NYT vs Buzzfeed: Valuations Discrepancies – Part II

 

by Frédéric Filloux

My last column about new valuations in digital media triggered an abundance of comments. Here are my responses and additions to the discussion. 

The most revealing part of argument used by those who tweeted (800 of them), commented or emailed me, is how many wished things to remain simple and segregated: legacy vs. native media, content producers vs. service providers, ancestral performances indicators and, of course, the self-granted permission to a certain category of people to decide what is worthy. Too bad for cartesian minds and simplifiers, the digital world is blurring known boundaries, mixing company purposes of and overhauling the competitive landscape.

Let’s start with one point of contention:

Why throw LinkedIn, Facebook and old companies such as the NYTimes or the Guardian into the equation? That’s the old apples and oranges point some commenters have real trouble seeing past. Here is why, precisely, the mix is relevant.

Last Tuesday February 17, LinkedIn announced it had hired a Fortune reporter as its business editor. Caroline Fairchild is the archetypal modern, young journalist: reporter, blogger with a cause (The Broadsheet is her newsletter on powerful women), mastering all necessary tools (video editing, SEO tactics, partnerships) as she went from Bloomberg to the HuffPo, among other gigs. Here is what she says about her new job:

 LinkedIn’s been around for 11 years and today publishes more than 50,000 posts a week (that’s roughly 10 NYTs per day) — but the publishing platform is still an infant, debuting widely less than a year ago. The rules and roles are being defined and redefined daily; experimenting is a constant.

Here we are: LinkedIn intends to morph into a major business news provider and a frontal competitor to established business media. Already, scores of guest columnists publish on a regular basis on LinkedIn, enjoying audiences many times larger than their DeLuxe appearances in legacy media. (For the record, I was invited to blend the Monday Note into LinkedIn, but the conditions didn’t quite make sense to us. Jean-Louis Gassée and I preferred preserving our independent franchise.)

For a $2.2bn revenue company such as LinkedIn, creating a newsroom aimed at the business community definitely makes sense and I simply wonder why it took them so long to go full throttle in that direction — not only with an avalanche of posts but with a more selective, quality-oriented approach. If it shows an ability to display properly value-added editorial, LinkedIn could be poised to become a potent publishing platform eventually competing with The Economist, Quartz, FT.com or Les Echos. All of it with a huge data analytics staff led by world-class engineers.

That’s why I think the comparison with established media makes sense.

As for Facebook, the argument is even more straightforward. Last October, I published a column titled How Facebook and Google Now Dominate Media Distribution; it exposed our growing dependence on social media, and the need to look more closely at the virtues of direct access as a generator of quality traffic. (A visit coming from social generates less than one page view versus 4 to 6 page views for direct access.) Facebook has become a dominant channel for accessing the news. Take a look at this table from Reuters Institute Report on Digital News Report (PDF here.)

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There’s no doubt that these figures are now outdated as media’s quest to tap into the social reservoir has never been greater. (In passing, note the small delta between News Lovers and Casual Users.) It varies widely from one country to another, but about 40% of the age segment below 35 relies on social as its primary source for news… and when we say “social”, we mostly mean Facebook. Should we really ignore this behemoth when it comes to assess news economics? I don’t think so.

More than ever, Facebook deserves close monitoring. No one is eager to criticize their dope dealer, but Mark Zuckerberg’s construction is probably the most pernicious and the most unpredictable distributors the news industry ever faced.

For instance, even if you picked a given media for your FB newsfeed, the algorithm will decide how much you’ll see from it, based on your past navigation and profile. And numbers are terrible: as an example, only 16% of what the FT.com pushes on Facebook actually reaches its users, and that’s not a bad number when compared to the rest of the industry.

And still, the media sector continues to increase its dependence on social. Consider the recent change in the home page of NowThis,  a clever video provider specialized in  rapid-fire news clips:

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No more home page! Implementing a rather bold idea floated years ago by BuzzFeed’s editor Ben Smith, NowThis recently decided to get rid of the traditional web access to, instead, propagate its content only via, from left to right: Tumbler, Kik, YouTube, Facebook, Twitter, Instagram, Vine, and Snapchat. We can assume that this strategy is based on careful analytics (more on this in a future Monday Note.)

Among other questions raised by Monday Note readers: Why focus solely on the New York Times and why not include the Gannetts or McClatchys? It’s simply because, along with The Guardian or the FT.com, the NYT is substantially more likely to become predominantly a digital brand than many others in the (old) league.

To be sure, as one reader rightly pointed out, recent history shows how printed media that chose to go full digital end up losing on both vectors. Indeed, given the size of its print advertising revenue, the Times would be foolish to switch to 100% online — at least for now. However, the trends is there: a shrinking print readership, fewer points of copy sale, consequently higher cost of delivery… Giving up the idea of a daily newspaper (while preserving a revamped end-of-the-week offering) its just a matter of time — I’ll give it five years, not more. And the more decisive the shift, the better the results will be: Keep in mind that only 7 (seven!) full-time positions are assigned to the making of the Financial Times’ print edition; how many in the vast herd of money-losing, newspaper-obsessed companies?

Again, this is not a matter of advocating the disappearance of print; it is about market relevancy such as addressing niches and the most solvent readerships. The narrower the better: if your target group is perfectly identified, affluent, geographically bound — e.g. the financial or administrative district in big capital — a print product still makes sense. (And of course, some magazines will continue to thrive.)

Finally, when it comes to assessing valuations, the biggest divide lies between the static and the dynamic appreciation of the future. Wall Street analysts see prospects for the NYT Co. in a rather static manner: readership evolution, in volumes and structures, ability to reduce production expenditures, cost of goods — all of the above feeding the usual Discounted Cash Flow model and its derivatives… But they don’t consider drastic changes in the environment, nor signs of disruption.

