apple

Shift Happens: Apple + IBM. This Time It’ll Be Different.

 

Strategic Alliances and other grandly named partnerships never seem to live up to their florid marriage announcements. Apple and IBM are it – again – but this time, Apple is the larger, more prosperous company, and IBM is trying the bad old recipe of regaining growth by cutting down.

Let me slip into something more comfortable: Devil’s Advocate robes. Thus togged out, I will explain why this Apple + IBM rapprochement won’t work – or, worse, it will.

First, the clash of cultures.

Apple is a focused company, its financial statements tell the story: Its money is made in hardware. All other activities, such as the important contributions from the App Store, make up an ecosystem that support the hardware volumes and margins. Everyone in the company knows this.

A look at IBM’s latest quarterly report tells a much more complicated story. In its simplest analysis, the company consists of three main segments, each with its own P&L (Profit & Loss) numbers and, one assumes, its own goals, rewards and punishments, and fight for resources. It is, counterintuitively as the shadow of its former grandeur remains, a smaller business than Apple’s: $24.4B last quarter (-2% year-to-year) vs. $37.4B (+6%).

I asked WolframAlpha for per employee, per year revenue and profit comparisons and got this:

Wofram IBM Apple Revenue

and…

Wolfram IBM Apple Profit

Inside IBM, morale isn’t great. Following a series of layoffs, management is perceived as using Excel as a windshield to drive the company.

Two groups with widely differing habits of the heart and mind.

Second, earlier embraces haven’t worked.

We have memories of  AIM, the 1991 accord between Apple, IBM, and Motorola that gave us Kaleida, the multimedia PowerPC processor, and Taligent, Apple and IBM’s attempt at a more modern operating system. Big announcements, big plans – and nothing but debris.

Even earlier, we have memories of the Apple/DEC Alliance: In the Summer of 1987, my boss and benefactor John Sculley had given me the mission to bring to a conclusion a conversation he’d started with DEC’s CEO. Things went well and, in January 1988, we reached our goal:

 “…Apple Computer and Digital Equipment announced a joint development agreement under which the two companies would work together to integrate Macintosh and the AppleTalk network system with the VAX and DECnet.

At the celebratory dinner, I sat next to DEC’s founder, Ken Olson. The likable Grand Old Man professed happiness with our collaboration and calmly told me that while he knew lots of people who used PCs, he couldn’t comprehend why. At home, he said, he had a “glass teletype” — a CRT, remember those? — and an Ethernet connection back to the factory, quite expensive at the time. Combined with DEC’s  ALL-IN-1 office productivity suite (all commands were two-characters long) he had everything he needed.

The Apple/DEC Alliance went nowhere. As with many such covenants, the product of the announcement was the announcement itself. The marriage itself was a sham.

Third and more generally, alliances don’t work.

There was a time when strategic alliances were all the rage. In 1993, my friend Denise Caruso published the aptly titled Alliance Fever, a 14-page litany of more than 500 embraces. The list started at 3DO and ending with Zenith Electronics, neither of which still stands: 3DO went bankrupt in 2003, Zenith was absorbed by LG Electronics.

These aren’t isolated bad endings. If you have the time and inclination for a nostalgic stroll through the list, you’ll see many more such disappearances.

But, you’ll object, this was more than twenty years ago. The industry has learned from these examples; we won’t fall into the same rut.

One would hope. And one would be disappointed.

The tendency remains strong for sheepish company execs to congregate and participate in what Valley wags call a Clusterf#^k. In two Monday Notes (Mobile World 2010 and 2011), I offered examples such as this one:

Do your eyes glaze over when you read such BS?

“Global leaders Intel Corporation and Nokia merge Moblin and Maemo to create MeeGo*, a Linux-based software platform that will support multiple hardware architectures across the broadest range of device segments, including pocketable mobile computers, netbooks, tablets, mediaphones, connected TVs and in-vehicle infotainment systems.”

Relax, you’re normal. Who are they kidding? Themselves, most likely.

All the holy words are there: Linux (mandatory), based (to male things clearer), platform (the p-word), multiple hardware architectures (we don’t know what we’re doing so we’re covering all bases), broadest range of devices (repeat the offense just committed), segments (the word adds a lot of meaning to the previous phrase), including pocketable mobile computers, netbooks, tablets, mediaphones, connected TVs and in-vehicle infotainment systems (only microprocessor-driven Toto toilets are missing from the litany).

Alliances generally don’t work because there’s no one really in charge, no one has the power to mete out reward and punishment, to say no, to change course. Often, the partners in an alliance are seen as a bunch of losers clinging to each other with the hope that there’s safety in numbers. It’s a crude but, unfortunately, not inaccurate caricature.

I’ll switch sides now and explain why It’ll Be Different This Time.

Division of labor is the most convincing argument for this partnership. IBM is and always has been an Enterprise Services company. As it did in its glorious mainframe days, it can take care of everything: analyze your business, recommend changes, re-engineer your organization, write software, maintain everything. Today, there’s much less focus on hardware revenue, but the broad scope remains.

Then came the mobile revolution, which IBM has missed out on. It’s not that they didn’t have the opportunity. The company could have jumped on the mobile-everything wave, but that would have meant breaking the “Roadmap 2015” promise that was avowed by IBM’s former CEO, Sam Palmisano. Palmisano might be forgiven for not anticipating the size and importance of mobile when he promised, in his 2010 letter to investors, that IBM share value would double by 2015, but Ginni Rometty, Palmisano’s successor, has no excuse. The 2012 changing of the guard was a perfect opportunity for Rometty to stand up, say Things Have Changed and re-jigger the roadmap. Ah well.

On the positive side, IBM’s clients are re-organizing their businesses as a result of the mobile deluge, some late, some early. The smarter ones have realized that mobile devices aren’t just “small PCs” and have turned to broad-range professional services vendors such as IBM to re-engineer their business.

For Apple’s part, the iPhone and the iPad have gained increasingly wider acceptance with large Enterprise customers:98% of Fortune 500 companies have rdeployed iOS devices and more than 90% of tablet activations in enterprise environments are iPads.” Of course, a few BYOD devices don’t constitute wholesale adoption inside a company. Apple doesn’t have the manpower and culture to come in, engineer, deploy, and maintain company-wide applications and fleets of devices. That’s IBM forte.

What’s new in the arrangement is IBM’s decision to invest in extending its ability to develop applications that fully integrate iOS devices — as opposed to “suffering” them.

