hardware

Notes From The Road: Apple Watch, Apple Car

 

 by Jean-Louis Gassée

Taking a closer look at the size and precision of Apple’s manufacturing operations has made me rethink my skepticism about the putative Apple Car.

I’ve been in Paris for the last two weeks, mostly disconnected. I won’t wallow in specifics; suffice it to say that the struggle with cable TV, Internet, and cellular providers here is eerily similar to what we commonly endure in the Valley. There is one difference, however: A few hours ago, I watched as a cable technician spliced a fiber connection into our apartment, something I can’t get in downtown Palo Alto.

A few Web-free days watching people and eavesdropping on conversations in Left Bank cafés helped me rethink my position on the Apple Car – because of the Apple Watch.

The local level of interest in the Apple Watch is mild at best, nothing like the paroxysms in the States. Never have we seen such large-scale derangement over an Apple product announcement, not for the iPhone or for the iPad, Steve Ballmer’s and Dan Lyons’ shouts notwithstanding. Google “Apple Watch fail” and you’ll get more than 61M hits – and this is before anyone has had a chance to pay for and use the product.

The latest instance of mental poisoning comes from the NewYork Times’ tech columnist Nick Bilton. The (original) title of his anti-Watch column, “Could Wearable Computers Be as Harmful as Cigarettes?”, sounds like the work of a netwalker striking a provocative pose to attract pageviews. But Bilton is no carnival barker; he’s a real journalist with an otherwise impeccable professional record and a solid reputation for insightful writing. As you’ll see when you click on the link, the title has been changed to a less prurient “The Health Concerns in Wearable Tech”, and a long Editor’s Note and a Correction have been appended. If that weren’t enough, Margaret Sullivan, the Grey Lady’s Public Editor, has weighed in with an apology of sorts, calling some of Bilton’s assertions “pseudoscience”.

As detox, we can turn to “How Apple Makes the Watch” on Greg Koenig’s tech-porn blog Atomic Delights. Using pictures from the Apple Watch films, Koenig offers a lovingly detailed exploration of Apple’s industrial design decisions and manufacturing feats:

“Apple appears to have eschewed any revolutionary alchemy and instead, applied an innovative work hardening process to create gold that is (claimed to be) significantly harder than the typical 18kt used by other watchmakers. “

From gold alloys and steel forging, to CNC (Computerized Numerically Controlled) machining, laser clean-up, and in-process measurement exploits, Koenig’s post impresses us with the depth of the technical organization behind the product.

360-Mak_of_watch

After mentioning “rumors of entire German CNC mill factories being built to supply Apple exclusively” and the disappearance of manufacturing experts who later reappear in Cupertino or Shenzhen, Koenig concludes:

“While we all are massively impressed with the scale of Apple’s operations, there is constant intrigue as to exactly how they pull it all off with the level of fit, finish and precision obvious to anyone who has examined their hardware.”

(I can safely say you won’t be bored with Koenig’s blog. After reading about the Watch, you should continue down the page to his article on Mac Pro Manufacturing, followed by a 15-second video that shows how objects we can’t live without, springs, are made.)

After a couple of readings, Koenig’s thoughts on the scale and precision of Apple’s manufacturing process got me to rethink my views of the putative Apple Car. In two Monday Notes, The Fantastic Apple Car and Apple Car: Three More Thoughts, I expressed strong skepticism.

In the first place, I wrote, a long history of eating and drinking at the best restaurants on the planet doesn’t qualify you to become a successful restaurateur. More important, Jony Ive’s justly renowned prowess in coming up with exquisitely polished objects misses the point of car manufacture where the focus isn’t on the object itself, but on the machine that excretes the cars in high volume, high quality, and well-managed cost. It’s the Industrial in Industrial Design that matters.

On the weight of these two points I concluded that while the idea of an Apple Car is attractive, Apple shouldn’t confuse its love of cars and its high regard for beautiful swage lines with an ability to become a successful car maker.

Now, I wonder if I ought to Think Different.

The scale of Apple’s Supply Chain makes it clear that the company knows how to make the machine that makes the machines on a very large scale and at a high quality level. In a comparison at the beginning of his post, Koenig helps us grasp the otherwise unimaginable size of Apple’s manufacturing [emphasis mine]:

“Apple is the world’s foremost manufacturer of goods. At one time, this statement had to be caged and qualified with modifiers such as “consumer goods” or “electronic goods,” but last quarter, Apple shipped a Boeing 787’s weight worth of iPhones every 24 hours. When we add the rest of the product line to the mix, it becomes clear that Apple’s supply chain is one of the largest scale production organizations in the world.

787 of iPhones

(Initially, I read Koenig’s statement as “one 787 full of iPhones everyday”. But, no, this is the entire unladen weight of the 787 itself.)

How does this compare to cars? US sales of the 3,000 pound (1,500 kgs) Nissan Leaf averaged 2,500/month in 2014. That’s 7.5M pounds worth of cars. The iPhone’s monthly weight (240K lbs * 30 days) is…7.2M pounds. As another reference point, Tesla sold 2,500 cars in September 2014.

Such number play is just that, a feeble attempt to seize sizes. And even if we grant Apple the numbers — if we stipulate that Apple can manage a supply chain that produces a month’s weight worth of electric cars that are equivalent to the size and weight of a Nissan Leaf or, two notches up, of a Tesla — the next question is whether or not such a product will move the needle. Will it sell in multiples of Apple’s new unit of currency: $10B?

(Apple 2015 sales are expected to significantly exceed $200B.)

For this to happen, the putative Apple Car would have to sell in volumes about 10 times higher than what Nissan did last year in the US: 30K vehicles/month, at $30K each, times 12 months = $10.8B.

Of course, I’m looking at the putative Apple Car in terms of the car as we know it today, just as we all initially looked at the iPod and the iPhone using existing products as the frame of reference. Perhaps Apple has something more imaginative, more in keeping with its Think Different mantra than a mere derivation of existing designs. But whatever it intends, I no longer believe that Apple can’t design a machine to make cars.

JLG@mondaynote.com

Apple Car: Three More Thoughts

 

by Jean-Louis Gassée

[Update appended]
Beside free publicity, and huge amounts of it, the putative Apple Car raises interesting questions about car manufacturing, the future of automobiles, and the part that an interloper such as Apple could play in this century-old industry. 

The volume of comments and Twitter traffic in reaction to last week’s Monday Note, The Fantastic Apple Car, was just one small rivulet in this week’s gusher of rumors, jokes, and proclamations about Apple becoming a car manufacturer. Bloomberg takes the car as fait accompli, telling us that “Apple…is pushing its team to begin production of an electric vehicle as early as 2020”. A recent 9to5mac post provides a long list of car experts and executives hired by Apple, thus giving more than gossipy credence to the story of Apple committing huge resources to such a project.