Venture Capital people see the context in a much more dynamic, chaotic perspective. For instance: the unabated rise of the smartphone; massive shifts in consumer behaviors and time allocation; the impact of Moore’s or Metcalfe’s Laws (tech improvements and network effects); or a new breed of corporations such as the Full Stack Startup concept exposed by Andreessen Horowitz’ Chris Dixon (the man behind BuzzFeed valuation):

Suppose you develop a new technology that is valuable to some industry. The old approach was to sell or license your technology to the existing companies in that industry. The new approach is to build a complete, end-to-end product or service that bypasses existing companies.
Prominent examples of this “full stack” approach include Tesla, Warby Parker, Uber, Harry’s, Nest, Buzzfeed, and Netflix.

All of it is far more enthralling than promising investors a new print section for 2016, two more tabs on the website all manned by a smaller but more productive staff.

One analysis looks at a continuously evolving environment, the other places bets on an uncertain, discontinuous future.

The problem for legacy media is their inability to propose disruptive or scalable perspectives. Wherever we turn — The NYT, The Guardian, Le Monde — we see only a sad narrative based on incremental gains and cost-cutting. No game changing perspective, no compelling storytelling, no conquering posture. Instead, in most cases, the scenario is one of quietly managing an inevitable decline.

By contrast, native digital players propose a much brighter (although riskier) future wrapped in high octane concepts, such as: Transportation as reliable as running water, everywhere, for everyone (Uber), or Organize the world’s information and make it universally accessible and useful (Google), or Redefining online advertising with social, content-driven publishing technology, [and providing] the most shareable breaking news, original reporting, entertainment, and video across the social web (BuzzFeed).

No wonder why some are big money attractors while others aren’t.

frederic.filloux@mondaynote.com

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Apple Car: Three More Thoughts

 

by Jean-Louis Gassée

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

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

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The NYTimes could be worth $19bn instead of $2bn  

 

by Frédéric Filloux

Some legacy media assets are vastly underestimated. A few clues in four charts.   

Recent annual reports and estimates for the calendar year 2014 suggest interesting comparisons between the financial performance of media (either legacy or digital) and Internet giants.

In the charts below, I look at seven companies, each in a class by itself:

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A few explanations are required.

For two companies, in order to make comparisons relevant, I broke down “digital revenues” as they appear in financial statements: $351m for the New York Times ($182m in digital advertising + $169m for digital subscriptions) and, for The Guardian, $106m (the equivalent of the £69.5m in the Guardian Media Group annual report (PDF here).

Audience numbers above come from ComScore (Dec 2014 report) for a common reference. We’ll note traffic data do vary when looking at other sources – which shows the urgent need for an industry-wide measurement standard.

The “Members” column seemed necessary because traffic as measured by monthly uniques does differ from actual membership. Such difference doesn’t apply to news media (NYT, Guardian, BuzzFeed).

For valuations, stock data provide precise market cap figures, but I didn’t venture putting a number the Guardian’s value. For BuzzFeed, the $850m figure is based on its latest round of investment. I selected BuzzFeed because it might be one of the most interesting properties to watch this year: It built a huge audience of 77m UVs (some say the number could be over 100m), mostly by milking endless stacks of listicles, with clever marketing and an abundance of native ads. And, at the same time, BuzzFeed is poaching a number first class editors and writers, including, recently, from the Guardian and ProPublica; it will be interesting to see how Buzzfeed uses this talent pool. (For the record: If founder Jonah Peretti and editor-in-chief Ben Smith pull this off, I will gladly revise my harsh opinion of BuzzFeed).

The New York Times is an obvious choice: It belongs to the tiny guild of legacy media that did almost everything right for their conversion to digital. The $169m revenue coming from its 910,000 digital subscribers didn’t exist at all seven years ago, and digital advertising is now picking up thanks to a decisive shift to native formats. Amazingly enough, the New York Times sales team is said to now feature a ratio of one to one between hardcore sales persons and creative people who engineer bespoke operations for advertisers. Altogether, last year’s $351m in digital revenue far surpasses newsroom costs (about $200m).

A “normal” board of directors would certainly ask management why it does not consider a drastic downsizing of newspaper operations and only keep the fat weekend edition. (I believe the Times will eventually go there.)

The Guardian also deserves to be in this group: It became a global and digital powerhouse that never yielded to the click-bait temptation. From its journalistic breadth and depth to the design of its web site and applications, it is the gold standard of the profession – but regrettably not for its financial performances, read Henry Mance’s piece in the FT.

Coming back to our analysis, Google unsurprisingly crushes all competitors when it comes its financial performance against its audience (counted in monthly unique visitors):

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Google monetizes its UVs almost five times better than its arch-rival Facebook, and 46 times better than The New York Times Digital. BuzzFeed generates a tiny $1.30 per unique visitors per year.

When measured in terms of membership — which doesn’t apply to digital media — the gap is even greater between the search engine and the rest of the pack :

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The valuation approach reveals an apparent break in financial logic. While being a giant in every aspects (revenue, profit, market share, R&D spending, staffing, etc), Google appears strangely undervalued. When you divide its market capitalization by its actual revenue, the multiple is not even 6 times the revenue. By comparison, BuzzFeed has a multiple of 8.5 times its presumed revenue (the multiple could fall below 6 if its audience remains the same and its projected revenue increases by 50% this year as management suggests.)  Conversely, when using this market cap/revenue metric, the top three (Twitter, Facebook, and even LinkedIn) show strong signs of overvaluation:

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Through this lens, if Wall Street could assign to The New York Times the ratio Silicon Valley grants BuzzFeed (8.5 instead of a paltry 1.4), the Times would be worth about $19bn instead of the current $2.2bn.

