About Jean-Louis Gassée

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The enduring Apple TV Fantasy

 

We all want TV Done Right, free of the Soviet Era set-top box, UI and opaque contracts. We imagine Apple will put all the pieces together. But what’s desirable and “obvious” might not be so simple or soon…

“When I go into my living room and turn on the TV, I feel like I have gone backwards in time by 20 to 30 years,” Apple CEO Tim Cook told . NBC’s Brian Williams “It’s an area of intense interest. I can’t say more than that.”

These words — and similar ones in a substantial Bloomberg interview — launched yet another round of frenzied speculation about the mythical Apple TV.

Piper Jaffray’s Gene Munster insists that an Apple TV in 2013 is a sure thing. “It will be the biggest thing in consumer electronics since the smartphone“. (Of course, Munster has been saying this every year for the last three years…)

Another analyst, Wells Fargo’s Maynard Um, agrees that the device is inevitable, if only because a full-fledged television is “more in tune” with Apple than a simple set-top box.

Hmmm…

First, let’s take a calmer look at Tim Cook’s words. As many have noted, there’s nothing new here. Cook said essentially the same things at the D10 Conference last May and has repeated the message on earnings conference calls. The only changes to the Apple TV script in the past twelve months are the stated number of black pucks sold in the last fiscal year (more than 5 million), and an upgrade from “hobby” to “intense interest”. The actual meaning of this “interest” is widely open to interpretation.

Speculation aside, Cook has one thing right: The set-top box experience does place one back in time by 20 to 30 years:

– We still can’t order channels à la carte or search the program grid. For the latter you have to go to your tablet. And forget about the former.

– You can’t buy your own set-top box; you have to rent it from your carrier. For STB makers, there’s no incentive to build a better product.

– Add in the contorted rights and packages games played by the content providers and you end up with today’s mess.

The solution? Channels, shows, special events should all be presented as apps. Click, pay, and play, with standard fare for free. Catch the 6 pm news when you get home at 9:30; watch two programs side-by-side with Android 7 or iOS 9, all on your screen of choice: smartphone, tablet, PC, or TV.

The technology isn’t an issue. There’s enough bandwidth on cable (or pretend-fiber) networks, plenty of storage on servers, and all the required computing power in current or future TV boxes, from Apple and its competitors.

But there’s an obstacle in the tangled, encrusted business models that the Comcasts, CBSs, and Disneys cling to out of fear that Apple will wrest control of their content, that they’ll be disintermediated a la iTunes or the iPhone/iPad App Store.

Second, I simply don’t believe Apple will make, or even wants to make, a TV set. To realize the dream, as discussed previously, you need to put a computer — something like an Apple TV module — inside the set. Eighteen months later, as Moore’s Law dictates, the computer is obsolete but the screen is just fine. No problem, you’ll say, just make the computer module removable, easily replaced by a new one; more revenue for Apple…and you’re right back to today’s separate box arrangement. And you can spread said box to all HDTVs, not just the hypothetical Apple-brand set.

If carriers and content owners can be tricked, bribed, sued, or otherwise made to see the light and wisdom of higher revenue per subscriber, the TV Done Right will descend from Heaven in the form of a next generation Apple set-top box, not a TV set.

So why is Tim Cook talking about Apple TV at all?

The simplest explanation is that he’s simply answering an interviewer’s question. Possible… but not likely in such tightly choreographed exercises.

A cheekier possibility is that the answer is a head fake. Cook, a noted College Football fan, is trying to draw Google offsides, to provoke then into yet another embarrassing Google TV moment. And maybe even goad Microsoft into another WebTV dud.

Amusing… but not likely.

In Google’s case, the failed experiment has been digested and the next iteration will be much sharper. (Note well that Google’s subsidiary Motorola is putting its set-top box business up for bids, with “vendor financing possible”…)

For Microsoft, the company is happy with its successful Xbox ecosystem and its ability to provide TV content through its game console, even if that content doesn’t flow onto its phone and tablets as nicely as they would like. In any event, Tim Cook wishes Steve Ballmer no ill — au contraire, Cook wants Ballmer to stay on the job as long as he keeps helping his friends in Cupertino.

A more serious interpretation: Apple’s CEO is indicating that he’ll continue to invest talent and money until the TV obstacles are finally surmounted. In other words: “Join us and ride the wave that will sweep away the competition”.

Speaking of the competition, Sony is trying to break free from its profitless HDTV past by building a new 4K TV business.

If you have the opportunity, treat yourself to a 4K TV demo at a Sony Store. The spectacle is stunning: You see the delicate capillaries on a baby’s eyelids, feathers on birds, minute details on street scenes without any of the blurring you get on today’s HDTV.

With 3,840 by 2,160 pixels on an 80-inch TV screen, the 4K boasts 4 times the resolution of 1080p (1920 by 1080)… and an even greater price tag ratio: $25K vs $2K or less. The 4K TV is delivered with a server that contains full-resolution movies because cable and satellite carriers provide no such content — and have no plans to do so.

Sony has a valuable asset in its movie library and a need to push its new 4K TV technology. Could this portend an Apple-Sony alliance? The two companies have worked well together in the past, a CEO-level conversation could easily happen. But even if an Apple TV box provided a strong showcase for a Sony 4K TV set, carriers would still have to be shown how to milk the opportunity.

On still more sober musings, let’s consider Apple TV’s place in the company’s business. In the 2012 fiscal year ending last september, Apple’s total revenue was $156B. 5 million Apple TVs translates into $500M; that’s 0.3% of the company’s total.

Why bother? In 2014, Apple’s revenue could exceed $250B. Even if Apple TV sales were to grow by ten times, they would still represent no more than a 2% fragment of the total.

The answer is that Apple TV isn’t meant to generate revenue but to enhance the value of the more muscular, profit-making members of the ecosystem: iPhones, iPads and, to a lesser extent, Macs. In a similar, grander, and now well-understood way, iTunes isn’t in the business of making money by itself. iTunes made the iPod larger than the Mac in 2006, and it made the App Store possible — and the iPhone and the iPad as profit engines.

For Apple TV, is there a path from today’s supporting role to a $50B size, to 20% of Apple’s revenue in 2014? (Gene Munster thinks there is.)

My belief is that Apple TV sales numbers will continue to increase as the device is slowly, patiently improved and the ecosystem is enhanced. In a not-too-distant future we’ll see explicit Apple TV apps, similar to those on iPhones and iPads.

And someday, Apple will reach a limited agreement with a carrier such as Comcast. The enhanced experience will create a wedge — and will spur competitors. As a result, TV will at last become “modern” — sitting down in front of your TV set will no longer send you time traveling to 1992.

JLG@mondaynote.com

——————
Late update, an amusing coincidence: a just-discovered “Apple TV set” at Lyfe, a modern Palo Alto eatery.
With my apologies for the low quality pictures, this is the menu on five TV sets, side-by-side in portrait mode:

And, if you’re curious, you discover five Mac Minis bolted to the back of the TV sets:

Gene Munster should take a look.

Wintel: Le Divorce Part II

 

At CES 2011, Ballmer told the world Windows would “fork”, that it would also run on lower power ARM chips for mobile devices. This was seen as a momentous breach in the long-standing Wintel duopoly. Two years later, the ARM tooth of the fork looks short and dull.

This is what I wrote almost two years ago:

After years of monogamy with the x86 architecture, Windows will soon run on ARM processors.

