hardware

Wintel: Le Divorce Part II

 

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

This is what I wrote almost two years ago:

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

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

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

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

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

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

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

Acer exec Linxian Lang warns:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

 

Tablets Trade-Offs And Compromises

 

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

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

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

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

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

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

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

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

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

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

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

On to the iPad mini.

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

But what about the “mini” part?

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

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

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

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

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

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

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

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

JLG@mondaynote.com

 

What happened to the iPad?

 

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

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

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

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

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

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

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

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

JLG@mondaynote.com

Apple, ARM, and Intel

 

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

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

Something has to give.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

 

Losing The Plot

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regard Hewlett-Packard, serial plot loser.

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

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

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

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

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

There is more.

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

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

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

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

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

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

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

JLG@mondaynote.com

 

Apple Never Invented Anything

Monsieur Voiture, you hopeless [redacted French slur], you still can’t prepare a proper mayonnaise! I’ll show you one last time while standing on one foot…”

[Bear with me, the connection with today's title will become apparent in a moment.]

The year is 1965, I’m midway through a series of strange jobs that I take between dropping out of college and joining HP in 1968 — my “psychosocial moratorium”, in California-speak. This one approaches normal: I’m a waiter in a Paris restaurant on rue Galande, not far from Notre-Dame.

Every day, before service starts, it’s my job to make vinaigrette, remoulade, and mayonnaise, condiments for the hors d’oeuvres (French for appetizers) I’ll wheel around on a little cart — hence the Monsieur Voiture snicker from the chef.

The vinaigrette and remoulade are no problem, but the mayonnaise is not my friend: Day after day, my concoction “splits” and the chef berates me.

So now, pushed beyond limit, he grabs a cul-de-poule (a steel bowl with a round bottom), throws in the mustard, vinegar, and a bit of oil, cracks an egg on the bowl’s edge, separates and drops the yolk into the mixture — all with one hand. I see an opportunity to ingratiate myself: Obligingly, I reach for a whisk.

“No, all I need is a fork.”

Up on one foot, as promised, he gives the mixture a single, masterful stroke — and the mayonnaise begins to emulsify, I see the first filaments. The chef sniffs and walks away. I had been trying too hard…the rest was obvious: a thin trickle of oil, whisk calmly.

Clearly, the episode left its mark, and it came back to mind when I first saw the iPad.

For thirty years, the industry had tried to create a tablet, and it had tried too hard. The devices kept clotting, one after the other. Alan Kay’s Dynabook, Go, Eo, GridPad, various Microsoft-powered Tablet PCs, even Apple’s Newton in the early nineties….they didn’t congeal, nothing took.

Then, in January 2010, Chef Jobs walks on stage with the iPad and it all becomes obvious, easy. Three decades of failures are forgotten.

This brings us to last week’s animated debate about Apple’s talent for invention in the Comments section of the “Apple Tax” Monday Note:

“…moving from stylus to touch (finger) was a change in enabling technology, not some invention by Apple – even gesture existed way back before the iPhone. Have an IPAQ on my desk as a reminder – a product ahead of the implementing technology!
Unfortunately Apple have run out of real innovation…”

In other words: “Nothing new, no innovation, the ingredients were already lying around somewhere…”. The comment drew this retort from another reader:

“iPaq as a precursor to iPad?
Are you on drugs? Right now?”

Drugged or sober, the proud iPaq owner falls into the following point: The basic ingredients are the same. Software is all zeroes and ones, after all. The quantity and order may vary, but that’s about it. Hardware is just protons, neutrons, electrons and photons buzzing around, nothing original. Apple didn’t “invent” anything, the iPad is simply their variation, their interpretation of the well-known tablet recipe.

By this myopic logic, Einstein didn’t invent the theory of relativity, Henri Poincaré had similar ideas before him, as did Hendrik Lorentz earlier still. And, come to think of it, Maxwell’s equations contain all of the basic ingredients of relativity; Einstein “merely” found a way to combine them with another set of parts, Newtonian mechanics.

Back to the kitchen: Where does talent reside? Having access to commonly available ingredients or in the subtlety, the creativity — if not the magic — of their artful combination? Why are the great chefs so richly compensated and, yes, imitated? Alain Ducasse, Alain Senderens, and Joel Robuchon might be out of our price range, but Pierre Herme’s macarons are both affordable and out of this world — try the Ispahan, or the salted caramel, or… (We’ll note that he opened his first boutique in Tokyo, where customers pay attention to details.)