Again, there is no doubt that Wall Street would respond enthusiastically to a major shrinkage of NYTCo’s print operations; but regardless of the drag caused by the newspaper itself, the valuation gap is absurdly wide when considering that 75% of BuzzFeed traffic is actually controlled by Facebook, certainly not the most reliably unselfish partner.

As if the above wasn’t enough, a final look confirms the oddity of market valuations. Riding the unabated trust of its investors, BuzzFeed brings three times less money per employee  than The New York Times does (all sources of revenue included this time):

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I leave it to the reader to decide whether this is a bubble that rewards hype and clever marketing, or if the NYT is an unsung investment opportunity.

frederic.filloux@mondaynote.com

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The Fantastic Apple Car

 

by Jean-Louis Gassée

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

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

I even thought of writing a little parody piece:

WinCar, Microsoft Disrupts The Auto Industry.

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

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

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

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

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

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

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

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

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

Let’s count the ways….

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

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

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

But now let’s look at the reality.

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

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

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

355-UniqueTech

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

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

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

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

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

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

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

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

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

The fantastic Apple Car is a fantasy.

JLG@mondaynote.com

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How Many Laws Did Apple Break?

 

by Jean-Louis Gassée

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

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

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

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

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

Apple Largest Quarterly Profit Ever Edited

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

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

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

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

But not everyone thinks highly of Apple’s doings.

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

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

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

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

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

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

We now turn to law-breaking.

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

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

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

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

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

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

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

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

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

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

Dediu Losing PC War

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

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From “Trust In News” to “News Profiling”

 

by Frédéric Filloux

For news organizations, the key challenge is to lift value-added editorial above Internet noise. Many see “signals” as a possible solution, one that could be supplemented by a derivative of ad profiling.   

Last year Richard Gingras and Sally Lehrman came up with the Trust Project (full text here, on Medium). Richard is a seasoned journalist and the head of News and Social at Google; Sally is a senior journalism scholar at the Markkula Center for Applied Ethics at Santa Clara University in California.

Their starting point is readers’ eroding confidence in media. Year after year, every survey confirms the trend. A recent one, released ten days ago at the Davos Economic Forum by the global PR firm Edelman confirms the picture. For the first time, according to the 2014 version of Edelman’s Trust Barometer, public trust in search engines surpasses trust in media organizations (64% vs 62%). The gap is even wider for Millennials who trust search engines by 72% vs 62% for old medias.

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And when it comes to segmenting sources by type — general information, breaking, validation –, search leaves traditional media even further in the dust.

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No wonder why, during the terrorist attack in Paris three weeks ago, many publishers saw more than 50% of their traffic coming from Google. This was reflected on with a mixture of satisfaction (our stuff surfaces better in Google search and News) and concern (a growing part of news media traffic is now in the hands of huge US-based gatekeepers.)

Needless to say, this puts a lots of pressure on Google (much less so to Facebook that is not that much concerned with its growing role as a large news conduit.) Hence the implicit mission given to Richard Gingras and others to build on this notion of trust.

His project is built around five elements to parse news contents with:

#1. A mission and Ethics statement. As described in the Trust Project:

One simple first step is a posted mission statement and ethics policy that convey the mission of a news organization and the tenets underlying its journalistic craft. Only 50% of the top ten US newspapers have ethics policies available on the web and only 30% of ten prominent digital sites have done so.

The gap between legacy and digital native news media is an interesting one. While the former have built their audience on the (highly debatable) notion of objective reporting, balanced point of views, digital natives come with a credibility deficit. Many of the latter are seen as too close to the industry they cover; some prominent ones did not even bother to conceal their ties to the venture capital ecosystem, others count among their backers visible tech industry figures. Others are built around clever click-bait mechanisms that are supplemented — marginally — by solid journalism. (I’ll let our readers put names on each kind.)
In short, a clear statement on what a media is about and what are the potential conflicts of interests is a mandatory building block for trust.

#2. Expertise and Disclosure. Here is the main idea:

Far too often the journalist responsible for the work is not known to us. Just a byline. Yet expertise is an important element of trust. Where has their work appeared? How long have they worked with this outlet? Can audiences access their body of work? 

Nothing much to add. Each time I spot an unknown and worth reading writer, my first reaction is to Google him/er to understand who I’m dealing with. Encapsulating background information in an accessible way (and standardized enough to be retrievable by a search engine) makes plain sense. 

#3. Editing Disclosure, i.e. details on the whole vetting process a story had gone through before hitting the pixels. Fine, but it’s a legacy media approach. Stories by Benedict Evans, Horace Dediu, or Jeff Jarvis (see his view on the Trust Project), just to name a few respected analysts, are not likely to be reviewed by editors, but their views deserve to be surfaced as original contents. Therefore, Editing Disclosure should not carry a large weight in the equation.

#4. Citation and Corrections. The idea is to have Wikipedia-like standards that give access to citations and references behind the author’s assertions. This is certainly an efficient way to prevent plagiarism, or even “unattributed inspiration”. The same goes for corrections and amplifications, as the digital medium encourages article versioning.

#5. Methodology. What’s behind a story, how many first-hand interviews, reporting made on location as opposed to the soft reprocessing of somebody else’s work. Let’s be honest, the vast majority of news shoveled on the internet won’t pass that test.

Google’s idea to implement all of the above is to create a set of standardized “signals” that will yield objective ways to extract quality stuff from the vast background noise on the Web. Not an easy task.

First, Google news already works that way. In a Monday Note based on Google News’ official patent filing (see: Google news: The Secret Sauce), I looked at the signals isolated by Google to improve its news algorithm. There are 13 of them, ranging from the size of the organization’s staff to the writing style. It certainly worked fine (otherwise, Google News won’t be such a success). But it no longer is enough. Legacy media are now in constant race to produce more in order to satisfy Google’s (News + Search) insatiable appetite for fresh fodder. In the meantime, news staffs keep shrinking and “digital serfs”, hired for their productivity rather than their journalistic acumen, become legions. Also, criteria such as the size of a news staff no longer apply as much, this because independent writers and analysts — as those mentioned above — have become powerful and credible voices.

