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Apple Is Doomed: The Phony Sony Parallel

hardware By April 29, 2012 Tags: , 100 Comments

In the weeks preceding the April 24th release of Apple’s quarterly earnings, a number of old canards sent the stock down by about 12%: Carriers are going to kill the iPhone Golden Goose by cutting back “exorbitant” subsidies; iPhone sales are down from the previous quarter in the US; inexorable commoditization will soon bring down Apple’s unsustainably high Gross Margin.

The earnings were announced, another strong quarter recorded, and the stock rebounded 9% in one trading session:

At least one doubter is finally convinced: Henry “The iPhone Is Dead In the Water” Blodget has become an Apple cheerleader, penning a post titled Yes, You Should Be Astonished By Apple. (Based on Henry’s record, should we now worry about the new object of his veneration?)

There has never been a dearth of Apple doomsayers. The game has been going on for more than 30 years, and now we have a new contestant: George Colony, an eminent industry figure, the Founder and CEO of Forrester Research, a global conglomerate of technology and market research companies.

Mr. Colony, an influential iPad fan, maintains a well-written blog titled The Counterintuitive CEO in which he shares his thoughts on events such as the Davos Forum, trends in Web technology and usage, and, in a brief homage, his hope that “Steve’s lessons will bring about a better world”.

We now turn to his April 25th post, Apple = Sony.

There are two problems with the piece: The application of a turgid, 100-year old “typology of organizations” that’s hardly relevant to today’s business scene, and an amazingly wrong-headed view of Sony and its founder, Akio Morita.

Colony offers the banal prediction that others have been making for a very long time, well before Dear Leader’s demise: With Steve Jobs gone, Apple won’t be the same and, sooner or later, it will slide into mediocrity. It happened to Sony after Morita, it’ll happen to Apple.

In an act of Obfuscation Under The Color Of Authority, Colony digs up (nearly literally) sociologist Max Weber to bolster his contention. Weber died in 1920; the 1947 work that Colony refers to, The Theory of Social and Economic Organization, is a translation-cum-scholarly commentary and adaptation of work that was published posthumously by Weber’s widow Marianne in 1921 and 1922.

From Weber’s work, Colony extracts the following typology of organizations:

1. Legal/bureaucratic (think IBM or the U.S. government),
2. Traditional (e.g., the Catholic Church)
3. Charismatic (run by special, magical individuals).

This is far too vague; these types are (lazily) descriptive, but they’re fraught with problematic examples, particularly in the third category: Murderous dictatorships and exploitative sects come to mind. What distinguishes these from Apple under Jobs? Moreover, how do these categories help us understand today’s global, time-zone spanning rhizome (lattice) organizations where power and information flow in ways that Weber couldn’t possibly have imagined a hundred years ago?

Having downloaded the book, I understand the respect it engenders: It’s a monumental, very German opus, a mother lode of gems such as the one Colony quotes:

Charisma can only be ‘awakened’ and ‘tested’; it cannot be ‘learned’ or ‘taught.’

True. The same can be said of golf. But it does little to explain the actual power structure of organizations such as Facebook and Google.

Instead of shoehorning today’s high-tech organizations into respectable but outdated idea systems, it would behoove a thought leader of Mr. Colony’s stature to provide genuine 21st century scholarship that sheds light on – and draws actionable conclusions from — the kind of organization Apple exemplifies. What’s the real structure and culture, what can we learn and apply elsewhere? How did a disheveled, barefoot company become a retail empire run with better-than-military precision, the nonpareil of supply chain management, the most cost effective R&D organization of its kind and size? And, just as important, are some of these marvels coupled too tightly to the Steve Jobs Singularity? That would be interesting — and would certainly rise above the usual “Charismatic Leader Is Gone” bromides.

Now let’s take a look at the other half of the title’s equivalence: Sony.This is Muzak thinking. It confuses the old and largely disproven brand image with what Sony actually was inside — even under Morita’s “charismatic” leadership.

I used to be an adoring Sony customer, bowing to Trinitron TVs and Walkman cassette players. But after I got to see inside the kitchen (or kitchens) in 1986, I was perplexed and, over time, horrified.

Contrary to what Colony writes, there was no “post-Morita” decadence at Sony. The company had long been spiritually dead by the time of the founder’s brain hemorrhage. The (too many) limbs kept moving but there had been no central power, no cohesive strategy, no standards, no unifying culture for a very long time.

Sony survived as a set of fiefdoms. Great engineers in many places. (And, to my astonishment, primitive TV manufacturing plants.) During Morita’s long reign, Sony went into all sorts of directions: music, movie-making, games, personal computers, phones, cameras, robots… For reasons of cultural (one assumes), Sony consistently showed an abysmal lack of appreciation for software, leaving the field to Microsoft, Nokia for a while, and then Google and Apple.

Under Akio Morita’s leadership, Sony took advantage of Japan’s lead in high-quality device manufacturing and became the masters of what we used to call the Japanese Food Fight: Throw everything against the wall and see what sticks. When the world moved to platforms and then to ecosystems, Sony’s device-oriented culture — and the fiefdoms it fostered — brought it to its current sorry state.

Today, would you care to guess what Sony’s most profitable business is? Financial Services:

How this leads to an = sign between Apple and Sony evades me.

This isn’t to say that Apple can’t be contaminated by the toxicity of success, or that the spots of mediocrity we can discern here and there (and that were present when Steve was around) won’t metastasize into full blown “bozo cancer”. But for those interested in company cultures, the more interesting set of questions starts with how Apple will “Think Different” from now on. Jobs was adamant: His successors had to think for themselves, they were told to find their own true paths as opposed to aping his.

From a distance, it appears that Tim Cook isn’t at all trying to be Jobs 2.0. But to call his approach “legal/bureaucratic” (in the Weber sense), as Colony does, is facile and misplaced.

If we insist on charisma as a must for leading Apple, one ought to remember that there’s more than one type of charisma. There’s the magnetic leader whose personality exudes an energy that flows through the organization. And then there’s the “channeling” leader, the person who facilitates and directs the organization’s energy.

Is the magnetic personality the only valid leader for Apple?

[I won’t let the canards cited at the beginning go unmolested. See upcoming Monday Notes.]


Apple: The End Is Nigh

hardware By April 8, 2012 Tags: , 29 Comments

The end of iPhone/iPad One Size Fits All, that is. So far, Apple has managed to sell more than 300M iOS devices using only a single size for the iPhone and another for the iPad. I’m becoming convinced this can’t last much longer. Soon, I believe, we’ll see a range of physically distinct iPhone and iPad models.

I’m coming to this conclusion from three angles.

Let me start with an analogy by anecdote. It’s 1974, I’m sitting across the street from Burberry’s Haymarket emporium in London watching a gaggle of tourists come out of the store, each wearing the same dark blue raincoat and distinctive Burberry scarf. Once an icon of British gentility (as perceived by non-Brits), the commissariat of trench coats, scarves, and other country squire accoutrements, Burberry had lost their cachet by sticking to a taste-numbing repetition. The company that had invented a true 20th century oxymoron — the mass-marketing of exclusivity – had lost the plot.

Louis Vuitton, on the other hand, is the epitome of the oxymoron. Vuitton stays on top of its game by ceaselessly coming up with product permutations that combine the differentiation customers need without losing the brand identity they crave.

For the past three weeks I’ve been traveling in the US, France, and Spain. In Spain, particularly, I was struck by the number of iPhones I saw in street cafés, airport lounges, hotels, and restaurants. One high-end eatery in Palma de Mallorca equips its waiters with iPod Touches on which they show pictures of dishes to patrons and, with a tap, take their orders. I’m generally careful about drawing conclusions from such anecdotal samplings –they might not be representative of a broader reality — but when I returned to the Valley, I heard a Marketplace® story (audio and transcript) that confirmed my observation: Spaniards are so taken with their iPhones that they’d rather cut other expenses amid the severe economic crisis than go without this indispensable component of their identity.