In cars, Brand X (I don’t want to offend) and BMW (I don’t drive one) get their steel, aluminum, plastics, rubber, and electronics from similar — and often the same — suppliers. But their respective chefs coax the ingredients differently, with markedly different aesthetic and financial outcomes.

Did IBM invent the PC? Did HP invent the pocket calculators or desktop computers that once put them at the top of the high tech world? Did Henry Ford invent the automobile.

So, yes, if we stick to the basic ingredients list, Apple didn’t invent anything…not the Apple ][, nor the Macintosh, not the iPod, the iPhone, or the iPad…to say nothing of Apple Stores and App Stores. We’d seen them all before, in one fashion or another.

And yet, we can’t escape a key fact: The same chef was involved in all these creations. He didn’t write the code or design the hardware, but he was there in the kitchen — the “executive chef” in trade parlance — with a unique gift for picking ingredients and whipping up unique products.

JLG@mondaynote.com

As a postscript, two links:

– Steve Wildstrom valiantly attempts to clear up the tech media’s distortions of the patents that were — and weren’t — part of the Apple-Samsung trial:

Whatever happens on appeal, I think the jury did an admirable job making sense of the case they were given. They certainly did better than much of the tech media, which have made a complete mess of the verdict.

– This August 2009 Counternotions post provides a well-reasoned perspective on the iPhone’s risks and contributions, as opposed to being a mere packaging job. (The entire Counternotions site is worth reading for its spirited dissection of fashionable “truths”.)

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Summer Fun: The HR-Less Performance Review

The idea for today’s off-topic note came to me when I read “Microsoft’s Lost Decade“, an aptly titled Vanity Fair story. In the piece, Kurt Eichenwald tracks Microsoft’s decline as he revisits a decade of technical missteps and bad business decisions. Predictably, the piece has generated strong retorts from Microsoft’s Ministry of Truth and from Ballmer himself (“It’s not been a lost decade for me!” he barked from the tumbrel).

But I don’t come to bury Caesar — not, yet, I’ll wait until actual numbers for Windows 8 and the Surface tablets emerge. Instead, let’s consider the centerpiece of Eichenwald’s article, his depiction of the cultural degeneracy and intramural paranoia that comes of a badly implemented performance review system.

Performance assessments are, of course, an important aspect of a healthy company. In order to maintain fighting weight, an organization must honestly assay its employees’ contributions and cull the dead wood. This is tournament play, after all, and the coach must “release” players who can’t help get the team to the finals.

But Microsoft’s implementation — “stack ranking”, a bell curve that pits employees and groups against one another like rats in a cage — plunged the company into internecine fights, horse trading, and backstabbing.

…every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor…For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings.

Employees quickly realized that it was more important to focus on organization politics than actual performance:

Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees.

This brought back bad memories of my corpocrat days working for a noted Valley company. When I landed here in 1985, I was dismayed by the pervasive presence of Human Resources, an éminence grise that cast a shadow across the entire organization. Humor being the courtesy of despair, engineers referred to HR as the KGB or, for a more literary reference, the Bene Gesserit, monikers that knowingly imputed an efficiency to a department that offered anything but. Granted, there was no bell curve grading, no obligation to sacrifice the bottom 5%, but the politics were stifling nonetheless, the review process a painful charade.

In memory of those shenanigans, I’ve come up with a possible antidote to manipulative reviews, an attempt to deal honestly and pleasantly with the imperfections of life at work. (Someday I’ll write a Note about an equally important task: How to let go of people with decency — and without lawyers.)

A review must start with three key ingredients, in this order:

  • First: Because your performance meets/exceeds requirements, we’ll renew our vows, our work relationship will continue.
  • Second: Here are your new numbers: salary, bonus, stock.
  • Third: We’re sufficiently happy with your performance as it stands today, so feel free to disregard the observations and suggestions for improvement I’m about to make. Now let’s talk…

This might sound a little too “different” (that’s Californian for “batty”), but there’s a serious purpose, here. We’ve all been reviewed, we all know the anxiety — and sometimes the resentment — that precedes the event. Mealy-mouthed comments about team-spirit, loyalty, how the company cares for its people and other insufferable HR pablum only makes things worse. You tune out, you can only hear the noises in your own head: Am I being led to the exit? Am I being shafted out of a raise/bonus/stock? Am I supposed to think that loyalty is its own — and only — reward?