In addition, any system aimed at promoting quality — and value — is prone to guessing, to cheating. Search algorithm has become a moving target for all the smart people the industry has bred, forcing Google to make several thousands adjustments in its search formulae every year.

The News Profile and Semantic Footprint approach. If the list stated by the creators of The Trust Project is a great start, it has to be supplemented by other systems. Weirdly enough, profiling techniques used in digital advertising can be used as a blueprint.

Companies specialized in audience profiling are accumulating anonymous profiles in staggering numbers: to name just one, in Europe, Paris-based Weborama has collected 210m profiles (40% of the European internet population), each containing detailed demographics, consumer tastes for clothing, gadgets, furniture, transportation, navigation habits, etc. Such data are sold to advertisers that can then pinpoint who is in the process of acquiring a car, or of looking for a specific travel destination. No one ever opted-in to give such information, but we all did by allowing massive cookies injections in our browsers.

Then, why not build a “News Profile”? It could have all the components of my news diet: The publications I subscribed or registered to, the media I visit on a frequent basis, the authors I searched for, my average length of preferred stories, my propensity to read large documented profiles of business persons, the documentaries I watched on You Tube, the decks I downloaded from SlideShare… Why not adding the books I ordered on Amazon and the people I follow on Twitter, etc. All of the above already exists inside my computer, in the form of hundreds, if not thousands, of cookies I collected in my navigations.

It could work this way: I connect — this time knowingly — to a system able to reconcile my “News Profile” to the “Semantic Footprint” of publications, but also of authors (regardless of their affiliation, from NYT’s John Markoff to A16z’ Ben Horowitz), type of production, etc. Such profiling would be fed by criteria described in The Project Trust and by Google News algorithm signals. Today, only Google is in the position to perform such daunting task: It has done part of the job since the first beta of Google News in 2002, it collects thousands of sources, and it has a holistic view of the Internet. I personally have no problem with allowing Google to create my News Profile based on data… it already has on me.

I can hear the choir of whiners from here. But, again, it could be done on a voluntary basis. And think about the benefits: A skimmed version of Google News, tailored to my preferences, that could include a dose of serendipity for good measure… Isn’t it better than a painstakingly assembled RSS feed that needs constant manual updates? To me it’s a no-brainer.

frederic.filloux@mondaynote.com

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Microsoft Makes Clever Moves

 

by Jean-Louis Gassée

While Microsoft Office for mobile is a satisfying success, the company can’t seem to create — or even buy — a mobile operating system that can compete with iOS and Android. Perhaps they’ve been looking in the wrong direction and can return to their “trusted” Embrace and Extend tactics.

Microsoft published its numbers for its Fiscal Year 2015 2nd quarter ending in December 2014. While the company isn’t the money machine it once was, it is healthy: Revenue grew 8% to $26.5B, Operating Income declined only a bit (- 2%) at $7.8B, there will be another $.31 dividend for the quarter, and cash reserves stand at $90B.

Such numbers give Satya Nadella the space he needs to implement the Mobile First – Cloud First vision he outlined last year. A key component of this plan is to spread Office applications across all platforms and devices: PCs, tablets, and smartphones – native apps as well as Web versions. Last week, Microsoft took another step in this direction with the release of its historic Outlook PIM (Personal Information Manager) app for Android and iOS.

While the Outlook release was warmly received, I’ve learned to take enthusiastic press reviews with caution. I prefer to “play customer”: I buy and use the product in klutzy ways engineers can’t foresee and, as a result, I get a better idea of how the product will fare in the real world. So, I installed Outlook on my iPad mini and, not to pour salt on some wounds… It Just Works. It runs my Exchange account at work, and it speaks Gmail and iCloud as well. No ifs, no buts.

Perhaps the most interesting aspect of the release is that it completes the core components of the native MS Office bundle: Word, PowerPoint, Excel, and now Outlook. It doesn’t matter which platform you use — Windows, Mac, Android, or iOS — you now have the full complement of Microsoft’s productivity apps built specifically for your device.

I used to think that if Apple could get its software house in order and work out the  (numerous) bugs, iWork could easily displace Microsoft Office on Mac, iCloud, and iOS. After all, iWork is free… Now, I’m not so sure. With this release, MS Office provides a fit and finish, a safe and effective cross-platform solution that’s worth the price of admission, particularly in the Enterprise world.

But Apple isn’t the competitor Microsoft worries about. Cross-platform Office is a powerful countermove against Google Apps. Microsoft doesn’t have a dog in the old Web vs. Native Apps fight, it offers both everywhere.

In other matters, however, things aren’t entirely rosy for Microsoft. Its smartphone hardware business isn’t doing well. A look at the recent 10-Q and at the slide presentation for the Earnings Release shows hardware revenue of $2.3B, for 10.5M Lumia phones and 39.7M on-Lumia devices:

Phone Hardware

Microsoft’s smartphone business is still dealing with the Nokia acquisition trauma, so these numbers are less reliable than in a stable business. But even if we proceed with caution, when we divide the $2.3B revenue number by 50.2M (the total number of devices), we get a meager ASP (Average System Price) of $46.

One could argue that the computation is misleading because it throws Non-Lumia phones — such as the Nokia X running Android — into the same pot as worthier Lumia devices. So let’s take take another stab at the numbers: Let’s imagine that all non-Lumia phones are simply given away, $0 ASP. That leaves us with 10.5M Lumia phones divided into $2.3B revenue for a yield of $219 ASP. Compare this to the $687 ASP Apple got for its iPhones last quarter. Playing with numbers a bit more, if you assume a $20 ASP for non-Lumia “dumbphones”, the ASP for Lumia smart devices comes to $143.