How long before customers look left, look right, see everyone with the same phone or tablet and start itching for something different? My friend Peter Yared contends that the trend has already started in the UK where the “18-25 class” now favors the smorgasbord of Samsung devices as a relief from the iPhone uniform.

And, lest we think this preoccupation with fashion identity is beneath Apple’s Olympian taste, a look at the shelves of Cupertino’s Hypergalactic Company Store will bring us back to Earth:

We can argue that one-size-fits-all simplicity has served Apple well. I hear one European retail magnate deplore Apple’s inflexible (he actually said ‘‘totalitarian’’) policies even as he marvels at the low number of SKUs (distinct product references) that have produced Apple’s monstrous revenue. (A connoisseur, he also envies Apple stores where, as he put it, the cash register follows the customer.)

But Apple has long ceased to be marginal, on the brink of disaster, imprudently challenging established giants. Apple has become a dominant brand whose rise to ubiquity now requires a differentiation it didn’t need in pre-iOS years.

For the iPhone, how will differentiation manifest itself without veering into capricious, superficial variation?

Screen size? We know the key argument against a significantly bigger screen: Our thumb needs to reach across the entire surface for one-hand operation, a requirement widely held as non-negotiable. As for a smaller screen, the loss of functionality, app compatibility trouble, and touch-UI difficulties make “downsizing” improbable.

Shape? The elegant iPhone 4/4S industrial design is by no means obsolete. I personally consider it a classic, more so than the earlier, less innovative design. Still, alternatives will expand the iPhone’s appeal, communicate newness and differentiation.

Another angle concerns the iPad. Unit sales are climbing faster than the iPhone and sameness is — or soon will be — an issue. There’s an “obvious” solution: Our old friend, the rumored 7” tablet (measured on the diagonal).

In an August 2009 Monday Note discussing Apple tablet gossip, I went so far as to measure the width of men’s jacket pockets (5.5” to 6”, typically) and concluded that a 7” (diagonal) tablet would be nice. But I’m prejudiced, I like small computers. I loved my Toshiba Libretto and yearned for a similarly-sized MacBook. I’d given up on the prospect of a “MacBook Nano,” but I still had hopes for a pocketable tablet.

Wiser minds prevailed and we got the 9.7” iPad.

Still, the yearning for a smaller tablet wouldn’t die. In October 2010, when queried about a smaller iPad during the Q4 earnings conference call Q&A, Steve Jobs famously dismissed the idea, saying “7-inch tablets should come with sandpaper so users can file down their fingers.” Behold the nerve — and the lack of same in the audience! No one thought of asking about the iPhone’s even smaller screen.

Seriously, what Jobs probably meant was that a simple reduction in the size of the tablet screen would mean a proportional diminution of the size of UI elements, a brute force solution Apple had avoided by allowing – and encouraging — device-specific resources. (As we know now, no one really uses iPhone apps in 2X mode on an iPad.)

Also, we ought to remember notable Jobsian ‘‘statements of misdirection’’: No video on the iPod; No body reads anymore (pre-iPad). And the vintage 2007  category winner: No native apps on the iPhone, use Web 2.0 technology!

When thinking about the insistent 7” iPad rumors, I start to worry that iOS developers will have to write or adapt their apps to a third target, the “iPad Nano”. (Don’t hold me to that monicker, I was sure the latest iPad would be called iPad HD, for its high definition Retina screen…) But when I consider the foreseeable volume for a smaller iPad, I become a bit more optimistic: Would multiples of 10M units sold in the first year induce a developer to invest in a new version? Very likely, yes.

Even more encouraging is this clever twist unearthed by A.T. Faust III in a March 21st blog post. If you shrink the original 9.7”, 1024×768 iPad display to a 7.8” diagonal screen, you end up with a 163 ppi (pixels per inch) display, higher than the original, lower than the new iPad (264 ppi), and exactly half the iPhone 4/4S (326). Most relevant, according to A.T Faust, 163 ppi is the exact pixel density of the first iPhone…which means that app developers won’t necessarily have to retool everything in their UI libraries. And the hypothetical 7” iPad would easily fit in a 5.5” -wide jacket pocket:

Lastly, there’s another reason for Apple to forget the sandpaper and, instead, throw sand into Amazon’s and Google’s (purported) 7” tablet gears. 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.

While we wait, futilely perhaps, I’ve decided to do a bit of field research and bought a Samsung ‘‘phablet’’, the Galaxy Note, this after giving my 7” Kindle Fire to one of our children. The Note’s screen is a mere 5”, an attempt to combine a phone and a tablet — with an “unmentionable” stylus. I’ll report back in a few weeks.


RIM’s Future: Dead, Alive, Reborn?

hardware By April 1, 2012 Tags: , , 17 Comments

Much has been written about RIM’s gloomy quarterly numbers, most of it sensible (with one brain flatulence exception). The attention is a testament—an apt word—to the place RIM once occupied. From its humble pager origins, the BlackBerry, rightly nicknamed CrackBerry, became the de rigueur device of enterprise users. Like most former BlackBerry fans, I have my own fond memories of its world-class mail/contacts/calendar PIM service and of the impeccable OTA (Over The Air) synchronization that freed my wife from her Palm USB cable and HotSync travails.

As always, Horace Dediu digests the numbers for us, adds insight, and comes up with a somber conclusion (emphasis added):

The selection of tools for workers by a group that claims to understand their needs better than they do is an archaic concept.
This was true even in 2005 when RIM began targeting consumers. It was then that they saw the writing on the wall–that their enterprise business was being commoditized. All of RIM’s growth since has been in consumer segments. By abandoning that trajectory RIM is effectively giving up on growth. And giving up on growth is simply giving up.

For the first time in seven years, RIM lost money, $125M; revenue is down 25% from a year ago; unit volume decreased by 11% from the previous quarter. The only somewhat positive sign is that cash increased by $610M leaving RIM with $2.1B in its coffers, a fact preeminently featured in their press release. The message is clear: Look, we’ve got plenty of cash to last us until “late 2012” when we’ll be back with new BB10-powered smartphones.

This is a dubious proposition.

RIM will undoubtedly undergo another two or three quarters of marketshare erosion and losses. Last quarter’s combination of positive cash flow in spite of losses can’t be repeated indefinitely, there’s only so much inventory you can liquidate—at a loss—before you see the bottom of the cash register.

This isn’t to say that Thorsten Heins, RIM’s new CEO, isn’t making an effort, starting with housecleaning: Much to everyone’s relief, former co-CEO Jim Balsillie is “severing all ties with the BlackBerry maker” after a brief stay on the Board when dethroned in January. Jim Rowan, the former co-COO (Heins was the other half before becoming CEO), is also leaving RIM. More significantly, software CTO David Yach is sailing away after 13 years at the helm. Nobody accused RIM of making poor quality hardware, it’s the outmoded and late software that fell the smartphone leader.

For too long, RIM execs (and not just David Yach) didn’t heed the software threat from Google and Apple, they thought their enterprise franchise was impregnable. But by 2010, reality could no longer be ignored; RIM panicked and looked for an OS to replace their aging software engine. They found QNX, a UNIX-like system hatched at the University of Waterloo next door and used by its then-owner, Harman International, for real-time audio and infotainment embedded applications. Dating from the early eighties, QNX is mature and well-tested — but no more adept as a smartphone OS than a vanilla Linux distro. Certainly, you’ll find Linux code at the bottom of the Android stack, but what makes Android successful are its thick, rich layer of frameworks that are indispensable to application developers.

