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Apple Car: Three More Thoughts

hardware By February 22, 2015 Tags: , , , 51 Comments

 

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.”

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The Fantastic Apple Car

hardware By February 15, 2015 Tags: , , 82 Comments

 

by Jean-Louis Gassée

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

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

I even thought of writing a little parody piece:

WinCar, Microsoft Disrupts The Auto Industry.

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

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

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

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

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

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

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

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

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

Let’s count the ways….

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

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

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

But now let’s look at the reality.

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

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

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

355-UniqueTech

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

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

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

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

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

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

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

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

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

The fantastic Apple Car is a fantasy.

JLG@mondaynote.com

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How Many Laws Did Apple Break?

business models, hardware By February 8, 2015 Tags: 76 Comments

 

by Jean-Louis Gassée

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

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

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

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

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

Apple Largest Quarterly Profit Ever Edited

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

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

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

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

But not everyone thinks highly of Apple’s doings.

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

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

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

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

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

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

We now turn to law-breaking.

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

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

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

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

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

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

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

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

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

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

Dediu Losing PC War

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

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An Ancient Love Story: Apple & Payment Systems

hardware By September 7, 2014 Tags: , , 34 Comments

 

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.

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Macintel: The End Is Nigh

hardware By August 3, 2014 Tags: , , , 178 Comments

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.

 

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The Beats Music Rorschach Blot

hardware, Uncategorized By June 1, 2014 Tags: , , 24 Comments

 

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

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