There are many products and services I’d love to see Apple get into. For example, how could Apple not do a better job than Comcast, Verizon, and AT&T at providing wired and wireless broadband? But the Cupertino company stays out of that arena for a number of reasons: regulations, fragmentation, manpower, equipment both under and above ground.

One could argue that cars present a simpler challenge. Roads are roads and country regulations are well understood. And, yes, a car made and serviced by Apple could be an affordable quality product.

Still, I remain a skeptic. Monday Note commenter Hamranhansenhansen does a good job of summarizing my position:

“[…] if Apple were doing a car, why not just buy Tesla in the exact same way they bought Beats? Apple already made headphones for about 14 years and then bought Beats anyway. Tesla is the Beats of cars, and it is local to Apple and already has a factory and really great mindshare. If they did not want Elon Musk, he has SpaceX and could likely make a graceful exit. Apple’s car line would then be named “Tesla” same as their PC’s are named “Mac” and headphones named “Beats.” The price of Tesla right now is excellent, especially considering the battery crossover to iPhones and iPads.
It makes much more sense to me that Apple is going to become a car component manufacturer, so that BMW, Bentley, Ferrari, etc. can buy Tesla-style in-car dash systems from Apple, just as Ford bought the awful Sync from Microsoft. The itch that needs to be scratched is Jony Ive getting into his Bentley and his iPhone won’t hook up reliably and sits in a bolt-on cradle.

This week, I’ll add three vignettes, three morsels of food for thought about the hotly desired AppleCar.

For more than twenty years, two Apple execs roamed the Earth in search of technologies, suppliers, contractors, and entrepreneurs to acquihire. In their travels, they fortified themselves at many of the best restaurants on the planet, becoming friends, or so they thought, with the astute chefs, sommeliers, and maîtres d’hôtel.

Impressed by their own accumulated knowledge of the restaurant industry the two decided to parlay the money and ambition they had been soaking in at Apple and open a high-concept, high-end saloon. They spared no expense on location, decoration, wine cellar, state-of-the-art kitchen, big name chef, experienced front-of-the-house staff and, of course, a publicist.

After two miserable years of quarrels with prime donne, theft and drug use by the staff, bad reviews planted by rivals, and calamitous “surprise” food inspections, our two wannabe restaurateurs closed their dream place, millions of dollars gone to waste.

They got confused. After all the years they spent in the best restaurants in the world, they thought they knew the restaurant business. What they did know was how to be great patrons… how to talk wine with the sommelier, when to compliment the chef, how to respectfully send back a dish that isn’t just so. They were customers, not restaurateurs.

You know where I’m going with this: Some Apple execs are great car connoisseurs — one senior VP is even on the Board of Directors of Ferrari. They have the resources to own and operate, on roads and tracks, many of the choicest automobiles on the planet, but that doesn’t automatically give them the knowledge to be manufacturers.

The second vignette takes me back a few decades to Northern Italy. During my years at Apple, I took an Industrial Design team to pay a visit to Giorgetto Giugiaro, a towering figure in the automobile industry who would later be recognized as one of the Car Designers of the Century. (Both Wikipedia articles just linked to make for terrific reading – if you’re into cars.) Our goal, in visiting Giugiaro, was to find fresh inspiration, new stanzas for our design language. I had long admired not only the aesthetics of the cars Giugiaro had designed, but also their practicality and efficiency. The historic success of his work on the Volkswagen Golf re-started the company and put it on a trajectory to one day challenge Toyota.

When we walked into Giugiaro’s Italdesign offices, a surprise awaited us. When I thought of Industrial Design — Esthétique Industrielle in French — aesthetics first came to mind, industry second. But what Giugiaro showed us was the opposite: The industrial side of his practice was, for him, truly foremost. In his own words, his job wasn’t to design an award-winning shape for a car, his job was to design the process, the factory that would eventually excrete a continuous flow of vehicles.

An example from Giugiaro’s portfolio: The Renault 19. At a time when the French manufacturer saw a hole in its product line, Giugiaro raided the corporate parts bank, designed a production line, installed it, and trained the production technicians.

More than 25 years later, the conversation is still with me: One doesn’t design a car, one designs the machine, the process, the supply ecosystem that produces the vehicle. As Horace Dediu puts it, innovations are in the production system:

(Beside his Asymco blog and @asymco Twitter stream, Horace also produces Asymcar, a podcast series dedicated to the auto industry.)

I would love to be wrong about the AppleCar — I join the choristers who would love to see what Apple could do with a car — but we’ve heard a bit too much about Apple’s ability to design an interesting electric vehicle and not enough about the industrial part, about the machine that makes the machines.

Finally, there’s Carlos Ghosn. (Again, you won’t regret reading the Wikipedia article.)
How do you compete with this man?
The Brazilian born Ghosn spent his early school years in Lebanon, attended the prestigious École Polytechnique in Paris, and started his automotive career at Michelin, the very techie and idiosyncratic tire maker. After rising to CEO of Michelin North America, Ghosn was recruited by the ailing Renault, and Ghosn managed to turn two companies around by creating a global alliance with Nissan. He’s now the CEO of both companies – and a hero in Japan, featured in manga (a comic strip genre). He speaks Portuguese, Arabic, French, English and some Japanese.

As CEO of Renault-Nissan, Ghosn was instrumental in the creation of the best selling electric car on the market today, the Nissan Leaf (another interesting Wikipedia read). With 158,000 units sold, representing about $6B, the Leaf is a well-rounded implementation of an affordable “pure” electric car (as opposed to hybrids such as the Toyota Prius, or the Chevy Volt, or BMW i3 and i8 that are assisted by small accessory gasoline engines).

I don’t know which fine cars Ghosn drives for pleasure, but he certainly knows how to make the machines that create them. If Apple wants to make and sell electric cars in numbers large enough to garner revenue in multiples of 10 billion — the unit of currency for Apple in 2020 — they’ll first have to figure out how to beat Carlos Ghosn at his game.

JLG@mondaynote.com

Update
Tim Bradshaw, the author of the Financial Times article referred to above, points out his story came out before the Wall Street Journal piece and resents the “rewrite” label for his work.
I regret the error.
What led me astray is this, on FT.com, with a Saturday Feb 14 date:
“The Wall Street Journal reported on Friday that Mr Zadesky’s team was overseeing a project code-named Titan that had produced an initial design for a vehicle resembling a minivan.”
And that’s why I thought the WSJ (Fri 2/13) got there first.
It looks like the Feb 14th date was the stamp for the latest update to the article, not the 1st publication date that appears to have beaten the WSJ by “several hours” according to Arash Massoudi, one of Tim’s colleagues at the FT.”