When RIM bought QNX from Harman, the OS offered little or nothing of such vital smartphone app frameworks. David Yach’s team had to build them from the ground up (or, perhaps, adapt some from the Open Source world). This doesn’t happen quickly—ask Google why they acquired Android, or look at Apple’s years of stealth iOS development based on its own OS X. The difficulty in engineering a fully-functional foundation on which to build competitive apps explains why RIM’s “Amateur Hour Is Over” PlayBook tablet lacked a native email client when it was released last spring. And this is why the new BB10 phones are slated for ‘‘late 2012”. By that time, Samsung and Apple will have newer software and hardware—and an even larger market share.

The trouble for RIM is simply stated: Too little too late, while the money runs out. If only the cure were as easily put.

We won’t dwell on the contrast between what Heins said in his first press conference as CEO in January (“Stay the Course”) and the changes he now claims are necessary. He has had time to assess the situation and has declared “We Can’t Be All Things To All People”, by which he means abandoning consumer-oriented multimedia initiatives, a retreat Horace Dediu equates to a wholesale giving up on growth, to becoming hopeless.

For my part, I can’t help but wonder: What did Thorsten Heins see, say, and do since he joined RIM in 2007, right when the Jesus Phone came out? At the time, as his bio points out, he was Senior VP of the BlackBerry Handheld Business unit…

Today, RIM’s new CEO isn’t looking away. In public statements last week, he made it clear that all options are on the table. We can ignore the possibility that RIM might find licensees for its OS (what OS?). This leaves RIM with a single option: Sell the company…but to whom? Asus, Samsung, HTC? Why not ZTE and Huawei while we’re at it? None of this makes sense, these are not necrophiliac companies, they’re happily riding Android.

Disregard the talk of buying RIM for its alleged patent portfolio. This is the company that, after years of fight, had to pay NTP more than $600M, and Visto more than $260M in patent settlements. In any event, as the Nortel example shows, one can buy patents without getting saddled with the company.

Of course, there is one intriguing possibility left: Microsoft could do to RIM what it did to Nokia. They could convince RIM to abandon its unlikely-to-succeed “native” software effort and become the second prong in Microsoft’s effort to regain significance in the smartphone wars. We can picture the headlines: RIM Joins Nokia in Adopting Windows Phone, Microsoft Now Firmly Back in the Race…

We’ll soon know if Microsoft, after toying a few times with a RIM acquisition, now finds a more realistic management team and Board sitting across from them at the negotiating table.


Apple Phlebotomy

hardware By March 26, 2012 Tags: 30 Comments

The treatment for the blood disease called Polycythemia Vera (the name means “too many red cells”) goes back to the Dark Ages: Lance a vein and relieve the patient of a pint of blood. Phlebotomy treats the symptom but not the condition. There is no known cure; the blood-letting must be repeated indefinitely.

This is what comes to mind when I see how Apple intends to treat its Polycashemia Vera, its “too many greenbacks” problem. Over the next few years, Apple will bleed off $45B of excess cash through a combination of dividend payouts of $2.65/share per quarter and stock repurchase of $10B over three years. (Also, as Tim Cook has stated, the buyback is a means to “undilute” Apple employees’ stock grants. Horace Dediu has a perceptive analysis here.)

But why get rid of the excess cash? How dangerous is it? And what exactly is “excess”?

This is a matter of animated (and occasionally silly) debate.

On one side, you have die-hard company supporters who argue that there’s no such thing as too much cash, you never know what the future holds. Management should ignore the “evil Wall Street speculators” who call for dividends and stock buybacks, jeopardizing the company’s future just to line their pockets.

On the other side, shareholders (or, more accurately, the Wall Street fund managers who represent them) get nervous when a company’s cash reserves far exceed its operational needs (plus a rainy day fund). Management might develop a case of “acquisition fever,” an investment banker-borne contagion that breeds a lust to buy shiny objects for ego aggrandizement.

It’s a rational concern, and while Apple’s performance and cautious spending habits gives management a great deal of credibility, a cash reserve that’s rapidly approaching a full year of revenue (let alone operating expenses) became “really too much” and led to last week’s $45B announcement.

The $45B figure is impressive…but will it be enough to treat this chronic condition?

In Fiscal Year 2011, Apple grew its cash balance by $31B. Using very conservative growth estimates — well below the rates we’ve come to expect from Apple —we’ll assume an additional $40B for FY 2012, $50B in 2013, $60B in 2014…that’s another $150B. Even after the $45B phlebotomy, Apple’s mattress will swell by another $100B in the next three years, to a total of about $200B.

The patient will require repeated blood-lettings.

A gaggle of observers would like to remind us of their version of the Law of Large Numbers; not the statistical LLN, but the one that says, using a simple example, that while 50% growth is relatively easy for a $10M business, it’s nearly impossible at the $100B level. And, yet, this is very much what’s in store for Apple in FY 2012. With Q1 revenue of $46B already in the books we can expect the annual figure to peg at roughly $180B. (This isn’t a wild guess: AAPL pretty much sticks to the FY 20ZZ = 4 x Q1 FY 20ZZ formula.)

$180B would be an astonishing 70% increase in revenue compared to FY 2011 ($108B). Astonishing but not surprising; it simply continues a trend: 2011, the first full year of the iPad, was 66% above 2010, which was 52% above 2009. Even in the midst of the financial cataclysm, Apple’s 2009 numbers showed a 14% increase over 2008, which showed a “customary” 52% increase over 2007, the year of the Jesus Phone. FY 2007, in which the iPhone contributed a smallish $483M, generated a “mere” 28% revenue increase above 2006, the memorable year when iPod revenue surpassed Macintosh sales, $7.7B vs. $7.4B.

One conclusion sticks out: Apple has escaped the lay version of the LLN because it repeatedly breaks into new categories. The “foundation” Macintosh business couldn’t fuel such growth.

Can this last? Can Apple create (or co-opt) another $100B category, add a fourth member to its iTrio: iPod, iPhone, iPad? The rumored Apple iTV (whether it’s the black puck or a “magical” HDTV set) is offered as a candidate for another iPhone/iPad disruption. I’m skeptical. As discussed here and here, I don’t believe Apple can turn TV into another $100B iMotherlode. Unless, of course, Apple comes up with a $650 ASP (Average Selling Price) black puck that will be enticing enough to be bought in iPhone numbers and renewed as frequently. This would require content and (cable) carrier deals for which Apple’s cash might bend the wills of content and transportation providers.

Another possibility, advanced by a friend of mine, would be for Apple to disrupt the digital camera business. Not in the way the iPhone has already eaten into the “snapshot” market, but by offering a real, non-phone camera, with bigger sensors, lenses, and, as a result, bigger body. While technically far from impossible, a look at Canon’s and Nikon’s books shows this isn’t a $100B sector. Canon’s total revenue, including printers and professional non-camera optics, is $44B, with fairly thin margins (COGS in the 70% neighborhood); Nikon’s revenue is about $1B. Too small to move Apple’s needle.

So where does Apple turn for the next big iThing? Perhaps they don’t need to “turn,” at all. Recall Tim Cook’s oft-repeated party line: All our businesses have plenty of headroom.

Read the transcripts of past conference calls (here, here and here, courtesy of Seeking Alpha) or assay Cook’s recent appearance at a Goldman Sachs conference. The mantra is clear: We have a small market share in the huge smartphone segment; iPad sales are growing even faster than the iPhone’s; Mac revenue is growing at a healthy 25% pace in the (still) huge traditional PC market.

Up to the advent of what I can’t help call the Apple Anomaly, we had two bins for companies.

Bin One held stable companies, businesses with modest, predictable growth rates. As they didn’t require huge amounts of money to feed the engine, much of their cash flow was returned to shareholders as dividends. And, when they needed cash for inventories or plants, they could borrow it, issue bonds providing ‘‘guaranteed’’ income (I simplify).