On the numbers side, naysayers mistakenly use the “98%” figure quoted above to opine that the partnership won’t create much additional revenue. They’re probably right — at least initially. But the partnerships could herald a move from “anecdotal” to systematic deployments that are deep and wide. This will take time and the needle won’t move right away…it will be more like the hours hand on the clock face.

Another more immediate effect, across a wide range of enterprises, will be the corporate permission to use Apple devices. Recall the age-old mantra You Don’t Get Fired For Buying IBM, which later became DEC, then Microsoft, then Sun…and now Apple. Valley gossip has it that IBM issued an edict stating that Macs were to be supported internally within 30 days. Apparently, at some exec meetings, it’s MacBooks all around the conference room table — except for the lonely Excel jockey who needs to pivot tables.

We’ll see if the company whose motto once was Think actually works well with the Think Different squad.

JLG@mondaynote.com

 

The Sweet Spot On Apple’s Racket

 

iPad sales are falling – but the sky is not. We’re merely dealing with a healthy case of expectations adjustment.

The tablet computer has always felt inevitable. The desire to harness the power of a computer in the comfortable form of a letter-size tablet with a keyboard, or perhaps a stylus for more natural interaction — or why not both? — has been with us for a very long time. Here we see Alan Kay holding a prototype of his 1972 Dynabook (the photo is from 2008):

Alan_Kay_and_the_prototype_of_Dynabook,_pt._5_(3010032738)

(credit: http://en.wikipedia.org/wiki/Dynabook)

Alan prophetically called his invention a personal computer for children of all ages.

For more than 40 years, visionaries, entrepreneurs, and captains of industry have whetted our appetite for such tablets. Before it was recast as a PDA, a Personal Digital Assistant, Steve Sakoman’s Newton was a pen-based letter-size tablet. Over time, we saw the GridPad, Jerry Kaplan’s and Robert Carr’s Go, and the related Eo Personal Communicator. And, true to its Embrace and Extend strategy, Microsoft rushed a Windows for Pen Computing extension into Windows 3.1.

These pioneering efforts didn’t succeed, but the hope persisted: ‘Someone, someday will get it right’. Indeed, the tablet dream got a big boost from no less than Bill Gates when, during his State of The Industry keynote speech at Comdex 2001 (Fall edition), Microsoft’s CEO declared that tablets were just around the corner [emphasis mine]:

“The Tablet takes cutting-edge PC technology and makes it available wherever you want it, which is why I’m already using a Tablet as my everyday computer. It’s a PC that is virtually without limits — and within five years I predict it will be the most popular form of PC sold in America.

Unfortunately, the first Tablet PCs, especially those made by Toshiba (I owned two), are competent but unwieldy. All the required ingredients are present, but the sauce refuses to take.

Skip ahead to April 2010. The iPad ships and proves Alan Kay right: The first experience with Apple’s tablet elicits, more often than not, a child-like joy in children of all ages. This time, the tablet mayonnaise took and the “repressed demand” finally found an outlet. As a result, tablets grew even faster than PCs ever did:

PNG - Tablets Fastest Ever

(Source: Mary Meeker’s regular Internet Trends 2014 presentation, always long, never boring)

In her 2013 report, Meeker showed iPads topping the iPhone’s phenomenal growth, climbing three times faster than its more pocketable sibling:

PNG - iPad 3X iPhone Meeker 2013

(Source: Mary Meeker Internet Trends 2013)

There were, however, two unfortunate aspects to this rosy picture.

First, there was the Post-PC noise. The enthusiasm for Android and iOS tablets, combined with the end of the go-go years for PC sales, led many to decree that we had finally entered the “Post-PC” era.

Understandably, the Post-PC tag, with its implication that the PC is no longer necessary or wanted, didn’t please Microsoft. As early as 2011, the company was ready with its own narrative which was delivered by Frank Shaw, the company’s VP of Corporate Communications: Where the PC is headed: Plus is the New “Post”. In Microsoft’s cosmos, the PC remains at the center of the user’s universe while smartphones and tablets become “companion devices”. Reports of the PC’s death are greatly exaggerated, or, as Shaw puts it, with a smile, “the 30-year-old PC isn’t even middle aged yet, and about to take up snowboarding”.

(Actually, the current debate is but a new eruption of an old rash. “Post-PC” seems to have been coined by MIT’s David Clark around 1999, causing Bill Gates to pen a May 31st, 1999 Newsweek op-ed titled: Why the PC Will Not Die…)

Both Bill and Frank are right – mostly. Today’s PC, the descendant of the Altair 8800 for which Gates programmed Microsoft’s first Basic interpreter, is alive and, yes, it’s irreplaceable for many important tasks. But classical PCs — desktops and laptops — are no longer at the center of the personal computing world. They’ve been replaced by smaller (and smallest) PCs — in other words, by tablets and smartphones. The PC isn’t dead or passé, but it is shape-shifting.

There was a second adverse consequence of the iPad’s galloping growth: Expectations ran ahead of reality. Oversold or overbought, it doesn’t matter, the iPad (and its competitors) promised more than they could deliver. Our very personal computers — our tablets and smartphones — have assumed many of the roles that previously belonged to the classical PC, but there are some things they simply can’t do.

For example, in an interview with the Wall Street Journal, Tim Cook confides that “he does 80% of the work of running the world’s most valuable company on an iPad.” Which is to say Tim Cook needs a Mac for the remaining 20%…but the WSJ quote doesn’t tell us how important these 20% are.

We now come to the downward trend in iPad’s unit sales: -2.29% for the first quarter of calendar year 2014 (compared to last year). Even more alarming, unit sales are down 9% for the quarter ending in June. Actually, this seems to be an industry-wide problem rather than an Apple-specific trend. In an exclusive Re/code interview, Best Buy CEO Hubert Joly says tablet sales are “crashing”, and sees hope for PCs.

Many explanations have been offered for this phenomenon, the most common of which is that tablets have a longer replacement cycle than smartphones. But according to some skeptics, such as Peter Bright in an Ars Technica op-ed, there’s a much bigger problem [emphasis mine]:

“It turns out that tablets aren’t the new smartphone…[t]hey’re the new PC; if you’ve already got one, there’s not much reason to buy a new one. Their makers are all out of ideas and they can’t make them better. They can only make them cheaper.”

Bright then concludes:

“[T]he smartphone is essential in a way that the tablet isn’t. A large screen smartphone can do…all the things a tablet can do… Who needs tablets?”

Hmmm…

There is a simpler – and much less portentous – explanation. We’re going through an “expectations adjustment” period in which we’ve come to realize that tablets are not PC replacements. Each personal computer genre carries its own specifics; each instils unique habits of the body, mind, and heart; none of them is simply a “differently sized” version of the other two.

