apple

The Apple Game: New Categories vs. Ecosystem Development

 

Putting hopes for Apple’s future on a magical New Category misunderstands the company’s real direction. Instead, Apple stays the course and continues to play its Ecosystem Game. Many interpret this as a company in death throes.

The iPhone is 7 years old. The iPad was introduced 4 years ago. Since then… nothing.
Apple’s growth is gone: a mere 9% revenue uptick in 2013; only 6% for the last quarter.

It’s time to acknowledge the painfully obvious truth: Innovation has deserted Apple. Something must have gone seriously wrong if the company can no longer break into new categories.

This is the refrain that echoes through the Web… and this is the toxic waste of success.

It started back in the early 80’s when all we wanted was a better Apple ][ (or a working Apple ///)… and we were stunned by the Macintosh. We were unable to imagine a mouse + a bit-mapped display + moveable windows + pull-down menus, all the things that came to define the next iteration of personal computers. We couldn’t imagine it because we didn’t have the right words to think with.

The Mac created a template for what we’ve come to expect from Apple: A breakthrough. Now we’ve had two epochal hits in rapid succession — the iPhone and iPad — and, once again, we’re hooked. We need another fix, another burst of excitement, something New and Different. We’re no longer satisfied with the boring New and Improved.

The desire for Something New is understandable, but breakthroughs don’t happen on demand… and a “breakthrough” isn’t always necessary.

Consider the PC. In rough numbers, the PC is 40 years old. In that time, it has matured into what we now enjoy through gradual improvements to hardware and software: Better graphics, sound, displays, user interface, network connectivity.

Why don’t we take as much pleasure in the continuous flow of improvements to our smartphones and tablets?

When we regard the new categories that Apple has “failed” to create (or join) we face a number of problems.

We’ll make short work of the fantasized Apple TV set. We all know what we want: à la carte content served to us as apps through an Apple-grade device. We’ve had enough of the Soviet-era set-top boxes and tiered pricing foisted on us by cable companies.

Even if Apple wanted to head in that direction — and step into the quagmire of exploitative relationships between content creators, distributors, and de facto carrier monopolies — the impact on the company’s top and bottom lines, revenue and profit, would be moderate. Ten million set-top boxes at (say) $299 makes “only” $3B — that’s less than 2% of last year’s revenue.

(A short digression on the curse of large numbers: At Apple’s size, which is approaching $200B in yearly revenue, a “breakthrough” product would need to generate at least 5%  — $10B — in order to move the needle. That’s approximately one Facebook.)

What about wearables? It’s a lively category and will get livelier as sensors get more sophisticated, consume less energy, and benefit from software refinements. Microsoft had one years ago; Pebble, Samsung, and many others offer “smartwatches”; Fitbit and Jawbone Up manufacture “fitness bracelets”.

My take on smartwatches and bracelets (The Next Apple TV: iWatch, More iWatch Fun and Apple’s Wearable Future) is that Apple is already in that category – with the “Always With Us” iPhone and motion sensing, and with apps such as Azumio’s Instant Heart Rate app.

We now turn to cars. The CarPlay announcement at the Geneva Motor Show follows the iOS in the Car presentation at last year’s WWDC (Apple’s Developers Conference).

We have to ask: How does the CarPlay money pump work, and in which direction? Does Mercedes Pay Apple, or the other way around? On the technical and User Interface levels, how does the tightly controlled and consistent Apple experience survive the wide range of UI cultures and cost constraints so painfully obvious in today’s cars? On its CarPlay webpage, Apple makes broad promises:

“To activate Siri voice control, just press and hold the voice control button on the steering wheel.”
“If your CarPlay-equipped vehicle has a touchscreen, you can use it to control CarPlay.”

and..

“CarPlay also works with the knobs, dials, or buttons in the car. If it controls your screen, it controls CarPlay.”

We’ll have to wait and see how “the apps you want to use in the car have been reimagined” and how automakers play one smartphone ecosystem against another.

In any case, CarPlay isn’t a product that’s meant to stand on its own. In Apple’s own words, it’s part of the iPhone ecosystem:

“CarPlay is a smarter, safer way to use your iPhone in the car. CarPlay takes the things you want to do with your iPhone while driving and puts them right on your car’s built-in display.”

A not-so-surprising  pattern emerges: Rather than play the New Category game, Apple stays the Ecosystem Development course it’s been on since the advent of the truly epoch-making iTunes. Tim Cook may claim that the $99 Apple TV black puck Tim Cook is no longer a hobby”, but its yearly revenue is in the $1B range, less than 1% of the company’s overall number. Apple may make a wearable someday, but will everyone want an iWatch the way they want an iPhone? And let’s not expect direct revenue upticks from CarPlay, just a more pleasant iPhone experience in “selected” vehicles.

This gets us to Apple’s deeply rooted fixation: From its April 1st, 1976 founding to this day, Apple has been in one and only one business: personal computers. Today, they come in three sizes: Macs, iPads, and iPhones. Everything else Apple creates — iTunes, the App Store, the physical Apple Stores, Apple TV pucks, CarPlay, the mythical iWatch — these are all part of the supporting cast, and they have a single mission: Prop up the volume and margins of the star products.

This isn’t to diminish the importance of the supporting cast. iTunes begat the iPod, a product once so successful it generated more revenue than the Mac in 2006. iTunes also introduced the distribution mechanism and micro-payment system that unleashed the iPhone’s full power, that made it an “app-phone”. As our friend Horace Dediu points out, iTunes by itself would rank #130 in the Fortune 500 list (yearly gross revenue of $23.5B, + 34% growth in 2103).

Nonetheless, iTunes doesn’t have a separate P&L (Profit & Loss) statement in Apple’s financials because there’s only one P&L for the entire company. There are no “line of business” numbers because there’s only one business.

As the Macalope explains, ecosystems are put to very different uses by Amazon and Google, on the one hand, and Apple:

“Amazon and Google sell tablets at cut rates in order to get people to use their ecosystems. It’s less crucial for them that people buy tablets; they just want people to use tablets to buy stuff and look at ads. Apple makes money off its ecosystem, too, but unlike Amazon and Google that’s not where it makes most of its money.”

Still, there is another possibility. Apple could get into an entirely new business, as opposed to one or more of the ecosystem-supporting products/services mentioned above. One such example is Amazon Web Services (AWS). Instead of opening another line of product sales, fresh produce or wine, Amazon got into the business of renting servers to companies large and small. It’s not Amazon’s biggest line, it weighs less than 3% of total revenue, it’s thought to be very profitable (unlike the main lines) and grows very fast. Gartner thinks AWS is now larger than its next five competitors combined. An amazing success.

Amazon did it because it developed a superior computer services infrastructure  for its core business and decided to offer similar services to any and all.

Back to Apple, could one imagine the company using some of its hard-earned expertise to branch in a different, non personal computers business? For a not-too-serious example, Porsche makes cars and there is a Porsche Design business. But I don’t see Tim Cook telling Sir Jony to open a design studio business. And Porsche Design weighs nothing compared to the Porsche car maker. Such branching out sounds very remote.

So is it true that Apple has given up on developing its business? In 2013, Apple increased its R&D spending by 32% (you can download Apple’s entire 10-K report here); 2012 was + 39%. In the previous two fiscal years ending last September — and without entering any new category — Apple increased its R&D spending by 83% to $4.5B, 3% of revenue. And then it increased it by another 33% in the December, 2013 quarter.

Accelerated R&D spending can only mean one thing: Apple is widening the range of products under development. Let’s just hope company execs continue to be as good as they’ve been in the past at saying No, at not shipping everything they engineer.

JLG@mondaynote.com

 

The Apple Tesla Connection: Fun and Reason With Numbers

 

Apple acquiring Tesla would make for juicy headlines but would also be very dangerous. There are more sensible ways for the two companies to make money together.

Apple has never suffered from a lack of advice. As long as I can remember — 33 years in my case — words of wisdom have rained down upon the company, and yet the company stubbornly insists on following its own compass instead of treading a suggested path.

(Actually, that’s not entirely true. A rudderless, mid-nineties Apple yielded to the pressure of pundit opinion and licensed its Mac OS to Power Computing and Motorola… and promptly lost its profits to Mac clones. When Steve Jobs returned in 1997, he immediately canceled the licenses. This “harsh” decision was met with a howl of protest, but it stanched the bleeding and made room for the other life-saving maneuvers that saved the company.)