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

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

BlackBerry: The Endgame

 

The BlackBerry was the first truly modern smartphone, the king of Personal Information Management On The Go. But under its modern presentation lurked its most fatal flaw, a software engine that couldn’t be adapted to the Smartphone 2.0 era.

Jet-lagged in New York City on January 4th 2007, just back from New Years in Paris, I left my West 54th Street hotel around 6am in search of coffee. At the corner of the Avenue of the Americas, I saw glowing Starbucks stores in every direction. I walked to the nearest one and lined up to get my first ration of the sacred fluid. Ahead of me, behind me, and on down the line, everyone held a BlackBerry, checking email and BBM messages, wearing a serious but professional frown. The BlackBerry was the de rigueur smartphone for bankers, lawyers, accountants, and anyone else who, like me, wanted to be seen as a four-star businessperson.

Five days later, on January 9th, Steve Jobs walked on stage holding an iPhone and the era of the BlackBerry, the Starbucks of smartphones, would soon be over. Even if it took three years for BlackBerry sales to start their plunge, the iPhone introduction truly was a turning point In BlackBerry’s life.

RIM (as the company was once called) shipped 2M Blackberries in the first quarter of 2007 and quickly ascended to a peak of 14.6M units by Q4 2010, only to fall back to pre-2007 levels by the end of 2013:

337_unnamed-1

Last week, BlackBerry Limited (now the name of the company) released its latest quarterly numbers and they are not good: Revenue plunged to $916M vs. $1.57B a year ago (-42%); the company lost $207M and shipped just 2.1M smartphones, more than a half-million shy of the Q1 2007 number. For reference, IDC tells us that the smartphone industry shipped about 300M units in the second quarter of 2014, with Android and iOS devices accounting for 96% of the global market.

Explanations abound for BlackBerry’s precipitous fall.

Many focus on the company’s leaders, with ex-CEO Jim Balsillie and RIM founder Mike Lazaridis taking the brunt of the criticism. In a March 2011 Monday Note uncharitably titled The Inmates Have Taken Over The Asylum, I quoted the colorful but enigmatic Jim Balsillie speaking in tongues:

“There’s tremendous turbulence in the ecosystem, of course, in mobility. And that’s sort of an obvious thing, but also there’s tremendous architectural contention at play. And so I’m going to really frame our mobile architectural distinction. We’ve taken two fundamentally different approaches in their causalness. It’s a causal difference, not just nuance. It’s not just a causal direction that I’m going to really articulate here—and feel free to go as deep as you want—it’s really as fundamental as causalness.”

This and a barely less bizarre Lazaridis discussion of “application tonnage” led one to wonder what had happened to the two people who had so energetically led RIM/BlackBerry to the top of the industry. Where did they take the wrong turn? What was the cause of the panic in their disoriented statements?

Software. I call it the Apple ][ syndrome.

Once upon a time, the Apple ][ was a friendly, capable, well-loved computer. Its internal software was reliable because of its simplicity: The operating system launched applications and managed the machine’s 8-bit CPU, memory, and peripherals. But the Apple ][ software wasn’t built from the modular architecture that we see in modern operating systems, so it couldn’t adapt as Moore’s Law allowed more powerful processors. A radical change was needed. Hence the internecine war between the Apple ][ and Steve Jobs’ Mac group.

Similarly, the BlackBerry had a simple, robust software engine that helped the company sell millions of devices to the business community, as well as to lay consumers. I recall how my spouse marveled at the disappearance of the sync cable when I moved her from a Palm to a Blackberry and when she saw her data emails, calendar and address book effortless fly from her PC to her new smartphone. (And her PC mechanic was happy to be freed from Hotsync Not Working calls.)

But like the Apple ][, advances in hardware and heightened customer expectations outran the software engine’s ability to evolve.

This isn’t something that escaped RIM’s management. As recounted in a well-documented Globe and Mail story, Mike Lazaridis quickly realized what he was against:

“Mike Lazaridis was at home on his treadmill and watching television when he first saw the Apple iPhone in early 2007. There were a few things he didn’t understand about the product. So, that summer, he pried one open to look inside and was shocked. It was like Apple had stuffed a Mac computer into a cellphone, he thought.

[…] the iPhone was a device that broke all the rules. The operating system alone took up 700 megabytes of memory, and the device used two processors. The entire BlackBerry ran on one processor and used 32 MB. Unlike the BlackBerry, the iPhone had a fully Internet-capable browser.”

So at a very early stage in the shift to the Smartphone 2.0 era, RIM understood the nature and extent of their problem: BlackBerry’s serviceable but outdated software engine was against a much more capable architecture. The BlackBerry was a generation behind.

It wasn’t until 2010 that RIM acquired QNX, a “Unix-ish” operating system that was first shipped in 1982 by Quantum Software Systems, founded by two Waterloo University students. Why did Lazaridis’ company take three years to act on the sharp, accurate recognition of its software problem? Three years were lost in attempts to tweak the old software engine, and in fights between Keyboard Forever! traditionalists and would-be adopters of a touch interface.

Adapting BlackBerry’s applications to QNX was more complicated than just fitting a new software engine into RIM’s product line. To start with, QNX didn’t have the thick layer of frameworks developers depend on to write their applications. These frameworks, which make up most of the 700 megabytes Lazaridis saw in the iPhone’s software engine, had to be rebuilt on top of a system that was well-respected in the real-time automotive, medical, and entertainment segment, but that was ill-suited for “normal” use.

To complicate things, the company had to struggle with its legacy, with existing applications and services. Which ones do we update for the new OS? which ones need to be rewritten from scratch? …and which ones do we drop entirely?

In reality, RIM was much more than three years behind iOS (and, later, Android). Depending on whom we listen to, the 2007 iPhone didn’t just didn’t stand on a modern (if incomplete) OS, it stood on 3 to 5 years of development, of trial and error.

BlackBerry had lost the software battle before it could even be fought.

All other factors that are invoked in explaining BlackBerry’s fall — company culture, hardware misdirections, loss of engineering talent — pale compared to the fundamentally unwinnable software battle.

(A side note: Two other players, Palm and Nokia, lost the battle for the same reason. Encumbered by once successful legacy platforms, they succumbed to the fresh approach taken by Android and iOS.)