The realization of these different identities manifests itself in Apple’s steadfast refusal to hybridize, to make a “best of both worlds” tablet/laptop product.

Microsoft thinks otherwise and no less steadfastly (and expensively) produces Surface Pro hybrids. I bought the first generation two years ago, skipped the second, and recently bought a Surface Pro 3 (“The tablet that can replace your laptop”). After using it daily for a month, I can only echo what most reviewers have said, including Joanna Stern in the WSJ:

“On its third attempt, Microsoft has leapt forward in bringing the tablet and laptop together—and bringing the laptop into the future. But the Pro 3 also suffers from the Surface curse: You still make considerable compromises for getting everything in one package.”

Trying to offer the best of tablets and laptops in one product ends up compromising both functions. In my experience, too many legacy Windows applications work poorly with my fingers on the touch screen. And the $129 Type Cover is a so-so keyboard and poor trackpad. Opinions will differ, of course, but I prefer using Windows 8.1 on my Mac. We’ll see how the upcoming Windows 9, code name Threshold, will cure the ills of what Mary Jo Foley, a well-introduced Microsoft observer, calls Vista 2.0.

If we consider that Mac unit sales grew 18% last quarter (year-to-year), the company’s game becomes clear: The sweet spot on Apple’s racket is the set of customers who, like Tim Cook, use MacBooks and iPads. It’s by no means the broadest segment, just the most profitable one. Naysayers will continue to contend that the prices of competing tablets are preordained to crash and will bring ruin to Apple’s Affordable Luxury product strategy…just as they predicted netbooks would inflict damage on MacBooks.

As for Peter Bright’s contention that “[tablet] makers are all out of ideas and they can’t make them better”, one can easily see ways in which Google, Lenovo, Microsoft, Apple, and others could make improvements in weight, speed, input methods, system software, and other factors I can’t think of. After we get over the expectations adjustment period, the tablet genre will continue to be innovative, productive, and fun – for children of all ages.

JLG@mondaynote.com

App Store Curation: An Open Letter To Tim Cook

 

With one million titles and no human guides, the Apple App Store has become incomprehensible for mere mortals. A simple solution exists: curation by humans instead of algorithms.

Dear Tim,

You know the numbers better than anyone — I don’t need to quote them to you — but we all know that the iOS App Store is a veritable gold mine. Unfortunately, the App Store isn’t being mined in the best interests of Apple’s customers and developers, nor, in the end, in the interests of the company itself.

The App Store may be a gold mine, but it’s buried in an impenetrable jungle.

Instead of continuing with this complaint, I’ll offer a suggestion: Let humans curate the App Store.

Instead of using algorithms to sort and promote the apps that you permit on your shelves, why not assign a small group of adepts to create and shepherd an App Store Guide, with sections such as Productivity, Photography, Education, and so on. Within each section, this team of respected but unnamed (and so “ungiftable”) critics will review the best-in-class apps. Moreover, they’ll offer seasoned opinions on must-have features, UI aesthetics, and tips and tricks. A weekly newsletter will identify notable new titles, respond to counter-opinions, perhaps present a developer profile, footnote the occasional errata and mea culpa…

The result will be a more intelligible App Store that makes iOS users happier.

If I’m so convinced, why don’t I drive it myself? You might recall that I offered to do so — for free — in a brief lobby conversation at the All Things D conference a couple of years ago. The ever-hovering Katie Cotton gave me the evil eye and that was the end of the exchange.

I look back on my years at Apple with a certain affection, and would be happy to repay the company for what it did for me, so, yes, I would do it for free… but I can’t bankroll a half dozen tech writers, nor can I underwrite the infrastructure costs. And it won’t pay for itself: As an independent publication (or, more likely, an app) an App Store Guide isn’t financially viable. We know it’s next to impossible to entice people to pay for information and, as the Monday Note proves, I have no appetite for becoming a nano-pennies-per-pageview netwalker.

So, the App Store Guide must be an Apple publication, a part of its ecosystem.

Best,

JLG

PS:  We both understand that ideas are just ideas, they’re not actual products. As Apple has shown time and again — and most vividly with the 30-year old tablet idea vs. the actual iPad — it’s the product that counts. If you see the wisdom of a human-curated Apple App Guide, and I hope you do, I will not seek credit.

——————————-

Regular Monday Note readers will remember I already tilted at the App Store curation windmill: Why Apple Should Follow Michelin and  the tongue-in-cheek Google’s Red Guide to the Android App Store. Who knows, the third time might be the charm.

To play devil’s advocate, let’s consider a developer’s bad reaction to an Apple App Guide review. Let’s say MyNewApp gets a thumbs down in the Productivity section of the Guide. I’m furious; I write Tim or Eddy Cue an angry letter, I huffs and puff, threaten to take my business elsewhere — to Windows Phone, for example. I exhort my friends, family, and satisfied customers to contribute to a letter-writing campaign…

Why risk this sort of backlash? Particularly when today’s formula of “featuring” apps seems to be working:

330-Apps_curation

But…does it really work all that well? Today’s way of choosing this app over that one already upsets the non-chosen. Further, the stars used to “measure” user feedback are known to be less than reliable. A thoughtful, detailed, well-reasoned review would serve customers and developers alike.

This leads us to the Guide’s most important contribution to the app universe: Trust. An Apple-sponsored App Guide can be trusted for a simple reason: The company’s one and only motive is to advance its users’ interests by making the App Store more trustworthy, more navigable. As for developers, they can rely on a fair and balanced (seriously) treatment of their work. The best ones will be happier and the “almost best” others will see an opportunity to get their improved work noticed in a future review cycle.

There is also the temptation to shrug the suggestion off with the customary ‘Don’t fix it, it’s not broken.’  Sorry, no, it is broken. See what Marco Arment, a successful Apple developer, says on his blog [emphasis mine]:

“Apple’s App Store design is a big part of the problem. The dominance and prominence of “top lists” stratifies the top 0.02% so far above everyone else that the entire ecosystem is encouraged to design for a theoretical top-list placement that, by definition, won’t happen to 99.98% of them. Top lists reward apps that get people to download them, regardless of quality or long-term use, so that’s what most developers optimize for. Profits at the top are so massive that the promise alone attracts vast floods of spam, sleaziness, clones, and ripoffs.”

and…

Quality, sustainability, and updates are almost irrelevant to App Store success and usually aren’t rewarded as much as we think they should be, and that’s mostly the fault of Apple’s lazy reliance on top lists instead of more editorial selections and better search.

The best thing Apple could do to increase the quality of apps is remove every top list from the App Store.”

