for a new type of device that would complement the “re-imagined” Windows 8.

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Two and a half years later, we know two things: Surface tablet sales have been modest (about $2B in the 2014 Fiscal Year ended June 30th), and Windows 8 frustrated so many users that Microsoft decided to re-re-imagine it and will re-introduce it as Windows 10, scheduled to be released in mid-2015.

Microsoft believes its Surface combines the best of the PC with the best of a tablet. While the hybrid form has given rise to some interesting explorations by PC makers, such as the Yoga 3 Pro by Lenovo, many critics — and not just Apple — condemn the hybrid as a compromise, as a neither-nor device that sub-optimizes both its tablet and its PC functions (see the tepid welcome given to the HP Envy).

What would happen if Microsoft stopped making Surface Pro tablets? Not much… perhaps a modest improvement in the company’s profit picture. While the latest quarter of Surface Pro 3 sales appear to have brought a small positive gross margin, Surface devices have cost Microsoft about $1.7B over the past two years. Mission accomplished for the “design point”.

We now turn to smartphones.

Under the Ballmer regime, Microsoft acquired Nokia rather than let its one and only real Windows Phone licensee collapse. It was a strategic move: Microsoft was desperate to achieve any sort of significance in the smartphone world after seeing its older Windows Mobile platform trounced by Google’s Android and Apple’s iOS.

In the latest reported quarter (ended September 30th 2014), Windows Phone hardware revenue was $2.6B. For perspective, iPhone revenue for the same period was $23.7B. Assuming that Apple enjoys about 12% of the world smartphone market, quarterly worldwide revenue for the sector works out to about $200B… of which Microsoft gets 1.3%. Perhaps worse, a recent study says that Microsoft’s share of the all-important China smartphone market is “almost non-existent at 0.4 percent”. (China now has more than twice as many smartphone users, 700M, as the US has people, 319M.)

Hardware development costs are roughly independent of volume, as is running an OS development organization. But hardware production costs are unfavorably impacted by low volumes. Windows Phones sell less and they cost more to make, putting Microsoft’s smartphone business in a dangerous downward spiral. As Horace Dediu once remarked, the phone market doesn’t forgive failure. Once a phone maker falls into the red, it’s nearly impossible to climb back into the black.

What does all this mean for Microsoft?

Satya Nadella, the company’s new CEO, uses the phrase “Mobile First, Cloud First” to express his top-level strategy. It’s a clear and relevant clarion call for the entire organization, and Microsoft seems to do well in the Cloud. But how does the Windows Phone death spiral impact the Mobile First part?

In keeping with its stated strategy, the company came up with Office apps on iOS and Android, causing bewilderment and frustration to Windows Phone loyalists who feel they’d been left behind. Versions of Office on the two leading mobile platforms ensures Microsoft’s presence on most smartphones, so why bother making Windows Phones?

Four and a half years ago, in a Monday Note titled Science Fiction: Nokia Goes Android, I fantasized that Nokia ought to drop its many versions of Symbian and adopt Android instead. Nokia insiders objected that embracing a “foreign OS” would cause them to lose control of their destiny. But that’s exactly what happened to them anyway when they jumped into bed with Stephen Elop and, a bit later, with Windows Phone. This started a process that severely damaged phone sales, ending with Microsoft acquisition of what was already a captive licensee.

Now the Android question rises again.

Should Microsoft pursue what looks like a manly but losing Windows Phone hardware strategy or switch to making and selling Android phones? Or should it drop an expensive smartphone design, manufacturing, and distribution effort altogether, and stay focused on what it does already, Mobile First, Cloud First applications?

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The Intel Enigma

 

by Jean-Louis Gassée

Intel once turned down the opportunity to become the sole supplier of iPhone processors. Why haven’t they let go of their defocused search for the Next Big Thing and, instead, used All Means Necessary to regain the account?

Intel is a prosperous company. For the quarter ended last September, Intel scored $14.6B in Sales, 65% Gross Margin and $4.5B in Operating Income, a nice progression from the same period a year ago:

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A 65% Gross Margin is enviable for any company, and exceptional for a hardware maker: Intel’s GM is up in software territory. By comparison, Apple’s Gross Margin – considered too comfortable by followers of the Church of Market Share – stands at 38.6% for the 2014 Fiscal Year ended last September.