To be heard, the reviewer must silence these questions. Hence the preamble: Your job is safe; here are the $$; we like what you do enough that you can safely continue to behave in the manner we have come to expect, no need to course-correct.

There follows a pause to let the news sink in. Anxiety quelled, the reviewee is now prepared — and willing — to listen.

On to the observations and suggestions. It’s probably a good idea to start with the minus side of the ledger — this isn’t much different from a sales pitch: Get the product’s negatives out of the way first. Stick to specific comments about goals missed, undesirable habits, and the like. “When you arrive 20 minutes late at our staff meetings, you’re being disrespectful to your colleagues, including me.” Defensive reactions to the negative part of a review are unavoidable, so you sing the refrain: The objectionable behavior, while imperfect, doesn’t jeopardize your job.

(As an aside, and seriously: Objecting to a behavior that you insist will be tolerated because of the overall goodness of the relationship…this approach works wonders outside of work. It’s a lot more constructive than the comminatory “You must stop doing this”, which invites the sarcastic and unhelpful response: “And if I don’t? What? You’ll divorce me?”)

The review can now proceed to the positive, to praising the individual’s performance and giving thanks. Saccharine is to be avoided, examples are a must, and exaggeration is only welcome in moderate doses.

Finally, ask for feedback… but don’t kid yourself: Hierarchy trumps honesty, so you may have to ask twice. Explain that you understand the challenge in giving feedback to the reviewer. You might get some useful tidbits, especially if they sting a bit.

Back in the real world, this simple, direct approach might not fit a large organization where you need to protect the rest of the team from the demoralization of a metastasized employee. The habitual backstabber, the knee-jerk naysayer, the self-appointed “Fellow” must be excised before too much harm is done. It’s a difficult task that requires a degree of human judgment and courage that’s not afforded by a mechanical ranking system.

Next week, we might return to topics such as Apple’s uneasy relationship with file systems, Android tablets and phablets, or some such tech disquisition.

Saving Private RIM

Over the past couple weeks, we’ve read a number of bedtimes stories about RIM’s next move. They all start with the same trope: Once upon a time, late last century, Apple was on the edge of the precipice and still managed to come back — and how! Today, RIM’s situation isn’t nearly as dire as Apple’s was then. Unlike Apple, it doesn’t need a cash transfusion and, in the words of Thorsten Heins, RIM’s new CEO: “If you look at the platform it’s still growing, if you look at the devices we’ve got a single phone that’s sold 45 million units.” RIM will pull off an Apple-like rebound and live happily ever after.

Equating RIM 2012 with Apple 1997 is, in so many respects, delusional. Let me count the ways.

First, the context, the marketplace. In its dark days, Apple faced PC clones running Windows. With Microsoft’s 95% market share, it wasn’t even a two-platform race. Microsoft came to Apple’s rescue with a $150M investment and a commitment to continue writing apps for the Macintosh. This was enlightened self-interest on Microsoft’s part: Discreetly tucked into the agreement was the settlement of a brewing IP suit. And by keeping their highly visible (if economically unthreatening) competitor alive, Microsoft hoped to score a few goodwill points in the face of the DOJ’s antitrust investigations.

Fifteen years later, there’s no looming smartphone monopoly. We have a genuine two-horse race between Android and iOS, and a third horse, Microsoft, circling in the paddock. This is a very different world, a much rougher one with bruisers such as Apple, Samsung, Huawei, and ZTE…with this many players, there’s no rationale for investing in a fallen player.

Second, ecosystems. In Stephen Elop’s ringing (if infelicitously timed) words, yesterday’s platform struggles have become all-out ecosystem wars. To claw back into the race, let alone to return to its former CrackBerry glory, RIM must build an array of content and services that can equal or better those that will be offered by the dominant players in 2013.

This isn’t just about app stores — a challenge unto itself when developers ask why they should commit to a troubled player. Smartphone and tablet users expect entertainment, navigation, synchronization between their devices and other Cloud services.

In the Daily Telegraph interview quoted earlier, Thorsten Heins boasts that BB10, the upcoming BlackBerry 10 OS, will have “true multitasking, … potentially running a car’s navigation, entertainment and gaming systems for the whole family“. Elsewhere, he refers to a new world of applications in which your Blackberry will connect to “the embedded systems that run constantly in the background of everyday life – from parking meters and car computers to credit card machines and ticket counters“. (Home automation can’t be very far off.) Even more majestically, Heins tells us that RIM’s mission is “to build a new mobile computing platform to empower a people in a way they didn’t think possible“.