As discussed here last December, even with “forever” cash reserves, why bother? Big enterprises such as Bank of America and Chase that have discontinued Windows Phone support agree.

After fruitlessly jumping into a Broad Strategic Partnership with Nokia and then promptly Osborning it, Microsoft acquired the company’s smartphone business rather than letting it die. It’s still not working and, as the most recent industry numbers show, there’s little hope that Microsoft’s phone hardware business, while saddled with the hapless Windows Phone OS, will be anything other than a waste of time, money, and reputation. Many have suggested that Microsoft drop its OS efforts and fork Android, returning, in Ben Thompson’s words, to “its roots of embracing and extending”.

That brings us to Cyanogen. In the grand tradition of Homebrew Computing that gave birth to Microsoft, Apple and countless others, developers have taken the Open Android operating system and opened it even more, creating a raft of improved versions.

Initially, many thought these variants were just for the hacker who wanted to play with his Android device, reflash its ROM, and grow hair on his chest. But one Android strain, CyanogenMod, exhibited such vitality hat it spawned an organized, for-profit company. In 2012, Benchmark and Redpoint led a $7M Series A investment in Cyanogen, Inc. (“Series A” is typically the first serious VC money, after a Seed Round.) In December, 2014, there was a more substantial $23M Series B round, led by another member of the Valley’s VC nobility, Andreessen Horowitz. And now, there is talk of a $70M round…  in which Microsoft might be a “minority” player.

Kirk McMaster, Cyanogen’s CEO, has been unusually candid about the company’s goal [emphasis mine]:

“I’m the CEO of Cyanogen. We’re attempting to take Android away from Google.”

and…

We’ve barely scratched the surface in regards to what mobile can be. Today, Cyanogen has some dependence on Google. Tomorrow, it will not. We will not be based on some derivative of Google in three to five years. There will be services that are doing the same old bulls— with Android, and then there will be something different. That is where we’re going here.”

Ambitious words, indeed, but they’re backed by some of the Valley’s smartest money.

Microsoft’s role in Cyanogen is probably just a minor one; perhaps it will help with the patent portfolio it unleashes on Android OEMs. But the company’s involvement at all could be seen as part of its long battle with Google. Recall that “Google acquired Android in 2005 as a defense against Windows Mobile dominating smartphones just as Windows dominated PCs.” Later, in 2008, Microsoft acquired Android founder Andy Rubin’s previous company Danger, whose Sidekick design inspired Google’s pre-iPhone G1 devices.

Cyanogen has long been in Google’s cross-hairs. In its early days, CyanogenMod (since renamed to Cyanogen OS) was perceived as such a nuisance — or a threat — that its users suddenly found that they needed to perform contorted workarounds to load Google’s proprietary apps (Google Map, YouTube, GTalk, and so on). Can Microsoft resist the temptation to aid this Google irritant?

Tantalizing as the Cyanogen investment is, it might not be enough to keep Microsoft in the brutal smartphone hardware business, but it’s consistent with the company’s efforts to undermine Google’s ecosystem by any means necessary. Including gathering allies to do to Android what Bill Gates once did to Lotus 1-2-3.

Let’s keep in mind that the mobile industry is no more mature than the PC industry was in the mid eighties. Things could get interesting as Cyanogen reveals more of the business model its muscular investors have bought into. And they will become particularly interesting if the company can corral support from industry players who are eager to get out from under Google’s thumb.

JLG@mondaynote.com

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Forking Apple Brands

 

by Jean-Louis Gassée

After last week’s lengthy discussion of Apple’s software foibles, today’s fare is lighter but intriguing: The Apple logo is a stamp of excellence that’s proudly worn by the Mac, iPhone, iPad, Watch… why is it withheld from one of Apple’s other major group of products?]

Naming a computer company Apple was a true stroke of genius, the kind that sits beyond the reach of consciousness. With the name came a visual representation. The first, unofficial logo evoked Isaac Newton’s famous epiphany:

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(Source: Edible Apple)

Not a stroke of genius. It was a too kitschy, too busy, and failed to provide an easily memorized and recognized image, a signpost to the company’s products. It was quickly replaced with the simple Apple bite logo that we know today:

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(Source: Graphic Design 1)

Theories of the the logo’s meaning and construction occupy a corner of Apple mythology. Some are misguided (it’s an homage to Alan Turing, it’s a blasphemous reference to the forbidden fruit), while others are playful: A fellow named Barcelos Thiago points out the use of the Fibonacci series in the Apple logo (and in just about everything else).

Apple’s reputation, products, and imagery have coalesced into a brand, a mark that’s burned (as in the word’s origin) into the collective consciousness. Last year, Forbes called Apple the world’s most valuable brand. It’s impossible to measure contribution of the name and logo to the company’s success, but a peek at the Forbes’ list shows how little Apple spends advertising its products compared to Microsoft, Google, Samsung, or less technical companies such as Coca-Cola or Louis Vuitton:

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A brand exists in a circular relationship with the promises that it makes to the customer. If the products and services deliver on the pledge, the customer is more inclined to swear loyalty to the brand. A close examination of some of these circles brings up apparent paradoxes. Burberry’s, for example, was once credited for inventing the oxymoronic “mass-marketing of exclusivity” – a trick that Louis Vuitton now performs at the highest of levels, a feat that requires an advertising budget more than four times Apple’s.

The late Fred Hoar, an erudite Harvard graduate who once served as the head of Apple’s Marketing Communications, likened brand advertising to urinating inside one’s dark-blue flannel suit: It makes you feel warm but no one sees anything.