Now that Jobs is no longer with us and Apple’s growth has slowed, the advice rain is more intense than ever… and the pageviews netwalkers are begging for traffic. Suggestions range from the deranged (Tim Cook needs to buy a blazer), to – having forgotten what happened to netbooks – joining the race to the bottom (Apple needs a low-cost iPhone!), to the catchall “New Categories” such as Wearables, TV, Payment Systems, and on to free-floating hysteria: “For Apple’s sake, DO SOMETHING, ANYTHING!”

The visionary sheep point to the titanic deals that other tech giants can’t seem to resist: Google buys Nest for $3.3B; Facebook acquires WhatsApp for $16B (or $19B, depending on what and how you count). Why doesn’t Apple use its $160B of cash and make a big acquisition that will solidify its position and rekindle growth?

Lately, we’ve been hearing suggestions that Apple ought to buy Tesla. The company is eminently affordable: Even after TSLA’s recent run-up to $30B, the company is well within Apple’s means. (That Wall Street seems to be telling us that Tesla is worth about half of GM and Ford is another story entirely.)

Indeed, Adrian Perica, Apple’s head of acquisitions, met Tesla’s CEO Elon Musk last Spring. Musk, who later confirmed the meeting, called a deal “very unlikely”, but fans of both companies think it’s an ideal match: Tesla is the first Silicon Valley car company, great at design, robotics, and software. Like Apple, Tesla isn’t afraid to break with traditional distribution models. And, to top it off, Musk is a Steve Jobs-grade leader, innovator, and industry contrarian. I can see the headline: “Tesla, the Apple of the auto industry…”

But we can also picture the clash of cultures…to say nothing of egos.

I have vivid recollections of the clash of cultures after Exxon’s acquisition of high-tech companies to form Exxon Office Systems in the 1970s.

Still reeling from the OPEC oil crisis, Exxon’s management was hypnotized by the BCG (Boston Consulting Group) who insisted that “Information Is the Oil of the 21st Century.” The BCG was right, Tech has its Robber Barons: Apple, Oracle, Google, Facebook, Intel, and Microsoft all weigh more than Shell, Exxon, or BP.

But the BCG was also wrong: Exxon’s culture had no ability to understand what made the computer industry tick, and the tech folks thoroughly despised the Exxon people. The deal went nowhere and cost Exxon about $4B – a lot of money more than 30 years ago.

This history lesson isn’t lost on Apple. So: If Apple isn’t “interested” in Tesla, why are they interested in Tesla?

Could it be batteries?

A look at battery numbers for the two companies brings up an interesting parallel. Tesla plans to make 35,000 Tesla S cars this year. According to Car and Driver magazine, the battery weighs 1323 pounds (600 kilograms — we’ll stick to metric weights moving forward):

Tesla S Battery 1323lbs edited

That’s 21,000 (metric) tons of batteries.

For Apple devices the computation is more complicated — and more speculative — because the company publicizes battery capacity (in watt-hours) rather than weight. But after some digging around, I found the weight information for an iPhone 4S on the iFixit site: 26 grams. From there, I estimated that the weight of the larger iPhone 5S battery is 30 grams.

I reasoned that the weight/capacity ratio is probably the same for all Apple batteries, so if a 26g iPhone battery provides 5.25 watt-hrs, the iPad Air battery that yields 32.4 watt-hrs must weigh approximately 160g. Sparing you the details of the mix of iPad minis and the approximations for the various Macs, we end up with these numbers for 2014 (I’m deliberately omitting the iPod):

100M iPads @ 130g = 13,000 tons
200M iPhones @ 30g = 6,000 tons
20M Macs @ 250g = 5,000 tons
Total Apple batteries = 24,000 metric tons

It’s a rough estimate, but close enough for today’s purpose: Apple and Tesla need about the same tonnage of batteries this year.

Now consider that Tesla just announced it will build a battery mill it calls the Gigafactory:

gigafactory process

According to Tesla, the plant’s capacity in 2020 will be higher than what the entire world produced in 2013.

A more likely explanation for Apple’s conversation with Tesla might be something Apple does all the time: Sit with a potential supplier and discuss payment in advance as a way to secure supply of a critical component.

Of course, neither Tesla nor Apple will comment. Why should they? But a partnership born of their comparable needs for battery volumes makes a lot more sense than for the two companies to become one.

–JLG@mondaynote.com

follow gassee

Postscript: Certainly, Apple is no stranger to acquisitions — the company recently disclosed that it purchased 23 small companies in the last 16 months — but the operative word, here, is “small”. Apple has made two large purchases in twenty years: The late-1996 acquisition of NeXT for $429M (and 1.5M Apple shares), and the $356M purchase of Authentec in July 2012. Other other than that, Apple’s acquisitions have focused on talent and technologies rather than sheer size.

This seems wise. In small acquisitions, everyone knows who’s in charge, it’s the acquirer’s way or the highway, and failure rarely makes headlines. Bigger deals always involve explicit or implicit power sharing and, more important, a melding of cultures, of habits of the heart and mind, of “the ways we do things here”.

——–

Apple Numbers For Normals: It’s The 5C, Stupid!

 

Today’s unscientific and friendly castigation of Apple’s iPhone 5C costly stumble: misdirected differentiation without enough regard for actual customer aspirations.

Here’s a quick snapshot of Apple’s numbers for the quarter ending December 2013, with percentage changes over the same quarter a year ago:

307TABLE JLG

We can disregard the iPod’s “alarming” decrease. The iPod, which has become more of an iPhone ingredient, is no longer expected to be the star revenue maker that it was back in 2006 when it eclipsed the Mac ($7.6B vs. $7.4B for the full year).

For iPhones, iPads, and overall revenue, on the other hand, these are record numbers…. and yet Apple shares promptly lost 8% of their value.

Why?

It couldn’t have been that the market was surprised. The numbers exactly match the guidance (a prophylactic legalese substitute for forecast) that was given to us by CFO Peter Oppenheimer last October:

“We expect revenue to be between $55 billion and $58 billion compared to $54.5 billion in the year ago quarter. We expect gross margins to be between 36.5% and 37.5%.”

(Non-normals can feast their eyes on Apple’s 10-Q filing and its lovingly detailed MD&A section. I’m sincere about the “lovingly” part — it’s great reading if you’re into it.)

Apple guidance be damned, Wall Street traders expected higher iPhone numbers. As Philip Elmer-DeWitt summarizes in an Apple 2.0 post, professional analysts expected about 55M iPhones, 4M more than the company actually sold. At $640 per iPhone, that’s about $2.5B in lost revenue and, assuming 60% margin, $1.5B in profit. The traders promptly dumped the shares they had bought on the hopes of higher revenues.

In Apple’s choreographed, one-hour Earnings Call last Monday (transcript here), company execs offered a number of explanations for the shortfall (one might say they offered a few too many explanations). Discussing proportion of sales of the iPhone 5S vs. iPhone 5C. Here what Tim Cook had to say [emphasis mine]:

“Our North American business contracted somewhat year over year. And if you look at the reason for this, one was that as we entered the quarter, and forecasted our iPhone sales, where we achieved what we thought, we actually sold more iPhone 5Ss than we projected.

And so the mix was stronger to the 5S, and it took us some amount of time in order to build the mix that customers were demanding. And as a result, we lost some sort of units for part of the quarter in North America and relative to the world, it took us the bulk of the quarter, almost all the quarter, to get the iPhone 5S into proper supply.

[…]

It was the first time we’d ever run that particular play before, and demand percentage turned out to be different than we thought.

In plainer English:

“Customers preferred the 5S to the 5C. We were caught short, we didn’t have enough 5Ss to meet the demand and so we missed out on at least 4 million iPhone sales.”

Or, reading between the lines:

“Customers failed to see the crystalline purity of the innovative 5C design and flocked instead to the more derivative — but flattering — 5S.”

Later, Cook concludes the 5S/5C discussion and offers rote congratulations all around:

“I think last quarter we did a tremendous job, particularly given the mix was something very different than we thought.”

… which means:

“Floggings will begin behind closed doors.”

How can a company that’s so precisely managed — and so tuned-in to its customers’ desires — make such a puzzling forecast error? This isn’t like the shortcoming in the December 2012 quarter when Apple couldn’t deliver the iMacs it had announced in October. This is a different kind of mistake, a bad marketing call, a deviation from the Apple game plan.

With previous iPhone releases, Apple stuck to a simple price ladder with $100 intervals. For example, when Apple launched the iPhone 5 in October 2012, US carriers offered the new device for $200 (with a two-year contract), the 2011 iPhone 4S was discounted to $100, and the 2010 iPhone 4 was “free”.

But when the iPhone 5S was unveiled last September, Apple didn’t deploy the 2012 iPhone 5 for $100 less than the new flagship device. Instead, Apple “market engineered” the plastic-clad 5C to take its place. Mostly built of iPhone 5 innards, the colorful 5C was meant to provide differentiation… and it did, but not in ways that helped Apple’s revenue — or their customers’ self-image.