Bin One stocks are boringly/pleasantly predictable.

Bin Two companies are ‘‘hot’’, fast-growing high-tech businesses. They require lots of cash, most often harvested on the stock market. Cash-flow and future requirements are such they rarely issue a dividend.

Bin Two stocks are pleasantly/dangerously hot.

Apple straddles both bins: it generates obscene amounts of cash and it still grows much faster than the rest of the high-tech world.

Summarizing Tim Cook’s position: Yes, we’ll pay dividends and buy shares back. And No: We have no intention of becoming a stodgy Bin One company.

Apple’s CEO implicitly assumes the people he leads will continue to come up with winners in each category, an assumption respectively disputed and wholeheartedly endorsed by the usual suspects. So far, doomsayers haven’t had a great run. But just you wait, they say: In The Long Run Apple Will Fail. They will be right, of course, but when?

In the meantime, the company is still left with a $100B cash “problem.”

This must be by design: Apple’s Board could dial cash down to, say, a healthy $40B. Why not do so?

One possible explanation is that Apple is playing a game of “projection,” they’re creating the perception that they can buy or do anything they want: Wage a price war against Samsung, corner the supply of critical components and force competitors to pay more, create a second source for key modules, buy major distribution channels.

The problem with such speculations is that Apple is already doing some of the above. For example, keeping the intuitively more expensive (display, battery, LTE module) new iPad at the same price points as the iPad 2 continues the price war Apple started with the original iPad’s surprising $499 pricetag.

Also, Apple has already disclosed that it has committed some of its cash as forward payments to suppliers. And strategically creating or even buying a semi-conductor plant to cut Samsung off won’t cost tens of billions. For reference, the latest Intel fabs cost in the neighborhood of $5B each. In any event, one can’t see Apple’s culture adapting to the esoteric semi-conductor manufacturing sector.

This leaves distribution. Could the company acquire, say, Best Buy or an international equivalent? These companies are (relatively) inexpensive: Best Buy’s market cap is less than $10B —for a reason: lousy margins that, in theory, Apple could prop up. But, in reality, hese are complicated businesses and would be a nightmare to restructure: Imagine getting rid of all the brands, pruning and retraining staff. Highly implausible.

We know Apple’s business model: Make and sell high-margin hardware, rinse and repeat every year, everything else is in service to the elegant hardware experience of the Dear Customer. If we stick to our search for places to invest $100B, we’re left with a big question mark.

The only scenario left for the big number is a hedge against political risk in China or against an economic Nuclear Winter. Apple would use its cash reserve to pull through and reemerge even stronger than its competitors.


App Cameras

hardware By March 19, 2012 5 Comments

In an August, 2010 Monday Note titled Smartcameras In Our Future?, I wished for smartphone-like apps running on a nice compact camera such as Canon’s S90 (now replaced by the S100). At the time, in-camera photo processing was limited and wireless connectivity required accessories like Eye-Fi, a clever but not so easy-to-use SD card with a Wi-Fi radio.

On the smartphone side, connectivity (Wi-Fi and 3G) was simple and mostly good (AT&T exceptions hereby stipulated) and, as a bonus, GPS geolocation worked. But when it came to picture quality, smartphones couldn’t compete with dedicated compact cameras. The phones’ inadequate sensors had trouble with high contrast scenes. Pictures in low light? Forget about it.

Since then, sensor technology has made incredible progress. A few years ago, ISO 3,200 was considered extreme; today, the Canon 1 DX and Nikon D4 reach ISO 204,800 sensitivity. Granted, these are big, expensive high-end cameras — and heightened sensitivity doesn’t always yield the best picture — but the new top number is 64 times the previous maximum. A low-light scene that once required a blur-friendly 1/2 second exposure can now be safely captured in 1/128th of a second.

Such progress stems from the silicon industry’s relentless progress, particularly, in this case, in silencing electrical noise. Stray electrons that are introduced by the camera’s circuitry are intelligently rejected; “authentic” electrons that capture the sparse photons in a low-light snapshot are no longer drowned in an electrical hubbub.

As expected, these improvements have ‘”dribbled down.” The advancements in silicon technology that have given us the 24x36mm sensors in our pro cameras are finding their way into the tiny sensors in our smartphones. ‘The Best Camera Is The One That’s With You’ is truer than ever. Esteemed photographers such as Annie Leibovitz have fun showing off what they can do with a smartphone.

But improved sensor technology is only one of the reasons why smartphones have eaten compact cameras alive. The other reason is software. Smartphone app stores now sport a huge number of photo apps. Search for ‘‘photo editor” in Google play (née Android Marketplace) and you’ll get more than 1,000 hits. The iPhone App Store yields an absurdly high number as well. Not all of these apps are useful — or even good — but the gamut is impressive. From collage to special effects, from panorama stitching to HDR processing (coaxing highlight and lowlight details into a “viewable” picture), smartphone camera software makes these better sensors even better.

Now add in the smartphone’s connectivity with its natural affinity for easy and automatic upload/download, such as what Photostream does for Apple devices… Compact cameras – which, by comparison to smartphones, don’t seem quite so compact anymore — are at an ever-growing disadvantage.

“It won’t last,” says Samsung. In the eyes of many, the Korean electronics giant has become the new Sony, or, better, the new Panasonic. Well-known for smartphones and tablets, Samsung also reigns in the HDTV market, they make PCs, refrigerators, cameras, all very good ones. As the king of Android phones, it’s no surprise to hear rumors that Samsung is preparing to launch Android compact cameras. It’s a terrific idea: Compact cameras have bigger sensors, better optics and zoom lenses. With better apps and connectivity (Wi-Fi at least), they’ll make great travel companions.

Canon and Nikon should pay heed…or risk sequestering themselves in the ultra high-end camera ghetto.


The Apple TV Set — Not Again!

hardware By March 4, 2012 Tags: 23 Comments

It’s the rumor that refuses to die and the myth that keeps on giving…pageviews. Serial Apple-rumorist Gene Munster is at it again: In a 15 minute Bloomberg Radio program (obligingly summarized here by Business Insider’s Henry Blodget and here by 9to5Mac) the PiperJaffray analyst issues his umpteenth version of the prediction:

Apple’s TV is real. It will be ‘The Biggest Thing In Consumer Electronics Since The Smartphone’.

As if this weren’t bold enough, Munster also predicts that Apple’s TV set will be announced this year and will ‘freeze the market for five months’. Naturally, the design will be bold: ‘… just a sheet of glass, no edges or bevels’.

Let’s start with a bow to the power of desire and the company’s reputation: Wouldn’t it be grand to have a magical TV-done-right? A Jony Ive hardware design, a UI purified of the ugliness and complexity foisted upon us by operators (cable or satellite) and set-top designers (Motorola, General Instruments), iOS-based, controlled via Siri, fed by a completely remodeled iTunes and App Store…

Apple keeps barging into existing markets it didn’t invent — MP3 players, smartphones, tablets — and manages to go home with a big share of the game. It does this by skillfully rethinking the device, inside and out. With the iPod, the iPhone, and the iPad, Apple offered sleek, elegant, cohesive form factors…and it did more: It provided a new ecosystem. The process started with iTunes (selling separate songs and micro-payments), which provided a debugged foundation that made the iPhone the first ‘‘app-phone’’ and paved the way for the iPad.

Why can’t Apple do something similar for its hypothetical TV set? Is it just a lovely, comforting fantasy?

Today’s TV experience is far from magical. A few weeks ago, I bought a 47” LG Smart 3D HDTV on post-Xmas sale at Fry’s. At $990, the thin, easy-to-install, internet-connected TV sounded good.