This all sounds like a noble and worthy goal…but it’s a bit vague. How will RIM’s approach be different from — or better than — the competing ecosystems?

This leads us to our third point: The engineering team (or, “it’s simply a matter of implementation”). When Steve Jobs reverse-acquired Apple in 1997, he brought with him the creators of NextStep, the likes of Avie Tevanian, Bertrand Serlet, and Scott Forstall. They led a team of talented, like-minded computer scientists whose goal was clear: Replace the decrepit Mac OS with a truly modern foundation. It took them the better part of five years to produce what we know as OS X.

RIM acquired QNX, the foundation for BB10, a mere two years ago. After a quick bow to the work ethic and technical manhood of RIM’s engineers, one must ask if they’re in the same league as the team Jobs brought to Apple 2.0, if they can accomplish everything they need to do by early 2013. Weren’t most of these engineers already onboard when RIM fell asleep at the switch?

Fourth and last, leadership. Using Apple 1997 as the model for turning around a once-great company invites challenging comparisons. Or, more accurately, a single comparison: Is Thorsten Heins made of the same unobtainium as Steve Jobs? This isn’t a question of IQ, of neo-cortex, but of Mind, of being sufficiently agitated, of having the right animal inside.

The prodigal Jobs returned to Apple having known stellar business success with Pixar, and just-as-stellar lack thereof at NeXT (despite the company’s technical prowess). Heins, by contrast, is an insider. He’s been part of RIM’s problem since 2007.

But enough of this fantasy. Let’s turn to the latest story: RIM’s CEO has conceded that the company might have to license its platform:

To deliver BB10 we may need to look at licensing it to someone who can do this at a way better cost proposition than I can do it.

Dumbfoundingly, the licensing idea (which, presumably, will include BlackBerry Messenger), has been met with approval: ”RIM is in trouble and is seemingly finally listening to reason“.

This gambit doesn’t work. It didn’t work for Palm (twice!), nor for Nokia with Symbian. And it really didn’t work for Apple when it licensed the Mac OS to PowerComputing and Motorola in 1995. The Mac clones quickly underpriced the original products and siphoned profits out of Apple’s income statement. Jobs reversed that decision in 1997, and, after much initial criticism, was ultimately vindicated.

With these examples, what drives Heins to think that the BlackBerry 10 clones won’t underprice RIM’s own devices and empty the cash register? BlackBerry Messenger may be well-liked, but it’s also under attack by free, multi-device services such as iMessage.

So, where does this leave RIM? The use of “Private” in this note’s title isn’t a facile pun. It points to a possible avenue for the BlackBerry maker. If it decides to license the software layer of its (formerly) proprietary platform, RIM will indisputably see hardware dollars disappear much faster than software licenses can be signed. RIM will forego a known source of revenue in order to grow a new income stream that, given enough time, might be strong enough to keep the company solvent.

For a publicly-traded company, switching business models in this way is a factual impossibility, it defies business gravity. Shareholders might applaud the long-term strategy but when the cheering stops, they’ll dump the stock.

If RIM wants to do something bold, such as focusing on software and services, they might consider taking the company private. As I write this, RIM has a market cap that’s less than $4B and more than $2B in apparently unencumbered cash. Management and the Board could work with a Private Equity fund, a KKR-type organization, and buy the company from the shareholders.

The ink dries, the curtains close. Backstage, in private, the company performs painful surgery, sheds the groups and businesses that are no longer required by the new, tighter focus. This may be hard on employees, but it’s unavoidable either way: Lose some of the company now, or the entire thing soon enough.

In theory, the company re-emerges smaller but stronger, with a highly profitable software and services business model.

Will this work for RIM? I don’t think so. Given the company’s low market cap and the availability of private capital, if this were an attractive move, it would have been attempted already. Cold-hearted investors looking at the risk involved must have already asked themselves the burning question: How do you compete with free? How do you sell licenses when Android hands them out, gratis (even if licensees have to pay for a few Microsoft patents)?

Sadly for former BlackBerry fans like yours truly — or for current ones who appreciate its core functionality — there aren’t many moves left for RIM on the smartphone chessboard.