But when we take a closer look at the numbers, the picture isn’t as rosy.  Nearly 90% of Intel’s revenue — $12.9B of the total $14.6B  — comes from two groups: PC and Data Center (servers, networking, storage). Intel’s presence in the mobile world? Nonexistent:

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Essentially no revenue for Mobile and Communications, and a $1B loss. Looking at the past four quarters, Intel has lost about $4B in the pursuit of the mobile market (Daniel Eran Dilger says $7B in the past two years).

How did Intel handle the problem? By sweeping it under the rug. In November, Intel CEO Brian Krzanich announced that the company was merging Mobile into the PC group and would discontinue its $51 per Android tablet subsidy in 2015. This came just weeks after Krzanich had proclaimed Mission Accomplished in the tablet field:

“‘We’ve made good progress getting into tablets’ Krzanich told reporters ahead of the annual Intel Developer Forum in San Francisco. ‘We’ve gone from nothing to something where I consider us a real tablet manufacturer.’”

348The company’s inability to break into the mobile field — into any field other than PCs and servers — isn’t new, and it has worried Intel for decades. Company execs and strategists aren’t happy being the hardware half of Wintel, with being yoked to Microsoft’s fortunes. They like the money, but they want a “second source” for their profits, something other than the x-86 market, so they’ve embarked on a never-ending quest for the next stage in the Intel rocket.

(Of course, the company isn’t blind to the benefits of the Wintel alliance: Given two processors of equal merit, the one running Windows fetches the higher price, hence the ferocious tactics that have landed the company in court on several occasions.)

In its search for the Next Big Thing, Intel has tried alternatives to the x-86 architecture and come up with failures such as the iAPX 32 and the Itanium high-end server processor. The latter, a puzzling adoption of HP’s PA-RISC architecture, was quickly dubbed Itanic by tech wags as results failed to match lofty launch projections.

Intel has tried server farms, modems, networking equipment and, I kid you not, toy microscopes, but they somehow never got around to mobile. In the pre-iPhone days of the mobile world, the dominant players — Nokia, Motorola, Palm, Blackberry — all used processors based on the ARM architecture, processors that were too small and inexpensive to interest Intel. No money there, they cost 1/10th or less of a PC processor.

Steve Jobs offered Intel a chance to get into the mobile game: He asked the company to bid on an ARM-derivative for the iPhone. As Paul Otellini, Intel’s CEO at the time, wistfully and gallantly recounted, he gave the opportunity a pass, thinking the numbers (price and quantity) were too low. (An ex-Intel acquaintance told me that the business people felt they should go after Nokia, instead, because of its huge volume at the time.)

In 2006, after missing the iPhone, Intel sold its ARM processor business to Marvell.

When iPhones and Android-based smartphones took off, Intel insisted they weren’t concerned, that they would triumph in the end: We will win because our unapproachable manufacturing technology will produce x-86 processors that are superior in every way to ARM-based competitors.

We’ve heard this line every year since. The latest version is summarized in this slide from a November Investor Meeting:

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What Intel contends here is that they always have a three-year lead over their competition. — it’s just a given. What company execs fail to explain is why smartphone manufacturers have failed to see the light, and why Android tablet makers had to be bribed.

Now it seems that Intel has discovered the Internet of Things… and Wearables, of course. If you have the patience, flip through this 66-slide presentation that tells us that IoT will be huge because the objects around us will all become intelligent (a story we’ve already heard from companies such as Cisco — which is also looking for its Next Big Thing).

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Naturally, wearables are in there:

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This is painful. The whole presentation is an Everything And The Kitchen Sink assemblage of unoriginal ideas. There’s no focus in Intel’s Theory of Everything, no way to see when, where, and how the company will actually rise above the IoT noise.

As for wearables — now fashionable in more ways than one — Intel touts its new MICA bracelet:

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You can “pre-order” yours at Opening Ceremony and have it delivered in time for Christmas.

Let’s not forget Intel’s partnership with Google for the next-gen Google Glass, nor the company’s acquisition of Basis, a maker of fitness wearables.

Certainly, the more “initiatives” Intel throws at the wall the higher the chances that one of them will stick. But from the outside, it feels like Intel is being driven by courtiers and PowerPoint makers, that senior management really doesn’t know what to do – and what not to do. (Krzanich says he green-lighted the MICA project because his wife approved of it “after using it for several days”.)