As in any divorce, Microsoft and Intel point fingers at one another. Intel complains about Microsoft’s failure to make a real tablet OS. They say MS has tried to shoehorn “Windows Everywhere” onto a device that has an incompatible user interface, power management, and connectivity requirements while the competition has created device-focused software platforms.

Microsoft rebuts: It’s Intel’s fault. Windows CE works perfectly well on ARM-based devices, as do Windows Mobile and now Windows Phone 7. Intel keeps telling us they’re “on track”, that they’ll eventually shrink x86 processors to the point where the power dissipation will be compatible with smartphones and tablets. But…when?

Today, a version of Windows (RT) does indeed run on an ARM processor, on Microsoft’s Surface tablet-PC hybrid. Has Microsoft finally served Intel with divorce papers?

Not so fast. The market’s reaction to Redmond’s ambitious Surface design has fallen far short of the heights envisioned in the company’s enthusiastic launch: Surface machines aren’t flying off Microsoft Store shelves. Ballmer himself admits sales are “modest” (and then quickly backpedals); Digitimes, admittedly not always reliable, quotes suppliers who say that Surface orders have been cut by half; anecdotally, but amusingly, field research by Piper Jaffray’s Gene Munster (who can be a bit excitable) shows zero Surfaces sold during a two hour period at the Mall of America on Black Friday, while iPads were selling at a rate of 11-an-hour.

Traditional PC OEMs aren’t enthusiastic either. Todd Bradley, head of HP’s Personal Systems Group, is unimpressed:

“It tends to be slow and a little kludgey as you use it .…”

Acer exec Linxian Lang warns:

“Redmond will have to eat ‘hard rice’ with Surface…it should stick to its more readily-chewed software diet.”

To be sure, there are happy Surface users, such as Steve Sinofsky, the former Windows Division President, as captured in lukew’s Instagram picture:

(An aside: I went back to Sinofsky’s 8,000 words blog post that lovingly describes the process of developing “WOA” — Windows on ARM. At the time, WOA was presented as part of the Windows 8 universe. Later, Microsoft swapped the “8″ designation and chose to use “RT” instead. These naming decisions aren’t made lightly. Is there any wonder why WOA was moved out of the Windows 8 camp?)

It’s possible that the jury is still out… Surface sales could take off, Windows RT could be embraced by leading PC OEMs… but what are the odds? In addition to the tepid reception from customers and vendors alike, Microsoft must surmount the relentless market conquest of Android and iOS tablets whose numbers (210 million units) are expected to exceed laptop sales next year.

So, no… the Wintel Divorce isn’t happening. Intel’s x86 chips will remain the processors of choice to run Windows. Next month, we’ll have CES and its usual burst of announcements, both believable and dubious (remember when 2010 was declared the Year Of The Tablet PC?). We’ll have to sort the announcements that are merely that from those that will yield an actual device, but in the end I doubt we’ll see many new and really momentous Windows RT products out there.

Microsoft’s lackluster attempt at Post-PC infidelity doesn’t help Intel in its efforts to gain a foothold in the mobile world. Intel’s perennial efforts to break into the mobile market with lower power, lower cost x86 chips have, also perennially, failed. As a result, there is renewed speculation about a rapprochement between Intel and Apple, that the Santa Clara microprocessor giant could become an ardent (and high-volume) ARM SoC foundry.

As discussed here, some of this makes sense: Samsung is Apple’s biggest and most successful competitor in the smartphone/tablet space, spending billions more than anyone else in global marketing programs. At the same time, the South Korean company is Apple’s only supplier of ARM chips. Intel has the technology and manufacturing capacity to become an effective replacement for Samsung.

This wouldn’t be an easy decision for Intel: the volumes are high — as high as 415M ARM chips for 2013 according to one analyst — but the margins are low. And Intel doesn’t do low margins. Because of the Wintel duopoly, Intel’s x86 chips have always commanded a premium markup. Take Windows out of the picture and the margin disappears.

(As another aside, the 415,000 ARM chips number seems excessive. Assuming about 50 million iPhone 5s and 15 million iPads in the current quarter, and using the 4X rule of thumb for the following calendar year, we land somewhere between 250M and 300M ARM chips for Apple in 2013.)

Also, Intel would almost certainly not be Apple’s sole supplier of ARM chips. Yes, Apple needs to get out of its current and dangerous single source situation. But Tim Cook’s Supply Chain Management expertise will come into play to ensure that Apple doesn’t fall into a similar situation with Intel, that the company will secure at least a second source, such as the rumored TSMC.

The speculation by an RBC analyst that Intel will offer its services to build ARM chips for the iPhone on the condition Apple picks an x86 device for the iPad is nonsensical: Apple won’t fork iOS. Life is complicated enough with OS X on Intel and iOS on ARM.

Historically, a sizable fraction of Intel’s profits came from the following comparison. Take two microprocessor chips of equal “merit”: manufacturing cost, computing output, power dissipation… And add one difference: one runs Windows, the other doesn’t. Which one will get the highest profit margin?

In the ARM world and its flurry of customized chips and software platforms, the “runs Windows” advantage is no longer. ARM chips generate significantly lower margins than in the Intel-dominated world (its competitor AMD is ailing).

This leaves the chip giant facing a choice: It can have a meager meal at the tablet/smartphone fest, or not dine at all at the mobile table…while it watches its PC business decline.

In other news… Paul Otellini, Intel’s CEO, unexpectedly announced he’ll leave next May, a couple years ahead of the company’s mandatory 65-year retirement age. No undignified exit here. Intel’s Board pointedly stated they’ll be looking outside as well as inside for a successor, another unusual move in a company that so far stuck to successions orchestrated around carefully groomed execs. This could be seen as a sanction for Otellini missing the mobile wave and, much more important, a desire to bring new blood willing and able to look past the old x86 orthodoxy.

JLG@mondaynote.com

 

Apple Can Finish What Microsoft’s Sinofsky Started

 

In 2007, Microsoft introduces a new version of Windows called Vista, a grand name for what turns out to be an embarrassing dud. (Memories of my first and determining interaction with Vista can be found here.)

Steven Sinofsky, once a Bill Gates technical assistant and, at the time, head of Microsoft Office development, is given a shovel (and a pad of pink slips) and told to clean the stables. To create a new, respectable version of Windows in a mere 30 months will require great discipline, a refusal to compromise, the rejection of distracting advice, relentless attention to the schedule, as well as the merciless pruning of features and people who get in the way. Sinofsky had it all: superb technical skills, the dogged drive of a rassar, and the political will to mow down the obstacles.

In July 2009, Microsoft unveils Windows 7, a product widely acclaimed as absolving Vista’s sins, and Sinofsky is promoted to president of the Windows division, a title parsimoniously bestowed.

Sinofsky immediately begins work on the next version of Windows, following his proven strategy of adding solid, well-defined details while maintaining backwards compatibility and avoiding the rat trap of “feature creep”. But something happens along the way: In early 2010, the iPad comes out. Although the device is initially misunderstood by Microsoft — Steve Ballmer speaks of “slates and tablets and blah blah blah” — it doesn’t take long for the Redmond company to realize that it needs an answer, it needs to defend its PC empire against the interloping tablet that has been so warmly embraced by the public.

The company changes course and Sinofsky gets a new mission: Windows 8 isn’t going to be a mere clean-up job, it’s not an “embrace and extend” improvement, but a new ”reimagined” Windows, a PC Plus that will straddle the PC and tablet worlds. The new OS will provide a radically new look-and-feel, a touch-screen interface in addition to a keyboard and mouse (or trackpad), and it will stray from the comfy x86 monogamy to also work on ARM processors.

