apple

Apple Under Siege

 

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

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

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

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

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

steve_silouhette

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

 

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

 

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

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

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

…and equally lazy “markitecture” accusations…

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

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

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

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

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

5S GeekBench Anand Edited

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

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

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

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

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

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

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

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

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

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

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

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

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

And Apple gets its just deserts:

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

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

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

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

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

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

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

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

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

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

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

AnandTech Baytrail A7

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

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

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

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

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

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

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

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

JLG@mondaynote.com

 

Apple Market Share: Facts and Psychology

 

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

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

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

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

iphone5c copie

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

Network Effect + Commoditization = Failure

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

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

Hence the preordained failure.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

Apple’s Wearables Future

 

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

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

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

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

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

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

Glass Fashion Brin

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

Glass en Vogue 2

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

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

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

smartwatch_ggl

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

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

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

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

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

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

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

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

Will I keep using it? Probably not.

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

—————————————–

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

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

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

Apple Buys Intel

 

Getting rid of Samsung as a processor supplier and, at the same time, capturing the crown jewel of the American semiconductor industry. How could Apple resist the temptation to solve its cash problem and make history again?

Halfway through the second quarter of the 2013 fiscal year, most of Apple’s top execs meet at an undisclosed location (Eddy Cue’s chair is empty – he’s been called away to a Ferrari board meeting). They’re joined by a few trusted industry insiders: Bill “the Coach” Campbell, Apple and Intuit Director and adviser to Google’s founders, Mssrs. Page and Brin; Larry Sonsini, the Silicon Valley consigliere of more than three decades; and Frank Quattrone, the star investment banker with nine lives.

The meeting isn’t about the company’s dwindling profit margins. The smaller margins were expected and invited: The reduced-price iPad and heavy promotion of the “old” iPhone 4 as an entry-level product are part of the long term strategy of guarding Apple’s lower end (so to speak). And no whining about AAPL’s grim slide over the last six months, a problem that has only one solution: Apple needs to record a series of better quarters.

The problem of the day is, once again, what to do with Apple’s obscene pile of cash.

By the end of December 2012, the company held about $137B in cash (or equivalents such as marketable securities), including $23B from operations for the quarter.

CFO Peter Oppenheimer delivers the bad news: It looks like operations will disgorge another $35B this quarter. The stock buy-back and dividend program that was designed to bleed off $45B over the next few years (see this March 2012 Monday Note) won’t be enough if the company continues at this rate.

Apple needs something bigger.

Quattrone has been sitting quietly at the end of the table. He clears his throat and speaks:

Buy Intel.

Well, yes, Frank (says Tim Cook), we’ve been buying Intel processors for the Mac since 2005.

Not the chips. The company. The planets are aligned for Apple to strike a blow that will leave the industry forever changed. Make history, acquire Intel.

Quattrone has their attention. He unfolds the celestial calibration:

  • Apple needs to extract itself from the toxic relationship with Samsung, its ARM supplier.
  • Intel is the best large-scale silicon manufacturer in the world. They have the people, the technology, and the plant capacity to match Apple’s needs for years to come.
  • “But Intel doesn’t do ARM!” you say. Indeed, Intel has no interest in the fierce competition and small margins in the ARM-based SoC market. Joining the ARM fray would severely disrupt Intel’s numbers and infuriate Wall Street. But if Intel were to essentially “go private” as Apple’s semiconductor manufacturing arm (pun intended), catering to all of Apple’s x86 and ARM needs (and whatever else Bob Mansfield is secretly plotting), Wall Street would have no such objection.
  • Intel is flailing. The traditional PC market – Intel’s lifeblood – continues to shrink, yet the company does nothing to break into the ARM-dominated mobile sector. In the meantime, the company makes perplexing investments such as buying McAfee for $7.68B.
  • There’s a leadership vacuum at Intel. Six months after announcing CEO Paul Otellini‘s “retirement”, Intel’s Board has yet to find a replacement who can sail the ship in more competitive waters. Apple could commission Pat Gelsinger, a 30-year Intel veteran and former CTO (Intel’s first) who fled to VMware after his career stalled at Intel. Despite being a bit of a Bill Gates look-alike (once upon a time), Gelsinger is a real technologist who would fit well within Apple, especially if he were given the opportunity to really “go for” the ARM architecture instead of iteratively tweaking x86 devices.
  • Last but not least, Intel’s market cap is about $115B, eminently affordable. The company is profitable and generates a good deal of cash, even after the heavy capital expenditures required by its constant need to build new and expensive manufacturing plants.
  • …oh, and one more thing: Wouldn’t it be fun to “partner” more closely with Microsoft, HP and Dell, working on x86 developments, schedules and… pricing?