Of all the things Intel should and shouldn’t have done, the Apple element figures mightily. Since Intel offered a whopping $51 Android tablet subsidy, a charity that landed its mobile activities $7B in the red over two years, why didn’t the company offer Apple a $10 or $20 subsidy per processor as a way get the manufacturing relationship restarted? ‘We’ll beat Samsung’s prices, we’ll be your second source.’ If Intel’s 14nm process is so superior, how come Intel execs didn’t convince Apple to dump frenemy Samsung?

I see three possible answers.

One is that the 14 nanometer process is woefully late. Deliveries of some Broadwell chips (the nickname of the next round of x-86 processors) are now slated for early- to mid-2105. Apple might feel that Intel’s process needs to mature before it can deliver 300M units.

The second is that Intel’s claim of a three-year technology lead might be less than reliable. Samsung could be closer to delivering 14nm chips than Intel would like us (and itself) to believe.

Or perhaps Intel sees Apple as a real adversary that’s intent on designing all of its own processors, even for laptops and desktops that are currently powered by x-86 chips. But even so, why not become the preferred fabricator?

The Intel enigma remains: There’s no clear, resounding answer to the What’s Next?question, only some lingering puzzlement over What Happened?

JLG@mondaynote.com

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Apple Watch: Hard Questions, Facile Predictions

 

by Jean-Louis Gassée

Few Apple products have agitated forecasters and competitors as much as the company’s upcoming watch. The result is an escalation of silly numbers – and one profound observation from a timepiece industry insider.

Apple Watch 2015 sales predictions are upon us: 10 million, 20 million, 24 million, 30 million, even 40 million! Try googling “xx million apple watch”, you won’t be disappointed. Microsoft’s Bing doesn’t put a damper on the enthusiasm either: It finds a prediction for first year sales of 60 million Apple Watches!

These are scientific, irony-free numbers, based on “carefully weighed percentages of iPhone users” complemented by investigations into “supplier orders” and backed up by interviews with “potential buyers”. Such predictions reaffirm our notion that the gyrations and divinations of certain anal-ists and researchers are best appreciated as black comedy— cue PiperJaffray’s Gene Munster with his long-running Apple TV Set gag.

Fortunately, others are more thoughtful. They consider how the product will actually be experienced by real people and how the new Apple product will impact the watch industry.

As you’ll recall from the September 14th “Apple Watch Is And Isn’t”, Jean-Claude Biver, the LVMH executive in charge of luxury watch brands such as Hublot and TAG Heuer, offered his frank opinion of the “too feminine” AppleWatch:

“To be totally honest, it looks like it was designed by a student in their first trimester.” 

At the time, it sounded like You Don’t Need This sour grapes from disconcerted competitor. But recently, Biver has also given us deeper, more meaningful thoughts:

“A smartwatch is very difficult for us because it is contradictory,” said Mr. Biver. “Luxury is supposed to be eternal … How do you justify a $2,000 smart watch whose technology will become obsolete in two years?” he added, waving his iPhone 6. 

Beautiful. All the words count. Luxury and Eternity vs. Moore’s Law.

To help us think about the dilemma that preoccupies the LVMH exec, let’s take a detour through another class of treasured objects: Single Lens Reflex cameras.

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Unless you were a photojournalist or fashion photographer taking hundreds of pictures a day, these cameras lasted forever. A decade of use would come and go without impact on the quality of your pictures or the solid feel of the product. People treasured their Hasselblads, Leicas (not an SLR), Canons, and more obscure marques such as the Swiss Alpa. (I’m a bit partial, here, I bought a Nikon exactly like the one pictured above back in 1970.)

These were purely mechanical marvels. No battery, the light sensor was powered by…light.

Then, in the mid-nineties, digital electronics begin to sneak in. Sensor chips replaced silver-halide film; microcomputers automated more and more of the picture taking process.

The most obvious victim was Eastman Kodak, a company that had dominated the photographic film industry for more than a century – and filed for bankruptcy in 2012. (A brief moment of contemplation: Kodak owned many digital photography patents and even developed the first digital camera in 1975, but “…the product was dropped for fear it would threaten Kodak’s photographic film business.” [Wikipedia].)

The first digital cameras weren’t so great. Conventional film users rightly criticized the lack of resolution, the chromatic aberrations, and other defects of early implementations. But better sensors, more powerful microprocessors, and clever software won the day. A particular bit of cleverness that has saved a number of dinner party snapshots was introduced in the late-nineties: A digital SLR sends a short burst of flash to evaluate the scene, and then uses the measurements to automatically balance shutter speed and aperture, thus correcting the classical mistake of flooding the subject in the foreground while leaving the background in shadows.