Now under turnaround management, BlackBerry is looking for an exit. John Chen, the company’s new CEO, comes with a storied résumé that includes turning around database company Sybase and selling it to SAP in 2012. Surely, such an experienced executive doesn’t believe that the new keyboard-based BlackBerry Passport (or its Porsche Design sibling) can be the solution:

337_unnamed

Beyond serving the needs or wants of die-hard keyboard-only users, it’s hard to see the Passport gaining a foothold in the marketplace. Tepid reviews don’t help (“The Passport just doesn’t offer the tools I need to get my work done”); Android compatibility is a kludge; developers busy writing code for the two leading platforms won’t commit.

Chen, never departing from his optimistic script, touts BlackBerry’s security, Mobile Device Management, and the QNX operating system licenses for embedded industry applications.

None of this will move the needle in an appreciable way. And, because BlackBerry’s future is seen as uncertain, corporate customers who once used BlackBerry’s communication, security, and fleet management services continue to abandon their old supplier and turn to the likes of IBM and Good Technology.

The company isn’t in danger of a sudden financial death: Chen has more than $3B in cash at his disposal and the company burns about $35M of it every quarter. Blackberry’s current stock price says the company is worth about $5B, $2B more than its cash position. Therefore, Chen’s endgame is to sell the company, either whole or, more likely, in parts (IP portfolio, QNX OS…) for more than $2B net of cash.

Wall Street knows this, corporate customers know this, carriers looking at selling Passports and some services know this. And potential body parts buyers know this as well… and wait.

It’s not going to be pretty.

JLG@mondaynote.com

An Ancient Love Story: Apple & Payment Systems

 

This week’s product launch should break the mold of Apple’s recent Fall announcements: More products than usual and a challenge to the status quo – in payment system this time.

A larger iPhone; a line of wearables (unveiled if not yet ready-to-ship); significant iOS improvements (a true “iOS 2.0”); HomeKit and HealthKit devices, applications, and partnerships; payment systems… If only half of the rumors about Apple’s September 9th media event are true, we’re going to have a wider and deeper flood of new products than we’ve seen in Apple’s previous Fall launches.

And let’s not forget the big white cocoon that covers the two-story structure that Apple built for the occasion:

Apple White Cocoon Edited

(image source:  AppleInsider)

Apple is likely to add some drama to the event by lifting the veil at the last moment.

For today, we’ll focus on the recent flurry of leaks and rumors surrounding payment systems. We’ve heard about agreements with American Express, Visa, MasterCard, Bank of America; with retailers such as Nordstrom and Macy’s, CVS and Walgreens; and hoteliers such as Starwood… The predications may not prove accurate down to the last detail, but the outbreak is too strong not to be taken seriously. Apple is about to get into the payment system business in a serious way.

There have been rumors before. Search for “apple payment system” and you’ll get about 80 million hits on Google (11 million on Bing). Flipping through the pages, we see that the excitement started as far back as five years ago when Apple’s “Grab & Go” patent filings disclosed the company’s interest in near field communication, a wireless data transfer method that can be used for quick purchases and payments. This led to the birth of a new i-Word around 2010: the iWallet.

From its very beginning, the iPhone has looked like a logical payment device. Our phones are always with us; they’re more secure than the magnetic stripe on a credit card because they can use “payment tokens” — codes that authenticate you without identifying your credit card account; payment apps can be easily downloaded and updated.

The possibilities looked endless and, of course, led to overheated predictions: Think of all the trillions of dollars sloshing around in debit/credit cards. If Apple captured only a small fraction of the flow, they’d be filthy rich!

Others disagreed. In January 2011, PCWorld’s Tom Spring explained why Apple’s Mobile Payment System Will Fail. Among his objections, was the implicit assumption that phones are somehow easier than cards (“What’s gained…by waving an iPhone instead of swiping a bank card is not clear to me”), and that retailers won’t accept phones as payment instruments until the “Another Box at the Register” obstacle is surmounted:

“Near field communication is a technology that requires a physical box/reader on the retailer’s end. Until we know more about what incentives there are for retailers to invest in this technology I think it’s going to be hard sell for Apple to convince millions of merchants to put another box at the point of sale…”

Indeed, attempting to modify ingrained customer behavior isn’t a well-trodden path to riches, nor is asking retailers to install a new box next to their cash register. This is why many payment system innovations, Google Wallet is a recent example, have failed to amass enough gravitational pull to gain currency (pardon the pun). There just hasn’t been enough acceptance by consumers and retailers for “fast lane” payment devices to become as matter-of-fact as the incumbents.

Still… Apple has repeatedly shown great patience and willingness to challenge settled wisdom.

The company’s embrace of payment systems started in 2003 when its newly-opened iTunes Store offered two innovations: Single tracks were sold for 99 cents apiece (at the time), and we could settle the purchase with a credit card. Critics scoffed: The price is too low! The credit card companies’ fixed+percentage transaction fees will be a profit-killer!

How can Apple possibly make money with such a proposition?

This was myopia. The iTunes Store wasn’t intended to be a money maker. Its only purpose was to sell more iPods at higher margins, that’s where the money was – and still is. In retrospect, Jobs was pouring the foundations of the Apple ecosystem business model:   Hardware is the star; everything else supports the big shots’ volumes and margins.

Returning to today’s (or this coming Tuesday’s) topic, Apple doesn’t want to displace the key players — the banks and credit card companies — any more now than they did a decade ago. Credit card companies, for example, play a hard-to-replace role in policing transactions. It’s not always pretty or convenient when one has to call a US number from Europe because the system “tripped” over an unusual transaction, but it works.

One can’t imagine Apple even thinking of storing and lending money, of trying to “capture a fraction of the flow”. If the company does introduce a near field payment system, it won’t be as an attempt to make money in itself, it will simply be another extension of the Apple ecosystem, another way to make iDevices more attractive.

Beyond this neat playbook theory lurks the matter of modifying consumer behavior and retail infrastructure; Tom Spring’s objections are just as cogent today as they were in 2009. And perhaps Apple’s answer — its rebuttal to the conventional reluctance — is hiding in the still-cocooned show-and-tell building.

JLG@mondaynote.com

PS: On today’s topic, see Horace Dediu’s views on the value of payment systems as bit pipes.

PPS: Unrelated but hard to resist: People from the fashion industry now working at Apple. And their friends, fashion editors, unusual invitees to a Cupertino product launch.

Macintel: The End Is Nigh

When Apple announced its 64-bit A7 processor, I dismissed the speculation that this could lead to a switch away from Intel chips for the Macintosh line for a homegrown “desktop-class” chip. I might have been wrong.

“I don’t know exactly when, but sooner or later, Macs will run on Apple-designed ARM chips.” Thus spake Matt Richman in a 2011 blog post titled “Apple and ARM, Sitting in a Tree”. Richman explained why, after a complicated but ultimately successful switch from PowerPC chips to Intel processors in 2005, Apple will make a similar switch, this time to ARM-based descendants of the A4 chip designed by Apple and manufactured by Samsung.