Picture two iPhone users. One has a spanking new iPhone 5S, the other has an iPhone 5 that he bought last year. What do you see? Two smartphone users of equally discerning taste who, at different times, bought the top-of-the-line product. The iPhone 5 user isn’t déclassé, he’s just waiting for the upgrade window to open.

Now, replace the iPhone 5 with an iPhone 5C. We see two iPhones bought at the same time… but the 5C owner went for the cheaper, plastic model.

We might not like to hear psychologists say we build parts of our identity with objects we surround ourselves with, but they’re largely right. From cars, to Burberry garments and accessories, to smartphones, the objects we choose mean something about who we are — or who we want to appear to be.

I often hear people claim they’re not interested in cars, that they just buy “transportation”, but when I look at an office or shopping center parking lot, I don’t see cars that people bought simply because the wheels were round and black. When you’re parking your two-year old Audi 5S coupe (a vehicle once favored by a very senior Apple exec) next to the new and improved 2014 model, do you feel you’re of a lesser social station? Of course not. You both bought into what experts call the Affordable Luxury category. But you’re self-assessment would be different if you drove up in a Volkswagen Jetta. It’s made by the same German conglomerate, but now you’re in a different class. (This isn’t to say brand image trumps function. To the contrary, function can kill image, ask Nokia or Detroit.)

The misbegotten iPhone 5C is the Jetta next to the Audi 5S coupé. Both are fine cars and the 5C is a good smartphone – but customers, in numbers large enough to disrupt Apple’s forecast, didn’t like what the 5C would do to their image..

As always, it’ll be interesting to observe how the company steers out of this marketing mistake.

There is much more to watch in coming months: How Apple and its competitors adapt to a new era of slower growth; how carriers change their behavior (pricing and the all important subsidies) in the new growth mode; and, of course, if and how “new categories” change Apple’s business. On this, one must be cautious and refrain from expecting another iPhone or iPad explosion, with new products yielding tens of billions of dollars in revenue. Fodder for future Monday Notes.

JLG@mondaynote.com

@gassee

 

Amazon and Apple Business Models

 

Amazon “loses” money, Apple makes tons if it. And yet, Wall Street prefers Jeff Bezos’s losses to Tim Cook’s. A look at the two very different cash machines will help dispel the false paradox.

The words above were spoken by an old friend and Amazon veteran, as three French émigrés talked shop at a Palo Alto watering hole. The riposte would fit as the epigraph for The Amazon Money Pump For Dummies, an explanation of Amazon’s ever-ascending stock price while the company keeps “losing money”.

(I don’t like the term Business Model, and Bizmodel even less so. I prefer Money Pump with its lively evocations: attach the hose, adjust the valves, prime the mechanism, and then watch the flow of money from the customer’s pocket to the investor’s purse).

Last quarter, Amazon’s revenue grew by 24% year-on-year, and lost about 1% of its net sales of $17B. This strong but profitless revenue growth follows an established pattern:

AMZN No Profit Growth copy
Despite the company’s flat-lined profits, Wall Street loves Amazon and keeps sending its shares to new heights. Since its 1997 IP0, AMZN has gone from $23 to $369/share:

298 share 21x
How come?

[Professional accountants: Avert your eyes; the following simplification could hurt.

Profit isn't cash, it's merely an increase in the value of your assets. Such increase can be illiquid. Profit is an accountant's opinion. Cash is a fact.]

Amazon uses its e-commerce genius to prime the money pump. The company seduces customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer attention. What keeps the pump going is the lag between the moment they ding my credit card and the time that they pay Samsung for the Galaxy Note tablet I ordered. Last quarter, Amazon’s daily revenue was about $200M ($17B divided by 90 days). If it waits just 24 hours to pay its suppliers, the company has $200M to play with. If it delays payment for a month, that’s $6B it can use to invest in developing the business. Delay an entire quarter…the numbers become dizzying.

But, you’ll say, there’s nothing profoundly original there. All businesses play this game, retail chains depend on it. Definitely — but what sets Amazon apart is what it does with that flow of free cash. The company is relentless in building the best services and logistics machine on Earth. Just this week, we read that Amazon has hired the US Post Office to deliver Amazon packages (only) on Sundays.

Amazon uses cash to build a better Amazon that keeps bringing in more cash.

Why do suppliers “loan” Amazon such enormous amounts of cash? Why do they let the company grow on their backs? Because, just like Wall Street, they trust that the company will keep growing and give them ever more business. Amazon might be a hard taskmaster, but it can be trusted to pay its bills (eventually) — the same cannot be said of some other retail organizations.

Amazon doesn’t care that it doesn’t make a “profit” on the sale of a box of Uni-Ball pens that it ships for free. Rather, it focuses on pumping enormous amounts of cash into the virtuous spiral of an ever-expanding business. Wall Street rewards the company with an equally expanding market cap.

How long can Amazon’s expansion last? Will the tree grow to the sky? If we consider a single line of business — books, for example — saturation will inevitably set in. But one of the many facets of Bezos’ genius is that he’s always been able to find new territories. Amazon Web Services is one area where the company is now larger than all of its competitors combined, and shows no sign of slowing down or of approaching saturation.

In the end, we mustn’t be fooled by the simplicity of Amazon’s money pump. Bezos’ genius is in the implementation, in the details. Like a chef who’s not afraid to disclose his recipes, Bezos writes to his shareholders every year — his missives are all here — And he always appends his first 1997 letter, thus reminding everyone that he’s not about to lose the plot.

The other friend in this conversation, an old Apple hand, happily nodded along as our ex-Amazon compatriot told stories from his years in the Seattle trenches. When asked about the Apple money pump and why Wall Street didn’t seem to respect Apple’s huge profits, he started with an epigraph of his own:

The simplest encapsulation of Apple’s business model is the iPod.

To paraphrase: The iPod is the movie star, it brings the audience flocking to the theatre; iTunes is the supporting cast.

iTunes was initially perceived as a money-losing operation, but without it the iPod would have been a good-looking but not terribly useful piece of hardware. iTunes propelled iPod volumes and margin by providing an ecosystem that comprised two innovations: “music by the slice” (vs. albums,) and a truly new micro-payment system (99 cents charged to a credit card).

That model is what powers the Apple money pump today. The company’s personal computers — smartphones, tablets, and laptops/desktops — are the movie stars. Everything else exists to make these lead products more useful and pleasant. Operating systems, applications, stores, Apple TV, the putative iWatch…they’re all part of the supporting cast.

Our Apple friend offered another thought: The iPod marked the beginning of the Post-PC era. By 2006 — a year before the introduction of the iPhone — iPod sales had exceeded Mac revenue.

Speaking of cash, Apple doesn’t need to play Amazon’s timing games. Product margins range from 20-25% for desktops and laptops (compared to HP’s 3-5%), to 65% or more for iPhones. With cash reserves reaching $147B at the end of September 2013, Apple has had to buy shares back and pay dividends to bleed off the excess.

Far from needing a “loan” from its suppliers, Apple heads in exactly the opposite direction. On page 37 of the company’s 2013 10-K (annual) filing, you’ll find a note referring to “third-party manufacturing commitments and component purchase commitments of $18.6 billion“. This is a serious cash outlay, an advance to suppliers to secure components and manufacturing capacity that works out to $50 for every person in the US…

Wall Street’s cautious regard for Apple seems ill-advised given Apple’s ability to generate cash in embarrassing amounts. As the graph below shows, after following a trajectory superficially similar to Amazon’s, Apple apparently “fell from grace” in 2012:

298 fall from grace
I can think of two explanations, the first one local, the other global.

During Fiscal 2012, ending in September of that year, Apple’s Gross Margins reached an unprecedented high of 43.9%. By all standards, this was extremely unusual for a hardware company and, as it turned out, it was unsustainable. In 2013, Apple Gross Margin dropped by more than 6 percentage points (630 basis points in McKinsey-speak), an enormous amount. Wall Street felt the feast was over.

Also, Fiscal 2013 was seen as a drought year. There were no substantial new products beyond the iPhone 5 and the iPad mini announced in September and October 2012, and there was trouble getting the new iMacs into customers’ hands during the Holiday season.

More globally important is the feeling that Apple has become a “hits” business. iPhones now represent 53% of Apple’s revenue, and much more (70%?) of its profits. They sell well, everything looks rosy…until the next season, or the next round of competitive announcements.

This is what makes Wall Street nervous: To some, Apple now looks like a movie studio that’s too dependent on the popularity of its small stable of stars.