No such waste at at Apple. The product, not the brand, is the hero. Apple’s ads focus on the product, on what it does, on the feats that it allows unnamed customers to perform. The brand ascends to where it belongs, above specific products and promotions.

Apple ads are also (mostly) free from celebrity endorsements. The imprimatur of a noted figure can be effective — I’m thinking of George Clooney second banana persona in Nestlé’s tongue-in-cheek Nespresso ads. But we usually feel the use of endorsements as an admission that the product needs stilts, that it lacks differentiation.

If Apple ever hires a spokesperson for its iPhones, even if it’s Andrew Wiles or, in a couple of years, a happily retired Barack Obama, you should look elsewhere: The brand has started to unravel. (Apple does, of course, occasionally use celebrities — this ad featuring the Williams sisters for example — but as Adweek points out, it’s rare.)

Given this thinking, what do we make of Apple’s other brand, Beats?

Beats was acquired last year, for $3.2B. The reasons behind the price are still a bit unclear, but we already see ads that aren’t much more than mini-movies of celebrity athletes (Colin Kaepernick, Cesc Fabregas, LeBron James) shutting out the noise of irate fans and implications of social injustice by donning the company’s headphones.

Does the Beats lines needs stilts in order to achieve differentiation and justify its high pricetag? The quality of Beats headphones is a contested subject. One study shows they’re preferred by teens, other painstaking reviews claim there are many better headphones. On this, because of my old ears, I don’t have much of an opinion beyond Sound Holiday Thoughts written in December 2013.

It’s a novel situation: Apple Thinks Different about the two brands it now owns. The personal computing brand is carefully nurtured, pruned, protected, now at the pinnacle. The other is just as carefully kept apart.

Walk into an Apple store and you’ll see Beats headphones and speakers next to Bose, B&O, and Logitech products. Before the acquisition, this was no surprise, Beats products were just third party accessories. Now, they’re Apple products, even if they don’t carry the Apple logo. They sit on the shelves next to their competitors, such as the $999.95 Denon Music Maniac Artisan headphones. Can you imagine the Apple Store selling Surface Pro hybrids, stocking them right next to the iPads?

You won’t find Apple logos on Beats headphones, and you won’t find any Apple references in a Beats headphone commercial. The headphones are part of the Beats Music streaming music ecosystem whose goal is to play everywhere, including the Windows Phone Store.

But there’s a problem. As Horace Dediu notes, Apple’s music business has stopped growing, vastly overwhelmed by apps:

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The Beats acquisition raised many questions still unanswered: Why get into the headphones and loudspeakers business? What is the Job To Be Done here?  Same queries for the Beats Music streaming service, one that might benefit from its bundling with Apple hardware, but whose curation “sounds” less than enthralling thus far, notwithstanding Tim Cook’s enthusiasm.

As the year unfolds, we’ll see how Beats products and services grow the brand, if its isolation from the Apple brand merely is prophylactic caution, or part of a bigger plan to stay on top of the music world.

The Apple Watch won’t be the only development to… watch this year.

JLG@mondaynote.com

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2015 Digital Media: A Call For a Big Business Model Cleanup 

 

by Frédéric Filloux

Digital media are stuck with bad economics resulting in relentless deflation. It’s time to wake-up and make 2015 the year of radical — and concerted — solutions.

Trends in digital advertising feel like an endless agony to me. To sum up: there is no sign of improvement on the performance side; a growing percentage of ads are sold in bulk; click-fraud and user rejection are on the rise, all resulting in ceaseless deflation. Call it the J-Curve of digital advertising, as it will get worse before it gets better (it must – and it will).

Here is a quick summary of issues and possible solutions.

The rise of Ad Blocking system, the subject of a December 8th, 2014 Monday Note. That column was our most viewed and shared ever, which measures a growing concern for the matter. Last week, AdBlockPlus proudly announced a large scale deployment solution: with a few clicks, system administrators can now install AdBlockPlus on an entire network of machines. This yet another clue that the problem won’t go away.

There are basically three approaches to the issue.

The most obvious one is to use the court system against Eyeo GmBH, the company operating AdBlockPlus. After all, the Acceptable Ads agreement mechanism in which publishers pay to pass unimpeded through ABP filters is a form of blackmail. I don’t see how Eyeo will avoid collective action by publishers. Lawyers — especially in Europe — are loading their guns.

The second approach is to dissuade users from installing ABP on their browsers. It’s is up to browser makers (Google, Microsoft, Apple) to disable ABP’s extensions. But they don’t have necessarily much of an incentive to do so. Browser technology is about user experience quality when surfing the web or executing transactions. Performance relies on sophisticated techniques such as developing the best “virtual machines” (for a glimpse on VM technology, this 2009 FT Magazine piece, The Genius behind Google’s browser  is a must-read). Therefore, if the advertising community, in its shortsighted greed, ends up saturating the internet with sloppy ads that users massively reject, and that such excesses led a third party developer to create a piece of software to eliminate the annoyance, it should be no surprise to see the three browsers providers tempted to allow ad blocking technologies.

Google’s is in a peculiar position on this because it also operates the ad-serving system DFP (DoubleClick for Publishers). Financially speaking, Google doesn’t necessarily care if a banner is actually viewed because DFP collects its cut when the ad is served. But, taking the long view, as Google people usually do, we can be sure they will address the issue in coming months.

The best way to address the growing ad rejection is to take it at its root: It’s up to the advertising sector to wake up and work on better ads that everybody will be happy with.

But reversing this trends will take time. The perversity of ad-blocking is that everyone ends up being affected by the bad practices of a minority: Say a user installs ABP on her computer after repeated visits on a site where ads are badly implemented, chances are that she will intentionally disconnect ABP on sites that carefully manage their ads are next to zero.