Digital cameras have become so good we now have nostalgia “film packs” that recreate the defects — sorry, the ambiance — of analog film stock such as Ektachrome or Fuji Provia.

But Moore’s Law exacts a heavy price. At the high end, the marvelous digital cameras from Nikon, Canon, and Sony are quickly displaced year after year by new models that have better sensors, faster microprocessors, and improved software. Pros and prosumers can move their lenses — the most expensive pieces of their equipment — from last year’s model to this one’s, but the camera body is obsolete. In this regard, the most prolific iterator seems to be Sony, today’s king of sensor chips; the company introduces new SLR models once or twice a year.

At the medium to low end, the impact of Moore’s law was nearly lethal. Smartphone cameras have become both so good and so convenient (see Chase Jarvis’ The Best Camera is the One That’s With You) that they have displaced almost all other consumer picture taking devices.

What does the history of cameras say for watches?

At the high-end, a watch is a piece of jewelry. Like a vintage Leica or Canon mechanical camera, a Patek watch works for decades, it doesn’t use batteries, and it doesn’t run on software. Mechanical watches have even gained a retro chic among under-forty urbanites who have never had to wind a stem. (A favorite of techies seems to be the Officine Panerai.)

So far, electronic watches haven’t upended the watch industry. They’ve mostly replaced a spring with a battery and have added a few functions and indicator displays – with terrible user interfaces. This is about to change. Better/faster/cheaper organs are poised to invade watches: sensors, microprocessors + software, wireless links…

Jean-Claude Biver is right to wonder how the onslaught of ever-improving technology will affect the “eternity” of the high-end, fashion-conscious watch industry…and he’ll soon find out:  He’s planning a (yet-to-be announced) TAG Heuer smartwatch.

With this in mind, Apple’s approach is intriguing: The company plays the technology angle, of course, and has loaded their watch with an amazing — some might say disquieting — amount of hardware and software, but they also play the fashion and luxury game. The company invited fashion writers to the launch; it hosted a celebrity event at Colette in Paris with the likes of Karl Lagerfeld and Anna Wintour in attendance. The design of the watch, the choice of materials for the case and bands/bracelets… Apple obviously intends to offer customers a differentiated combination of traditional fashion statement and high-tech functions.

But we’re left with a few questions…

Battery life is one question — we don’t know what it will be. The AppleWatch user interface is another.

The product seems to be loaded with features and apps… will users “get” the UI, or will they abandon hard-to-use functions, as we’ve seen in many of today’s complicated watches?

But the biggest question is, of course, Moore’s Law. Smartphone users have no problem upgrading every two years to new models that offer enticing improvements, but part of that ease is afforded by carrier subsidies (and the carriers play the subsidy game well, despite their disingenuous whining).

There’s no carrier subsidy for the AppleWatch. That could be a problem when Moore’s Law makes the $5K high-end model obsolete. (Expert Apple observer John Gruber has wondered if Apple could just update the watch processor or offer a trade-in — that would be novel.)

We’ll see how all of this plays out with regard to sales. I’ll venture that the first million or so AppleWatches will sell easily. I’ll certainly buy one, the entry-level Sports model with the anodized aluminum case and elastomer band. If I like it, I’ll even consider the more expensive version with a steel case and ingenious Marc Newson link bracelet — reselling my original purchase should be easy enough.

Regardless of the actual sales, first-week numbers won’t matter. It’s what happens after that that matters.

Post-purchase Word of Mouth is still the most potent marketing device. Advertising might create awareness, but user buzz is what makes or breaks products such as a watch or phone (as opposed to cigarettes and soft drinks). It will take a couple months after the AppleWatches arrive on the shelves before we can judge whether or not the product will thrive.

Only then can we have a sensible discussion about how the luxury segment of the line might plan to deal with the eternity vs. Moore’s Law question.

JLG@mondaynote.com

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Clayton Christensen Becomes His Own Devil’s Advocate

 

by Jean-Louis Gassée

Every generation has its high tech storytellers, pundits who ‘understand’ why products and companies succeed and why they fail. And each next generation tosses out the stories of their elders. Perhaps it’s time to dispense with “Disruption”.

“I’m never wrong.”