JLG@mondaynote.com

Business Model Dances

Apple will licence the iOS. An unexpected disturbance is apparent in Apple’s vaunted Supply Chain. It’s not what’s there, but what isn’t: In the past, each new iPhone was preceded by an increase in orders for displays, batteries, memory, cases, etc. But now, as we approach the September/October launch of the new iPhone 5, the manufacturing pipeline is only modestly full.

Concerned by the underflow, I put in a call to a friend at DigiTimes. Is this just a test run that portends a delayed release? According to my friend’s usual sources: No, the launch hasn’t been pushed back. The parts aren’t on order because Apple intends to produce the new iPhone in much smaller numbers offered through online sales only, plus a small subset of the Apple Stores worldwide (no more than 44 stores, says the rumor). But there will, nonetheless, be much rejoicing at the launch, because…

…Apple will announce a broad iOS licensing program.

This is great news for “rational” business people: Apple has finally come to its senses. I imagine the explosion in the media:

Apple sees the light at the end of the tunnel, and it’s the Android locomotive with Samsung at the controls.

or…

Years ago, I told Apple’s CEO: ‘Mr. Jobs, break down that wall’. Thank Heaven, Tim Cook is a reasonable man: the Walled Garden is now open to all.

But I couldn’t help but ask: Why launch a new iPhone at all, why not leave the field fully open to Apple’s new partners? My friend was ahead of me; he had already asked the same question. The answer: Apple must set the proper hardware standards for the iOS platform while leaving room for its OEMs. The iPhone 5 isn’t an ordinary iPhone, its a design point.

As I put down the phone, I spin out the rest of this story:

In order to compete with Android, which is free but for the occasional payoff to the Redmond Patent Troll, the iOS license is forced to essentially zero, as well. Before its epiphany, Apple made about $400 per iPhone. Now enlightened, Apple’s margin for each design point iPhone is around $50 per unit, and the company makes nothing on the huge number of iOS clones sold by Samsung, HTC, Huawei and ZTE, RIM and Nokia (just kidding about these last two).

Within weeks (days?), the big Wall Street funds that own most of AAPL dump their shares and the most valuable high-tech company in history loses 90% of its market cap.

Let’s stop the fiction here and consider the very real peril in switching business models. Once you choose a path, you stick to it for the rest of your life, whether brutish and short, or long and prosperous.

In the mid-nineties, Apple tried to correct the errors of its un-licensing ways and almost paid with its life as Power Computing and Motorola siphoned gross margin money out of Apple’s P&L. When Jobs reverse-acquired Apple, one of the first things he did was stanch the bleeding by canceling the Mac OS licenses. It was met with noisy disapproval –  for a while.

With this in mind, let’s look at two other companies that are trying to finesse difficult business model moves: Microsoft and Google.

Microsoft announces its Surface tablets…pardon…Tablet PCs, and quickly finds itself between two business models: Are they offering a vertically integrated device, a la Xbox; or are they licensing a software platform, as in Windows/Office? As remarked upon by Horace Dediu and others, one day Ballmer says:

“We are working real hard on the Surface. That’s the focus. That’s our core.”

and the next, with equal strength of conviction:

“Surface is just a design point.”

Ballmer isn’t delusional, he knows he can’t dump his OEM vassals and become a vertically integrated tablet maker overnight, setting up manufacturing, distribution, and support for 100 million or more units a year. Also, PC+ wars of words aside, he sees that these annoying “media tablets” are gaining on Windows PCs.

The solution: Announce Tablet PCs that he hopes will spur HP, Dell, and Lenovo to imitate and even outdo Microsoft own Surface devices. In a perfectly Nixonian explanation, Ballmer promises that after years of forcing PC clone makers into a race to the bottom by constantly eating into their margins — and then condemning them for their shoddy products — the new, open Microsoft won’t cheat its business partners, they won’t withhold some of that “openness” for exclusive use by Microsoft’s own devices.

As with the presidential precursor, this could be a very shrewd move…and ultimately doomed.

If it works, Microsoft will have succeeded in “reimagining” Windows.

If it doesn’t work, Ballmer will have a “neither-nor” business model on his hands: He’ll have chased away partners without gaining the time and talent to create a Microsoft tablet business the size of Google’s and Apple’s. Perhaps, in Brian Hall’s words: “Someone should tell Microsoft that PC+ is about as likely as Minicomputer+“.