We hear that history will repeat itself, that the iPhone/iPad will lose the battle to Android, just as the Mac “lost” to Windows in the last century.

Our ex-Apple friend prefers an automotive analogy. Audi, Tim Cook’s preferred brand, owns a small portion of the luxury car market (about 7.5%), but it constantly posts increasing profits — and shows no sign of slacking off. Similarly, today’s $21B Mac business holds a mere 10% of the PC market, but Apple “uses” that small share to command 45% of market profits. The formula is no secret but, as with Amazon’s logistics and service, the payoff is in the implementation, how the chef combines the ingredients. It’s the “mere matter of implementation” that eluded Steve Ballmer’s comprehension when he called the MacBook an Intel laptop with an Apple logo slapped on it. Why wouldn’t the Mac recipe also work for smartphones and tablets?

JLG@mondaynote.com

 

New iWork: Another Missed Opportunity To Set Expectations

 

With the 5.0 iWork suite we revisit Apple’s propensity to make lofty claims that fall short of reality. The repetition of such easily avoidable mistakes is puzzling and leads us to question what causes Apple executives to squander the company’s well-deserved goodwill.

Once upon a time, our youngest child took it upon herself to sell our old Chevy Tahoe. She thought her father was a little too soft in his negotiations on the sales lot, too inclined to leave money on the table in his rush to end the suffering.

We arrive at the dealership. She hops out, introduces herself to the salesperson, and then this kid — not yet old enough to vote — begins her pitch. She starts out by making it clear that the car has its faults: a couple dents in the rear fender, a stubborn glove compartment door, a cup holder that’s missing a flange. Flaws disclosed, she then shows off the impeccable engine, the spotless interior, the good-as-new finish (in preparation, she’d had the truck detailed inside and out, including the engine compartment).

The dealer was charmed and genuinely complimentary. He says my daughter’s approach is the opposite of the usual posturing. The typical seller touts the car’s low mileage, the documented maintenance, the vows of unimpeachable driver manners. The seller tries to hide the tired tires and nicked rims, the white smoke that pours from the tail pipe, the “organic” aroma that emanates from the seat cushions — as if these flaws would go unnoticed by an experienced, skeptical professional.

‘Give the bad news first’ said the gent. ‘Don’t let the buyer discover them, it puts you on the defensive. Start the conversation at the bottom and end with a flourish.’ (Music to this old salesman’s ears. My first jobs were in sales after an “unanticipated family event” threw me onto the streets 50 years ago. I’m still fond of the trade, happiest when well executed, sad when not).

The fellow should have a word or two with Apple execs. They did it again, they bragged about their refurbished iWork suite only to let customers discover that the actual product fails to meet expectations.

We’ll get into details in a moment, but a look into past events will help establish the context for what I believe to be a pattern, a cultural problem that starts at the top (and all problems of culture within a company begin at the executive level).

Readers might recall the 2008 MobileMe announcement, incautiously pitched as Exchange For The Rest of Us. When MobileMe crashed, the product team was harshly criticized by the same salesman, Steve Jobs, who touted the product in the first place. We’ll sidestep questions of the efficacy of publicly shaming a product team, and head to more important matters: What were Jobs and the rest of Apple execs doing before announcing MobileMe? Did they try the product? Did they ask real friends — meaning non-sycophantic ones — how they used it, for what, and how they really felt?

Skipping some trivial examples, we land on the Maps embarrassment. To be sure, it was well handled… after the fact. Punishment was meted out and an honest, constructive apology made. The expression of regret was a welcome departure from Apple’s usual, pugnacious stance. But the same questions linger: What did Apple execs know and when did they know it? Who actually tried Apple Maps before the launch? Were the execs who touted the service ignorant and therefore incompetent, or were they dishonest, knowingly misrepresenting its capabilities? Which is worse?

This is a pattern.

Perhaps Apple could benefit from my daughter’s approach: Temper the pitch by confessing the faults…

“Dear customers, as you know, we’re playing the long game. This isn’t a finished product, it’s a work in progress, and we’ll put your critical feedback to good use.”

Bad News First, Calibrate Expectations. One would think that (finally!) the Maps snafu would have seared this simple logic into the minds of the Apple execs.

But, no.

We now have the iWork missteps. Apple calls its new productivity suite “groundbreaking”. Eddy Cue, Apple’s head of Internet Software and Services, is ecstatic:

“This is the biggest day for apps in Apple’s history. These new versions deliver seamless experiences across devices that you can’t find anywhere else and are packed with great features…” 

Ahem… Neither in the written announcement nor during the live presentation will one find a word of caution about iWork’s many unpleasant “features”.

The idea, as best we can discern through the PR fog, is to make iOS and OS X versions of Pages, Numbers, and Keynote “more compatible” with each other (after Apple has told us, for more than two years, how compatible they already are).

To achieve this legitimate, long game goal, the iWork apps weren’t just patched up, they were re-written.

The logic of a fresh, clean start sounds compelling, but history isn’t always on the side of rewriting-from-scratch angels. A well-known, unfortunate example is what happened when Lotus tried a cross-platform rewrite of its historic Lotus 1-2-3 productivity suite. Quoting from a Wikipedia article:

“Lotus suffered technical setbacks in this period. Version 3 of Lotus 1-2-3, fully rewritten from its original macro assembler into the more portable C language, was delayed by more than a year as the totally new 1-2-3 had to be made portable across platforms and fully compatible with existing macro sets and file formats.”

The iWorks rewrite fares no better. The result is a messy pile of missing features and outright bugs that educed many irate comments, such as these observations by Lawrence Lessig, a prominent activist, Harvard Law professor, and angry Apple customer [emphasis and edits mine]:

“So this has been a week from Apple hell. Apple did a major upgrade of its suite of software — from the operating system through applications. Stupidly (really, inexcusably stupid), I upgraded immediately. Every Apple-related product I use has been crippled in important ways.

… in the ‘hybrid economy’ that the Internet is, there is an ethical obligation to treat users decently. ‘Decency’ of course is complex, and multi-faceted. But the single dimension I want to talk about here is this: They must learn to talk to us. In the face of the slew of either bugs or ‘features’ (because as you’ll see, it’s unclear in some cases whether Apple considers the change a problem at all), a decent company would at least acknowledge to the public the problems it identifies as problems, and indicate that they are working to fix it.”

Lessig’s articulate blog post, On the pathological way Apple deals with its customers (well worth your time), enumerates the long litany of iWork offenses.

Srange Paste Behavior copy

[About that seemingly errant screenshot, above...keep reading.]

Shortly thereafter, Apple issued a support document restating the reasons for the changes:

“…applications were rewritten from the ground up to be fully 64-bit and to support a unified file format between OS X and iOS 7 versions” 

and promising fixes and further improvements:

“We plan to reintroduce some of these features in the next few releases and will continue to add brand new features on an ongoing basis.”

Which led our Law Professor, who had complained about the “pathologically constipated way in which Apple communicates with its customers”, to write another (shorter) post and thank the company for having at last “found its voice”…

Unfortunately, Lessig’s list of bugs is woefully short of the sum of iWork’s offenses. For example, in the old Pages 4.0 days, when I click on a link I’m transported to the intended destination. In Pages 5.0, instead of the expected jump, I get this…

[See above.]

Well, I tried…CMD-CTRL-Shift-4, frame the shot, place the cursor, CMD-V… Pages 5.0 insists on pasting it smack in the middle of a previous paragraph [again, see above].

Pages has changed it’s click-on-a-link behavior; I can get used to that, but…it won’t let me paste at the cursor? That’s pretty bad. Could there be more?

There’s more. I save my work, restart the machine, and the Save function in Pages 5.0 acts up:

Pages 5.0 Autosave Bug copy

What app has changed my file? Another enigma. I’m not sharing with anyone, just saving my work in my Dropbox, something that has never caused trouble before.

Another unacceptable surprise: Try sending a Pages 5.0 file to a Gmail account. I just checked, it still doesn’t work. Why wasn’t this wasn’t known in advance – and not fixed by now?

I have to stop. I’ll leave comparing the even more crippled iCloud version of iWork to the genuinely functional Web version of Office 365 for another day and conclude.

First. Who knew and should have known about iWork’s bugs and undocumented idiosyncrasies? (I’ll add another: Beware the new autocorrect)

Second. Why brag instead of calmly making a case for the long game and telling loyal customers about the dents they will inevitably discover?