We can now turn to my own biases.

Why do I care? Good question, I’m now 70 and could just sit in zazen and enjoy the show. And there’s a lot of show to enjoy: The tech industry is more exciting now than when I was a rookie at HP France in 1968. But in today’s app stores, the excitement fades — and I’m not just talking about Apple, Android’s Google Play is every bit as frustrating. I see poorly exploited gold mines where quantity obscures quality and the lack of human curation ruins the Joy of Apps. There are caves full of riches but, most of of the time, I can’t find a path to the mother lode.

Is it a lack of courage in anticipation of imagined protests? Hunger sated by too much success too soon? An addiction to solving all problems by algorithm instead of by human judgment?

I hope its none of these, and that we’ll soon see a newsletter/blog and a reasoned, regularly enriched guide that leads us to the better App Store titles.

—JLG

 

Macintel: The End Is Nigh

When Apple announced its 64-bit A7 processor, I dismissed the speculation that this could lead to a switch away from Intel chips for the Macintosh line for a homegrown “desktop-class” chip. I might have been wrong.

“I don’t know exactly when, but sooner or later, Macs will run on Apple-designed ARM chips.” Thus spake Matt Richman in a 2011 blog post titled “Apple and ARM, Sitting in a Tree”. Richman explained why, after a complicated but ultimately successful switch from PowerPC chips to Intel processors in 2005, Apple will make a similar switch, this time to ARM-based descendants of the A4 chip designed by Apple and manufactured by Samsung.

Cost is the first reason invoked for the move to an An processor:

“Intel charges $378 for the i7 chip in the new high-end 15 inch MacBook Pro. They don’t say how much they charge for the i7 chip in the low-end 15 inch MacBook Pro, but it’s probably around $300. …When Apple puts ARM-based SoC’s in Macs, their costs will go down dramatically. ”

We all know why Intel has been able to command such high prices. Given two microprocessors with the same manufacturing cost, power dissipation, and computing power, but where one runs Windows and the other doesn’t, which chip will achieve the higher market price in the PC market? Thus, Intel runs the table, it tells clone makers which new x86 chips they’ll receive, when they’ll receive them, and, most important, how much they’ll cost. Intel’s margins depend on it.

ARM-based processors, on the other hand, are inherently simpler and therefore cost less to make. Prices are driven even lower because of the fierce competition in the world of mobile devices, where the Wintel monopoly doesn’t apply.

329_A7chip

Cost is the foremost consideration, but power dissipation runs a close second. The aging x86 architecture is beset by layers of architectural silt accreted from a succession of additions to the instruction set. Emerging media formats demand new extensions, while obsolete constructs must be maintained for the sake of Microsoft’s backward compatibility religion. (I’ll hasten to say this has been admirably successful for more than three decades. The x86 nickname used to designate Wintel chips originates from the 8086 processor introduced in 1978 – itself a backward-compatible extension of the 8088…)
Because of this excess baggage, an x86 chip needs more transistors than its ARM-based equivalent, and thus it consumes more power and must dissipate more heat.

Last but not least, Richman quotes Steve Jobs:

“I’ve always wanted to own and control the primary technology in everything we do.”

Apple’s leader has often been criticized for being too independent and controlling, for ignoring hard-earned industry wisdom. Recall how Apple’s decision to design its own processors was met with howls of protest, accusations of arrogance, and the usual predictions of doom.

Since then, the interest for another Grand Processor Switch has been alive and well. Googling “Mac running on ARM” gets you close to 10M results. (When you Bing the same query, you get 220M hits — 22x Google’s results. SEO experts are welcome to comment.)

Back to the future…

In September 2013, almost a year ago already, Apple introduced the 64-bit A7 processor that powers new iPhones and iPads. The usual suspects pooh-poohed Apple’s new homegrown CPU, and I indulged in a little fun skewering the microprocessor truthers: 64 bits. It’s Nothing. You Don’t Need It. And We’ll Have It In 6 Months. Towards the end of the article, unfortunately, I dismissed the speculation that Apple An processors would someday power the Mac. I cited iMacs and Mac Pros — the high end of the product line —as examples of what descendants of the A7 couldn’t power.

A friend set me straight.

In the first place, Apple’s drive to own “all layers of the stack” continues unabated years after Steve’s passing. As a recent example, Apple created its own Swift programming language that complements its Xcode IDE and Clang/LLVM compiler infrastructure. (For kremlinology’s sake I’ll point out that there is an official Apple Swift blog, a first in Apple 2.0 history if you exclude the Hot News section of the of apple.com site. Imagine what would happen if there was an App Store blog… But I digress.)

Secondly, the Mac line is suspended, literally, by the late delivery of Intel’s Broadwell x86 processors. (The delay stems from an ambitious move to a bleeding edge fabrication technology that shrinks the basic building block of a chip to 14 nanometers, down from 22 nanometers in today’s Haswell chips.) Of course, Apple and its An semiconductor vendor could encounter similar problems – but the company would have more visibility, more control of its own destiny.

Furthermore, it looks like I misspoke when I said an An chip couldn’t power a high-end Mac. True, the A7 is optimized for mobile devices: Battery-optimization, small memory footprint, smaller screen graphics than an iMac or a MacBook Pro with a Retina display. But having shown its muscle in designing a processor for the tight constraints of mobile devices, why would we think that the team that created the most advanced smartphone/tablet processor couldn’t now design a 3GHz A10 machine optimized for “desktop-class” (a term used by Apple’s Phil Schiller when introducing the A7) applications?

If we follow this line of reasoning, the advantages of ARM-based processors vs. x86 devices become even more compelling: lower cost, better power dissipation, natural integration with the rest of the machine. For years, Intel has argued that its superior semiconductor design and manufacturing technology would eventually overcome the complexity downsides of the x86 architecture. But that “eventually” is getting a bit stale. Other than a few showcase design wins that have never amounted to much in the real world, x86 devices continue to lose to ARM-derived SoC (System On a Chip) designs.

The Mac business is “only” $20B a year, while iPhones and iPad generate more than 5 times that. Still, $20B isn’t chump change (HP’s Personal Systems Group generates about $30B in revenue), and unit sales are up 18% in last June’s numbers vs. a year ago. Actually, Mac revenue ($5.5B) approaches the iPad’s flagging sales ($5.9B). Today, a 11” MacBook Air costs $899 while a 128Gb iPad Air goes for $799. What would happen to the cost, battery life, and size of an A10-powered MacBook Air? And so on for the rest of the Mac line.