So far, traditional Windows OEMs have been quiet, with the (perhaps transitory) exception of HP which announced that it won’t make a Windows RT tablet. (That’s the ARM-based variant, as opposed to the more conventional Intel-based one.)

All subject to change, as we know from Ballmer’s constant zigs and zags.

With Google we see what could be the beginning of several contortions. Just like Microsoft, Google seems to have become impatient with their own subjects: “No one seems to be able to do a proper tablet…we’ll have to do it ourselves.” (We know what “proper” means, here: It’s a grudging recognition of the great degree of complexity that belies the iPad’s benign surface.)

So now we have Google’s 7″ Nexus tablet, the first such device to receive the highest of honors — A Tablet To Rival the iPad — bestowed by reviewers from the NYT, the WSJ, Ars Technica, and others.

(I’m getting mine. Here’s my order number: 15731260465432498277.1587861291707893. Thirty-six digits. They must be kidding, right? Or they’re making room for a lot of orders from exoplanets. Not enough for a Googol, though.)

Is Google’s “vertical” move into designing, manufacturing, selling, and supporting its own tablets the same as Microsoft’s? Probably not. In the past, they tried with phones made by HTC, but the experiment didn’t last. Because Amazon was able to pick Android’s lock and create the Android-based yet non-Android Kindle Fire, Google’s current move could be much more serious.

And it could carry serious risks, as well: The gentle folks at Samsung are not going to take this with a smile and a quick genuflection. If they’re not cowed by Apple, they certainly aren’t going to let Google eat into their tablet business. As for phones, there’s Google’s $12.5B subsidiary, Motorola Mobility, another irritant for Samsung and other Android smartphone makers.

Like Microsoft, Google now faces the toxic waste of its own licensing formula: A good, enthusiastically-adopted platform that launches a race to the bottom. With few exceptions, the low margins and the haste to produce model after model have starved engineering teams of the budgets and time they need to to come up with “proper” products. Google becomes unhappy, decides to “do something about it” — and thus pushes itself closer to a business model change in which it competes with its own partners.

For the first Nexus tablet, Google can sell it at cost (or close to it), just like Amazon. But Google doesn’t have Amazon’s ecosystem, its vast store of physical products and digital content that the Kindle Fire helps sell. Sooner or later, this could force Google to make tablets “for their own sake”, as a money-making business unit.

Or they could stick with the current Android strategy: An OEM platform that runs zillions of devices, all with the same goal: Expose the consumer to Google services, to the radiation of its advertising business, all the time, everywhere, on any device.

Or , like Microsoft, end up in a neither here nor there crack of the business model space.

This is going to be interesting.

JLG@mondaynote.com

iPad Mini: Wishful Thinking?

Or another killer product? Or, on the pessimistic side, a loser defensive move showing Apple’s fear of competitors such as Amazon, with its Kindle Fire, and Google’s 7″ Nexus tablet?

Recent leaks from purported sources inside Apple’s traditional suppliers have ignited a new frenzy of speculation. And not just from the usual blogging suspects — often better informed and more insightful than the official kommentariat. BusinessWeek and the Wall Street Journal both stuck their august necks out: The so-called iPad Mini will be launched this coming September.

On this matter, my own biases are on the record.

In an August 2009 Note titled “Apple’s Jesus Tablet: What For?“, I went as far as measuring the pocket on men’s pockets. As a result, I posited a 10″ (diagonal) tablet might not provide the same desirable ubiquity as a 7″ one that men could carry in a coat or jacket pocket, and women in a purse.
(Apple once came to a similar conclusion: the original Newton project started by Steve Sakoman in 1987 was a letter-size tablet. After he and I left, the screen size was cut in half and the actual Newton came out as a pocketable product.)
Five months later, on January 27th, 2010, Steve Jobs stood up and changed the personal computing world for the third time with the 9.7″ (diagonal screen size) iPad. The take-no-prisoners price ($499 for the entry model) was a big surprise. Another one, much less obvious, was Dear Leader’s unusually tentative positioning statement: ‘We’ll see how the iPad finds its place between the iPhone and a MacBook’. (I’m paraphrasing a bit but the tone was there.)
The iPad surprised many, Apple included and, at the beginning, was often misunderstood. I recall my initial disappointment at not being able to perform the same tasks as on my laptop. A huge number of normal humans of all ages thought differently. As we know now, the iPad grew even faster than the iPhone. Notwithstanding Microsoft’s clinging to its ossified PC-centric rhetoric, this turned out to be the true beginning of the Post-PC era.