As if the AdBlock challenge wasn’t not enough, the commercial internet has to deal with growing “Bot Fraud”. Ads viewed by robots generating fake — but billable — impressions become a plague as the rate of bogus clicks is said to be around 36% (see this piece in MIT’s Technology Review). This is another serious problem for the industry when advertisers are potentially defrauded with such magnitude: as an example, last year, the FT.com revealed that up to 57% of a Mercedes-Benz campaign viewers actually were robots.

In the digital advertising sector, the places to find some relief remain branded content or native ads. Depending on how deals are structured, prices are still high and such ad forms can evade blocking. Still, to durably avoid user rejection, publishers should be selective and demanding on the quality of branded content they’ll carry.

Another ingredient of the cleanup involves Internet usage metrics — fixed and mobile. More than ever, our industry calls for reliable, credible and, above all, standardized measurement systems. The usual ‘Unique Visitor’ or page views can’t remain the de rigueur metrics as both are too easily faked. The ad market and publishers need more granular metrics to reflect actual reader engagement (a more critical measure when reading in-depth contents vs. devouring listicles dotted with cheap ads). Could it be time spent on a piece of content or shares on social networks? One sure thing, though: the user needs to be counted across platforms she’s using. It is essential to reconcile the single individual who is behind a variety of devices: PC, smartphone or tablet. To understand her attention level — and to infer its monetary value, we need to know when, for how long, and in which situations she uses her devices. Wether it is anonymously or based on a real ID, retrieving actual customer data is critical.

The answer is complicated, but one thing is sure: to lift up its depleted economics, the industry needs to agree on something solid and long-lasting.

The media industry solutions to the problems we just discussed will have a significant impact on digital information. As long as the advertising market remains in today’s mess, everybody loses: Advertisers express their dissatisfaction with more pressure on the prices they’re willing to pay; intermediaries — media buying agencies — come under more scrutiny; and, in the end, publisher P&Ls suffer. The two digital world ‘mega-gatekeepers’ — Facebook and Google — could play a critical role in such normalization. Unfortunately, their interests diverge. There is not a month when we do not see competition increase between them, on topics ranging from user attention, to mobile in emerging markets, internet in the sky, and artificial intelligence… At this stage, the result of this multi-front war is hard to predict.

frederic.filloux@mondaynote.com

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Apple Software Quality Questions

 

by Jean-Louis Gassée

A flurry of recent software accidents in iOS and OS X raises questions about Apple’s management of its relentless increase in R&D spending.

For the past six months or so, I’ve become increasingly concerned about the quality of Apple software. From the painful gestation of OS X 10.10 (Yosemite) with its damaged iWork apps, to the chaotic iOS 8 launch, iCloud glitches, and the trouble with Continuity, I’ve gotten a bad feeling about Apple’s software quality management. “It Just Works”, the company’s pleasant-sounding motto, became an easy target, giving rise to jibes of “it just needs more work”.

I felt this was an appropriate Monday Note topic but kept procrastinating. Then the Holidays break came, including time on a boat with worse than no Internet – meaning frustratingly unpredictable and slow when on.

Coming back to the Valley, I read Marco Arment’s January 4th, 2015 post titled Apple has lost the functional high ground:

“We don’t need major OS releases every year. We don’t need each OS release to have a huge list of new features. We need our computers, phones, and tablets to work well first so we can enjoy new features released at a healthy, gradual, sustainable pace.

I fear that Apple’s leadership doesn’t realize quite how badly and deeply their software flaws have damaged their reputation, because if they realized it, they’d make serious changes that don’t appear to be happening. Instead, the opposite appears to be happening: the pace of rapid updates on multiple product lines seems to be expanding and accelerating.”

(Unfortunately, this well-meaning, reasoned critique from a respected Apple developer became fodder for the usual click-baiters, leading Arment to regret that he wrote it. This is sad.)

Arment isn’t the only one lamenting Apple’s software quality. See Glenn Fleishman’s well-documented list of nontrivial issues, or Michael Tsai’s compilation of comments from developers and engineers, such as this one from Geoff Wozniak (no relation to Woz):

“At this point, my default position on Apple software in OS X has moved from ‘probably good’ to ‘probably not OK’. They seem more interested in pumping out quantity by way of more upgrades. It’s death by a thousand cuts, but it’s death nonetheless.”

I’m late to this discussion but I’d like to add a few detailed observations of my own, examples of questionable design decisions, poor implementation, and other “broken windows”. Boredom may ensue.

We’ll start with Apple’s Pages word processor. When it was introduced ten years ago, I found it mostly pleasant, easy for my limited use, progressively improved over a succession of releases, with welcome features such as Google Search, Wikipedia, and Dictionary/Thesaurus integration.

Curiously, however, Pages did some things differently. Hyperlink creation, for example, was inconsistent with Apple Mail, TextEdit, and Microsoft Word conventions. With these “older” products, you select some text, press cmd-K, paste the URL of the desired destination, and you’re good to go:

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In the new Pages, no cmd-K joy. You have to bring up the Inspector, paste the link in the URL field, and press Enter.

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It’s not overly complicated, but why abandon the simple ⌘-K convention used elsewhere on the Mac?

With each Pages update I hoped for a return to the ancient ways, and when Pages 5 came out in late 2013, I thought my prayers had been answered. I select some text, type ⌘-K, and up pops the link editor:

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I paste the target URL into the Link field, press Enter, and I’m done, right? I’ve just created a link to a MacWorld story.

But, no. If I go back to the link I just entered, I see this:

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The MacWorld URL I entered is gone, replaced by the “helpful” default, www.apple.com. I also try clicking on Go to Page; indeed, it takes me to www.apple.com.

This can’t be right…I click Edit and go through the process again, the intended link sticks this time. Out of fear of having stumbled on an unreproducible phantom quirk, I carefully step through the procedure several times from different angles.