WiFi set-up isn’t too hard:

Using the Web browser is another story (although, to be fair, in a world of smartphones and tablets, why would you browse the Web on your TV?):

Still, there are plenty of embedded applications…

…and the “management’’ UI is cheerful, if a little disorganized:

For the Skype application circled above, you can buy a dedicated webcam. I did, it’s expensive — it adds 15% to the TV’s price — but its really Plug-and-Play, no software added.

All the parts are there…but a $49 or $79 Roku, a $179 Boxee Box, a $179 Xbox, or the $99 Apple TV offers more content, flexibility, and modularity, to say nothing of a more accessible UI.

Does this make a case for yet another category reinvention by Apple?

Not so fast.

As discussed in previous Monday Notes (here and here), there’s one strong, clear reason to bet against an integrated or smart Apple TV set: To perform the expected magic, a computer must inhabit the otherwise “dumb” TV. Very quickly, in a year or two, Moore’s Law will obsolete that computer. To get a new computer — more powerful, more fun —  you’ll need a whole new TV set. We might be willing to buy a new phone, tablet, or laptop every other year, but not a new 47” HDTV.

I believe Apple TV’s magic will be performed by a separate box, a descendant of today’s $99 Apple TV black puck, perhaps in combination with a new version of Time Capsule. This will enable the no-longer-a-hobby Apple TV to bring its magic to the millions of HDTVs already in homes all over the world — and to be replaced with better/faster hardware without drama.

(While we wait for the grand new Apple TV, we’re likely to get an updated version of today’s black puck Real Soon Now: The vintage 2010 model is no longer available online at Amazon, Best Buy, or Radio Shack — I just checked. If, as I hope, the upgrade outputs real 1080p HD — 1920 by 1080, versus today’s 720p — 1280 by 720, it’ll be an easy sell. Especially as an AirPlay companion to something like an iPad HD with twice the linear resolution of today’s tablet, 2048 by 1536 versus the original 1024 by 768.)

So, no grand integrated device…but the next-gen Apple TV, the next black puck, will certainly have that iOS/Apple Store magic, right? With three success stories in the books, the process of writing and distributing iOS apps is well understood, billions of dollars have changed hands through the App Store, developers and customers are standing by!

Again, not so fast.

Most of what we do with our PCs, smartphones, and tablets is related, it’s one form or another of personal computing. Yes, we also play games on our phones, but our posture is primarily ‘‘lean-forward’’: productivity, communication, organization, learning.

A TV, even when running iOS, isn’t a personal computer. We won’t be typing The Great American Novel or answering email, but we will play games, tune into channels-as-apps, video-chat with our friends and families running Skype or FaceTime. The TV is entertainment, it’s a ‘‘lean-back’’ experience. As one wag put it, the PC helps us think; the TV relieves us from our thoughts.

To gain acceptance, the Apple TV ecosystem will have to offer a library of entertainment apps tailored for TV. The company has made inroads in the genre – see the 60 Minutes iPad app, or for Apple TV (a great boon for naturalized fans who occasionally spend time in repatriation). But most entertainment content providers – TV networks, event producers, movie studios – are proceeding with caution. They know the history: Steve Jobs managed to convince music ‘‘majors’’ to let Apple distribute the content. Over time, the content distributor became more important than the content owner, giving sharper meaning to the old Hollywood saying, “If content is king, distribution is King Kong.”

No one knows if, when, and how Apple will succeed in building an Apple TV App Store that will have enough content to displace the old set-top box, its bundles, and its “lovely” navigation.

But can we, at least, hope for a separate, “dumb” TV set from Apple, elegance we can hang on the wall?

Here we run into the business model question. For Apple, only hardware margins matter. Everything else — software, content, stores — is there to serve the topmost goal. It’s doubtful that Apple can “maintain the hardware lifestyle to which it is accustomed” with such a product.

Today, the TV hardware business shows signs of desperation with its gimmickry and price wars. Even at the high end where Bang & Olufsen makes “exclusive” sets that sell for 3 to 4 times as much as technically comparable Samsung devices, life isn’t too comfortable. Take a look at B&O’s latest investor presentation and you’ll see that TV sales make up less than half of their $500M revenue, and show a slight decrease year-to-year. Operating profit is a modest 4% or so.

With this in mind, could Apple achieve its ‘‘customary’’ 37% Operating Profit selling a “dumb” TV? For help in answering the question, let’s compare the price of Apple’s 27” Thunderbolt Display to its competition. The Thunderbolt is “more than HD” (2560 by 1440) and has some features that aren’t found on other monitors — power to another device; extra USB, Ethernet, Firewire, and Thunderbolt ports; an integrated 720p camera — but at $999 it’s selling in middling quantities even though it demands a significant premium. At Amazon, a Samsung 27” (1920 by 1080) monitor sells for $329. Some competitors go as low as $250.

Now imagine a 47” or 55” 1080p TV set version of the Thunderbolt Display with fewer ports and better sound, perhaps. Today, Samsung’s top-of-the line 46” sets sell for $1,800; the 55” model is $2,000. Would Apple get a 50% premium over those prices?

But even more than price and margins, there’s volume. Going back to Gene Munster’s ‘Biggest Thing In Consumer Electronics Since The Smartphone’ claim, would Apple’s elegant, slightly better connected, webcam equipped, but nonetheless dumb set sell in iPhone or iPad quantities? I seriously doubt it.

If Apple succeeds in building the right content-and-apps ecosystem around a next-gen Apple TV box, the new device will be in a position to eclipse today’s ungainly set-top boxes, it will have a chance to sell in large quantities at good margins — and thus stop being a ‘‘hobby.” Then, yes, Apple might also sell a few (almost) dumb but definitely elegant sets on the side — as a recreation.


HP’s PC Addiction

hardware By February 26, 2012 Tags: 30 Comments

Why is HP still in the PC business? It must be for the sport, because the money isn’t there. Looking at the quarterly figures released this past week, we see PC revenue down 15% year-to-year, with a low 5.2% Operating Profit:

HP can explain. In the earnings release conference call (transcript obligingly provided by Seeking Alpha), CFO Catherine A. Lesjak invokes the floods in Thailand and their impact on hard disk production as one excuse for the PC revenue shortfall. For her part, CEO Meg Whitman ‘‘opens the first envelope”: She (subtly) blames her predecessor for his PSG spin-off announcement and the ensuing on-again-off-again business disruption.

But the Thailand floods didn’t seem to have much of an impact on Dell, whose latest quarterly numbers show 3% Y/Y growth for Desktop PCs, let alone on the Cupertino neighbor where the Mac business grew by more than 20%. And as a member of HP’s Board of Directors at the time, didn’t Whitman approve the decision to dump the PC?

None of this answers the question: Why stick with a declining product line within a declining industry? Part of the answer lies in the weight of PSG:

The PC is still HP’s biggest business…and its least profitable. The only explanation for staying in the game, to quote Meg Whitman in her conference call remarks:

‘It gives us great return on invested capital and a lot of synergies.’

Perhaps, but what happens to the enjoyable cashflow if the PC business continues to deteriorate, as an industry in general, and as a challenged product line at HP?

Personal computing now comes in three flavors: traditional, tablets, and smartphones. The latter two are dynamic and thriving while the traditional segment stagnates. HP has failed to gain any presence in tablets and smartphones, and now finds itself the biggest player in a market that’s in a race to the bottom.

HP’s absence from the tablet/smartphone segment isn’t for want of trying. When then-CEO Mark Hurd decided to acquire Palm, he was making a clear strategic move for HP to become a major player in smartphones and tablets, to gain independence from stodgy Microsoft, to control its destiny in the newer and more promising personal computing segments. The move was reinforced last August when HP’s Board supported Léo Apotheker’s decision to exit the unprofitable PC business, a gambit inspired by IBM’s similar decision years earlier.