By moving to ARM, Apple could continue to increase its PC market share and scoop much of the profits – it currently rakes in about half of the money made by PC makers. And it could do this while catering to its customers in the Affordable Luxury segment who like owning both an iPad and a Mac.

While this is entirely speculative, I wonder what Intel’s leadership thinks when contemplating a future where their most profitable PC maker goes native.

JLG@mondaynote.com

———-

Postscript: The masthead on Matt Richman’s blog tells us that he’s now an intern at Intel. After reading several of his posts questioning the company’s future, I can’t help but salute Intel management’s open mind and interest in tightly reasoned external viewpoints.

And if it surprises you that Richman is a “mere” intern, be aware that he was all of 16-years-old when he wrote the Apple and ARM post. Since then, his blog has treated us to an admirable series of articles on Intel, Samsung, Blackberry, Apple, Washington nonsense – and a nice Thank You to his parents.

 

News on mobile: better be a Danish publisher than a Japanese one

 

This is the second part of our Mobile facts to Keep in Mind (see last week Monday Note – or here on Quartz). Today, a few more basic trends and a closer look at healthy markets for digital news. 

Last week, we spoke about the preeminence of mobile applications. Not all readers agree, of course, but I found more data to support the finding; among many sources, the remarkable Reuters Institute Digital News Report (PDF here) is worth reading:

47% of smartphone users say they use mainly apps for news

According to the report, this figure has risen by 6 percentage points in just one year. By contrast, 38% of the news consumption is made via a browser — which is losing ground: -4% in just a year.

The trend is likely to accelerate when taking in account demography: On smartphones, the most active groups are the 18-24s and the 35-44s; on tablets the most active group is the 45-54 segment.

Platform usage varies in accordance to local market share, but when it come to paying for news, Apple leads the game:

iOS users are x1.5 likely to pay for news in the US
and x2 likely to pay in the UK than Android or other users

Here is the bad part, though. Again based on the Reuters report, the use of smartphones does narrow the range of news sources. More than ever, the battle for the first screen is crucial.

Across the ten countries surveyed,
37% of users rely on a single news source
vs. 30% for PC users

In the UK, the trend is even stronger with 55% of mobile users relying a single news source. This goes along with good news for those who still defend original news production: mobile news consumption is quite focused on legacy media. The BBC app crushes the competition with 67% of respondents saying they used the app the previous week, vs. 25% for Sky, MSN and Yahoo are trailing with respectively 2% and 7%.

If you want to survey a healthy digital news market, go to Denmark

MN_328_vikings_logo

A Viking logo (from the TV Series) as viewed by the Brand New blog;
note the ancient reference to technology…

Not only does Denmark rank among the best countries to live and develop a business in, but when it comes to digital news, it leads the pack in several of ways:

Despite the digital tsunami, Denmark retains many strong media brands. As a result, legacy media are the prime way for accessing digital news. And since Danish media did well embracing new platforms, they enjoyed similarly success on social, funneling readers to their properties.
The opposite holds for France and Germany where the transition is much slower; in those countries digital users rely much more on search to reach news brands. Two side effects ensue: News readers are more accidental and therefore generate a much lower ARPU; and the greater reliance on Google is problematic (hence the call to arms in France and Germany against the search engine giant.)

– Because of the strength of its traditional media brands, the Denmark news market has left very little oxygen to pure players: They weigh only 10% of weekly digital news, vs. 39% in the US and 46% in Japan were legacy media have been severely hit.

– Danes are the heaviest users of both smartphones and tablets to access news.

– They use mobile apps more than anywhere else: 19%, vs. 15% for US and 12% for Germany.

– They are mostly Apple users : 58% say they use an iOS device to access news in the last week (vs. 28% in Germany), hence a better ARPU for mobile publishers.

–  Danish news consumers generously overlap their devices way more than in any country. 79% use a PC, 61% a smartphone and 39% a tablet. Only 24% use only a PC for news. In Japan by contrast, 58% admit using only a PC for their news diet; up there, the use of smartphone and tablet to access information is respectively one half and one third of Denmark.

– In Danish public transportation, smartphones has overtaken print as the main news vector by 69% vs. 21% of the usage.

We all know where to seek inspiration for our digital news strategies.

frederic.filloux@mondaynote.com

WWDC: iOS 2.0, the End of Silos

 

Apple tears down the walls between iOS applications, developer rejoice, and Tim Cook delivers a swift kick to Yukari Iwatani Kane’s derrière – more on that at the end.

In this year’s installment of the World Wide Developers Conference, Apple announced a deluge of improvements to their development platforms and tools, including new SDKs (CloudKit, HomeKit, HealthKit); iCloud Drive, the long awaited response to Dropbox; and Swift, an easy-to-learn, leak-free programming language that could spawn a new generation of Apple developers who regard Objective-C as esoteric and burdensome.

If this sounds overly geeky, let’s remind ourselves that WWDC isn’t intended for buyers of Apple products. It’s a sanctuary for people who write OS X and iOS applications. This explains Phil Schiller’s absence from the stage: Techies don’t trust marketing people. (Unfortunately, the conference’s ground rules seem to have been lost on some of the kommentariat.)

The opening keynote is a few breaths short of 2 hours. If you’d rather not drink from the proverbial fire hydrant, you can turn to summaries from Federico Viticci in MacStories, Andrew Cunningham in Ars Technica (“Huge for developers. Massive for everyone else.”), or you can look for reviews, videos, and commentary through Apple’s new favorite search engine, DuckDuckGo, “The search engine that doesn’t track you”.

For today, I’ll focus on the most important WWDC announcement: iOS applications have been freed from the rigid silos, the walls that have prevented them from talking to each other. Apple developers can now write extensions to their apps and avail themselves of the interprocess facilities that they expect from a 21st century OS.

A bit of history will help.

When the first iPhone is shipped in late June, 2007, iOS is incomplete in many respects. There’s no cut and paste, no accented characters, and, most important, there are no native apps. Developers must obey Steve Job’s dictate to extend the iPhone through slow and limited Web 2.0 apps. In my unofficial version numbering, I call this iOS 0.8.

The Web 2.0 religion doesn’t last long. An iOS Software Development Kit (SDK) is announced in the fall and released in February, 2008. When the iTunes-powered App Store opens its doors in July, the virtual shelves are (thinly) stocked with native apps. This is iOS 1.0.

Apple developers enthusiastically embrace the platform and the App Store starts it dizzying climb from an initial 500 apps in 2008 to today’s 1.2 million apps and 75B cumulated downloads.

However, developers’ affections don’t extend to Apple’s “security state”, the limits imposed on their apps in the name of security and simplicity. To be sold in the App Store, an app must agree to stay confined in its own little sandbox, with no way to communicate with other apps.