A lively discussion ensues. Imagine solving many of Apple’s problems with a single sweeping motion. This would really make Cupertino the center of the high-tech world.

It’s an interesting idea, but there will be obstacles, both cultural and legal.

The Coach goes first: “Knowing both of these companies more than a little bit, I can attest to the pride they have in their respective cultures. They’re both disinclined to reconsider their beliefs in any meaningful way. Merging these two dissimilar groups, shedding unnecessary activities such as McAfee and the like would be dangerously disruptive to Apple’s well-honed, cohesive culture. As a general rule, merging two large organization rarely succeeds… unless you consider merging airlines a success…”

Finally, the Consigliere speaks: “It’s a tempting fantasy, it will mean years of work for my firm and many, many others, but as a friend of the company, as a past confidant of your departed Founder, don’t do it. There will be too much legal trouble with the Feds, with competitors, with Intel partners. Most fantasies aren’t meant to be enacted.”

I won’t dwell on the reality of the meeting: I made it up as a way to explain why Apple really has no choice other than submit to another cash phlebotomy, this time for an additional $60B. And, as with real-world phlebotomies, the procedure will treat the problem, but it won’t cure it. With $30B from operations per quarter, the $60B lancing will have to be repeated.

Some read the decision to return gobs of cash to shareholders as an admission of defeat. Apple has given up making big moves, as in one or more big acquisitions.

I don’t agree: We ought to be glad that the Apple execs (and their wise advisers) didn’t allow themselves to succumb to transaction fever, to a mirage of ego aggrandizement held out by a potential “game changing” acquisition.

A final word on taxes. To return the additional $60B (for a total of $100B when including the ongoing program announced last year) through increased dividends and repurchased shares, Apple will have to borrow money.

Borrow? When they have so much cash?

Yes, thanks to our mangled tax code. As explained here, about $100B of Apple’s cash is stored overseas. If repatriated, it would be “heavily” (read “normally”) taxed. Like most US companies that have international operations, Apple plays complicated, entirely legal tax games that allow their international profits to be taxed at very low rates as long as the profits — and the resulting cash — stay outside Uncle Sam’s reach. And thus we have the apparent paradox of borrowing money when cash-rich.

The benefit of these tax code contortions is difficult to explain to normal humans — as opposed to legislators who allowed the loopholes.

All this now makes Apple a different company. Once a fledgling challenger of established powerhouses such as IBM, Microsoft or HP, it now makes “too much cash” and is condemned to a life of paying dividends and buying back shares — like the old fogies it once derided.

JLG@mondaynote.com

 

 

Apple is Losing The War – Of Words

 

Besides its ads, Apple says very little, confident numbers will do the talking. This no longer works as others have seized the opportunity to drive the narrative. 

The day before Samsung’s big Galaxy S4 announcement, Apple’s VP of Marketing, Phil Schiller, sat down for an interview with Reuters and promptly committed what Daring Fireball’s John Gruber calls an unforced error:

“…the news we are hearing this week [is] that the Samsung Galaxy S4 is being rumored to ship with an OS that is nearly a year old,” [Schiller] said, “Customers will have to wait to get an update.”

Not so, as Gruber quickly corrects:

But it ends up the S4 is — to Samsung’s credit — shipping with Android 4.2.2, the latest available version. Not sure why Schiller would speculate on something like this based solely on rumors.

To Samsung’s delight, we can be sure, the interview received wide coverage in publications such as the Wall Street Journal and Bloomberg, just hours before the S4 was unveiled, complete with the month-old Android operating system.

This didn’t go over well. Even before the “year old Android version” was exposed as unfounded conjecture, reactions to Schiller’s trash talk were uniformly negative. Apple was accused of being on the defensive.

But, the true-believers ask, isn’t this something of a double-standard? What about the trash talk Samsung ads that depicted the iPhone as old-fashioned and its users as either cult sheep or doddering golden agers, weren’t they also a form of defensiveness? Why were Samsung’s mean-spirited ads seen as fun and creative, while Schiller’s slight misstep is called “defensive”?

Yes, Apple is held to a (well earned) different standard. Once a challenger with an uncertain future, Apple has become The Man. Years ago, it could productively poke fun at Microsoft in the great I’m a Mac, You’re a PC campaign (the full series of ads is here), but the days of taking potshots at the incumbent are over. Because of its position at the top, Apple should have the grace to not trash its competitors, especially when the digs are humorless and further weakened by error.