A little over three years later, right after delivering Windows 8, Sinofsky is abruptly sacked.(Excuse me, he’s “amicably” sacked… by his own “personal and private” choice).

Windows 8, Windows RT, and the Surface tablet are now on full display, as are the reviews — and they’re not pretty. As summarized in this June 2012 Business Insider piece, the pundits were concerned and baffled right from the start:

“Worst of all, the traditional desktop is buried — it’s just another Metro app — but there are still some things you can only do from the desktop, and some only from Metro.” (Matt Rosoff)

“In my time with Windows 8, I’ve felt almost totally at sea — confused, paralyzed, angry, and ultimately resigned to the pain of having to alter the way I do most of my work.” (Farhad Manjoo)

“Windows 8 looks to me to be an unmitigated disaster that could decidedly hurt the company and its future… The real problem is that it is both unusable and annoying.” (John Dvorak)

Perhaps these were simply hasty judgments meant to capture eyeballs, maybe customers would ignore the critics and embrace Windows 8. But no. Five months later, Paul Thurrott, the author of the respected Windows Supersite blog, gives us this post:

“Sales of Windows 8 PCs are well below Microsoft’s internal projections and have been described inside the company as disappointing.”

As head of HP’s Personal Systems Group (PCs and printers, a $55B/year business), Todd Bradley’s opinion of Microsoft’s latest creations carries considerable weight. Last week, in a long CITEworld interview, Bradley wasn’t impressed:

“I’d hardly call Surface competition.

CITEworld: Why not?

TB: One, very limited distribution. It tends to be slow and a little kludgey as you use it. I just don’t think it’s competitive. It’s expensive. Holistically, the press has made a bigger deal out of Surface than what the world has chosen to believe.”

As reported two weeks ago, I quickly encountered Windows 8′s split personality when I tried to use my new Surface, but I wanted the bigger picture.

Was Windows 8 running on a PC — Microsoft’s home turf — really an “unmitigated disaster”? I head over to the big Microsoft Store in the Stanford Shopping Center to buy the full version of the new OS — and they don’t have it. The upgrade version, yes, but no copies of the “System Builder” DVD that you need for a complete, from-scratch installation. Curious.

I head back home, order a copy from Amazon, buy an additional license from Microsoft for my second machine, and two days later I’m in business. The installation process is flawless (one with VMware Fusion, the other with Parallels), but things quickly go downhill. The problems I had with the Surface are just as distracting and frustrating on a PC: One moment you’re in the new, elegant, and, yes, reimagined User Interface, the next moment you’re foraging in the old Windows 7 Desktop. And, of course, existing Office apps have no place in the new UI.

It’s no wonder that customers aren’t keen to buy Windows 8. As a recent survey shows, “about one-third of Windows 7, Windows Vista and Windows XP users who are ready to buy a new personal computer say they intend to switch to an Apple product.

According to the Thurrott post mentioned earlier, the inside story is that Sinofsky was let go because of his “divisiveness”, that his departure isn’t a consequence of Window 8′s poor numbers. But if we imagine a different reality, one in which Sinofsky stands before a big Mission Accomplished banner, where critics rave about the beauty, harmony, and impeccable polish of a Windows 8 that runs flawlessly on PCs, laptops, tablets, and Surface-like hybrids…do we think for a moment Ballmer would have shown Sinofsky the door?

I think the real story behind Sinofsky’s removal contains elements of both personality and (Windows 8) performance. It’s no secret that Sinofsky made a lot of enemies while he pulled off a not-so-minor miracle with Windows 7. As a reward for his accomplishment, he was given a much more difficult assignment. Windows 8 had become a 21-blade Swiss Army knife: a great list of features on paper, dubious usability in practice. Add the need to adapt the operating system and the sacrosanct (and golden goose) Office applications to the new ARM processor and you end up with a Mission Impossible.

The same traits that made Sinofsky an extremely successful turnaround artist after the Vista mess — his monomaniacal pursuit of a clear goal — became liabilities in this reimagined world. He slipped and fell, the enemies saw their chance, the bayonets came out. Even supremely gifted [redacted] have a sell-by date.

Of course, none of this says anything about who came up with the mission. Was it Ballmer’s idea or Sinofsky’s? Microsoft isn’t talking.

Now let’s turn to Apple. The “recomplicated” Windows hands the Cupertino company an intriguing opportunity. They can capitalize on Microsoft’s misstep, extend a welcoming hand to the Windows users who intend to switch to Apple, and make the iPad the sine qua non of what a Post-PC device should be. (I use the “Post-PC” moniker for lack of a better one. For me, it doesn’t stand for the end of the PC but for its broadening into three instances: classic, tablet, smartphone.)

From the beginning, the iPad, designed to be a new genre, not a derivative, came with limitations. Yes, you could do some productivity work, but iOS’s lack of multi-tasking, a favorite whipping boy of the critics, made it difficult. To be sure, the OS supported concurrent activities inside the device, but running several applications at the same time was a no-no. The processor couldn’t handle it and, even if it could have, battery life would have been terrible.

So whether it was divine inspiration or simply a bowing to necessity, Apple shunned the temptation to make a PC-only-smaller, and created a whole new genre of personal computers. Microsoft couldn’t resist and gave us Windows Mobile with a Start button.

Almost five years have elapsed since the birth of iOS. (We’ll give a quick but deep hat tip to its ferocious and now deposed champion, Scott Forstall, and leave the discussion of his own exit for a future Monday Note.) With the latest iPad hardware, we have a fast processor and there are even faster ones in the making. Does the more muscular hardware and road-tested OS portend a future that supports the running of two applications side-by-side in a split-screen arrangement? Or perhaps a slidebar that reveals and hides the second app.

This isn’t exactly an original idea: Samsung just released a firmware update providing a split-screen multitasking view. And, of course, as explained here, the Snap feature in Windows 8 provides a neat way to run two apps side-by-side on a laptop or tablet.

Today, preparing a Keynote document that incorporates elements from other apps requires clumsy mental and physical gymnastics. Having access to the source and destination documents at the same time would be a welcome relief and a boost to business uses.

There are other quirks. You can edit a Mac-originated Pages or Numbers document on your iPad, but no such joy awaits users of Apple’s well-loved Preview. Upload a Preview PDF into iCloud from your MacBook and then grab your iPad and see if you can find it… No, you need to use DropBox or the (excellent) Microsoft SkyDrive. (One “explanation” for this state of affairs is the strong security that pervades iOS. Inter-application communication can open backdoors to malware, which is still quite rare in iOS. But if it can be done for Pages and other iWork apps…)

Now that all OS X and iOS software is under one hat, Craig Federighi‘s, perhaps we can expect these workflow speed bumps to be ironed out. Multiple concurrent applications, a document store that’s common to all apps… This is Apple’s opportunity: Stick to its guns, keep laptops and tablets clearly distinct, but make iPads easier to love by business users. The comparison between a worst-of-both-worlds Surface hybrid and the iPad would be no contest. iPad mini for media consumption, everywhere; iPad for business and everything else.

Apple can finish the job Sinofsky started.