Unfortunately, not-so-small matters of implementation compromised the grand design. Palm’s WebOS tablets and smartphones didn’t fly; Apotheker’s exit-without-an-exit-path announcement was followed by a hasty retreat and Léo’s no less hasty exit. Epaulette mate.

All HP can do now for its PSG business is pray. And, indeed, Meg Whitman bows to the Microsoft altar:

‘So we’re rooting for a fantastic Windows 8 product that’s delivered on time that we can get to the market before the holiday season.’

What does HP have to say about tablets? Not a word. Browse the conference call transcript; CMD-F, ‘tablet’, Enter… Nothing in Whitman’s prepared presentation, no T-word in the Q&A section. (A bonus finding: The silence of the analysts. Let the record show how lamely choreographed these Q&A sessions are. No analyst even dared to ask HP’s CEO about, you know, iPads, Kindle Fires, Android tablets… For once, the elephant-in-the-room metaphor applies: For Apple’s most recent quarter, iPad revenue rose to $9.15B vs. $8.87B for HP’s PSG. Definitely not worthy of a discussion for the benefit of HP’s concerned shareholders.)

At a WSJ event the same day, HP’s CEO finally admits the existence of the iPad…and gives it a patronizing pat on the head:

The iPad is terrific; I have one. I use it to read books or watch TV but I don’t use it to really get work done.

In another interview, as reported by Business Insider, Whitman recycles the old Blackberry enterprise security argument:

‘I think our sweet spot has to be around security. This whole security thing is a big worry, not just for big enterprises but also for medium enterprises and small and medium businesses. So if we can provide devices that consumers really want — and by the way, employees are consumers, too — and we can provide a tablet offering, then we have an opportunity to solve problems for the enterprise and small- and medium-business segments, with products that their employees like and are also secure in terms of protecting the enterprise’s data.’

The S-word paranoia stopped working for the BlackBerry some time ago. Enterprise users have embraced the iPad because, thanks to Apple’s ‘‘control freakery’’, the new tablets are more secure than laptops. I know of one giant oil company that deploys thousands of iPads (and iPhones), complete with the corporation’s own internal App Store, chock-full of homegrown applications for its office workers and road warriors.

It sounds like HP’s CEO is aping the best-of-both-worlds posture affected by Microsoft for its upcoming tablet software: We give you the productivity of a traditional PC plus the portability/fluidity of a touch-friendly tablet. She seems to have ignored the reason for the iPad’s success in business: Be better at less. The iPad doesn’t try to do everything a PC can do, it’s simply better at the things it does.

Business users have figured this out on their own, without waiting for the market research – or the blessings of their IT departments. In this post, TechCrunch reviews a new Forrester report on mobile and personal devices at work:

[T]he report notes that today’s I.T. departments think they have only a handful of devices out in the field: a PC and smartphone for most users, and maybe a tablet for a handful of execs. But in reality, one-half of info workers report using multiple devices, often behind I.T.’s back.

These workers prefer a set of tools to a Swiss Army knife.

Later in the same TechCrunch post:

Employees today are bringing their own devices largely outside of BYOD programs, Gillett says. While 73 percent of workers pick their own phone, 53 percent their own laptop, 22 percent their own desktop, and 66 percent their own tablet, significant numbers of workers report paying for the devices themselves. In the case of smartphones, for example, 57 percent report paying the full price for the device themselves, and 48 percent report paying full price for their own tablet.

There was a time when HP, Dell, and others could sell fleets of PCs because employees had to take what IT gave them. Today, users/workers are more inclined to decide for themselves which devices they want and, in many companies, management supports the initiative because it improves productivity without an increase in risk or cost.

Does HP stand a chance to become a viable supplier of the kinds of devices business users choose for themselves? We know the official answer: We’ll try harder; we’ll eliminate silos and inefficiencies in the supply chain; we’ll innovate again. Some of that may work for a while…but will it work faster than the competition? Also, with the exception of the departed CEO, most of the people who got HP in its current situation are still there. Will the same crew cause the same effects?

I still think HP’s initial intuition was right, that the PC business, as driven by Microsoft and Intel, will increasingly become a race to the bottom — with the two Wintel allies sucking all the profits. Instead of ‘‘rooting for a fantastic Windows 8”, HP should root around for a buyer for its PC business.


Apple Post-Quartum Thoughts

hardware By January 29, 2012 10 Comments

As if you haven’t heard, Apple posted its Q4 earnings last week. I’ll spare you my own encomium and refer you to these links:

For complete numbers, you can go to SEC filings 8-K and 10-Q. If you have the time and inclination, I recommend a walk through the MD&A (Management Discussion & Analysis) in the 10-Q. Never boring, it’s filled with meaningful details and decently written — I couldn’t find a single instance of whereas, forthwith, or insofar.
With this out of the way, a few thoughts and questions are prompted by the earnings release fever:

What happened to the “Android Is Winning” meme?

No question, Google’s Trojan Horse has made tremendous headway, powering more than 50% of all smartphones worldwide. It’s a technically robust product (comrades of mine from a previous OS war work on Android, so I could be biased) and the “free and open” pitch works wonders with handset manufacturers.

Rev 1.0 of the meme held no hope for Apple: Android will kill iOS just like Windows crushed the Mac. (We’ll deal with the Windows vs. Mac part in a moment.) But where’s the evidence Android is in any way ‘‘killing’’ the iPhone? It’s certainly not happening in the US: The iPhone Accounted for 80 Percent of AT&T Smartphone Sales Last Quarter; for Verizon the portion was closer to 70%. Apple sold 62 million iOS devices last quarter; reports of Apple’s imminent demise are greatly exaggerated. (The actual numbers might include some statistical double dipping due to activations, but that applies equally to all brands so the picture remains the same.)

In the meantime, an ABI Research study shows that Android is losing market share. As with all such research, we’ll keep the usual caveats in mind…and wait for the next study.

Let’s not forget the usual litany: Ah, yes, this is great, but Apple’s success can’t last. Some day, they’ll ship a dud; their arrogance will blind them; the toxic waste of success will kill them.

Sure, we all die. But when?

And aren’t those supposed to defeat Apple exposed to the same hubris, creeping mediocrity and belief in their own BS?

Another question: Where are Nokia, Motorola, RIM? The short answer: They’re all hurting:

  • Nokia just posted a steep loss for the quarter, its smartphone revenue declined by 38%.
  • Motorola (in the Android camp and soon part of Google) posted an $80M quarterly loss, selling only 200,000 tablets and 5.3M smartphones.
  • As for RIM, we know they’re in a tailspin. RIM just kicked Messrs. Lazaridis and Balsillie upstairs and got itself a new CEO (actually, a recycled co-COO). Last year, RIM’s share of the US smartphone market fell from 19.7% to 16.6%. (I don’t know how market research firms justify the digit after the decimal point…)

And there’s more: It now looks like Nokia has taken the lead in a race to the bottom. According to Forbes, Nokia’s “feature phones” (aka “dumbphones”), make more money than mid-market Androids.

Nokia‘s $40 feature phones are vastly more profitable than Sony Ericsson‘s $200 Android models. This is not how the smartphone revolution was supposed to turn out.

This would explain why Nokia acquired Smarterphone AS, a Swedish company specializing in “highly advanced functionality on very moderate hardware.” Goodbye Symbian and Meego, hello Windows Phone and Smarterphone. This is going to be interesting.

Speaking of Microsoft, the Redmond company stubbornly refuses to recognize that it’s a Post-PC world. Frank X. Shaw, Microsoft’s articulate chief propagandist, contends that we’ve entered the “PC-Plus” era: The PC still holds center stage, and is enhanced by these new “companion devices’”.