Schiller’s faux pas will soon be forgotten — it was a minor infraction, a five yard penalty — but it stoked my enduring frustration with a different sort of Apple-speak characteristic: The way Apple execs abuse words such as incredible“, “great“, “best when they’re discussing the company’s products and business.

My accusation of language molestation needs examples. Citing a page from W. Edwards Deming’s gospel, In God We Trust, Everyone Else Brings Data, I downloaded a handful of Apple earnings calls, such as this one, courtesy of Seeking Alpha, and began to dig.

[Speaking of language faux pas, Deming’s saying was shamelessly and badly appropriated — without attribution — by Google’s Eric Schmidt in a talk at MIT.)

Looking just for the words that emanated from the horses’ mouths, I stripped the intros and outros and the question parts of the Q&As, and pasted into Pages (which has, sadly, lain fallow since January 2009).  Pages has a handy Search function (in the Edit > Find submenu) that compiles a list of all occurrences of a word in a document; here’s what I found… .

  • Across the five earnings statements, some form of the word “incredible” appears 7, 9, 9, 11 and 9 times. The Search function offers a handy snippet display so you can check the context in which the word was used:

  • “Tremendous”, in its various forms, appears 12 times.
  • Amazing: 8
  • Strong: 58
  • Thrilled: 13
  • Maniacally focused: 2
  • All told, “great” appears 70 times. A bit more than half are pathetic superlatives (“great products”, “great progress”, “we feel great about…”), some are innocuous (“greater visibility”), but there’s an interesting twist: The snippet display showed that six were part of the phrase “Greater China”:

“Greater” or not, China is mentioned 71 times, much more than any other country or region I checked (Korea =  1, Japan = 6, Europe = 12).

(In the interest of warding off accusations of a near-obsessive waste of energy, I used a command line program to generate some of these numbers. Android? give me a second…4. Google=0, Facebook=4, Samsung=2.)

Now let’s try some “sad” words:

  • Disappoint: 0
  • Weak: 7. Six of these were part of “weak dollar”; the other was “weak PC market”. By contrast, only five or six of the 58 “strongs” referred to the dollar; the rest were along the lines of “strong iPad sales”.
  • Bad: 0
  • Fail: 0

The dissection can go on and on, but let’s end it with a comparison between more and less . Eliminating instances of less as a suffix (“wireless”), the result shows a remarkable unbalance: morewins each of the five sessions with a consistently lopsided score: 28 to 3…more or less.

But, you’ll object, what’s wrong with being positive?

Nothing, but this isn’t about optimism, it’s about hyperbole and the abuse of language. Saying “incredible” too many times leads to incredulity. Saying “maniacally focused” at all is out of place and gauche in an earnings call. One doesn’t brag about one’s performance in the boudoir; let happy partners sing your praise.

When words become empty, the listener loses faith in the speaker. Apple has lost control of the narrative; the company has let others define its story. This is a war of words and Apple is proving to be inept at verbal warfare.

In another of his sharply worded analyses titled Ceding the Crown, John Gruber makes the same point, although from a different angle:

The desire for the “Oh, how the mighty Apple has fallen” narrative is so strong that the narrative is simply being stated as fact, evidence to the contrary be damned. It’s reported as true simply because they want it to be true. They’re declaring “The King is dead; long live the King” not because the king has actually died or abdicated the throne, but because they’re bored with the king and want to write a new coronation story.

I agree with the perception, but blaming the media rarely produces results, we shouldn’t point our criticism in the wrong direction. The media have their priorities, which more often than not veer in the direction of entertainment passed as fair and balanced information (see Amusing Ourselves To Death by Neil Postman). If Apple won’t feed them an interesting, captivating story, they’ll find it elsewhere, even in rumors and senseless hand-wringing.

Attacking competitors, pointing to their weaknesses, and trumpeting one’s achievements is better done by hired media assassins. A company, directly or through a PR firm, engages oft-quoted consultants who provide the required third-party stats, barbs, and encomiums. This isn’t theorizing, I once was a director at a company, one of many, that used such an arrangement to good effect.