This excited competitors around the world: You’ll find here a list of 76 tablets announced at CES. By the end of 2011, few had accomplished anything. One exception was Amazon’s Kindle Fire, its Xmas season numbers were rumored to reach more than 4M units, even 6M by some rumored estimates. This rekindled, sorry, rumors of a smaller iPad.
In October 2010, Jobs famously dismissed the idea: “7-inch tablets should come with sandpaper so users can file down their fingers.” None of the journalists present at the time had the presence of mind to ask him about the iPhone screen…
Tim Cook, Steve’s disciple put it well at the D10 conference last June when he affectionately (and accurately) called Jobs a great flip-flopper, citing examples of products features his then boss ended up endorsing after repeatedly nixing them.
In an April 2012 Monday Note, I discussed the possible end of Apple’s One Size Fits All for  iPhones and, in particular, iPads. There, I linked to an A. T. Faust III post lucidly explaining how the original 1024 x 768 resolution could easily scale down to a 7.85″ tablet and achieve a nice 163 ppi (pixels per inch) resolution, the same as pre-Retina iPhones. This leads one to believe there is abundant (and inexpensive) manufacturing capacity for such pre-Retina displays.

A few questions.

First, developers. As we saw with iOS apps for iPhone and iPad, size matters, apps don’t scale. That hasn’t dampened the enthusiasm of developers for investing in app versions that take advantage of each device unique characteristics, as opposed to committing the cardinal sin of “It’s like the other one, only smaller/bigger”.
So, if developers believe a 7″ iPad would sell in large numbers, they’ll happily fire up Xcode, adapt their existing app, or write a new one. As for the belief in large unit volume for a 7″ device, the initial reception accorded to Google’s Nexus tablet shows there is potentially a lot of life in a smaller iPad.

(I ordered a Nexus tablet and will dutifully report. Last April, I bought a Samsung Note phablet and promised a report. Here it is: I’ll sell you mine for $50. A respectable product, I could definitely live with it. But, IMO, too big for a phone, too small for a tablet.)

Second, Apple was on offense. Now, competition succeeded in putting it on the defensive. While initial Kindle Fire sales were rumored to be huge, the same “sources”, checking on display supplier suppliers, now claim sales of Amazon’s tablet dropped precipitously after the Holidays. Amazon keeps mum, but is also rumored to prepare a slew of not one but several tablets for this year’s Xmas quarter.
As for the Nexus tablet, it isn’t shipping yet.
Instead of a defensive move, I think a 7″ iPad might be another take-no-prisoners move:

From the very beginning of the iPad and its surprising low $499 entry price, it’s been clear that Apple wants to conquer the tablet market and maintain an iPod-like share for the iPad. Now that Apple has become The Man, the company might have to adopt the Not A Single Crack In The Wall strategy used by the previous occupant of the hightech throne.

If this cannibalizes 10″ iPad sales, no problem, better do it yourself than let Google, Amazon or Samsung do it.

Lastly, the price/cost question. As you’ll see on this video, Todd Schoenberger, a Wall Street haruspex visibly off his meds, contends an iPad Mini is a terrible move for Apple, it would be a break with its single product version focus. Like, for the example, the one and only Macintosh, the one and only iPod. Also, he continues, an iPad Mini wouldn’t allow Apple achieve the 37% gross margin it gets from the bigger sibling.
No. If we’re to believe iSuppli, a saner authority on cost matters, the latest 32 GB 4G iPad carries a Bill Of Materials of about $364, for a retail price of $729. Even with a bit of manufacturing overhead, we’re far from 37% today. And, tomorrow, a smaller iPad, with a smaller display, a smaller battery, a correspondingly smaller processor would nicely scale down in cost from the “new” iPad and its expensive display/battery/processor combo.
To where? I won’t speculate, but Apple has shown an ability to be very cost competitive when using previous generation parts and processes. See today’s iPhone 3GS and iPhone 4 prices for an example.

I have no inside knowledge and quite a few inclinations: I’d love a pocketable iPad as much as I like small computers such as the defunct Toshiba Libretto and the lively 11″ MacBook Air.

If Apple comes up with a smaller iPad later this year, I think it’ll be a killer product.

–JLG@mondaynote.com