With 15 million iPads and large numbers of Kindle Fires and other tablets, Microsoft’s PC For Ever cant is wearing thin. In 2012, Apple will sell between 50M and 60M tablets; we can assume that total industry sales will be in the neighborhood of 100M units. Tim Cook, Apple’s CEO, openly admits that the iPad cannibalizes Mac sales – and quickly points out that there’s much more to cannibalize on the Windows side.

Last quarter, the Windows business declined by some 6%. Worldwide PC sales were, at best, stagnant; if we remove the nicely growing Mac business from global numbers, Windows PC units actually declined by 8.5%. One you’re over the hill, you pick up speed…

But this shouldn’t be news. Read Paul Robinson’s comment on a Fraser Speirs’ blog post:

There will still be computers and laptops but we will return to a time when they are bought by programmers, hobbyists and tinkerers. Everyone else will buy a ‘computing device’ of some sort and be all the happier for it.

This was written exactly two years ago, on January 29th, 2010. The iPad had just been announced — and criticized for [insert your favorite faults here]. Fraser’s own post, aptly titled Future Shock, deserves to be read in its entirety. I’ll quote two choice morsels:

For years we’ve all held to the belief that computing had to be made simpler for the ‘average person’. I find it difficult to come to any conclusion other than that we have totally failed in this effort.

Secretly, I suspect, we technologists quite liked the idea that Normals would be dependent on us for our technological shamanism. Those incantations that only we can perform to heal their computers, those oracular proclamations that we make over the future and the blessings we bestow on purchasing choices.


If the iPad and its successor devices free these people to focus on what they do best, it will dramatically change people’s perceptions of computing from something to fear to something to engage enthusiastically with. I find it hard to believe that the loss of background processing isn’t a price worth paying to have a computer that isn’t frightening anymore.

In the meantime, Adobe and Microsoft will continue to stamp their feet and whine.

(See also Fraser’s concise explanation of iOS multitasking here and here.)

Microsoft isn’t stupid. They’re just saying what they have to say for today’s business. We’ll see how their PC-Plus story evolves when their ARM-based Windows 8 tablets ship later this year.

Third and last for today: Macintosh.

Although it now plays third fiddle to its iPhone and iPad siblings, the “historic” Macintosh looks hale: +26% in units, +22% in revenue. That’s $6.6B with an operating margin in the 25% range. Compare this to HP, the world’s largest PC maker. In its last reported quarter, HP booked about $10B of PC revenue, with a 6% margin.

The Mac has lost the pole position before: In 2006, Apple saw $7.4B in Macintosh revenue versus $7.7B for the iPod. Right before the iPhone introduction, Apple’s halo product was its music player.

Now, Apple is the iOS company. While the Mac first donated its software DNA to iOS, in the latest OS X Lion we witness the iPadification of the elder.

So far, my experience of OS X Lion is mixed. Is it because the gene splicing is still in transition? Or maybe simply Apple committed its elite troops to the iOS front, leaving things half-done on the Mac…

I’ll leave that discussion for another Monday Note.


Will Microsoft buy RIM or Nokia?

hardware, mobile internet By January 15, 2012 Tags: , , , 14 Comments

We continue along the lines of last week’s Monday Note kriegsspiel with the latest speculation Will Microsoft, at long last, buy RIM? The idea has been kicked around for at least five years: Days after the iPhone’s introduction in January 2007, Seeking Alpha suggested that the Xbox maker ought to buy RIM in order to build an XPhone. In retrospect, this would have saved both companies a lot of grief.

It’s early 2007 and the BlackBerry maker is riding high. With its Microsoft Exchange integration; a solid PIM (Personal Information Manager) that neatly combines mail, calendar, and contacts; and the secure BlackBerry Messenger network, the “CrackBerry” is rightly perceived as the best smartphone on the market. I love my Blackberry and once I manage to get a hosted Exchange account for the family, I show my un-geeky spouse the ease of over-the-air (OTA) synching between a PC and the BlackBerry. ‘No cable?’ No cable. She promptly ditches her Palm device. One by one, our adult children follow suit. For a brief time, we are a BlackBerry family.

But the Blackberry’s success blinds RIM executives. They don’t see – or refuse to believe – that the iPhone poses a threat to their dominance. A little later, Android comes on the scene. Apple and Google deploy technically superior software platforms that, by comparison, expose the Blackberry’s weaker underpinnings. In 2010, RIM acquires the QNX operating system in an effort to rebuild its software foundations, but it’s too late. The company has lost market share and shareholders see RIM squander 75% of its market cap.

Now, imagine: On the heels of the iPhone introduction in 2007, Microsoft acquires RIM and quickly proceeds to do what they’ve only now accomplished with Windows Phone 7: They ditch the past and build a modern system. This would have saved Microsoft a lot of time and RIM shareholders lots of money. Instead, Microsoft mocks the iPhone and brags that the venerable (to be polite) Windows Mobile will own 40% of the market by 2012.

Things don’t quite work as planned. Early 2010, Microsoft wisely abandons Windows Mobile for the more modern Windows Phone 7 (a moniker that combines the Windows Everywhere obsession with a shameless attempt to make us believe the new smartphone OS is a “version” of the desktop Windows 7).

And things still keep not working as planned. WP 7 doesn’t get traction because handset makers are much more interested in Android’s flexibility and, particularly, their price. Android’s Free and Open pitch works wonders; the technology is sound and improves rapidly; OEMs see Microsoft as the old guard, stagnant, while Google is on the rise, a winner.

All the while, Nokia experiences their own kind of “domination blindness”. In 2007 Nokia is the world’s largest mobile phone maker, but they can’t see the technical shortcomings of their aging Symbian platform, or the futility of their attempts to “mobilize” Linux. iOS and Android devices quickly eat into Nokia’s market share and market cap (down 80% from its 2007 high).

In 2010, Stephen Elop, formerly a Microsoft exec, takes the helm and promptly states two brutal truths: This isn’t about platforms, we are in an ecosystem war; technically, we’ve been kidding ourselves. Nokia’s new CEO sees that the company’s system software efforts – new and improved versions of Symbian or Maemo/Moblin/Meego – won’t save the company.

Having removed the blinders, Elop looks for a competitive mobile OS. Android is quickly discarded with the usual explanations: We’d lose control of our destiny… Not enough opportunities for differentiation… The threat of a race to the bottom might have entered the picture as well.

This leads Elop back into his former boss’ arms. Microsoft and Nokia embark on a “special relationship” that involves technical collaboration and lots of money. It’ll be needed: By the end of 2011, WP 7 has less than 2% market share. Nokia’s just-announced Lumia smartphone is well received by critics but will it demonstrate enough superior points to gain significant share against the Android-iOS duopoly? I’ll buy one as soon as possible in order to form an opinion.

The “MicroNokia” relationship isn’t without problems. Many Nokia fans are outraged: Elop sold out, Nokia’s MeeGo was unfairly maligned, the company has lost its independence… See Tomi Ahonen’s blog for more. (And “more” is the right word. Ahonen’s learned, analytical, and often rabid posts range between 4,000 and 10,000 words.)

The Nokia faithful have a point. In my venture investing profession, we call an arrangement such as the MicroNokia partnership “buying the company without paying the price.” Right now, Microsoft appears to control Nokia’s future since, at this stage, Nokia is as good as dead without WP 7.

But doesn’t that mean that Nokia also controls Microsoft’s smartphone future? “Statements of direction” aside, there are no notable WP 7 OEMs. (Samsung and HTC ship a few WP 7 phones, but their share is infinitesimal compared to their Android handsets.) With Android growing so fast, why would a smartphone maker commit to WP 7 while Nokia holds a privileged status on the platform?