According to Apple dogma, this limitation is a good thing because it prevents the viruses and other malware that have plagued older operating systems and overly-trusting apps. One wrong click and your device is visited by rogue code that wreaks havoc on your data, yields control to remote computers, or, worst of all, sits silently and unnoticed while it spies on your keystrokes. No such thing on iOS devices. The prohibition against inter-application exchange vastly reduces the malware risk.

This protection comes with a cost. For example, when you use a word processor or presentation tool on a personal computer, you can grab text and images of any provenance and drop them into your project. On the iOS version of Pages, you can only see other Pages documents — everything else is out of sight and out of reach.

The situation becomes even more galling when developers notice that some of Apple’s in-house apps — iMessage, Maps, Calendar with Contacts — are allowed to talk among themselves. To put it a little too simply, Apple engineers can write code that’s forbidden to third party developers.

Apple’s rules for app development and look-and-feel are famously (and frustratingly) rigid, but the company is occasionally willing to shed its dogma. In 2013, for example, skeuomorphism was abandoned…do any of us miss the simulated leather and torn bits of paper on the calendar?

With last week’s unveiling of the new version of iOS, a much more important dogma has been tossed into the dustbin: An app can now reach beyond its sandbox. Apps can interconnect, workflows are simplified, previously unthinkable feats are made possible.

This is the real iOS 2.0. For developers, after the 2008 momentous opening of the App Store that redefined the smartphone, this is the second major release.

With the new iOS, a third-party word processor developer can release his app from its sandbox by simply incorporating the Document Picker:

“The document picker feature lets users select documents from outside your app’s sandbox. This includes documents stored in another app’s iCloud container or documents provided by a third-party extension.”

Users of the word processor will be able to see and incorporate all files, regardless of how they were created or where they’re stored (within the obvious physical limits). This is a welcome change from today’s frustratingly constricted situation.

iOS Extensions, a feature that lets applications offer their own services to other apps, played well when demonstrated by Craig Federighi, Senior VP of Apple Software:

“Federighi was able to easily modify Safari by adding a sharing option for Pinterest and a translation tool courtesy of Bing. Users will also be able to apply photo filters from third-party apps and use document providers like Box or OneDrive…”
Business Insider, Why You Should Be Excited for Extensions in iOS 8 

Prominent among the benefactors of iOS Extensions are third-party keyboard designers. Today, I watch with envy as my Droid compatriots Swype a quick text message. The keyboard layouts and input methods on my iPhone are limited to the choices Apple gives me — and they don’t include Swype. Tomorrow, developers will be able to augment Apple’s offerings, including keyboards that are designed for specific apps.

As expected, developers have reacted enthusiastically to the end of silo hell. Phil Libin, Evernote’s CEO, sums up developer sentiment in the Ars Technica review:

“We’re most excited about extensions, widgets, TouchID APIs and interactive notifications. We’re all over all of that…This is a huge update for us. It feels like we got four out of our top five most wanted requests!”

Now, for the mandatory “To Be Sure” paragraph…

None of this is free. I don’t mean in the financial sense, but in terms of complexity, restrictions, adapting to new ways of doing old things as well as to entirely fresh approaches. While the relaxation of Apple’s “security state” strictures opens many avenues, it also heightens malware risk, something Apple is keenly aware of. In some cases the company will put the onus on the user, asking us to explicitly authorize the use of an extension. In other situations, as Charles Arthur points out in his WWDC article for The Guardian, Apple will put security restrictions on custom keyboards. Quoting Apple’s prerelease documentation:

“There are certain text input objects that your custom keyboard is not eligible to type into. First is any secure text input object [which is] distinguished by presenting typed characters as dots.
When a user taps in a secure text input object, the system temporarily replaces your custom keyboard with the system keyboard. When the user then taps in a nonsecure text input object, your keyboard automatically resumes.”

In part, the price to pay for the new freedoms will depend on Apple’s skills in building safeguards inside the operating system — that’s what all OS strive for. Developers will also have to navigate a new labyrinth of guidelines to avoid triggering the App Store security tripwire.

That said, there is little doubt that the fall 2014 edition of iOS will be well received for both existing and new iDevices. Considering what Apple iOS developers were able to accomplish while adhering to the old dogma, we can expect more than simply more of the same when the new version of iOS is released.

Which brings us to Tim Cook and the stamp he’s put on Apple. Critics who moan that Apple won’t be the same now that Steve Jobs is gone forget the great man’s parting gift: “Don’t try to guess what I would have done. Do what you think its best.” With the Maps fiasco, we saw Cook take the message to heart. In a break with the past, Cook apologized for an Apple product without resorting to lawyerly caveats and justifications. In a real break with the past, he even recommended competing products.

We’ve also seen Cook do what he thinks is best in his changes to the executive team that he inherited from Jobs. Craig Federighi replaces 20-year NeXT/Apple veteran Scott Forstall; Angela Ahrendts is the new head of Retail; there’s a new CFO, Luca Maestri, and a new head of US Sales, Doug Beck. The transitions haven’t always been smooth — both Ahrendts’ and Beck’s immediate predecessors were Cook appointees who didn’t work out and were quickly dismissed. (Beck was preceded by Zane Browe, former CFO at United Airlines…a CFO in a Sales job?)

Inside the company, Cook is liked and respected. He’s seen as calmly demanding yet fair; he guides and is well supported by his Leadership Team. This isn’t what the PR office says, it’s what I hear from French friends who work there. More than just French, they’re hard-to-please Parisians…

I Love Rien I'm Parisien

…but they like Cook, the way he runs the show. (True to their nature, they save a few barbs for the egregious idiots in their midst.)

With this overall picture of corporate cultural health and WWDC success in mind, let’s turn to Yukari Iwatani Kane, the author of Haunted Empire, Apple After Steve Jobs.

On her Web page, Kane insists her book, exemplar of the doomed-without-Jobs attitude, is “hard-hitting yet fair”. That isn’t what most reviewers have to say. The Guardian’s Charles Arthur called it “great title, shame about the contents”; Time’s Harry McCracken saw it as “A Bad Book About Apple After Steve Jobs”; Jason Snell’s detailed review in Macworld neatly addresses the shortcoming that ultimately diminishes the book’s value:

“Apple after the death of Steve Jobs would be a fascinating topic for a book. This isn’t the book. Haunted Empire can’t get out of the way of its own Apple-is-doomed narrative to tell that story.”