A brief anecdote: When Microsoft was Microsoft, Waggener Edstrom, the company’s PR powerhouse, was an exemplary propagandist. I distinctly remember a journalist from a white-shoe East Coast business publication coming to my office more than twenty years ago, asking very pointed questions. I asked my own questions in return and realized that the individual didn’t quite know the meaning of certain terms that he was throwing around. A bit of hectoring and cajoling, and the individual finally admitted that the questions were talking points provided by the Seattle PR firm. A few years later, I got a comminatory phone call from one of the firm’s founders. My offense? I had made an unflattering quip about Microsoft when it was having legal troubles with Apple (the IP battle that was later settled as part of the 1997 “investment” in Apple and Steve Jobs). PR firms have long memories and sharp knives.

The approach may seem cynical, but it’s convenient and effective. The PR firm maintains a net (and that’s the right word) of relationships with the media and their pilot fish. If it has the talent of a Waggener Edstrom, it provides sound strategic advice, position papers, talking points, and freeze-dried one-liners.

Furthermore, a PR firm has the power of providing access. I once asked a journalist friend how his respected newspaper could have allowed one of its writers to publish a fellacious piece that described, in dulcet tones, a worldwide Microsoft R&D tour by the company’s missus dominicus. “Access, Jean-Louis, access. That’s the price you pay to get the next Ballmer interview…”

Today, look at the truly admirable job Frank Shaw does for Microsoft. Always on Twitter, frequently writing learned and assertive pieces for the company’s official blog. By the way, where’s Apple’s blog?

The popular notion is that Apple rose to the top without these tools and tactics, but that’s not entirely true. Dear Leader was a one-man propagandastaffel, maintaining his own small network of trusted friends in the media. Jobs also managed to get exemptions from good-behavior rules, exemptions that seem to have expired with him…

Before leaving us, Jobs famously admonished “left-behind” Apple execs to think for themselves instead of trying to guess what he would have done. Perhaps it’s time for senior execs to rethink the kind of control they want to exercise on what others say about Apple. Either stay the old course and try to let the numbers do the talking, or go out and really fight the war of words. Last week’s misstep didn’t belong to either approach.

One last word: In the two trading days bracketing the Samsung S4 launch Schiller clumsily attempted to trash, Apple shares respectively gained 1%, followed by a 2.58% jump the day after the intro. Schiller could have said nothing before the launch and, today, let others point to early criticism of the S4′s apparent featuritis.

JLG@mondaynote.com

The Next Apple TV: iWatch

 

Rumors don’t actual Apple products make, see the perennial Apple TV — and the latest iWatch rumors. This is an opportunity to step back, look at Apple’s one and only love –personal computers — and use this thought to sift through rumors. 

Every week brings new rumors of soon-to-be-released Apple products. The mythical Apple TV set is always a favorite: Gossip of an Apple buyout of troubled TV maker Löwe has sent the German company’s stock soaring. We also hear of a radio streaming service that will challenge Pandora and Spotify, and there’s the usual gaggle of iPhone, iPad, and Mac variations. More interesting is the racket surrounding Apple’s “stealth” projects:  an iWatch and other wearable devices (and “racket” is the right word — see these intimations of stock manipulation).

There is a way to see through the dust, to bring some clarity, to organize our thoughts when considering what Apple might actually do, why the company would (or wouldn’t) do it, and how a rumored product would fit into the game plan.

The formula is simple: Apple engineers may wax poetic about the crystalline purity of the software architecture, execs take pride in the manufacturing chain and distribution channels (and rightly so), marketing can point to the Apple Customer Experience (when they’re not pitching regrettable Genius ads or an ill-timed campaign featuring Venus and Serena Williams). But what really floats their bots, what hardens Apple’s resolve is designing, making, and selling large numbers of personal computers, from the traditional desktop/laptop Mac, to the genre-validating iPad, and on to the iPhone — the Very Personal Computer. Everything else is an ingredient, a booster, a means to the noblest end.

Look at Apple’s report to its owners: there’s only one Profit and Loss (P&L) statement for the entire $200B business. Unlike Microsoft or HP, for example, there is no P&L by division. As Tim Cook put it:

We manage the company at the top and just have one P&L and don’t worry about the iCloud team making money and the Siri team making money…we don’t do that–we don’t believe in that…

Apple’s appreciation for the importance and great economic potential of personal computers — which were invented to act as dumb servants to help us with data storage, text manipulation, math operations — may have been, at first, more instinctual than reasoned. But it doesn’t matter; the company’s monomania, it’s collective passion is undeniable. More than any other company, Apple has made computers personal, machines we can lift with our hands and our credit cards.

With these personal computer glasses on, we see a bit more clearly.