Cost is the first reason invoked for the move to an An processor:

“Intel charges $378 for the i7 chip in the new high-end 15 inch MacBook Pro. They don’t say how much they charge for the i7 chip in the low-end 15 inch MacBook Pro, but it’s probably around $300. …When Apple puts ARM-based SoC’s in Macs, their costs will go down dramatically. ”

We all know why Intel has been able to command such high prices. Given two microprocessors with the same manufacturing cost, power dissipation, and computing power, but where one runs Windows and the other doesn’t, which chip will achieve the higher market price in the PC market? Thus, Intel runs the table, it tells clone makers which new x86 chips they’ll receive, when they’ll receive them, and, most important, how much they’ll cost. Intel’s margins depend on it.

ARM-based processors, on the other hand, are inherently simpler and therefore cost less to make. Prices are driven even lower because of the fierce competition in the world of mobile devices, where the Wintel monopoly doesn’t apply.

329_A7chip

Cost is the foremost consideration, but power dissipation runs a close second. The aging x86 architecture is beset by layers of architectural silt accreted from a succession of additions to the instruction set. Emerging media formats demand new extensions, while obsolete constructs must be maintained for the sake of Microsoft’s backward compatibility religion. (I’ll hasten to say this has been admirably successful for more than three decades. The x86 nickname used to designate Wintel chips originates from the 8086 processor introduced in 1978 – itself a backward-compatible extension of the 8088…)
Because of this excess baggage, an x86 chip needs more transistors than its ARM-based equivalent, and thus it consumes more power and must dissipate more heat.

Last but not least, Richman quotes Steve Jobs:

“I’ve always wanted to own and control the primary technology in everything we do.”

Apple’s leader has often been criticized for being too independent and controlling, for ignoring hard-earned industry wisdom. Recall how Apple’s decision to design its own processors was met with howls of protest, accusations of arrogance, and the usual predictions of doom.

Since then, the interest for another Grand Processor Switch has been alive and well. Googling “Mac running on ARM” gets you close to 10M results. (When you Bing the same query, you get 220M hits — 22x Google’s results. SEO experts are welcome to comment.)

Back to the future…

In September 2013, almost a year ago already, Apple introduced the 64-bit A7 processor that powers new iPhones and iPads. The usual suspects pooh-poohed Apple’s new homegrown CPU, and I indulged in a little fun skewering the microprocessor truthers: 64 bits. It’s Nothing. You Don’t Need It. And We’ll Have It In 6 Months. Towards the end of the article, unfortunately, I dismissed the speculation that Apple An processors would someday power the Mac. I cited iMacs and Mac Pros — the high end of the product line —as examples of what descendants of the A7 couldn’t power.

A friend set me straight.

In the first place, Apple’s drive to own “all layers of the stack” continues unabated years after Steve’s passing. As a recent example, Apple created its own Swift programming language that complements its Xcode IDE and Clang/LLVM compiler infrastructure. (For kremlinology’s sake I’ll point out that there is an official Apple Swift blog, a first in Apple 2.0 history if you exclude the Hot News section of the of apple.com site. Imagine what would happen if there was an App Store blog… But I digress.)

Secondly, the Mac line is suspended, literally, by the late delivery of Intel’s Broadwell x86 processors. (The delay stems from an ambitious move to a bleeding edge fabrication technology that shrinks the basic building block of a chip to 14 nanometers, down from 22 nanometers in today’s Haswell chips.) Of course, Apple and its An semiconductor vendor could encounter similar problems – but the company would have more visibility, more control of its own destiny.

Furthermore, it looks like I misspoke when I said an An chip couldn’t power a high-end Mac. True, the A7 is optimized for mobile devices: Battery-optimization, small memory footprint, smaller screen graphics than an iMac or a MacBook Pro with a Retina display. But having shown its muscle in designing a processor for the tight constraints of mobile devices, why would we think that the team that created the most advanced smartphone/tablet processor couldn’t now design a 3GHz A10 machine optimized for “desktop-class” (a term used by Apple’s Phil Schiller when introducing the A7) applications?

If we follow this line of reasoning, the advantages of ARM-based processors vs. x86 devices become even more compelling: lower cost, better power dissipation, natural integration with the rest of the machine. For years, Intel has argued that its superior semiconductor design and manufacturing technology would eventually overcome the complexity downsides of the x86 architecture. But that “eventually” is getting a bit stale. Other than a few showcase design wins that have never amounted to much in the real world, x86 devices continue to lose to ARM-derived SoC (System On a Chip) designs.

The Mac business is “only” $20B a year, while iPhones and iPad generate more than 5 times that. Still, $20B isn’t chump change (HP’s Personal Systems Group generates about $30B in revenue), and unit sales are up 18% in last June’s numbers vs. a year ago. Actually, Mac revenue ($5.5B) approaches the iPad’s flagging sales ($5.9B). Today, a 11” MacBook Air costs $899 while a 128Gb iPad Air goes for $799. What would happen to the cost, battery life, and size of an A10-powered MacBook Air? And so on for the rest of the Mac line.

By moving to ARM, Apple could continue to increase its PC market share and scoop much of the profits – it currently rakes in about half of the money made by PC makers. And it could do this while catering to its customers in the Affordable Luxury segment who like owning both an iPad and a Mac.

While this is entirely speculative, I wonder what Intel’s leadership thinks when contemplating a future where their most profitable PC maker goes native.

JLG@mondaynote.com

———-

Postscript: The masthead on Matt Richman’s blog tells us that he’s now an intern at Intel. After reading several of his posts questioning the company’s future, I can’t help but salute Intel management’s open mind and interest in tightly reasoned external viewpoints.

And if it surprises you that Richman is a “mere” intern, be aware that he was all of 16-years-old when he wrote the Apple and ARM post. Since then, his blog has treated us to an admirable series of articles on Intel, Samsung, Blackberry, Apple, Washington nonsense – and a nice Thank You to his parents.

 

The Beats Music Rorschach Blot

 

Apple has a long track record of small, cautious, unheralded acquisitions. Has the company gone off course with hugely risky purchase of Beats Music and Electronics, loudly announced at an industry conference? 