JLG@mondaynote.com

 

Minding The (Apple)Store

 

As I’ve written many times in the past, I’m part of the vast chorus that praises the Apple Store. And not just for the uncluttered product displays, the no-pressure sales people (who aren’t on commission), or the Genius Bar that provides expert help, but for the impressive architecture. Apple beautifies existing venues (Regent Street in London, rue Halevy near the Paris Opera) or commissions elegant new buildings, huge ones at times.

It’s a relentlessly successful story. Even the turmoil surrounding John Browett’s abbreviated tenure as head of Apple’s worldwide retail organization hasn’t slowed the pace  of store openings and customer visits. (As always, Horace Dediu provides helpful statistics and analysis in his latest Asymco post.)

It has always struck me as odd that in Palo Alto, Apple’s heartland and Steve Jobs’ adopted hometown, Apple had only a modestly-sized, unremarkable venue on University Avenue, and an even smaller store in the Stanford Shopping Center.

All of that changed on October 27th when the black veil that shrouded an unmarked project was removed, and the newest Apple Store — what some are calling a “prototype” for future venues, a “flagship” store — was revealed. (For the civic-minded — or the insomniac — you can read the painfully detailed proposal, submitted to Palo Alto’s Architectural Review Board nearly three years ago, here.)

I came back from a trip on November 2nd, the day the iPad mini became available, and immediately headed downtown. The new store is big, bold, elegant, even more so at night when the very bright lights and large Apple logo on its front dominate the street scene. (So much so I heard someone venture that Apple has recast itself as the antagonist in its 1984 commercial.)

The store is impressive… but its also unpleasantly, almost unbearably noisy. And mine isn’t a voice in the wilderness. The wife of a friend walked in, spent a few minutes, and vowed to never return for fear of hearing loss. She’d rather go to the cramped but much more hospitable Stanford store.

A few days later, I heard a similar complaint from the spouse of an Apple employee. She used to enjoy accompanying her husband to the old Palo Alto store, but now refuses because of the cacophony.

‘Now you know the real reason for Browett’s firing’, a friend said, half-seriously. ‘How can you spend North of $15M on such a strategically placed, symbolic store, complete with Italian stone hand-picked by Jobs himself…and give no consideration to the acoustics? It’s bad for customers, it’s bad for the staff, it’s bad for business, and it’s bad for the brand. Apple appears to be more concerned with style than with substance!’

Ouch.

The sound problem stems from a combination of the elongated “Great Hall”, parallel walls, and reflective building materials. The visually striking glass roof becomes a veritable parabolic sound mirror. There isn’t a square inch of sound-absorbing material in the entire place.

A week later, I returned to the store armed with the SPL Meter iPhone app. As the name indicates, SPL Meter provides a Sound Pressure Level (SPL) measurement in decibels.(Decibels form a logarithmic scale where a 3 dB increase means roughly twice as much sound pressure — noise in our case; +10 dB is ten times the sound pressure.)

For reference, a normal conversation at 3 feet (1m) is 40 to 60 dB; a passenger car 30 feet away produces levels between 60 and 80 dB. From the Wikipedia article above: “[The] EPA-identified maximum to protect against hearing loss and other disruptive effects from noise, such as sleep disturbance, stress, learning detriment, etc. [is] 70 dB.”

On a relatively quiet Saturday evening, the noise level around the Genius Bar exceeded 75 dB:

Outside, the traffic noise registered a mere 65 dB. It was 10 db noisier inside the store than on always-busy University Avenue!

Even so, the store on that Friday was a virtual library compared to the day the iPad mini was launched, although I can’t quantify my impression: I didn’t have the presence of mind to whip out my iPhone and measure it.

Despite the (less-than-exacting) scientific evidence and the corroborating anecdotes, I began to have my doubts. Was I just “hearing things”? Could Apple really be this tone deaf?

Then I saw it: An SPL recorder — a professional one — perched on a tripod inside the store.

I also noticed two employees wearing omnidirectional sound recorders on their shoulders (thinking they might not like the exposure, I didn’t take their pictures.) Thus, it appears that Apple is taking the problem seriously.

But what can it do?

It’s a safe bet that Apple has already engaged a team of experts, acousticians who tweak the angles and surfaces in concert halls and problem venues. I’ve heard suggestions that Apple should install an Active Noise Control system: Cancel out sound waves by pumping in their inverted forms — all in real time. Unfortunately, this doesn’t work well (or at all) in a large space.

Bose produces a rather effective solution…in the controlled environment of headphones.

This prompted the spouse mentioned above to suggest that Apple should hand out Bose headphones at the door.

Two days after the noisy Apple store opened its doors, Browett was shown the exit. Either Tim Cook is fast on the draw or, more likely, my friend is wrong: Browett’s unceremonious departure had deeper roots, most likely a combination of a cultural mismatch and a misunderstanding of his role. The Browett graft didn’t take on the Apple rootstock, and the newly hired exec couldn’t accept that he was no longer a CEO.

Browett’s can’t be scapegoated for the acoustical nightmare in the new Apple Store. Did the rightly famous architectural firm, Bohlin Cywinski Jackson, not hear the problem? What about the highly reputable building contractor (DPR) which has built so many other Apple Stores? Did they stand by and say nothing, or could they simply not be heard?

Perhaps this was a case of “Launchpad Chicken”, a NASA phrase for a situation where many people see trouble looming but keep quiet and wait for someone else to bear the shame of aborting the launch. It reminds me of the Apple Maps fiasco: An obvious problem ignored.

What a waste spending all that money and raising expectations only to move from a slightly undersized but well-liked store to a bigger, noisier, colder environment that turns friends away.

Having tacitly admitted that there’s a problem, Apple’s senior management can now show they’ll stop at nothing to make the new store as inviting as it was intended to be.

JLG@mondaynote.com

Tablets Trade-Offs And Compromises

 

A couple of hours after landing in SFO from Paris, I find myself setting up two new tablets: a Microsoft Surface and an iPad mini. While on the road, I had read much on both products and felt reasonably well prepared for the tasks.

This proved correct. But the product experience was another thing.

First, the Surface: Unpack, plug in, boot up, no problem. The magnetic touch keyboard and power adapter latch onto the tablet-PC without ado, the machine’s virgin launch is a breeze: I answer a few simple questions, enter my hotmail credentials and I’m in business… sort of.

In order to get a taste for the full Surface experience, I fire up Word 2013 (included with the tablet) to write this Monday Note. Not so slick, the keyboard and touchpad aren’t very helpful. When I ordered the Surface, I chose the slim $119.99 Touch Cover combo rather than the thicker $129.99 Type Cover. Building a keyboard into a protective cover is a great idea, but, as the name implies, the Touch version doesn’t have a real keyboard. Instead, you have to work with an unsatisfying, felt-like surface without tactile feedback. For “real” typing, I need the “real” Type Cover. I’m off to Stanford’s MS Store to correct my expensive mistake.

Keyboard problem solved, I hit another snag. While Word 2013 does a good job zooming using a two-finger touch, the Control Panel and other essential parts of Windows RT are (barely) touch-enabled retreads from Windows 7; they ignore your zoom. I discover this when I need to type accented characters such é or ñ, characters that, of course, don’t appear on the keyboard. Normally, this isn’t a problem; go to the Windows Control Panel, select the English International keyboard as the input mode, and you’re set. You type ~ followed by n to get ñ.

But how does this actually work in the reimagined Windows RT? I fumble around and finally find my old friend, the Control Panel:

From there, I go to Clock, Language, and Region, pop open the Input Method menu… and select the wrong mode. Because of the lack of zoom, picking the right option in a list a game of chance. You need the sanded fingertips Steve Jobs famously derided when asked about smaller tablets.