Thus spake an East Coast academic, who, in the mid- to late-eighties, parlayed his position into a consulting money pump. He advised — terrorized, actually — big company CEOs with vivid descriptions of their impending failure, and then offered them salvation if they followed his advice. His fee was about $200K per year, per company; he saw no ethical problem in consulting for competing organizations.

The guru and I got into a heated argument while walking around the pool at one of Apple’s regular off-sites. When I disagreed with one of his wild fantasies, his retort never varied: I’m never wrong.

Had I been back in France, I would have told him, in unambiguous and colorful words, what I really thought, but I had acclimated myself to the polite, passive-aggressive California culture and used therapy-speak to “share my feelings of discomfort and puzzlement” at his Never Wrong posture. “I’ve always been proved right… sometimes it simply takes longer than expected”, was his comeback. The integrity of his vision wasn’t to be questioned, even if reality occasionally missed its deadline.

When I had entered the tech business a decade and a half earlier, I marveled at the prophets who could part the sea of facts and reveal the True Way. Then came my brief adventures with the BCG-advised diversification of Exxon into the computer industry.

Preying on the fear of The End of Oil in the late-seventies, consultants from the prestigious Boston company hypnotized company executives with their chant: Information Is The Oil of The 21st Century. Four billion dollars later (a lot of money at the time), Exxon finally recognized the cultural mismatch of the venture and returned to the well-oiled habits of its hearts and minds.

It was simply a matter of time, but the BCG was ultimately proved right — we now have our new Robber Barons of zeroes and ones. But they were wrong about something even more fundamental but slippery, something they couldn’t divine from their acetate foils: culture.

A little later, we had In Search of Excellence, the 1982 best-seller that turned into a cult. Tom Peters, the more exuberant of the book’s two authors, was a constant on pledge-drive public TV. As I watched him one Sunday morning with the sound off, his sweaty fervor and cutting gestures reminded me of the Bible-thumping preacher, Jimmy “I Sinned Against You” Swaggart. (These were my early days in California; I flipped through a lot of TV channels before Sunday breakfast, dazzled by the excess.)

Within a couple of years, several of the book’s exemplary companies — NCR, Wang, Xerox — weren’t doing so well. Peters’ visibility led to noisy accusations and equally loud denials of faking the data, or at least of carefully picking particulars.

These false prophets commit abuses under the color of authority. They want us to respect their craft as a form of science, when what they’re really doing is what Neil Postman, one of my favorite curmudgeons, views as simple storytelling: They felicitously arrange the facts in order to soothe anxiety in the face of a confusing if not revolting reality. (Two enjoyable and enlightening Postman books: Conscientious Objections, a series of accessible essays, and Amusing Ourselves To Death, heavier, very serious fare.)

A more recent and widely celebrated case of storytelling in a scientist’s lab coat is Clayton Christensen’s theory of disruptive innovation. In order to succeed these days — and, especially, to pique an investor’s interest — a new venture must be disruptive, with extra credit if the disrupter has attended the Disrupt conference and bears a Renommierschmiss from the Startup Battlefield.

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(Credit: www.claytonchristensen.com )

Christensen’s body of work is (mostly) complex, sober, and nuanced storytelling that’s ill-served by the overly-simple and bellicose Disruption! battle cry. Nonetheless, I’ll do my share and provide my own tech world simplification: The incumbency of your established company is forever threatened by lower cost versions of the products and services you provide. To avoid impending doom, you must enrich your offering and engorge your price tag. As you abandon the low end, the interloper gains business, muscles up, and chases you farther up the price ladder. Some day — and it’s simply a matter of time — the disruptor will displace you.

According to Christensen, real examples abound. The archetypes, in the tech world, are the evolution of the disk drive, and the disruptive ascension from mainframe to minicomputer to PC – and today’s SDN (Software Defined Networking) entrants.

But recently, skeptical voices have disrupted the Disruption business.

Ben Thompson (@monkbent) wrote a learned paper that explains What Clayton Christensen Got Wrong. In essence, Ben says, disruption theory is an elegant explanation of situations where the customer is a business that’s focused on cost. If the customer is a consumer, price is often trumped by the ineffable values (ease-of-use, primarily) that can only be experienced, that can’t be described in a dry bullet list of features.