Having read the book, I can respect the research and legwork this professional writer, previously at the Wall Street Journal, has put into her opus, but it’s impossible to avoid the feeling that Kane started with a thesis and then built an edifice on that foundation despite the incompatible facts. Even now she churlishly sticks to her negative narrative: Where last week’s successful WWDC felt like a confederation of engineers and application developers happily working together, Kane sees them as caretakers holding a vigil:

Kane Churlish Tweet 450

The reaction to Kane’s tweet was “hard-hitting yet fair”:

Responses to Kane 450

Almost three years after Tim Cook took the helm, the company looks hale, not haunted.

I’ll give Cook the last word. His assessment of Kale’s book:  “nonsense”.

JLG@mondaynote.com

 

The Beats Music Rorschach Blot

 

Apple has a long track record of small, cautious, unheralded acquisitions. Has the company gone off course with hugely risky purchase of Beats Music and Electronics, loudly announced at an industry conference? 

As Benedict Evans’ felicitous tweet put it, Apple’s $3B acquisition of Beats, the headphone maker and music streaming company, is a veritable Rorschach blot:

Benedict Evans Rorschach

The usual and expected interpretations of Anything Apple – with the implied or explicit views of the company’s future – were in full display at last week’s Code Conference after the Beats acquisition was officially announced during the second day of the event. Two of the conference’s high-profile invitees, Apple’s SVP Craig Federighi and Beats’ co-founder, Dr. Dre (née André Young), quickly exited the program so all attention could be focused on the two key players: Eddy Cue, Apple’s Sr. VP of Internet Software and Services; and Jimmy Iovine, Beats’ other co-founder and freshly minted Apple employee. They were interviewed on stage by Walt Mossberg and Kara Swisher, the conference creators (59-minute video here).

Walt and Kara had booked Cue and Iovine weeks before Tim Bradshaw scooped the Apple/Beats story on May 8th in the Financial Times (the original FT article sits behind a paywall; TechCrunch version here). Was the booking a sign of prescience? smart luck? a parting gift from Katie Cotton as she retires as head of Apple PR? (And was Swisher’s warmly worded valentine to Cotton for her 18 years of service a quid pro quo acknowledgment?)

After the official announcement and the evening fireside chat, the Rorschach analysis began. Amidst the epigrams, which were mostly facile and predictable, one stood out with its understated questioning of culture compatibility:

‘Iovine: Ahrendts or Browett?‘ 

The “Browett”, here, is John Browett, the British executive who ran Dixons and Tesco, two notoriously middle-brow retail chains. Apple hired him in April 2012 to succeed Ron Johnson as the head of Apple Retail… and showed him the door seven months later, removed for a clear case of cultural incompatibility. When Browett tried to apply his estimable cost-cutting knowledge and experience to the Italian marble Apple Store, things didn’t work out — and the critics were quick to blame those who hired him.

Nothing of the sort can be said of Dame Angela Ahrendts. Now head of Apple’s physical and on-line stores, Ahrendts was lured from Burberry, a culturally compatible and Apple-friendly affordable luxury enterprise.

Will Iovine be a Browett or an Ahrendts?

In a previous Monday Note, I expressed concern for the cultural integration challenges involved in making the Beats acquisition work. What I learned from the on-stage interview is that Jimmy Iovine and Eddy Cue have known and worked with each other for more than ten years. Iovine says he’ll be coming to Cupertino ‘about once a month’, so my initial skepticism may have been overstated; Apple isn’t acquiring a company of strangers.

But are they acquiring a company that creates quality products?  While many see Beats Music’s content curation as an important differentiator in the streaming business, one that would give a new life to its flagging music sales, others are not so sure. They find Beats Music’s musical choices uninspiring. I’m afraid I have to agree. I downloaded the Beats Music app, defined a profile, and listened for several hours while walking around Palo Alto or sitting at my computer. Perhaps it’s me, my age, or my degenerate tastes but none of the playlists that Beats crafted for me delivered neither the frisson of discovery nor the pleasure of listening to an old favorite long forgotten. And my iPhone became quite hot after using the app for only an hour or so.

Regarding the headphones: They’re popular and sell quite well in spite of what The Guardian calls “lacklustre sound”. I tried Beats Electronic’s stylish Studio headphones for a while, but have since returned to the nondescript noise-canceling Bose QC 20i, a preference that was shared (exactly or approximately) by many at the conference.

There was no doubt, at the conference, that Apple understands there are problems with Beats, but there’s also a feeling that the company sees these problems as opportunities. An overheard hallway discussion about the miserable state of the iTunes application (too strongly worded to repeat here verbatim) neatly summed up the opportunity: ‘Keeping Beats as a separate group affords Cook and Cue an opening for independently developing an alternative to iTunes instead of trying to fix the unfixable.’ It’s worth noting that the Beats Music app is available on mobile devices, only, and it appears there’s no plan to create a desktop version. This underlines the diminished role of desktops, and points out the possibility of a real mobile successor to the aging iTunes application.

Continuing with the blot-reading exercise, many members of the audience found it necessary to defend the $3B price tag. Some point out that since Apple’s valuation is about 3X its revenue, Beats’ purported $1.5B hardware revenue easily “justifies” the $3B number. (Having consorted with investment bankers at various moments of my business life, as an entrepreneur, a company director, and a venture investor, I know they can be trusted to explain a wide range of valuations. Apparently, Apple is paying $500M for the streaming business and $2.5B for the hardware part.)

My own reading is that the acquisition price won’t matter: If it acquisition succeeds, the price will be easily forgotten; if it fails, Apple will have bigger worries.

Ultimately, the Apple-Beats products and services we don’t haven’t yet seen will do the talking.

–JLG@mondaynote.com

Misunderstanding Apple

 

We’ve come to expect analysts and pundits to misunderstand Apple. More puzzling is when Apple misunderstands itself.

My three-week Road Trip of a Lifetime, driving all the way from Key West, FL to Palo Alto, was interrupted by a bout of pneumonia, low blood oxygen, paroxysmal cough and, most alarming, a loss of appetite. Thankfully, all indicators are looking good and I’m back walking Palo Alto’s leafy streets.

The succession of wheel time and downtime gave me an opportunity to contemplate two recent controversies: Fred Wilson’s prediction of Apple’s imminent fall, and rumors of Apple’s purchase of Beat Electronics. These are both manifestations of what I’ll call, for lack of a better term, Misunderstanding Apple.

First, Fred Wilson. At the recent TechCrunch Disrupt conference, the successful and articulate venture investor predicted that by 2020 Apple will no longer hold the #1 position in the tech world. They won’t even be in the top three. According to Wilson, Apple “doesn’t think about things they way they need to think about things”. Specifically, the company is “too rooted in hardware…[which] is increasingly becoming a commodity” and “Their stuff in the cloud is largely not good. I don’t think they think about data and the cloud.