As Benedict Evans’ felicitous tweet put it, Apple’s $3B acquisition of Beats, the headphone maker and music streaming company, is a veritable Rorschach blot:

Benedict Evans Rorschach

The usual and expected interpretations of Anything Apple – with the implied or explicit views of the company’s future – were in full display at last week’s Code Conference after the Beats acquisition was officially announced during the second day of the event. Two of the conference’s high-profile invitees, Apple’s SVP Craig Federighi and Beats’ co-founder, Dr. Dre (née André Young), quickly exited the program so all attention could be focused on the two key players: Eddy Cue, Apple’s Sr. VP of Internet Software and Services; and Jimmy Iovine, Beats’ other co-founder and freshly minted Apple employee. They were interviewed on stage by Walt Mossberg and Kara Swisher, the conference creators (59-minute video here).

Walt and Kara had booked Cue and Iovine weeks before Tim Bradshaw scooped the Apple/Beats story on May 8th in the Financial Times (the original FT article sits behind a paywall; TechCrunch version here). Was the booking a sign of prescience? smart luck? a parting gift from Katie Cotton as she retires as head of Apple PR? (And was Swisher’s warmly worded valentine to Cotton for her 18 years of service a quid pro quo acknowledgment?)

After the official announcement and the evening fireside chat, the Rorschach analysis began. Amidst the epigrams, which were mostly facile and predictable, one stood out with its understated questioning of culture compatibility:

‘Iovine: Ahrendts or Browett?‘ 

The “Browett”, here, is John Browett, the British executive who ran Dixons and Tesco, two notoriously middle-brow retail chains. Apple hired him in April 2012 to succeed Ron Johnson as the head of Apple Retail… and showed him the door seven months later, removed for a clear case of cultural incompatibility. When Browett tried to apply his estimable cost-cutting knowledge and experience to the Italian marble Apple Store, things didn’t work out — and the critics were quick to blame those who hired him.

Nothing of the sort can be said of Dame Angela Ahrendts. Now head of Apple’s physical and on-line stores, Ahrendts was lured from Burberry, a culturally compatible and Apple-friendly affordable luxury enterprise.

Will Iovine be a Browett or an Ahrendts?

In a previous Monday Note, I expressed concern for the cultural integration challenges involved in making the Beats acquisition work. What I learned from the on-stage interview is that Jimmy Iovine and Eddy Cue have known and worked with each other for more than ten years. Iovine says he’ll be coming to Cupertino ‘about once a month’, so my initial skepticism may have been overstated; Apple isn’t acquiring a company of strangers.

But are they acquiring a company that creates quality products?  While many see Beats Music’s content curation as an important differentiator in the streaming business, one that would give a new life to its flagging music sales, others are not so sure. They find Beats Music’s musical choices uninspiring. I’m afraid I have to agree. I downloaded the Beats Music app, defined a profile, and listened for several hours while walking around Palo Alto or sitting at my computer. Perhaps it’s me, my age, or my degenerate tastes but none of the playlists that Beats crafted for me delivered neither the frisson of discovery nor the pleasure of listening to an old favorite long forgotten. And my iPhone became quite hot after using the app for only an hour or so.

Regarding the headphones: They’re popular and sell quite well in spite of what The Guardian calls “lacklustre sound”. I tried Beats Electronic’s stylish Studio headphones for a while, but have since returned to the nondescript noise-canceling Bose QC 20i, a preference that was shared (exactly or approximately) by many at the conference.

There was no doubt, at the conference, that Apple understands there are problems with Beats, but there’s also a feeling that the company sees these problems as opportunities. An overheard hallway discussion about the miserable state of the iTunes application (too strongly worded to repeat here verbatim) neatly summed up the opportunity: ‘Keeping Beats as a separate group affords Cook and Cue an opening for independently developing an alternative to iTunes instead of trying to fix the unfixable.’ It’s worth noting that the Beats Music app is available on mobile devices, only, and it appears there’s no plan to create a desktop version. This underlines the diminished role of desktops, and points out the possibility of a real mobile successor to the aging iTunes application.

Continuing with the blot-reading exercise, many members of the audience found it necessary to defend the $3B price tag. Some point out that since Apple’s valuation is about 3X its revenue, Beats’ purported $1.5B hardware revenue easily “justifies” the $3B number. (Having consorted with investment bankers at various moments of my business life, as an entrepreneur, a company director, and a venture investor, I know they can be trusted to explain a wide range of valuations. Apparently, Apple is paying $500M for the streaming business and $2.5B for the hardware part.)

My own reading is that the acquisition price won’t matter: If it acquisition succeeds, the price will be easily forgotten; if it fails, Apple will have bigger worries.

Ultimately, the Apple-Beats products and services we don’t haven’t yet seen will do the talking.

–JLG@mondaynote.com

Peak PC. Intel Fork.

 

Propelled by Moore’s Law and the Internet, PCs have enjoyed four decades of strong growth, defying many doomsday prophecies along the way. But, with microprocessor performance flattening out, the go-go years have come to an end. Intel, the emperor of PC processors, and a nobody in mobile devices needs to react.]

I’m suspicious of Peak <Anything> predictions. Some of us became aware of the notion of a resource zenith during the 1973 OPEC oil embargo, with its shocking images of cars lined up at gas stations (in America!):

Gas Lines Oil Embargo

This was Peak Oil, and it spelled doom to the auto industry.

We know what happened next: Cars improved in design and performance, manufacturers became more numerous. Looking at this bit of history through my geek glasses, I see three explanations for the rebound: computers, computers, and computers. Computer Assisted Design (CAD) made it easier to design new car models as variations on a platform; Volkswagen’s MQB is a good example. Massive computer systems were used to automate the assembly line and manage the supply chain. It didn’t take long for computers to work their way into the cars themselves, from the ECU under the hood to the processors that monitor the health of the vehicle and control the entertainment and navigation systems.

Since then, we’ve had repeated predictions of Peak Oil, only to be surprised by the news that the US will soon become a net oil exporter and, as Richard Muller points out in his must-read Physics for Future Presidents, we have more than a century of coal reserves. (Unfortunately, the book, by a bona fide, middle-of-the-road physicist, can’t promise us that physics will eventually push politics aside when considering the rise of CO2 in the atmosphere…)

I’ve heard similar End of The Go-Go Days predictions about personal computers since 1968 when my love affair with these machines started at HP France (I was lucky enough to be hired to launch their first desktop machine).

I heard the cry again in 1985 when I landed in Cupertino in time for the marked slowdown in Apple ][ sales. The never-before round of layoffs at Apple prompted young MBAs, freshly imported from Playtex and Pepsi, to intone the It’s All Commodities Now dirge. I interpreted the cry (undiplomatically — I hadn’t yet learned to speak Californian) as a self-serving It’s All Marketing Now ploy. In the meantime, engineers ignored the hand-wringing, went back to work, and, once again, proved that the technology “mines” were far from exhausted.