If I use the Touch Cover trackpad instead of directly touching the Control Panel on the ironically named Surface screen, things improve dramatically: My fat fingers now become delicate. This might explain why Microsoft insists on selling a keyboard with its Surface tablet. Without one, in my admittedly limited experience, it’s not quite useable.

Then there’s the UI formerly known as Metro. In the current state of Windows 8 and Windows RT, it’s only skin-deep: Using Office apps or modifying system settings quickly calls up the old Windows 7 UI. It’s not the end of the world, the UI will evolve with future versions but, in the meantime, the much-hyped Surface tablet cum PC feels far from polished and consistent. And the no-less-touted reimagination of Windows doesn’t go much deeper than the very neat and imaginative UI on its… surface.

At least the vaunted Surface kickstand works quite well… although only in landscape mode, and, even then, only if you’re sitting. If you type while standing or want landscape mode, forget the kickstand.

I’ll keep using the product in personal writing and presentations to make sure I’m not missing some killer feature. In the meantime, I’d be interested to know if Steve Ballmer or Microsoft Board Members use a Surface tablet rather than a MacBook Air running Windows 8, a truly excellent combination in my own paid-for experience.

On to the iPad mini.

Like its forebears — and its current competitors — setup is fast and easy. If you already have an iPad or an iPhone backed-up in iCloud, everything syncs and downloads nicely.

But what about the “mini” part?

I bought a Nexus 7 when it came out and liked the fact I could pocket it, whether in jeans or in jacket. The iPad mini is larger than the Nexus, slightly more than half an inch (14.7mm) wider. Still, the “mini” will fit inside the front pocket of most jeans. Unfortunately, it’s too tall for most shallower back pockets, but it’ll fit nicely in outside jacket and topcoat pockets (as measured in this August 2nd, 2009 Monday Note where I hoped for a pocketable Apple tablet) — and doctors’s and nurses’ lab coats…

Regardless of how you carry it, the iPad mini’s hardware is neatly detailed. It’s thin and light and the “aluminium”, as Sir Jonathan Paul Ive (KBE) rightly pronounces it in the Queen’s English, works well with the white front bezel. The (stereo) speakers sound good although, to my ears, they’re surprisingly no better or louder than the latest iPhone’s, themselves a marked improvement over earlier generations.

Turning to the screen, I agree with the many who are less than thrilled with the mini’s display. I think this is the result of a compatibility decision: The mini has the same number of pixels (1024 by 768) as the iPad 2, but at a higher density (163 pixels per inch vs. the original 132 ppi). With the same pixel count as the iPad 2, all apps run unchanged, their screen rendition is just smaller. The visual experience isn’t as pleasant as on the iPad 2 itself, let alone the iPad “3″ and its higher pixel density display.

When you read a Kindle or iBook novel, a magazine such as Bloomberg Businessweek, or the NY Times on your iPhone, the content isn’t simply the iPad version squeezed to fit into the phone’s tiny display. These applications reformat their content, they adapt to be legible… no squinting, no eye strain. Let’s hope these apps will be updated to make better use of the iPad mini screen, as opposed to offering squished iPad 2 rendering.

(We’ve also read the complaints that the mini isn’t a “Retina” device…but on this topic, I must recuse myself: I’ve twice mistaken an iPad 2 for the higher resolution device. Last Spring, as I had just gotten a new high-resolution iPad, at Soho’s Les Amis bistro, I watched a gentleman at the next table flip through beautiful pictures on his iPad. I leaned over and asked how he liked his new iPad “3″. ‘What? No, it’s last year’s iPad 2…’.

A few days later in Paris, I reset my iPad 2 in order to hand it to my Mother-In-Law, a replacement for the MacBook Air that was giving her — and me — headaches. Oops, I actually reset my new Retina iPad, mistaking it for the older iPad 2. No harm done, the iCloud backup resuscitated my new tablet.)

So, which of these two devices will enjoy the brighter future? The “inadequacy” of the mini’s screen quality is an issue — and could become a problem as both Android and Amazon ecosystems keep improving (and continue to undercut Apple’s prices). But I think the improved portability (size, weight), the elegant design and material quality, plus the instant compatibility with the hundreds of thousands of iPad apps will count for a lot.

As for the future of Microsoft’s Surface, as Peter Bright (a noted Microsoft analyst) concludes in his review of Redmond’s new tablet, it really needs a keyboard and pointing device in order to be usable with Office applications. This makes a good case for Apple’s decision to keep laptops and tablets separate, freeing each to do what it does best.

JLG@mondaynote.com

 

What happened to the iPad?

 

On October 23rd, Apple announced the widely expected iPad mini. The company also surprised most by also introducing a faster “4th generation” iPad, swiftly replacing the one launched on March 7th this year, seven and a half months ago.
That same day, Tim Cook proudly proclaimed a an iPad milestone: 100 million shipped since its April 2010 debut. Impressive.
No less impressively, Wall Street analysts quickly did their subtractions and concluded Q4 iPad shipments — to be officially announced two days later — were going to miss expectations.
They were right.
Where seers expected somewhere between 15 and 16 million iPads, the actual Q4 number was 14 million. Using the Average Selling Price (ASP) we’ll discuss in a moment, a “miss” of 2 million units translates into more than $1B in missed revenue.

Compared to the 17 million iPads shipped in Q3 (ending in June), Q4′s 14 million units look like a steep decline. This isn’t in keeping with the fast growth the iPad had shown since its 2010 beginning. On a “Quarters After Launch” basis, the iPad used to grow faster than the iPhone. Now, we see a decline from the 15.4 million units shipped in Q1 (ending December 2011), and only a modest 26% increase from last year’s Q4. Where are the go-go days of 70% or even 100% year-to-year growth?
Two days later, at the October 25th Earnings Conference Call, Apple’s CEO tried to put a better face on that strangely anemic 26% growth. As noted by Horace Dediu, Tim Cook pointed to a different number: sell-thru, units actually delivered to customers, grew by 44%. Not great, but not as tepid as 26%.
(See Philip Ellmer-Dewitt’s detailed explanation here. In essence, when product ships, it “changes hands”: the channel partner “takes title”, meaning it moves from Apple’s books to the reseller’s. For Apple, the items thus shipped count as revenue, even if they’re not sold-thru, that is sold to end customers. When the volume of products Apple ships to retailers is less than the volume sold-thru, channel inventories decline, more sales out than shipments in. This is how Apple sees revenue go up by 26% while sell-thru increases by 44%. A likely explanation for last quarter’s depletion of channel inventory is making room for the two new iPad models.)
Resorting to sell-thru numbers as a way to put iPad numbers in a better light could be habit-forming, it could force Apple’s management to provide more detailed inventory numbers more regularly.
On the end-customer demand side, Apple execs attributed the low Q4 iPad number to several months of intense and detailed rumors ahead of the iPad mini launch.
So, the iPad story could look this: Last year, the yearly iPhone refresh moved from June to October; as a result, Q4 iPhone shipments disappointed; but fast growth resumed once the new model shipped; the pattern now applies to the iPad as well.