I’d be surprised by Wilson’s facile, insight-free truisms, except this isn’t the first time he’s shown a blind spot when considering Apple. Wilson is famous for dumping his Apple shares at $91 in January 2009; AAPL is now at $590 or so. (He also sold Google, which closed at $528 on Friday, for a split-adjusted $160. Perhaps there’s a difference between being a venture investor, an insider who watches and influences a young company, and an outsider subjected to forces and emotions outside of one’s control.)

Calling Apple “too rooted in hardware” misunderstands the company. From its inception, Apple has been in one and only one business: personal computers (which, today, includes smartphones and tablets). Indeed, Apple’s quarterly numbers show that the sale of personal computers makes up 87% of its revenue. Everything else that Apple does, from iTunes to the Apple Store, exists to make its smartphones, tablets, laptops, and desktops more useful, more pleasant. And this “everything else” includes the lovingly machined hardware of the MacBook Air and iPhone 5. If the supporting cast does its job well, the main acts will sell in larger numbers and at higher prices.

Customers don’t buy Apple “hardware” in the same way a weekend carpenter buy nails at the friendly neighborhood hardware store. What Fred Wilson seems to miss is that hardware is more than an inert “thing” for Apple: It’s a conduit to an entire ecosystem, and it can yield an enormous strategic advantage. One such example is the 64-bit A7 processor that took everyone by surprise: 64 bits. It’s Nothing. You Don’t Need It. And We’ll Have It In 6 Months.

When the subject of commodization comes up, I invite people to look at the cars they see in the street. Are the likes of Audi, BMW, and Mercedes being commoditized? Do their owners only care that the wheels are black and round? Serendipitously, someone called “SubstrateUnderflow” answers the question in a comment on Wilson’s blog:

“…when I look around at all the cars out there, from the high end models to the most utilitarian models, almost no one buys the base stripped versions. Key devices that are central to people’s lives, comfort and utility have enough emotional SubstrateUndertow to sustain premium pricing.”

The 30-year old Mac business and its healthy margins (about 25% versus HP’s sub-5% for its PCs) shows that Apple has successfully avoided the commoditized race to the bottom that has plagued Wintel devices and is likely to accelerate for smartphones.

Wilson’s criticism of Apple’s “stuff in the cloud”, on the other hand, carries some sting. As a user of Apple’s products and services, I’m often disappointed with Apple’s Cloud offerings. I find iMessage’s quirks irritating, I see a lack of proper synchronization between iBooks on Macs and iDevices, and I’m still waiting for the Cloud version of iWorks to mature. But let’s turn to Horace Dediu for a crisp summary of Apple’s place in the Cloud:

“Not getting the cloud” means that in the last 12 months Apple obtained:
• 800 million iTunes users and
• an estimated 450 million iCloud users spending
•  $3 billion/yr for end-user services plus
•  $4.7 billion/yr for licensing and other income which includes
•  more than $1 billion/yr paid by Google for traffic through Apple devices and
•  $13 billion/yr in app transactions of which
•  $9 billion/yr was paid to developers and
•  $3.9 billion/yr was retained as operating budget and profit for the App Store.

In addition,
•  more than $1 billion/yr in Apple TV (aka Apple’s Kindle) and video sales and
• $2.7 billion/yr in music download sales and
• $1 billion/yr in eBooks sold

In summary, iTunes, Software and Services has been growing between 30% and 40% for four years and is on its way to $30 billion/yr in transactions and sales for 2014.

Horace is right; Fred Wilson clearly hasn’t done the numbers.

———————

I was still on the road when I read about the rumored $3.2B acquisition of Beats Electronics, the company that began in the headphone business and then spawned a streaming music service.

I’m puzzled. If the rumors prove true, Apple may be guilty of misunderstanding itself.

The hardware side, headphones, is immaterial: The products may look good, but their audio quality is regularly panned. And the revenue, about $500M, doesn’t move the needle.

The current wisdom is that Apple is mostly interested in Beats Music, the subscription streaming service. But that business isn’t big, either; it has only attracted about 110K subscribers.

Maybe Apple is interested in Beats Music’s technology and its vision for the future of streaming and music curation. I took the time to watch Walt Mossberg’s interview of Jimmy Iovine in which the Beats co-founder gives hints about his plans. Iovine’s AI-with-a-human-touch solution for delivering “what comes next” is technically vague — and vaguely dystopian (“we’ll scrape your hard drivewe’ll know where you are tomorrow”). I’m not convinced.

We also have rumors that Iovine and Dr. Dre, Beats’ other co-founder, might become some kind of senior advisers to Apple management. Given what I’ve read about Dre’s troubles with the Law, including a battery charge that landed him in jail, and an assault on a female that was settled out of court, I’m troubled. How will this play inside and outside Apple?

I don’t see how such an acquisition would enhance Apple’s business model or reputation.

That said, I hope I’m as wrong as I was when I thought the iPod was doomed to fail against commoditized, yes, that word, MP3 players. I hadn’t seen iTunes behind the hardware, Cloud storage, the distribution and micro-payments infrastructure that would one day make the iPhone and App Phone.

I also see people whose intellect and motives I respect strongly support the rumored acquisition. Preeminent among them is Ben Thompson who, in his Stratechery blog, explores Why Apple Is Buying Beats. There, after positing personal computers might have reached their peak, Ben asks whether Apple is in fact reinventing itself as a kind of fashion house [emphasis mine]:

“Or are we witnessing a reinvention, into the sort of company that seeks to transcend computing, demoting technology to an essential ingredient of an aspirational brand that identifies its users as the truly with it? Is Apple becoming a fashion house? Think about it: you have Jony Ive as all-up head of design, the equivalent of a Tom Ford or Donatella Versace. There is the hire of Angela Ahrendts – why would she leave the CEO position of Burberry for a Senior VP role? You have an iPhone framed as an experience, not a product. And now you acquire an accessory maker differentiated almost completely by its brand, not its inherent technical quality.”

And ponders at the Damned If You Do, Damned If You Don’t of such cultural change:

“Still, I can imagine the very thought of Apple positioning itself as a fashionable luxury brand is somewhat nauseating for many of my readers. It’s an understandable reaction, and one I somewhat share. I worry that Apple is losing what makes Apple, Apple, especially that desire to make the power of computing accessible for normal people. But I also know that stasis means stagnation, and over the long-run, death.”

To be continued…

JLG@mondaynote.com

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

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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”.

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