In 1988, a Sun Microsystems executive charitably warned me: “PCs are driving towards the Grand Canyon at 100 mph!”.  A subscriber to Sun’s The Network Is The Computer gospel, the gent opined that heavy-duty computing tasks would be performed by muscular computers somewhere (anywhere) on the network. Desktop devices (he confusingly called them “servers” because they were to “serve” a windowing protocol, X11) would become commodities no more sophisticated or costly than a telephone. He had no answer for multimedia applications that require local processing of music, video, and graphics, nor could he account for current and imminent mobile devices. His view wasn’t entirely new. In 1965, Herb Grosch gave us his Law, which told us that bigger computers provide better economics; smaller machines are uneconomical.

And yet, personal computers flourished.

I have vivid memories of the joy of very early adopters, yours truly included. Personal computers are liberating in many ways.

First, they don’t belong to the institution, there’s no need for the intercession of a technopriest, I can lift my PC with my arms, my brains, and my credit card.

Second, and more deeply, the PC is a response to a frustration, to a sense of something amiss. One of mankind’s most important creations is the symbol, a sign without a pre-existing meaning: X as opposed to a drawing of a deer on a cave wall. Strung together, these symbols show formidable power. The expressive and manipulative power of symbol strings runs through the Song of Songs, Rumi’s incandescent poetry, Wall Street greed, and quantum physics.

But our central nervous system hasn’t kept up with our invention. We don’t memorize strings well, we struggle with long division, let alone extracting cubic roots in our heads.

The PC comes to the rescue, with its indefatigable ability to remember and combine symbol strings. Hence the partnership with an object that extends the reach of our minds and bodies.

Around 1994, the Internet came out of the university closet, gave the PC access to millions of servers around the world (thus fulfilling a necessary part of the Sun exec’s prophecy), and extended our grasp.

It’s been great and profitable fun.

But today, we once again hear Peak PC stories. Sales have gone flat, never to return:

PC shipments 2014-18 - PNG

This time, I’m inclined to agree.

Why?

Most evenings, my home-builder spouse and I take a walk around Palo Alto. Right now, this smallish university town is going through a building boom. Offices and three-layer retail + office + residence are going up all around University Avenue. Remodels and raze-and-build projects can be found in the more residential parts of town. No block is left unmolested.

I can’t help but marvel. None of this activity, none of Silicon Valley would exist without Moore’s Law, the promise made in 1965 that semiconductor performance would double every 18 months. And, for the better part of 40 years, it did – and rained money on the tech ecosystem, companies and people. PCs, servers, embedded electronics, giant network routers, cars…they’ve all been propelled because Moore’s Law has been upheld…until recently.

The 1977 Apple ][ had a 1MHz 8-bit processor. Today’s PCs and Mac’s reach 3.7GHz, but number that hasn’t changed in more than three years. This isn’t to say that Intel processors aren’t still improving, but the days when each new chip brought substantial increases in clock speed seem to be over.

One should never say never, but Moore’s Law is now bumping into the Laws of Physics. The energy needed to vibrate matter (electrons in our case) increases with frequency. The higher the clock frequency, the higher the power dissipation and the greater the heat that’s generated…and a PC can withstand only so much heat. Consider the cooling contraptions used by PC gamers when they push the performance envelope of their “rigs”:

EK-Thermosphere_right2_12001

To work around the physical limits, Intel and others resort to stratagems such as “multiple cores”, more processors on the same chip. But if too many computations need the result of the previous step before moving forward, it doesn’t matter how many cores you have. Markitects have an answer to that as well: “speculative branch execution”, the use of several processors to execute possible next steps. When the needed outcome appears, the “bad” branches are pruned and the process goes forward on the already-computed good branch. It makes for interesting technical papers, but it’s no substitute for a 8GHz clock speed.

If we need confirmation of the flattening out of microprocessor progress, we can turn to Intel and the delays in implementing its Broadwell chips. The move to a 14 nanometers  “geometry” — the term here denotes the size of a basic circuit building block — is proving more difficult than expected. And the design isn’t meant to yield faster processors, just less power-hungry ones (plus other goodies such as better multi-media processing).

One possible reaction to this state of affairs is to look at tablets as a new engine of growth. This is what Microsoft seems to be doing by promoting its Intel-inside Surface Pro 3 as a laptop replacement. But even if Microsoft tablets turn out to be every bit as good as Microsoft says they are, they aren’t immune to the flattening out of Intel processor performance. (I don’t have an opinion yet on the product — I tried to buy one but was told to wait till June 20th.)

Does this broaden the opening for ARM-based devices? Among their advantages is a cleaner architecture, one devoid of the layers of backwards compatibility silt x86 devices need. ARM derivaties need less circuitry for the same computing task and, as a result, dissipate less power. This is one of the key reasons for their dominance in the battery-powered world of mobile devices. (The other is the customization and integration flexibility provided by the ARM ecosystem.) But today’s ARM derivatives run at lower speeds (a little above 1GHz for some) than Intel chips. Running at higher speeds will challenge them to do so without hurting battery life and having to add the fan that Microsoft tablets need.

With no room to grow, PC players exit the game. Sony just did. Dell took itself private and is going through the surgery and financial bleeding a company can’t withstand in public. Hewlett-Packard, once the leading PC maker, now trails Lenovo. With no sign of turning its PC business around, HP will soon find itself in an untenable position.

Intel doesn’t have the luxury of leaving their game — they only have one. But I can’t imagine that Brian Krzanich, Intel’s new CEO, will look at Peak PC and be content with the prospect of increasingly difficult x86 iterations. There have been many discussions of Intel finally taking the plunge and becoming a “foundry” for someone else’s ARM-based SoC (System On a Chip) designs instead of owning x86 design and manufacturing decisions. Peak PC will force Intel CEO’s hand.

JLG@mondaynote.com

Misunderstanding Apple

 

We’ve come to expect analysts and pundits to misunderstand Apple. More puzzling is when Apple misunderstands itself.

My three-week Road Trip of a Lifetime, driving all the way from Key West, FL to Palo Alto, was interrupted by a bout of pneumonia, low blood oxygen, paroxysmal cough and, most alarming, a loss of appetite. Thankfully, all indicators are looking good and I’m back walking Palo Alto’s leafy streets.

The succession of wheel time and downtime gave me an opportunity to contemplate two recent controversies: Fred Wilson’s prediction of Apple’s imminent fall, and rumors of Apple’s purchase of Beat Electronics. These are both manifestations of what I’ll call, for lack of a better term, Misunderstanding Apple.