No, the iPhone and the iPad behave more differently than in the above scenario. I went back to SEC filings and extracted data for the following graph tracking iPhone and iPad ASP’s for the past eight quarters:

The iPhone ASP is stable. Carriers keep indulging in (wooden) saber-rattling, complaining about “excessive” iPhone subsidies. Here, subsidy means the difference between the price carriers pay for a handset and the typical end-user price: $199 for the phone with a two-year contract. In such a $199 arrangement, for the past five years, Apple has been able to extract more money from carriers than any of its competitors. Paraphrasing Horace Dediu, the explanation for such an enduring advantage is a simple one: For carriers, the iPhone is a better salesman, it generates more revenue, a higher ARPU (Average Revenue Per User). As a result, carriers pay the iPhone salesman a higher commission, meaning a higher handset price. (And they sound like the grouchy bosses who complain their star sales person makes too much money…)

For the iPad, there is no such arrangement, no two-year contract, no subsidy. For example, AT&T will sell an iPad with a no-commitment, month-to-month wireless data contract. Without a two-year commitment, carriers have no incentive to sell the iPad at a particularly attractive price, causing customers to face the price without a subsidy fig-leaf. (One might argue smartphone contracts lead customers to borrow money, the $400+ subsidy, at usurious rates, but such habits are hard to break. Rare is the carrier that will offer a cure, a lower monthly contract if you pay full price for the phone.)

How do iPad customers react to the cold price truth? All we know is the ASP has been falling for five quarters. And we can also surmise price figures more actively in competitive situations than it does with smartphones. Or, for that matter, with notebooks and desktop computers: ASP for Macs is stable or growing a little, from $1282 last year to $1344 last quarter. These prices don’t prevent Apple from being number one on desktops and notebooks in the US — as Tim Cook reminded everyone on October 23rd.

The surprise iPad refresh can be seen as a reaction to competitive pressures, existing or upcoming ones. And, for the iPad mini, we have an interesting combination: premium price and an avowed lower gross margin, ‘significantly below our cooperate average‘ says Apple’s CFO during the October 25th Earnings Conference Call.

The iPad definitely behaves differently, neither a bigger smartphone, nor a smaller PC, thus confirming it belongs to a new category whose rules are still being established. The next few quarters will be even more interesting than recent ones: Google, Amazon and Microsoft have new products worth watching, they all intend to fight for a dominant role in the new space.

JLG@mondaynote.com

Apple, ARM, and Intel

 

Apple and Samsung are engaged in a knives-out smartphone war, most infamously in the courts but, more importantly, in the marketplace. In its latest ad campaign, Samsung has cleverly “borrowed” a page from Apple’s own marketing playbook, posturing the iPhone as the choice of autumn-aged parents and brainwashed queue sheep.

But when it comes to chips, the two companies must pretend to be civil for the sake of the children: Samsung is the sole supplier of ARM-based processors for the iPhone.

Something has to give.

Since no one sees Samsung getting out of its booming smartphone business, the conclusion is that Apple will assume full custody, it will take its iDevices processor business elsewhere.

But where? There are rumors (which we’ll get to), and none of them so much as hint at Intel.

Except for the rare cameo appearance, Intel is nowhere in the Post-PC world (or, as Frank Shaw, the literate and witty head of Microsoft’s corporate PR obdurately insists, the “PC Plus” world). Becoming Apple’s ARM source wouldn’t just put the Santa Clara company in the race, it would vault them into the lead.

They’ve been there before: Intel scored a coup when Apple switched to the x86 architecture for its Macintosh line in 2005. An iDevice encore would mark an even bigger score as smartphones and tablets have already reached much higher volumes and grow much faster.

So… Why hasn’t Intel jumped at the chance?

The first explanation is architectural disdain. Intel sees “no future for ARM“, it’s a culture of x86 true believers. And they have a right to their conviction: With each iteration of its manufacturing technology, Intel has full control over how to improve its processors. They can reduce x86 power consumption by using smaller building blocks (they’re already down to 22 nanometers wide). They can micro-manage (literally) which parts of a complex chip will be turned on, off, or somewhere in between, in a kind of hibernation.

A further problem is that Intel would need to change roles. Today, the company designs the microprocessors that it manufactures. It tells PC clone makers what these chips will do, how many they will get, when, and for how much. Its development model (called Tick Tock in industry argot) essentially defines the schedules and finances of hardware makers.

This dictatorial model won’t work for iDevices. Apple crossed the border into Intel’s chipset empire back in the Macintosh era, but, today, it has far too much invested in its ARM design to again surrender complete control. As evidenced by the A6 processor running inside the iPhone 5, Apple goes to great lengths to customize the basic ARM cores, adding graphic processors, memory, and large amounts of support logic, and even resorts to aggressive hand-optimization of the silicon layout — as opposed to just letting CAD software tools do the job.

Intel would have to accept Apple’s design and “pour” it into silicon — it would become a lowly “merchant foundry“. Intel knows how to design and manufacture standard parts, it has little experience manufacturing other people’s custom designs…or pricing them.

Which leads us to the most likely answer to the Why Not Intel question: Money. Intel is a sophisticated business entity that expertly balances both terms of the profit equation. On the one hand, they use brand identity, marketing incentives, and a little strong-arming to keep prices “acceptable”, while on the other, the Tick Tock technology and product development pushes its costs down.

The company meticulously tunes the price points for its processors to generate the revenue that will fund development as well as the Intel Inside campaigns that have cost hundreds of millions of dollars over the years, to say nothing of the more recent $300M Ultrabook fund.

One way to visualize Intel’s money pump is to think of what the industry calls a Wafer Start. Here, “wafer” refers to the basic silicon “galette” that will go through the manufacturing steps and emerge with thousands of chips ready to be diced out. For Intel, profit comes from the difference between the cost of running a wafer through the $5B manufacturing unit (a “fab” in our argot) and the revenue that the marketplace will grant each chip.

Intel’s published prices range from a “low” $117 for a Core i3 processor to $999 for a top-of-the-line Core i7 device. Of course, these are the publicly advertised price tags, so we can assume that Acer, Lenovo, and HP pay less… but compare this to iSuppli’s estimate for the cost of the A6 processor: $17.50.

Even if more A6 chips could be produced per wafer — an unproven assumption — Intel’s revenue per A6 wafer start would be much lower than with their x86 microprocessors. In Intel’s perception of reality, this would destroy the business model.

In the meantime, the rumor of the day is that Apple will use TSMC, a well-regarded Taiwanese foundry, the world’s largest. TSMC is known to have made test runs of the A4 last year, and is now reportedly doing the same for the A5 processors that power the new iPad. Furthermore, “industry insiders” have reported that Apple attempted to secure exclusive access to TMSC’s semiconductor output but were rebuffed. (Qualcomm tried, as well; same result.)

This raises a big Disruption question for Intel: In the name of protecting today’s business model, will it let TSMC and others take the huge mobile volume, albeit with lower profit per unit? Can Intel afford to shun ARM?

For all of Intel’s semiconductor design and manufacturing feats, its processors suffer from a genetic handicap: They have to support the legacy x86 instruction set, and thus they’re inherently more complicated than legacy-free ARM devices, they require more transistors, more silicon. Intel will argue, rightly, that they’ll always be one technological step ahead of the competition, but is one step enough for x86 chips to beat ARM microprocessors?

JLG@mondaynote.com

 

Losing The Plot

 

It’s a beautiful sight when, year after year, a company stays true to its original idea. But when a business loses the plot, we witness a sorry spectacle, an expensive slide into mediocrity. Every wayward company is wayward in its own way: Accountants masquerading as product planners; wannabe visionary execs jealousy trying to prove that they, too, can put a dent in the universe; board members panicking over bad press. But the result never varies: Customers leave.