If I tiptoe to the File menu and click Save after I’ve pasted the URL but without pressing Enter, the intended link stays; it’s not replaced by www.apple.com:

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However, this only works if I Tab into the Link field and paste my URL. If I double-click on the pre-filled www.apple.com, paste the URL, and Save from the File menu, the link is gone. (Again, I carefully reproduced the procedure.)

This is madness.

But it doesn’t stop there.

Befuddled users found they couldn’t send Pages 5 files through Gmail. It’s now fixed, as the What’s New in Pages screen proudly claims…

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…but how could such an obvious, non-esoteric bug escape Apple’s attention in the first place?

Then we have “deprecated” features. Gone are the convenient Writing Tools:

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Search with Google is still there, but it’s harder to find; a Look-Up function bundles the Dictionary and Wikipedia but, believe it or not, there’s no Thesaurus. I also liked the Search function in Pages 4.3:

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It’s gone in Pages 5. Admittedly, this might not be a big deal for most users, but it allowed me to have kremlinology fun with executive abuse of words such as “incredible” and other platitudinous phrases.

We know the official excuse for removing features: iOS compatibility. It’s a noble goal on paper, and it sounds good on stage and in Keynote slides, but iWork on iOS is far from a godsend. Creating even a moderately complex document on an iPad is an unpleasant, frustrating experience.

Even if we concede that iOS compatibility may mean some amount of “dumbing down” (and we’ll note that the MacWorld review was careful to call Pages 5 a different product rather than a mere update), why didn’t Apple catch more of the obvious bugs? I’d like to have a quiet on-on-one with the Pages product manager to hear his/her explanations for the state of the product.

I can’t leave Pages without a stop at the iCloud version. (Apple, probably taking a page from Google’s old playbook, labels all three iWork products “beta”.) I tried writing a Monday Note article in iCloud. Impossible, no links. If I turn to the version of Microsoft Word on their One Drive service…It Just Works:

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Imagine Microsoft running an ad campaign: I’m One Drive, You’re iCloud…

To be complete, Microsoft’s Office Online isn’t without its own quirks. It loves me so much it refuses to sign me out:

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We now turn to iTunes. Pages might not concern a majority of Mac users, but iTunes sure does, and it presents an even sorrier spectacle than Apple’s productivity apps.

A good product allows its users to build a mental model of what it does and how it does it. Paraphrasing Alan Kay, the user forms a what/how idea at the product’s door, then walks in and finds an Ali Baba cave full of pleasant surprises. How this applies to iTunes is left to the reader. iTunes is a mess, an accumulation of debris and additions without a discernible backbone. I won’t go as far as the Valley wag who calls iTunes Apple’s Vista, but iTunes reflects poorly on a company that takes prides in the fit and finish of its products.

For example, this is what I see when I open iTunes on my Mac:

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If you squint, you’ll see the same Bach Orchestral Suites repeated six times, and Mozart’s Requiem four times. Entries in the Playlist are duplicated for no apparent reason. And let’s not even try to make and manage folders to group playlists by artist or other criteria. Nor can I make sense of the presentation of TV Show episodes. On my Apple TV, iTunes sometimes shows episodes in natural order, but then reverses them for no reason.

No need to continue the litany, the One Cockroach Theory tells us there are many more under the sink. Such as, I can’t resist, iMessages inconsistencies between devices.

Of course, making bugs lists is easier than finding solutions, particularly if we want to avoid “all you have to do” bromides. So, we’ll proceed with caution and look at some numbers.

In 2012, Apple revenue grew by 45% to $156.5B and R&D went up by 39% to $3.4B.
In 2013, revenue grew 9% to $171B but R&D went up 32% to $4.5B.
In 2014, revenue went up 7% to $183B while R&D grew 35% to $6B.

Such relentless increase in R&D spending isn’t “free”, it means hiring lots of people and starting many projects, or, worse, piling more people onto existing ones. This results in management problems, less visibility over a larger number of teams and, vertically, more opaque layers, less ability to diagnose people problems.

Another consideration is priorities. The received wisdom is that Apple engineers hail from Lake Wobegon: They’re “all above average”. But in a fight for resources, where do you put your best soldiers, on iOS or OS X? On Pages or Mail?

Apple execs aren’t indifferent to the company’s software quality problems, and they’re not unaware of the management pitfalls in fixing them. Take Apple Mail: For several years (close to five by my memory of conversations with Bertrand Serlet, then Apple’s head of OS development), Apple Mail had been a painful, many times a day irritant. It consumed so much computing power that the Activity Monitor on my MacBook Pro sometimes showed a CPU usage number as high as 257%, with fans spinning loudly, and general mail operations getting mysteriously stuck. Messages would disappear from a mailbox and yet be found by Spotlight, the Mac’s internal Search engine.

A recent OS X update seems have fixed these problems. A better manager was put in charge, people decisions were finally made, and Apple Mail is now (almost) boringly normal, receiving, sending, deleting, and sorting junk without fuss.

Let’s just hope that the all-important iTunes development team gets the “cure” it deserves, and iWorks after that.

Last, there is the mixed bag of comparisons. One side of the coin is Apple’s numbers are splendid. The quarterly results that will be disclosed next week (January 27th) are likely to show strong iPhone 6 sales and a continuation of Mac progress. And despite my bug list, Apple software still compares favorably to Windows 8 and Android offerings.

The other view is that the quality lapses we observe are the beginning of a slide into satisfied mediocrity, into organizations and projects that “run themselves”, that are allowed to continue for political reasons without regard for the joy of customers.

I know what I hope for. I don’t expect perfection, I’ve lived inside several sausage factories and remember the smell. If Apple were to spend a year concentrating on solid fixes rather than releasing software that’s pushed out to fit a hardware schedule, that would show an ascent rather than a slide.

JLG@mondaynote.com

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