Last and most important, what does this new fiasco say about the Apple’s management culture? The new iPhones, iPad and iOS 7 speak well of the company’s justly acclaimed attention to both strategy and implementation. Perhaps there were no cycles, no neurons, no love left for iWork. Perhaps a wise general puts the best troops on the most important battles. Then, why not regroup, wait six months and come up with an April 2014 announcement worthy of Apple’s best work?

JLG@mondaynote.com

———

This hasn’t been a good week using Apple products and services. I’ve had trouble loading my iTunes Music library on an iPad, with Mail and other Mavericks glitches, moving data and apps from one computer to another, a phantom Genius Bar appointment in another city and a stubborn refusal to change my Apple ID. At every turn, Apple support people, in person, on the phone or email, were unfailingly courteous and helpful. I refrained from mentioning iWork to these nice people.

 

iPhone 5S surprises

 

I will withhold judgment on the new iPhone until I have a chance to play customer, buy the product (my better half seems to like the 5C while I pine for a 5S), and use it for about two weeks — the time required to go beyond my first and often wrong impressions”.

I wrote those words a little over a month ago. I’ve now played customer for the requisite two weeks — I got an iPhone 5S on October 3rd — and I’m prepared to report.

But first, some context.

iPhone launches always generate controversy, there’s always something to complain about: Antennagate for the iPhone 4, the Siri beta for the 4S, the deserved Maps embarrassment last year – with a clean, dignified Tim Cook apology.

(Whether these fracas translate into lost revenue is another matter).

As I sat in the audience during the introduction of the original iPhone, back in January, 2007, I thought the demo was too good, that Steve was (again) having his way with facts. I feared that when the product shipped a few months later, the undistorted reality would break the spell.

We know now that the iPhone that Steve presented on the stage was unfinished, that he trod a careful path through a demo minefield. But the JesusPhone that Apple shipped — unfinished in many ways (no native apps, no cut-and-paste) — was more than a success: It heralded the Smartphone 2.0 era.

iphone 5s

This year, Tim Cook introduced the riskiest hardware/software combination since the original iPhone. The iPhone 5S wants to be more than just “new and improved”, it attempts to jump off the slope with its combination of two discontinuities: a 64-bit processor and a new 64-bit iOS. Will it work, or will it embarrass itself in a noisome backfire?

First surprise: It works.

Let me explain. I have what attorneys call “personal knowledge” of sausage factories, I’ve been accountable for a couple and a fiduciary for several others. I have first-hand experience with the sights, the aromas, the tumult of the factory floor, so I can’t help but wince when I approach a really new product, I worry in sympathy with its progenitors. The 5S isn’t without its “aromas” (we’ll get to those later), but the phone is sleek and attractive, the house apps are (mostly) solid, and the many new Application Programming Interfaces (API) promise novel applications. Contrary to some opinions, there are fewer warts than anyone could have expected.

Surprise #2, the UI: I had read the scathing critiques of the spartan excesses, and, indeed, I feel the drive for simplicity occasionally goes too far. The buttons on the built-in timer are too thin, too subdued. When I meditate in the dark I can’t distinguish Start from Cancel without my glasses. But I’m generally happy with the simpler look. Windows and views get out of the way quickly and gracefully, text is neatly rendered, the removal of skeuomorphic artifacts is a relief.

The next surprise is the fingerprint sensor a.k.a. Touch ID. Having seen how attempts to incorporate fingerprint recognition into smartphones and laptops have gone nowhere, I had my doubts. Moreover, Apple had acquired AuthenTec, the company that created the fingerprint sensor, a mere 15 months ago. Who could believe that Apple would be able to produce a fingerprint-protected iPhone so quickly?

But it works. It’s not perfect, I sometimes have to try again, or use another finger (I registered three on my right hand and two on my left), but it’s clear that Apple has managed to push Touch ID into the category of “consumer-grade technology”: It works often enough and delivers enough benefit to offset the (small) change in behavior.

A personal favorite surprise is Motion Sensing.

When Apple’s Marketing Supremo Phil Schiller described the M7 motion processor, I didn’t think much of it, I was serving the last days of my two-month sentence wearing the JawBone UP bracelet mentioned in a previous Monday Note. (A friend suggested I affix it to his dog’s collar to see what the data would look like.)

Furthermore, the whole “lifestyle monitoring” business didn’t seem like virgin territory. The Google/Motorola Moto X smartphone introduced last August uses a co-processor that, among other things, monitors your activities, stays awake even when the main processor is asleep, and adjusts the phone accordingly. A similar co-processing arrangement is present in Moto X’s predecessors, the Droid Maxx, Ultra and Mini.

But then I saw a Twitter exchange about Motion Sensing apps about a week after I had activated my iPhone 5S. One thumb touch later, the free Pedometer++ app asked for my permission to use motion data (granted) and immediately told me how many steps I’d taken over the past seven days.

I went to the chauffeured iPhone on my wife’s desk and installed the app. I did the same on friends’ devices. The conclusion was obvious: The M7 processor continuously generates and stores motion data independent of any application. A bit of googling shows that there are quite a few applications that use the motion data that’s obligingly collected by the M7 processor; I downloaded a number of these apps and the step counts are consistent.

(Best in class is the ambitious MotionX 24/7. Philippe Kahn’s company FullPower Technologies licenses MotionX hardware and software to many motion-sensing providers, including Jawbone and, perhaps, Apple. Wearable technologies aren’t just for our wrists…we carry them in our pockets.)

My wife asked if her iPhone would count steps from within her handbag. Ever the obliging husband, I immediately attended to this legitimate query, grabbed her handbag, and stepped out of the house for an experimental stroll. A conservatively dressed couple walked by, gave me a strange look, and didn’t respond to my evening greeting, but, indeed, the steps were counted.

A question arises: Does Apple silently log my movements? No, my iPhone records my locomotion, but the data stays within the device — unless, of course, I let a specific application export them. One must be aware of the permissions.

Other 5S improvements are welcome but not terribly surprising. The camera has been smartly enhanced in several dimensions; search finally works in Mail; and, to please Sen. McCain, apps update themselves automatically.

All of this comes with factory-fresh bugs, of course, a whiff of the sausage-making apparatus. iPhoto crashed on launch the first three or four times I tried it, but has worked without complaint since then.  A black Apple logo on a white background appeared and then quickly disappeared — too brief to be a full reboot, too sparse to be part of an app.

I’ve had to reboot the 5S to recover a dropped cellular connection, and have experienced hard-to-repeat, sporadic WiFi trouble that seems to spontaneously cure itself.(“How did you fix it?” asks my wife when her tech chauffeur gets the sullen device to work again. “I don’t know, I poke the patient everywhere until it responds.”)

From my admittedly geeky perspective, I’m not repelled by these glitches, they didn’t lose my data or prevent me from finishing a task. They’re annoying, but they’re to be expected given the major hardware and software changes. And I expect that the marketplace (as opposed to the kommentariat) will shrug them off and await the bug fixes that will take care of business.

So, yes, overall, the “discontinuous” 5S works.

[I'm also using a pre-release of Mavericks, the upcoming 10.9 version of OS X, on two Macs. There, I wonder if I'm not seeing the opposite of the iPhone 5S: less risk, more bugs. I hope things straighten out for the public release. I'll report if and when warranted.] [I can't resist: The Washington Post's Wonkblog calls the iPhone's third color... Dignified Gold. I wonder: Is it a compliment to Sir Jony's unerring taste? Or a clever, indirect ethnic slur?]

JLG@mondaynote.com

Apple Under Siege

 

Two years after Steve Jobs left us, Apple now wears Tim Cook’s imprint and, for all the doubt and perpetual doomsaying, seems to wear it well. One even comes to wonder if the Cassandras aren’t in fact doing Apple a vital favor.

Last Friday, Tim Cook issued a somber remembrance to Apple employees:

Team-
Tomorrow marks the second anniversary of Steve’s death. I hope everyone will reflect on what he meant to all of us and to the world. Steve was an amazing human being and left the world a better place. I think of him often and find enormous strength in memories of his friendship, vision and leadership. He left behind a company that only he could have built and his spirit will forever be the foundation of Apple. We will continue to honor his memory by dedicating ourselves to the work he loved so much. There is no higher tribute to his memory. I know that he would be proud of all of you.
Best,
Tim

I am one of the many who are in Steve’s debt and I miss him greatly. I consider him the greatest creator and editor of products this industry has ever known, and am awed by how he managed the most successful transformation of a company — and of himself — we’ve ever seen. I watched his career from its very beginning, I was fortunate to have worked with him, and I thoroughly enjoyed agreeing and disagreeing with him.