More broadly, Christensen came under attack by Jill Lepore, the New Yorker staff writer who, like Christensen, is a Harvard academic. In a piece titled The Disruption Machine, What the gospel of innovation gets wrong, Lepore asserts her credentials as a techie and then proceeds to point out numerous examples where Christensen’s vaunted storytelling is at odds with facts [emphasis and edits mine]:

“In fact, Seagate Technology was not felled by disruption. Between 1989 and 1990, its sales doubled, reaching $2.4 billion, “more than all of its U.S. competitors combined,” according to an industry report. In 1997, the year Christensen published ‘The Innovator’s Dilemma,”’Seagate was the largest company in the disk-drive industry, reporting revenues of nine billion dollars. Last year, Seagate shipped its two-billionth disk drive. Most of the entrant firms celebrated by Christensen as triumphant disrupters, on the other hand, no longer exist

Between 1982 and 1984, Micropolis made the disruptive leap from eight-inch to 5.25-inch drives through what Christensen credits as the ‘Herculean managerial effort’ of its C.E.O., Stuart Mahon. But, shortly thereafter, Micropolis, unable to compete with companies like Seagate, failed. 

MiniScribe, founded in 1980, started out selling 5.25-inch drives and saw quick success. ‘That was MiniScribe’s hour of glory,’ the company’s founder later said. ‘We had our hour of infamy shortly after that.’ In 1989, MiniScribe was investigated for fraud and soon collapsed; a report charged that the company’s practices included fabricated financial reports and ‘shipping bricks and scrap parts disguised as disk drives.’”

Echoes of the companies that Tom Peters celebrated when he went searching for excellence.

Christensen is admired for his towering intellect and also for his courage facing health challenges — one of my children has witnessed both and can vouch for the scholar’s inspiring presence. Unfortunately, his reaction to Lepore’s criticism was less admirable. In a BusinessWeek interview Christensen sounds miffed and entitled:

“I hope you can understand why I am mad that a woman of her stature could perform such a criminal act of dishonesty—at Harvard, of all places.”

At Harvard, of all places. Hmmm…

In another attempt to disprove Jill Lepore’s disproof, a San Francisco- based investment banker wrote a scholarly rearrangement of Disruption epicycles. In his TechCrunch post, the gentleman glows with confidence in his use of the theory to predict venture investment successes and failures:

“Adding all survival and failure predictions together, the total gross accuracy was 84 percent.”

and…

“In each case, the predictions have sustained 99 percent levels of statistical confidence without a flinch.”

Why the venture industry hasn’t embraced the model, and why the individual hasn’t become richer than Warren Buffet as a result of the unflinching accuracy remains a story to be told.

Back to the Disruption sage, he didn’t help his case when, as soon as the iPhone came out, he predicted Apple’s new device was vulnerable to disruption:

“The iPhone is a sustaining technology relative to Nokia. In other words, Apple is leaping ahead on the sustaining curve [by building a better phone]. But the prediction of the theory would be that Apple won’t succeed with the iPhone. They’ve launched an innovation that the existing players in the industry are heavily motivated to beat: It’s not [truly] disruptive. History speaks pretty loudly on that, that the probability of success is going to be limited.”

Not truly disruptive? Five years later, in 2012, Christensen had an opportunity to let “disruptive facts” enter his thinking. But no, he stuck to his contention that Modularity always defeats integration:

“I worry that modularity will do its work on Apple.”

In 2013, Ben Thompson, in his already quoted piece, called Christensen out for sticking to his theory:

“[…] the theory of low-end disruption is fundamentally flawed. And Christensen is going to go 0 for 3.”

Perhaps, like our poolside guru, Christensen believes he’s always right…but, on rare occasions, he’s simply wrong on the timing.

Apple will, of course, eventually meet its maker, whether through some far off, prolonged mediocrity, or by a swift, regrettable decision. But such predictions are useless, they’re storytelling – and a bad, facile kind at that. What would be really interesting and courageous would be a detailed scenario of Apple’s failure, complete with a calendar of main steps towards the preordained ending. No more Wrong on the Timing excuses.

A more interesting turn for a man of Christensen’s intellect and reach inside academia would be to become his own Devil’s Advocate. Good lawyers pride themselves in researching their cases so well they could plead either side. Perhaps Clayton Christensen could explain, with his usual authority, how the iPhone defines a new theory of innovation. Or why the Macintosh has prospered and ended up disrupting the PC business by sucking up half of the segment profits. He could then draw comparisons to other premium goods that are happily chosen by consumers, from cars to clothes and…watches.

JLG@mondaynote.com

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