apple

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”.

——–

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