I tried to convey this in an October 9th, 2011 Monday Note titled Too Soon. I just re-read it and hope you’ll take the time to do the same. You’ll read words of dissent by Richard Stallman and Hamilton Nolan, but you’ll mostly find praise by Barack Obama, John Stewart, Nicholson Baker in the New Yorker, and this elegant image by Jonathan Mak:

steve_silouhette

Two years later, we can look at Apple under Tim Cook’s leadership. These haven’t been an easy twenty-four months: Company shares have gone on a wild ride, execs have been shown the door, there was the Maps embarrassment and apology, and there has been a product drought for most of the last fiscal year (ending in September).

All of this has provided fodder for the Fox Newsstands of the Web, for netwalkers seeking pageviews. The main theme is simple and prurient, hence its power: Without Steve, Apple is on the decline. The variations range from the lack of innovation — Where’s the Apple TV?, the iWatch?, the next Big Thing? — to The Decline of The Brand, Android Is Winning, and Everything Will Be Commoditized.

Scan Philip Ellmer-DeWitt’s Apple 2.0 or John Gruber’s Daring Fireball and treat yourself to intelligent repudiations of this incessant “claim chowder“, discredited pontifications. I’ll extract a few morsels from my own Evernote stash:

Apple’s press conference showed a brand unraveling, or so said VentureBeat in March, 2012. Eighteen months later, Apple passed Coca-Cola to become the world’s most valuable brand.

How Tim Cook can save himself (and Apple), subtitled, for good measure: What the confused Apple CEO can do to avoid getting canned and having to slink away with nothing but his $378 million compensation package as comfort. Penned by a communications consultant who “teaches public relations at NYU”, the article features an unexpected gem: Cook should buy a blazer. You know, “to break the deleterious chokehold of the Steve Jobs’ [sic] legacy”.

Apple: The Beginning of a Long Decline? (note the hedging question mark.) This LinkedIn piece, which questions the value of the fingerprint sensor, ends with a lament:

There was no sign of a watch. So those of us in Silicon Valley are left watching, wondering, and feeling a little empty inside… Jobs is gone. It looks like Apple’s magic is slowly seeping away now too.

Shortly thereafter, Samsung’s iWatch killer came out…and got panned by most reviewers.

Last: Apple’s Board of Directors are concerned about Apple’s pace of innovation, says Fox Business News Charlie Gasparino, who claims to have “reliable sources”.

Considering how secretive the company is, can anyone imagine a member of Apple’s Board blabbing to a Fox Business News irrespondent?

Despite the braying of the visionary sheep, Tim Cook never lost his preternatural calm, he never took the kommentariat’s bait. Nor have his customers: They keep buying, enjoying, and recommending Apple’s products. And they do so in such numbers — 9 million new iPhones sold in the launch weekend — that Apple had to file a Form 8-K with the Security and Exchanges Commission (SEC) to “warn” shareholders that revenue and profits would exceed the guidance they had provided just two months ago when management reviewed the results of the previous quarter.

In Daniel Eran Dilger’s words, Data bites dogma: Apple’s iOS ate up Android, Blackberry U.S. market share losses this summer:

Apple’s increase accounted for 1.5 of the 1.6 percentage points that Android and Blackberry collectively lost. This occurred a full month before the launch of Apple’s iPhone 5s and 5c and the deployment of iOS 7.

Regarding the “Apple no longer innovates” myth, Jay Yarow tells us why Apple Can’t Just ‘Innovate’ A New Product Every Other Year. His explanation draws from a substantial New York Times Magazine article in which Fred Vogelstein describes the convergence of company-wide risk-taking and engineering feats that resulted in the iPhone:

It’s hard to overstate the gamble Jobs took when he decided to unveil the iPhone back in January 2007. Not only was he introducing a new kind of phone — something Apple had never made before — he was doing so with a prototype that barely worked. Even though the iPhone wouldn’t go on sale for another six months, he wanted the world to want one right then. In truth, the list of things that still needed to be done was enormous. 

It’s a great read. But even Vogelstein can’t resist the temptation of inserting a word of caution: “And yet Apple today is under siege…” 

This is something I heard 33 years ago when I signed up to start Apple France in 1980, and I’ve heard it constantly since then. I’ll again quote Horace Dediu, who best summarizes the concern:

“[There's a] perception that Apple is not going to survive as a going concern. At this point of time, as at all other points of time in the past, no activity by Apple has been seen as sufficient for its survival. Apple has always been priced as a company that is in a perpetual state of free-fall. It’s a consequence of being dependent on breakthrough products for its survival. No matter how many breakthroughs it makes, the assumption is (and has always been) that there will never be another. When Apple was the Apple II company, its end was imminent because the Apple II had an easily foreseen demise. When Apple was a Mac company its end was imminent because the Mac was predictably going to decline. Repeat for iPod, iPhone and iPad. It’s a wonder that the company is worth anything at all.”

I recently experienced a small epiphany: I think the never-ending worry about Apple’s future is a good thing for the company. Look at what happened to those who were on top and became comfortable with their place under the sun: Palm, Blackberry, Nokia…

In ancient Rome, victorious generals marched in triumph to the Capitol. Lest the occasion go to the army commander’s head, a slave would march behind the victor, murmuring in his ear, memento mori, “remember you’re mortal”.

With that in mind, one can almost appreciate the doomsayers — well, some of them. They might very well save Apple from becoming inebriated with their prestige and, instead, force the company to remember, two years later and counting, how they won it.

JLG@mondaynote.com

 

64 bits. It’s Nothing. You Don’t Need It. And We’ll Have It In 6 Months

 

Apple’s A7 processor, the new iOS 7 and “house” apps are all industry firsts: genuine, shipping 64-bit mobile hardware and software. As we’ve seen before with the iPhone or the iPad, this new volley of Apple products is first met with the customary bursts of premature evaluations and counterfactual dismissals.

On September 10th, Apple revealed that the new iPhone 5s would be powered by its new 64-bit A7 processor. The initial reactions were less than enthused. We were treated to exhumations of lazy bromides…

“I don’t drink Kool-Aid. Never liked the stuff and I think we owe it to ourselves to collectively question whether or not Apple’s ‘reality distortion field’ is in effect when we consider how revolutionary the iPhone 5S is and if Apple’s 64-bit A7 processor under its shiny casing will be all its [sic] cracked up to be when the device hits the market in volume.” [Forbes]

…and equally lazy “markitecture” accusations…

“With current mobile devices and mobile apps, there really is no advantage [to 64 bits] other than marketing — the ability to say you’re the first to have it…” [InfoWorld]

…and breezy brush-offs, such as this tweet from an industry expert:

“We’ll see just how good Apple’s marketing team is trying to leverage 64-bit. 64-bit add more memory and maybe registers. Period.” [Twitter]

Rather than wonder what these commenters were drinking, let’s turn to AnandTech, widely regarded as one of the best online hardware magazines.

Founded by Anand Lal Shimpi when he was all of 14-years-old, AnandTech is known for its exhaustive (and sometimes exhausting) product reviews. The 14-section September 17th iPhone 5S review doesn’t disappoint. Among other things, it provides detailed iPhone 5S vs. iPhone 5 performance comparisons such as this:

5S GeekBench Anand Edited

There are many other charts, comparisons, and considerations of the new 64-bit ARMv8 instruction set, the move from 16 to 32 floating-point NEON 128-bit registers, the hardware acceleration of cryptography operations… It’s a very long read, but not a boring one (at least not for interested geeks).

The bottom line is plain: The A7 processor is a substantial improvement that’s well supported by the 64-bit iOS7. (And I’d like to meet the author and bow to his encyclopedic knowledge.)

Was it because of AnandTech’s cool analysis that the doubters have changed their tune?

As I predicted, Apple A7 benchmarks well due to CPU arch (for IPC), new GPU, ARM v8′

Now that the A7 had become a Benchmarking Beast, the author of the previous week’s brush-off tweet (“more memory and maybe registers. Period”) has revised his position [emphasis mine]:

“The improvements Apple made with the A7 are truly incredible, and they really went against the grain in their choices. With an industry obsessed with more cores, they went with fewer, larger and efficient cores. With people expecting v8 and 64-bit ARM in late 2014, Apple brings it out in 2013 with full Xcode support and many performance optimizations.” [...] “Apple has done it again, but this time in unexpected fashion.”

That all-purpose defense, unexpected, provides a key to the wrong-footing of many “experts”.

When Apple entered the microprocessor field a mere five years ago with its acquisition of Palo Alto Semiconductor, the move was panned: Apple had no future competing with established industry leaders such as Intel, Qualcomm, Nvidia, and Samsung.