A few weeks ago I was in France, enjoying the benefits of the French Paradox and happily testing its limits: Lots of duck fat washed down with an ethanol tincture of polyphenols. It was in this fulfilled state that I watched the launch of the latest iteration of an iconic product. There was a little stretch in one dimension, a little squeeze in another, measurable weight loss, more power better utilized, bigger screen for navigation…

The kommentariat were unanimous, the sum of the improvements equals a blockbuster.

I’m not talking about the boring iPhone 5. The occasion was the seventh iteration of the Volkswagen Golf, introduced at the 2012 Paris Motor Show (or, in the modest French appellation, the Mondial de l’Automobile).

The praise is deserved. Golf 7.0 comes with plenty of new features, yet stays backwards-compatible with previous releases…it’s still recognizable as a Golf.

Born in 1974, the Golf (then dubbed the Rabbit in the US) managed to stay true to Volkswagen’s overall corporate brief — its “People’s Car” mandate — while giving the idea new life by walking away from the Beetle’s design. The engine and drive wheels moved upfront; Giorgetto Giugiaro, the legendary and extraordinarily prolific designer, outlined the hatchback’s iconic silhouette, still recognized and loved 38 years later.

Admittedly, the Golf strayed a bit over the years, it gained weight, developed haunches. At one point, it grew to nearly twice its original mass. Worse, reliability was up and down, as were the experts’ opinions of its drivability.

But despite the swerves and cul-de-sac design details, Volkswagen managed to return to the original concept of a sexy, functional hatchback. And the customers didn’t leave — more than 30 million Golfs have been sold.

The Honda Civic story isn’t nearly pleasant. The Civic was introduced in 1967 as a tiny kei car hatchback called the N360 — for the 360 cubic centimeters of its motorcycle engine. In 1972, the little hatchback grew a pair of additional cylinders and became an auto industry icon, the first for Honda.

Year after year, Honda lovingly improved the Civic: Larger, smoother body; more comfortable interior; cleaner, more powerful engine; smoother suspension. For about twenty years, the Civic was a model of neat progression, of staying true to the original hatchback idea.

But in the mid-nineties, the Civic lost its unmistakable identity. No longer satisfied with being a versatile, dependable transportation machine, the Civic wanted to be treated with respect, it wanted…valet parking. A few years later, the Civic suffered a midlife crisis and tried to become a sports car.

What happened? Was it because of a change of the guard inside the company? Honda was often taken to task for being too much of a maverick; did the Japanese company try too hard to placate critics and become more “normal”?

The parallel Golf and Civic stories show a sharp contrast between the two companies. In many respects, the Civic started as a technically superior product. It had a better engine, better manufacturing, and legendary reliability. But Volkswagen stuck to the original concept and is well rewarded as a result.

There are even sorrier examples of lost plots in the auto industry — think Citroën — but it’s time to turn to our industry.

Regard Hewlett-Packard, serial plot loser.

In the early 70’s, HP owned the PC market (and forgive the anachronism…back then they were called “desktop computers”). Using the technical and financial might it had earned with its late-sixties “programmable calculator” line, HP developed a range of “discrete logic implementations” (integrated circuits) of their 2100 series minicomputer instruction set. It was a clean, visionary strategy. Very quickly, HP’s 9800 series of desktop computers flattened every competitor in its path: Wang, Olivetti, Tektronix, Seiko…

Then, in 1972, Intel introduced the 8008 microprocessor. HP looked down its nose at these  cheap, woefully underpowered 8-bit gizmos…there was no way these toys could compete with HP’s fast, powerful, 16-bit desktop devices — why, even HP’s old 9810A calculator used a 16-bit brain.

We know the rest of the story: The inexpensive devices Pac-Manned their way into HP’s PC business. The 9800 series was displaced by a crowd of entrants, many powered by Microsoft software, including the Apple ][, whose Basic Applesoft interpreter came from Redmond.

It wasn’t until 2002 that HP regained the PC industry’s top spot — and it only did so by acquiring Compaq, the deposed king of PCs. (Ironically, Compaq’s history is similarly predatory: It vaulted to the top when it acquired DEC, another erstwhile king, albeit of the  minicomputer industry. DEC missed the PC revolution entirely.)

Ten years later, after a sorry successions of CEOs, HP’s PC business has become a lackluster, low-margin (5%) endeavor, and Lenovo (or will it be Acer?) is about to assume the number one position in sales.

There is more.

HP was once the king of “mobile computing”. Starting with the HP 35 pocket device (1972), the company grew a phenomenally successful range of iconic devices such as the HP-80 and the HP-12C, the darlings of financial users.

In 1974, the HP-65 topped the range with its magnetic stripe reader for external program storage. The HP-80 had such high margins it provided most of the company’s meager profits during a mid-70‘s financial downturn. (Or so I, lowly HP trenchworker at the time, was told by “upper management”. I’ve researched the record but haven’t been able to confirm the factoid.)

HP owned the pocket-sized form factor, but they’ve since lost the mobile computing plot. There have been a few spasms — the iPaq devices, an iPod dalliance, the amazingly botched $1.2B Palm acquisition– but now HP plays no part in the mobile revolution.

HP CEO Meg Whitman knows this is a problem, that it must be fixed. She tells us that the company must “offer a smartphone because in many countries of the world that is your first computing device.” Her solution? HP won’t have a smartphone in 2013. (Whitman has also announced losses for this year, more losses for next year, and plans to lay off 29,000 people.)

Indeed, for more and more people, in both developing and developed countries, the smartphone has become the first computing device, the really personal computer. So what does “No Smartphone In 2013″ say?

There’s no dearth of Taiwan companies ready with customizable designs. That’s how Nokia got its first Lumia phones from Compal. So why isn’t HP coming up with a Windows Phone 8 device in the next few months? There’s only one possible answer: margins. The smartphone business, dominated as it is by Samsung and Apple, is now in a clones race to the bottom. For HP, this is an all-too-familiar plot line.

How can HP, with its new Make it Matter slogan, continue to lose its key plots? Waiting until 2014 to re-enter the smartphone race won’t help. And competing against Lenovo, Acer and others in the Windows 8 PC-cum-tablet space won’t make HP’s clone business more profitable.

JLG@mondaynote.com

 

French Entrepreneurs Revolt

 

Not against their VC overlords, mind you. No, calling themselves “Pigeons” (The Fleeced) they staged a highly visible protest  (Google translation) against their government’s latest stroke of the money pump. In a nutshell, the new Socialist administration proposed to tax an entrepreneur’s capital gains as ordinary income. In very rough numbers, the tax rate would go from 19% to 60% or, some say, 80% in extreme cases.

The outcry, obligingly amplified by the media, forced the Minister of Finance to meet with a delegation of the aggrieved and to beat a hasty, muddy, non-retreat retreat with the customary weasel words of caring for entrepreneurship, competitiveness, social justice and the country’s much-needed financial sanity.

This isn’t the first time the French government makes moves that hurt both the facts and the perception of its economy. It is, I believe, yet another manifestation of its perverted, ambivalent relationship with money.

Allow me to explain.