First, Fred Wilson. At the recent TechCrunch Disrupt conference, the successful and articulate venture investor predicted that by 2020 Apple will no longer hold the #1 position in the tech world. They won’t even be in the top three. According to Wilson, Apple “doesn’t think about things they way they need to think about things”. Specifically, the company is “too rooted in hardware…[which] is increasingly becoming a commodity” and “Their stuff in the cloud is largely not good. I don’t think they think about data and the cloud.

I’d be surprised by Wilson’s facile, insight-free truisms, except this isn’t the first time he’s shown a blind spot when considering Apple. Wilson is famous for dumping his Apple shares at $91 in January 2009; AAPL is now at $590 or so. (He also sold Google, which closed at $528 on Friday, for a split-adjusted $160. Perhaps there’s a difference between being a venture investor, an insider who watches and influences a young company, and an outsider subjected to forces and emotions outside of one’s control.)

Calling Apple “too rooted in hardware” misunderstands the company. From its inception, Apple has been in one and only one business: personal computers (which, today, includes smartphones and tablets). Indeed, Apple’s quarterly numbers show that the sale of personal computers makes up 87% of its revenue. Everything else that Apple does, from iTunes to the Apple Store, exists to make its smartphones, tablets, laptops, and desktops more useful, more pleasant. And this “everything else” includes the lovingly machined hardware of the MacBook Air and iPhone 5. If the supporting cast does its job well, the main acts will sell in larger numbers and at higher prices.

Customers don’t buy Apple “hardware” in the same way a weekend carpenter buy nails at the friendly neighborhood hardware store. What Fred Wilson seems to miss is that hardware is more than an inert “thing” for Apple: It’s a conduit to an entire ecosystem, and it can yield an enormous strategic advantage. One such example is the 64-bit A7 processor that took everyone by surprise: 64 bits. It’s Nothing. You Don’t Need It. And We’ll Have It In 6 Months.

When the subject of commodization comes up, I invite people to look at the cars they see in the street. Are the likes of Audi, BMW, and Mercedes being commoditized? Do their owners only care that the wheels are black and round? Serendipitously, someone called “SubstrateUnderflow” answers the question in a comment on Wilson’s blog:

“…when I look around at all the cars out there, from the high end models to the most utilitarian models, almost no one buys the base stripped versions. Key devices that are central to people’s lives, comfort and utility have enough emotional SubstrateUndertow to sustain premium pricing.”

The 30-year old Mac business and its healthy margins (about 25% versus HP’s sub-5% for its PCs) shows that Apple has successfully avoided the commoditized race to the bottom that has plagued Wintel devices and is likely to accelerate for smartphones.

Wilson’s criticism of Apple’s “stuff in the cloud”, on the other hand, carries some sting. As a user of Apple’s products and services, I’m often disappointed with Apple’s Cloud offerings. I find iMessage’s quirks irritating, I see a lack of proper synchronization between iBooks on Macs and iDevices, and I’m still waiting for the Cloud version of iWorks to mature. But let’s turn to Horace Dediu for a crisp summary of Apple’s place in the Cloud:

“Not getting the cloud” means that in the last 12 months Apple obtained:
• 800 million iTunes users and
• an estimated 450 million iCloud users spending
•  $3 billion/yr for end-user services plus
•  $4.7 billion/yr for licensing and other income which includes
•  more than $1 billion/yr paid by Google for traffic through Apple devices and
•  $13 billion/yr in app transactions of which
•  $9 billion/yr was paid to developers and
•  $3.9 billion/yr was retained as operating budget and profit for the App Store.

In addition,
•  more than $1 billion/yr in Apple TV (aka Apple’s Kindle) and video sales and
• $2.7 billion/yr in music download sales and
• $1 billion/yr in eBooks sold

In summary, iTunes, Software and Services has been growing between 30% and 40% for four years and is on its way to $30 billion/yr in transactions and sales for 2014.

Horace is right; Fred Wilson clearly hasn’t done the numbers.

———————

I was still on the road when I read about the rumored $3.2B acquisition of Beats Electronics, the company that began in the headphone business and then spawned a streaming music service.

I’m puzzled. If the rumors prove true, Apple may be guilty of misunderstanding itself.

The hardware side, headphones, is immaterial: The products may look good, but their audio quality is regularly panned. And the revenue, about $500M, doesn’t move the needle.

The current wisdom is that Apple is mostly interested in Beats Music, the subscription streaming service. But that business isn’t big, either; it has only attracted about 110K subscribers.

Maybe Apple is interested in Beats Music’s technology and its vision for the future of streaming and music curation. I took the time to watch Walt Mossberg’s interview of Jimmy Iovine in which the Beats co-founder gives hints about his plans. Iovine’s AI-with-a-human-touch solution for delivering “what comes next” is technically vague — and vaguely dystopian (“we’ll scrape your hard drivewe’ll know where you are tomorrow”). I’m not convinced.

We also have rumors that Iovine and Dr. Dre, Beats’ other co-founder, might become some kind of senior advisers to Apple management. Given what I’ve read about Dre’s troubles with the Law, including a battery charge that landed him in jail, and an assault on a female that was settled out of court, I’m troubled. How will this play inside and outside Apple?

I don’t see how such an acquisition would enhance Apple’s business model or reputation.

That said, I hope I’m as wrong as I was when I thought the iPod was doomed to fail against commoditized, yes, that word, MP3 players. I hadn’t seen iTunes behind the hardware, Cloud storage, the distribution and micro-payments infrastructure that would one day make the iPhone and App Phone.

I also see people whose intellect and motives I respect strongly support the rumored acquisition. Preeminent among them is Ben Thompson who, in his Stratechery blog, explores Why Apple Is Buying Beats. There, after positing personal computers might have reached their peak, Ben asks whether Apple is in fact reinventing itself as a kind of fashion house [emphasis mine]:

“Or are we witnessing a reinvention, into the sort of company that seeks to transcend computing, demoting technology to an essential ingredient of an aspirational brand that identifies its users as the truly with it? Is Apple becoming a fashion house? Think about it: you have Jony Ive as all-up head of design, the equivalent of a Tom Ford or Donatella Versace. There is the hire of Angela Ahrendts – why would she leave the CEO position of Burberry for a Senior VP role? You have an iPhone framed as an experience, not a product. And now you acquire an accessory maker differentiated almost completely by its brand, not its inherent technical quality.”

And ponders at the Damned If You Do, Damned If You Don’t of such cultural change:

“Still, I can imagine the very thought of Apple positioning itself as a fashionable luxury brand is somewhat nauseating for many of my readers. It’s an understandable reaction, and one I somewhat share. I worry that Apple is losing what makes Apple, Apple, especially that desire to make the power of computing accessible for normal people. But I also know that stasis means stagnation, and over the long-run, death.”

To be continued…

JLG@mondaynote.com