But with the successive, increasing refinement of the A4, A5, and A6, the designs were ultimately viewed as good, very good, roughly on par with the rest of the industry. What these processors lacked in raw power was more than made up for by they way they were integrated into Apple’s notion of a purposeful, usable mobile device: Enhanced UI responsiveness, reduced power consumption, obeisance to the unique requirements of media and communications.

The expectation was that Apple would either fail, or produce a “competent” (meaning not particularly interesting) iteration of previous A4-5-6 designs. No one expected that the processor would actually work, with all in-house apps running in 64-bit mode from day one.

But let’s back up and rewrite a bit of history, ourselves:

On September 10th, Samsung announced its flagship 64-bit Exynos processor, supported by Android 5.0, the 64-bit version of Google’s market-leading mobile OS. The new Galaxy S64 smartphone, which will ship on September 20th, features both 64-bit hardware and software components. Samsung and Google receive high praise:

“Supercomputer-class processor… Industry-leading performance… Tightly integrated 64-bit software and hardware open a new era of super high-performance applications previously impossible on mobile devices…”

And Apple gets its just deserts:

“Once again, Apple gets out-innovated…This confirms the trend we’ve seen since Tim Cook took over… iPhones have become second-class devices… The beginning of a long decline…”

Apple can be thankful this is fantasy: The real world would never treat it like this (right?).

My fantasy isn’t without basis: Within 24 hours of Apple’s September announcement, Samsung’s mobile business chief Shin Jong-kyun said his company will have its own 64-bit Exynos processor:

“Not in the shortest time. But yes, our next smartphones will have 64-bit processing functionality…” [The Korea Times]

As for Android support, no problem: 64-bit versions of the underlying Linux kernel already exist. Of course, the system software layer that resides on top of the Linux kernel — the layer that is Android — will also need to be converted to take advantage of the 64-bit processor, as will the Software Development Kit (SDK) that third-party developers use to create apps. It’s a sizable challenge, but one that’s well within the Android’s team skills and resources; the process has certainly been under way for a while already.

The real trouble starts outside of Google. Which 64-bit processor? Intel’s (the company says it will add 64-bit “capabilities” to Android)? Samsung’s? Qualcomm’s?

Who writes and supports device drivers for custom SoC modules? This sounds a lot like Windows device driver complications, but the complexity is multiplied by Google’s significantly weaker control over hardware variants.

Apple’s inherent control over all of the components in its platform will pay dividends in the speed and quality of the transition. There will be glitches — there will always be new, factory-fresh bugs — but the new 64-bit hardware is designed to run existing 32-bit apps, and it seems to actually do so in practice.

Now let’s go beyond the iPhone 5S. In his September 10th presentation, Phil Schiller, Apple’s Marketing Supremo, called the A7′s performance “desktop class”. These words were carefully calibrated, rehearsed, and approved. This isn’t a “Can’t innovate anymore? My asssaeta, blurted while seized by religious fervor at last Spring’s Apple Developers Conference.

Does “desktop class” imply that Apple could use future versions of its 64-bit processor to replace Intel chips in its Mac devices?

In the AnandTech post quoted above, several benchmarks compare Apple’s A7 to a new x86 chip, Intel’s Baytrail, with interesting results:

AnandTech Baytrail A7

So, yes, in theory, a future Apple 64-bit processor could be fast enough to power a Mac.

But let’s consider a 3GHz iMac running a high-end media creation application such as Photoshop or Autodesk. The processor doesn’t want to be constrained by power consumption requirements, it’s optimized for performance (this even ignores the upcoming MacPro and its thermal management prowess).

Can we see a split in the Mac product line? The lower, more mobile end would use Apple’s processors, and the high-end, the no-holds-barred, always plugged to the wall desktop devices would still use x86 chips. With two code bases to maintain ß OS X applications to port? Probably not.

Apple could continue to cannibalize its (and others’) PC business by producing “desktop-class” tablets. Such speculation throws us back to a well-known problem: How do you compose a complex document without a windowing system and a mouse or trackpad pointer?

We’ve seen the trouble with Microsoft’s hybrid PC/tablet, its dual Windows 8 UI which is considered to be “confusing and difficult to learn (especially when used with a keyboard and mouse instead of a touchscreen).”

The best suggestion I’ve seen so far comes from “a veteran design and management surgeon” who calls himself Kontra and proposes An interim solution for iOS ’multitasking‘ based on a multi-slot clipboard.

If Apple provides a real way to compose complex documents on a future iPad, a solution that normal humans will embrace, then it will capture desktop-class uses and users.

Until such time, Macs and iPads are likely to keep using different processors and different interaction models.

JLG@mondaynote.com

 

Apple Market Share: Facts and Psychology

 

Remember netbooks? When Apple was too greedy and stupid to make a truly low-cost Macintosh? Here we go again, Apple refuses to make a genuinely affordable iPhone. There will be consequences — similar to what happened when the Mac refused to join netbooks circling the drain. 

My first moments with the iPad back in April 2010 were mistaken attempts to use it as a Mac. Last year, it took a long overdue upgrade to my eyeglasses before I warmed to the nimbler iPad mini, never to go back to its older sibling.

With that in mind, I will withhold judgment on the new iPhone until I have a chance to play customer, buy the product (my better half seems to like the 5C while I pine for a 5S), and use it for about two weeks — the time required to go beyond my first and often wrong impressions.

While I wait to put my mitts on the new device, I’ll address the conventional hand-wringing over the 5C’s $549 pricetag (“It’s Too Damned High!” cry the masses).

iphone5c copie

Henry Blodget, who pronounced the iPhone Dead In Water in April 2011, is back sounding the alarm: Apple Is Being Shortsighted — And This Could Clobber The Company. His argument, which is echoed by a number of pundits and analysts, boils down to a deceptively simple equation:

Network Effect + Commoditization = Failure

The Network Effect posits that the power of a platform is an exponential function of the number of users. Android, with 80% of the smartphone market will (clearly) crush iOS by sucking all resources into its gravitational well.

Commoditization means that given an army of active, resourceful, thriving competitors, all smartphones will ultimately look and feel the same. Apple will quickly lose any qualitative advantage it now enjoys, and by having to compete on price it could easily fall behind.

Hence the preordained failure.

As a proof-of-concept, the nay-sayers point to the personal computer battle back in the pre-mobile dark ages: Didn’t we see the same thing when the PC crushed the Mac? Microsoft owned the personal computer market; PC commoditization drove prices into the bargain basement…

Interpret history how you will, the facts show something different. Yes, the Redmond Death Star claimed 90% of the PC market, but it failed to capture all the resources in the ecosystem. There was more than enough room for the Mac to survive despite its small market share.

And, certainly, commoditization has been a great equalizer and price suppressant — within the PC clone market. Microsoft kept most of the money with the de facto monopoly enjoyed by its Windows + Office combo, while it let hardware manufacturers race to the bottom (netbooks come to mind). Last quarter, this left HP, the (still) largest PC maker, with a measly 3% operating profit for its Personal Systems Group. By contrast, Apple’s share of the PC market may only be 10% or less, but the Mac owns 90% of the $1000+ segment in the US and enjoys a 25% to 35% margin.

After surviving a difficult birth, a ruthlessly enforced Windows + Office platform, and competition from PC makers large and small, the Mac has ended up with a viable, profitable business. Why not look at iDevices in the same light and see a small but profitable market share in its future?

Or, better yet, why not look at more than one historical model for comparison? For example, how is it that BMW has remained so popular and profitable with its One Sausage, Three Lengths product line strategy? Aren’t all cars made of steel, aluminium (for Sir Jony), plastic, glass, and rubber? When the Bavarian company remade the Mini, were they simply in a race to the bottom with Tata’s Nano, or were they confidently addressing the logical and emotional needs of a more affluent — and lasting — clientèle?

Back to the colorful but “expensive” 5C, Philip Elmer-DeWitt puts its price into perspective: For most iPhone owners, trading up to the 5C is ‘free‘ due to Apple’s Reuse and Recycle program. We’ll have to see if The Mere Matter of Implementation supports the theory, and where these recycled iPhones end up. If the numbers work, these reborn iPhones could help Apple gain a modest foothold in currently underserved price segments.

Still thinking about prices, I just took a look at the T-Mobile site where, surprise, the 5C is “free“, that is no money down and 24 months at $22 — plus a $10 “SIM Kit” (read the small print.) You can guess what AT&T offers: 24 months at $22/month (again, whip out your reading glasses.) Verizon is more opaque, with a terrible website. Sprint also offers a no-money-down iPhone 5C, although with more expensive voice/data plans.

This is an interesting development: Less than a week ago, Apple introduced the iPhone 5C with a “posted price” of $99 — “free” a few days later.