Microsoft is making smart moves against Android by using their patent portfolio to force Android handset makers to pay (undisclosed) royalties. With LG as the latest licensee, Microsoft appears to have snared 70% of Android OEMs. The (serious) joke in the industry is that Microsoft makes more money from Android than from WP 7.

But success with patents doesn’t translate into more WP 7 OEMs, which leaves us to wonder: Will Microsoft consummate the relationship and acquire Nokia, whether the entire corpus or, at least, the fecund (smartphone) bits? For years, Microsoft has claimed they’re all about choice, and when it comes to the PC, that’s true: Businesses and consumers have a wide choice of PCs running Windows. But their customers have no real choice when it comes to WP 7: It’s Nokia or…Nokia. They might as well tie the knot and call it what it is: Microsoft or Microsoft. It works wonders for Xbox and Kinect.

Going back to RIM, we hear it’s ‘’in play’’, that they’ve hired investment bankers to “look at their strategic alternatives”. In English: They’re looking for a buyer.

But who? Microsoft is otherwise engaged. So is Motorola. And forget Samsung.

With RIM’s market share dropping precipitously, and no sign of a rebound with spanking new models until the second half of 2012, who would want to risk billions in a market that’s controlled by competitors who manage to be both huge and fast-growing? Sure, RIM is still in the black, but its cash reserves are dwindling: the Cash and cash equivalents line went from $2.7B last February to $1.1B in November 2011. What’s left will evaporate quickly if revenue and profits keep dropping, as they’re likely to do for the foreseeable future.


The Apple Wireless Carrier (Part 2)

hardware, mobile internet By November 20, 2011 19 Comments

Spurred by years of frustration with AT&T, Verizon, Orange and the like, I wrote a half-serious Monday Note a few months ago (Steve, Please Buy Us A Carrier!) that imagined an Apple wireless universe. Simple pricing, no-surprise phone bills, no-tricks agreements. There would be dancing in the streets…

Unfortunately (I concluded), if Apple were to acquire a carrier — T-Mobile, say, to keep it out of AT&T’s clutches — they’d be saddled with a legacy business, its infrastructure, its people, its culture. That’s not the Apple way. They didn’t get into retail by buying up and remodeling Circuit City stores; the company builds from the ground up.

There are other problems. A single carrier – any carrier — would have limited geographic impact; the potential billions in service revenue is attractive, but it doesn’t serve Apple’s #1 business: selling hardware; wrestling with the FCC over regulatory issues would be intolerable.

Give us a carrier…It’s a nice fantasy but Apple isn’t going to spend tens of billions to buy a headache.

A few weeks later, I was politely but firmly admonished by my daughter’s significant other: Yes, buying a carrier – or a string of carriers – probably isn’t in Apple’s playbook, but let’s not be so quick to kick them out of the game. There is, he said, a better, simpler way for Apple to indulge their iPhone customers.

Today, Apple uses its cash to buy capacity from parts suppliers and manufacturing contractors. Why not do something similar with wireless carriers? The Cupertino company could buy “capacity” (minutes and gigabytes) from Verizon, AT&T, Sprint, or even China Mobile, Vodafone, and the intriguingly-named Tata Teleservices. Apple would become a Mobile Virtual Network Operator, a company that provides cell phone services that ride on someone else’s infrastructure.

There are dozens of MVNOs operating in the US: Virgin Mobile, Firefly, Straight Talk… Even 7-Eleven, the convenience store giant, offers its “own” cellular network: 7-Eleven Speak Out Wireless. I found one MVNO, H2O Wireless, that claims to “work” with iPhones and Android devices, although keep in mind the (in)famous “Some Restrictions Apply”.

This is a much livelier scene than I imagined. In 2006, according to the felicitously named, there were only 330 MVNOs. Wiki the term today and you’ll read that “there are 645 active MVNO operations in the world.” (For the modest sum of $1,125, you can buy a PDF copy of the MVNO Directory 2011 which lists all 645 companies. One free detail: 205 new companies in one year!)

Add Apple’s new “worldphone”, the iPhone 4S straddling GSM and CDMA networks, and you have the ingredients for a virtuous virtual Apple carrier

Insiders tell me this is easier said than done. They’re right. Wireless networks are complicated. Picture the attempt to superimpose Apple-style simplicity on top of layers upon layers of old hardware and patchwork software that span several “somewhat compatible” networks. Once again, an idea that sounds good is, in practice, unfeasible. Worse, the beautiful theory might lead to the sorriest kind of mediocrity: The product that’s impossible to fix and can’t be killed.

Still, I’m optimistic. I find the froth, the growth of MNVO companies exciting, encouraging. Whether they admit it or not, the incumbents know their culture isn’t going to foster innovation, only incrementation. For them, MVNOs might be a way to wage a proxy war against the competition by attracting innovators to their side — until the unruly mercenaries kill the overlord that engaged them.

Back to Apple, they could buy, rather cheaply, a number of MVNOs or even build their own. If 7-Eleven can do it…

Now we find out that as far back as 2005, “Jobs initially hoped to create his own network with the unlicensed spectrum that Wi-Fi uses rather than work with the mobile operators…” This came out in a talk given last week by John Stanton, a cellular industry pioneer, at a Law Seminars conference in Seattle. No real surprise: Jobs wasn’t fond of carriers. He considered them to be obstacles rather than instruments of progress and was naturally inclined to look for ways around them. We know what happened. Jobs ended up working with carriers — but only if they accepted Apple’s control over the handset features and iTunes and App Store content sales.

End of story? Not quite.

Take a look at the recently-announced Republic Wireless, a hybrid carrier that rides on a combination of WiFi networks and cellular infrastructure. The phone, a LG Optimus Android device, costs $199 upfront and the service goes for $19/month, with unlimited minutes, data, and text. No hidden fees, just sales tax. Free roaming in the US over Sprint’s network. Free WiFi calls to the US from anywhere in the world. No contract, no termination fee, cancel when you want. This is far from the $100+/month, two-year indentureship that AT&T offers its iPhone users.

Reactions to the new service, one of a broad array offered by (a Carolina company that presents itself as a “Complete BUSINESS Communications Provider”) range from guarded to enthusiastic. As Ina Fried of All Things D points out, Some Restrictions (Still) Apply:

“…the company wants to deliver most of its service over Wi-Fi, using cellular more as a backup for when Wi-Fi isn’t available. Customers who…gobble up too much cellular data or wireless minutes will be asked to find another carrier.”

The company buys 3G network capacity from Sprint. Return too often to the “all you can eat” network buffet and management will escort you out.

We’ll have to wait a few months to see what happens next. Will Republic Wireless grow into a viable, disruptive business, proving Jobs was right to look for a way to build a hybrid carrier? Will its business model fail because $19/month won’t be enough to pay the Sprint bill? Or will Republic Wireless end up as a beta for Apple’s own hybrid network?

An afterthought before we close.

Last week, we heard a titillating rumor: an Amazon smartphone would come out late next year. At first, I dismissed it as unrealistic. Then, I looked at my brand new Kindle Fire and marveled again at the way Amazon “picked Android’s lock”. The company took the Android Open Source code, added its own UI, applications, services and app store. The result is an ‘‘unofficial” Android device without any Google control on it, without the Trojan Horse apps. Further, by slotting its own browser between the Amazon customer and the Google search engine, Bezos & Co. keep accumulating user data without sharing any of it with their Mountain View frenemies. Why not apply this newly developed arrangement to an Amazon smartphone?
I also realized that, in order to feed data to its Kindles, Amazon developed Whispernet, a 3G network riding other carriers‘ infrastructure — which sounds like an MVNO of sorts.
We know the Kindle Fire model of being sold at cost or at a small loss because it boosts the company’s real business: selling things and content. The hypothetical Amazon smartphone (hardware + MVNO contract) would be priced in the same spirit.

More disruption on the way?