I’m at the Café de Flore, my Parisian neighborhood, what I call the World Centre for the Caviar Left. There, my café-crème drinking companions sometimes question my having left France to go live in the epitome of materialism, Silicon Valley. I point to the double-parked Porsches, the Louis Vuitton, Dior, Armani, Berlutti and Ralph Loren stores nearby. The answer, uttered in utmost sincerity, never varies: ‘It’s not the same…’

In a way, they’re right. Considering sex and money, Americans and French cultures exhibit truly polar opposite behaviors. The French see nothing wrong with a President having a wife, a mistress and a love child, they revel in sexual and often sexist jokes. But, if you ask someone how much they paid for their apartment, they’ll react as if you’d touched them in boundary-breaking ways. Conversely, they perceive us Americans as demonizing sex — think a past President and his “oral” office — while being obscene with money.

If, as I believe, the most honest statement of country’s values is its tax code, the French government has time and again clearly stated where it stands.

One such declaration is the ISF, the Wealth Tax. It’s not a gains tax (on income or capital), or a transaction tax (sales tax or VAT), this is a levy on your assets after you’ve paid all taxes on the path to your owning said assets. I can be seen as  a cultural indictment of the “haves”. The ISF comes with bizarre (or revealing) exclusions: You own a business, that asset is not taxed; the same goes for your expensive art collection; 75% of the forest you own is ISF-free. (I’ll stop there and warn readers the Wikipedia ISF article is woefully out of date on details, but right on the concept.)

The ISF keeps exerting a perverse influence on the country.
First, too many people with substantial assets fled the country, often to nearby Belgium and UK where they were welcomed as they were going to enrich the local economies. I personally know high-tech executives who, after paying good-size income tax bills for decades, decided to protect their savings and moved out. A loss for the French, from grocers to cab drivers and teachers.

Second, companies with European HQs in France moved out, their execs paying income tax on their wages didn’t want to pay additional levies on their assets. Apple is but one such example. Its Euro HQ is now in London. And, of course, no other company will now expose its execs to the ISF by locating a headquarter in France. Another loss in money and, just as important, in reputation, in making France look business-hostile.

Last May, France elected a new President, François Hollande, a leader of the Socialist Party who successfully presented himself as an alternative to the somewhat conservative and definitely abrasive Nicolas Sarkozy. On the stump, Hollande promised more fiscal justice and went for a new low in demagoguery, saying: ‘I hate rich people’.

Once he got in office, needing more revenue in a sinking economy, he announced he’d raise the ISF percentage, and tax incomes above 1M€ at a new 75% rate. Plus the new tax rate for capital gains discussed at the beginning.

Interestingly, besides the Pigeons’ protest (an example here, so-so translation by Google here), high functionaries in the Ministry of Finance indict their administration’s latest moves. In Le Monde (the semi-official daily) these well-informed technocrats publish a damning opinion piece (translation here) under a nom de plume, Les Arvernes. In it, they remind us that, with the rarest of exceptions, their government bosses never held real jobs. These apparatchiks have no intellectual and, most important, no emotional connection to what building a business is, to putting money and reputation at risk. When you get a wage, you don’t put money at risk. When you build a company, you do. Taxing two different risks at the same rate shows dangerous ignorance of what building a business is — and of the consequences of making France less attractive to business builders.

Here in the Valley, once we’re done slapping our foreheads, we look forward to seeing more talent flow in, looking for a friendlier ecosystem. Paradoxically perhaps, entrepreneurs moving to the Valley shouldn’t worry the money pump operators back in France. As the Israel and India examples uncontrovertibly establish, emigrating entrepreneurs end up doing a lot of good for their country. They send back money, jobs, savoir-faire, technology, culture and optimism. To them, Silicon Valley is a new Villa Medici. This is much better than the Maginot Line French politicians sometime fantasize about in order to prevent individuals to move to better business climates.

JLG@mondaynote.com

 

Apple’s $30B Maps

 

A short week after releasing the iPhone 5, Apple’s CEO publicly apologizes for the Maps fiasco and the company’s website updates its description of the new service. As the digital inspirations blog found out, the unfortunately emphatic description that once read:

Designed by Apple from the ground up, Maps gives you turn-by-turn spoken directions, interactive 3D views, and the stunning Flyover feature. All of which may just make this app the most beautiful, powerful mapping service ever.

becomes more modest:

Designed by Apple from the ground up, Maps gives you turn-by-turn spoken directions, interactive 3D views, and the stunning Flyover feature. All in a beautiful vector-based interface that scales and zooms with ease.

In his letter of apology, Tim Cook also reminds everyone of alternatives to his company’s product, and of easy ways to access Google and Nokia maps:

While we’re improving Maps, you can try alternatives by downloading map apps from the App Store like Bing, MapQuest and Waze, or use Google or Nokia maps by going to their websites and creating an icon on your home screen to their web app.

And Consumer Reports, after trying the new Maps found that, warts and all, they weren’t too terrible:

Apple uses maps from TomTom, a leading navigation company. We suspect many criticisms pointing to the map quality are misguided, as we have found TomTom to provide quality maps and guidance across multiple platforms. Instead, the fault may be Apple’s software applied to the TomTom data. […] Either way, in our experience thus far, this is a minor concern.
Bottom line:
Both the free Apple and Google navigation apps provide clear routing directions. Apple feels like a less-mature product. But as seen with the initial competing applications for the iPhone, we would expect updates to this new app over time–and Apple has promised as much. When getting down to the nitty gritty, Google provides a better overall package, but we feel that both provide a good solution for standard software. We expect the competition between the companies will benefit customers with ongoing improvements.

So… Normal teething problems, forgivable excess of enthusiasm from proud Apple execs, the whole media fireworks will blow over and everything will be soon forgotten — remember Antennagate?

One would hope so, especially if Apple’s Maps keep improving at a good pace.

But look at this graph:

Since the iPhone 5 release, and the Maps fracas, Apple shares lost about 4.5% of their value, that’s about $30B in market cap.

Fair or not, it’s hard not to fantasize about another course of events where, in advance, a less apologetic Tim Cook letter would have told Apple customers of the “aspiring” state of Apple Maps and encouraged them to keep alternatives and workarounds in mind. And where Apple’s website would have been modest from day one.

We’ll never know how Apple shares would have behaved, but they certainly wouldn’t have gone lower than they stand now — and Apple’s reputation as a forthright, thoughtful company would have been greatly enhanced.

This is more than piling on, or crying over spilled maps. We might want to think what this whole doing the right thing — only when caught — says about Apple’s senior management.

First, the technical side. Software always ships with fresh bugs, some known, some not. In this case, it’s hard to believe the Maps team didn’t know about some of the most annoying warts. Did someone or some ones deliberately underplay known problems? Or did the team not know. And if so, why? Too broad a net to cast and catch the bugs? Too much secrecy before the launch? (But Maps were demoed at the June WWDC.)

Second, the marketing organization. This is where messages are crafted, products are positioned, claims are wordsmithed. Just like engineers are leery of marketeers manhandling their precious creations, marketing people tend to take engineers’ claims of crystalline purity with, at best, polite cynicism. One is left to wonder how such a hot issue, Apple Maps vs. Google Maps, wasn’t handled with more care — before the blowup. And why, with inevitable comparisons between an infant product and a mature, world-class one, the marketing message was so lackadaisically bombastic.

And last, the CEO. Was trust in his team misplaced, abused? Were the kind of checks that make Apple’s supply chain work so well also applied to the Maps product, or was some ill side-effect of team spirit at play, preventing the much-needed bad news to reach the top?

We don’t need to know. But Apple execs do if they want the difficult birth of Apple Maps to be written in history as a wake-up call that put the top team back on track. I don’t want to think about the alternative.

JLG@mondaynote.com