After much complaining to the media about “excessive” iPhone subsidies, carriers now appear to agree with Horace Dediu who sees the iPhone as a great “salesman” for carriers, because it generates higher revenue per user (ARPU). As a result, the cell philanthropists offer lower prices to attract and keep users — and pay Apple more for the iPhone sales engine.

Of course, none of this will dispel the anticipation of the Cupertino company’s death. We could simply dismiss the Apple doomsayers as our industry’s nattering nabobs of negativism, but let’s take a closer look at what insists under the surface. Put another way, what are the emotions that cause people to reason against established facts, to feel that the small market share that allowed the Mac to prosper at the higher end will inevitably spell failure for iDevices?

I had a distinct recollection that Asymco’s Horace Dediu had offered a sharp insight into the Apple-is-doomed mantra. Three searches later, first into my Evernote catchall, then to Google, then to The Guardian, I found a Juliette Garside article where Horace crisply states the problem [the passage quoted here is from a longer version that's no longer publicly available; emphasis and elision mine]:

“[There's a] perception that Apple is not going to survive as a going concern. At this point of time, as at all other points of time in the past, no activity by Apple has been seen as sufficient for its survival. Apple has always been priced as a company that is in a perpetual state of free-fall. It’s a consequence of being dependent on breakthrough products for its survival. No matter how many breakthroughs it makes, the assumption is (and has always been) that there will never be another. When Apple was the Apple II company, its end was imminent because the Apple II had an easily foreseen demise. When Apple was a Mac company its end was imminent because the Mac was predictably going to decline. Repeat for iPod, iPhone and iPad. It’s a wonder that the company is worth anything at all.”

This feels right, a legitimate analysis of the analysts’ fearmongering: Some folks can’t get past the “fact” that Apple needs hit products to survive because — unlike Amazon, as an example — it doesn’t own a lasting franchise.

In the meantime, we can expect to see more hoses attached to Apple’s money pump.

Next week, I plan to look at iOS and 64-bit processing.

JLG@mondaynote.com

Apple’s Wearables Future

 

Wearable technologies have a huge future. For Apple, they’ll create a new product category with an iPhone-like revenue stream! No so fast. Smartwatches and other wearable consumer products lack key attributes for breaking out of the novelty prison. 

‘I Think the Wrist Is Interesting’ Thus spake Tim Cook on the opening night of last May’s D11 conference.

When pressed to discuss his company’s position on wearable technologies, Cook was unusually forthcoming: Instead of pleading Apple’s Fifth, Cook launched into a substantial discussion of opportunities for his company to enter the field, calling wearables “a very key branch of the tree”.

But when asked about the heavily publicized Google Glass he parried the question by suggesting that people who don’t otherwise wear glasses might be reluctant to don such an accoutrement.

I don’t find Tim Cook’s dismissal of eyewear very insightful: Just go to a shopping center and count the eyewear stores. Many belong to the same rich Italian conglomerate, Luxottica, a company with about ten house brands such as Oakley, Persol, and Ray-Ban, and a supplier to more than twenty designer labels ranging from Armani to Versace. (As the perturbing Sixty Minutes exposé on Luxottica pointed out, the company nicely rounds out its vertical dominance of the sector through its ownership of EyeMed, a vision insurance business.)

Eyewear, necessary or not, is a pervasive, fashionable, rich product category, a fact that hasn’t escaped Google’s eye for numbers. The company is making an effort to transmute their geeky spectacles into fashion accessories. Courtesy of Counternotions I offer this picture of Sergey Brin and fashionista Diane von Furstenberg proudly donning the futuristic eyewear at the NY Fashion Week:

Glass Fashion Brin

On a grander scale, we have a Vogue article, Google Glass and a Futuristic Vision of Fashion:

Glass en Vogue 2

The company’s efforts to make Google Glass fashionable might be panned today for pushing the envelope a little too far but, in a not-too-distant future, they stand a chance of being viewed as truly visionary.

If eyewear doesn’t excite Tim Cook, what does? To him, the wrist feels more natural, more socially acceptable. We all wear one or more objects around our wrist(s).

The wristwear genre isn’t new (recall Microsoft’s 2004 Spot). Ask Google to show you pictures of smartwatches, you get 23M results and screen after screen like this one:

smartwatch_ggl

The genre seems to be stuck in the novelty state. Newer entries such as Samsung’s Gear have gotten mixed reviews. Others contend a 2010 iPod nano with a wristband makes a much nicer smartwatch.

Regardless, by comparison, pre-iPod MP3 players and pre-iPhone smartphones were getting better press – and more customers. Considering the putative iWatch, the excitement about Apple getting into this class of devices appears to be excessive.

The litmus test for the potential of a device is the combination of pervasiveness and frequency of use. Smartphones are a good example, they’re always with us, we look at their screens often (too often, say critics who pretend to ignore the relationship between human nature and the Off button).

The iWatch concept makes two assumptions: a) we’ll wear one and, b) we’ll only wear that one.

Checking around we see young adults who no longer wear watches — they have a smartphone; and middle-agers use watches as jewelry, possessing more than one. This defeats both pervasiveness and frequency of use requirements.

Then there’s the biometry question: How much useful information can a wearable device extract from its wearer?

To get a better idea about what’s actually available (as opposed to fantasized), I bought a Jawbone UP wristband a little over a month ago. With its accelerometers and embedded microprocessors, UP purports to tell you how many steps you took, how long you’ve been inactive during your days, it logs your stretches of light and deep sleep, and even “makes it fun and easy to keep track of what you eat”.  Once or twice a day, you plug it into your smartphone and it syncs with an app that displays your activity in graphic form, tells you how well you’re doing versus various goals and averages. It also suggests that you log your mood in order to “discover connections that affect how you feel.”

At first, I found the device physically grating. I couldn’t accept it the way I’m oblivious to my watch, and I even found it on the floor next to my bed a couple of mornings. But I stuck with it. The battery life is as promised (10 days) and I’ve experienced none of the first versions troubles. I traveled, hiked and showered with it without a hitch other than the cap covering the connecting pin getting a bit out of alignment.

Will I keep using it? Probably not.

Beyond the physical discomfort, I haven’t found the device to be very useful, or even accurate. It’s not that difficult to acquire a useful approximation of hours slept and distance walked during the day — you don’t need a device for these things.

As for accuracy, the other day it declared that I had exhibited a substantial level of physical activity… while I was having breakfast. (I may be French, but I no longer move my hands all that much as I speak.)

The app’s suggestion that I log my food consumption falls into the magical thinking domain of dieting. A Monday morning step on a scale tells us what we know already: Moderation is hard, mysterious, out of the reach of gadgets and incantations.

For a product to start a new worthy species for a company as large as Apple, the currency unit to consider is $10B. Below that level, it’s either an accessory or exists as a member of the ecosystem’s supporting cast. The Airport devices are neat accessories; the more visible Apple TV supports the big money makers — Macs, iPads and iPhones — by enhancing their everyday use.

With this in mind, will “wearables” move the needle, will they cross the $10B revenue line in their second or third year, or does their nature direct them to the supporting cast or accessory bins?

Two elements appear to be missing for wearable technologies to have the economic impact that companies such as Apple would enjoy:

  • The device needs to be easily, naturally worn all the time, even more permanently than the watch we tend to take off at night.
  • It needs to capture more information than devices such as the Jawbone do.

A smartwatch that’s wirelessly linked to my smartphone and shows a subset of the screen in my pocket…I’m not sure this will break out of the novelty category where the devices have been confined thus far.

Going back to Tim Cook’s oracular pronouncement on wearables being “a very key branch of the tree”, I wonder: Was he having fun misdirecting his competition?

JLG@mondaynote.com

—————————————–

PS: After two July Monday Notes on the company, I’ll wait for the Microsoft centipede to drop one or two more shoes before I write about the Why, When, How and Now What of Ballmer’s latest unnatural acts. There in an Analyst Day coming September 19th — and the press has been disinvited.

PPS: In coming days, to keep your sanity when trying to drink from the Apple kommentariat fire hydrant, you can safely direct your steps to three sites/blogs:

  • Apple 2.0 , where Philip Ellmer-DeWitt provides rational news and commentary, skewers idiots and links to other valuable fodder.
  • Asymco, where Horace Dediu provides the absolute best numbers, graphs and insights into the greatest upheaval the tech industry has ever seen. Comments following his articles are lively but thoughtful and civilized.
  • Apple Insider. You might want to focus on learned, detailed editorials by Daniel Eran Dilger such as this one where he discusses Microsoft and Google (partially) shifting to an Apple-like business model. Daniel can be opinionated, animated even, but his articles come with tons of well-organized data.