For example: Is Apple a media distribution company? Take a look at Apple’s latest 10-Q SEC filing, especially the Management Discussion and Analysis (MD&A) section starting page 21. iTunes, now reported separately, clocked $3.7B for the last quarter of 2012.  Elsewhere, Horace Dediu sees $13.5B for the entire year. A big number indeed, and, certainly, iTunes is a key to Apple’s success: Without iTunes there would have been no iPod, Apple’s “halo product“, proof that the company could come up with a winner.  Later, iTunes begat the App Store, a service that solidified the App Phone genre.

Some misguided analysts look at the numbers and argue that Apple ought to spin off iTunes. They use the old “shareholder value” gambit, but the “value” simply isn’t there: Horace Dediu puts iTunes margins in the 15% region, well below Apple’s overall 38%. iTunes is a hugely important means to the personal computer end, but it’s not a separate business.

How about Apple as a retail company? The success of the Apple Store is stellar, a word that’s almost too weak: The Apple Stores welcomed three times more visitors than all of the Disney parks, and generated more than $20B in revenue last year — that works out to an astonishing $6000 per square foot, twice as much as the #2 shop (Tiffany and Co.). But Apple’s 400 stores aren’t a business, they only exist to create an experience that will lead to more sales, enhanced customer satisfaction, and, as a consequence, increased margins.

Apple as a software company? No. The raison d’être for OS X, iOS, iWork, and even Garage Band is to breathe life into Apple hardware. By now, the calls for Apple to see the error of its ways, to not repeat the original sin of not licensing Mac OS, to sell iOS licenses to all comers have (almost) died.
During my first visit to Apple’s hypergalactic headquarters and warehouse in February 1981, I was astonished at the sight of forklifts moving pallets of Apple ][ software. The term “ecosystem” wasn’t part of the industry lingo yet, but I had witnessed the birth of the notion.
Apple had a much harder time building a similarly rich set of applications for the Macintosh, but the lesson was eventually learned, partly due to the NeXT acquisition and the adoption of object oriented programming. We now have a multi-dimensional macrocosm — a true ecosystem — in which our various forms of personal computing work together, share data, media, services.

Where does the current Apple TV device (the black puck, not the mythical TV set) fit into this scheme? Apple TV runs on a version of iOS, and it knows how to communicate with a Bluetooth keyboard — but that doesn’t mean the device is a personal computer. Perhaps Apple will (someday) provide a TV Software Development Kit (SDK) so developers can adapt existing iOS apps or write new ones. But I still see it as a lean-back device, as opposed to a lean-forward PC.

In any case, sales of the $100 black puck don’t move the needle. Four million Apple TVs were sold in 2012; even if ten million are sold this year — and that’s a very optimistic estimate — it won’t make a noticeable difference, at least not directly. Apple TV is a neat part of the ecosystem, it makes iPhones, iPads, Macs and our iTunes libraries more valuable, but it’s still just a member of the supporting cast.

This brings us back to the putative iWatch. Computer history buffs will recall the HP 01 watch. Buoyed by the success of its handheld calculators, including the programable HP 65 with its magnetic card reader, HP convinced itself it could make a calculator watch, introduced in 1977:

A technology tour de force, fondly remembered by aging geeks, but a market failure: too expensive, too hard to use, ill-fitting distribution channels.

Apple is in a different spot. Today, you can find a number of iPod watchbands such as this one:

It’s hard to imagine that Apple would merely integrate an existing accessory into a new iPod. Sales of the iPod proper are decelerating, so the iPod-as-iWatch could give the line a much needed boost, but it’s difficult to reconcile the rumors of “100 people” working on the project if it’s just a retrofit job. Is Apple working on an iWatch that can be experienced as an Even More Personal personal computer — an “intimate computer”? If so, many questions arise: user interface, sensors, iOS version, new types of apps, connection with other iDevices… And, of course price.

This would be much more interesting than the perennially in-the-future Apple TV set. Of course, iWatch and Apple TV aren’t necessarily mutually exclusive. If the Löwe buyout rumors are true, Apple could do both — the company could develop its own watch device and repurpose Löwe’s TV. (I still doubt the TV set part, as opposed to enhancing the black puck.)

But once we understand what Apple’s only business is, and that the related software, retail, and services are simply part of the supporting cast, Apple’s attitude towards big acquisitions becomes clearer. Apple isn’t looking at buying a big new business, it already owns The Big One. So, no movie studio, no retail chain or cable company, no HP or Dell, or Yahoo!. (But… a big law firm, perhaps?) Integrating a large group of people into Apple’s strong, unbending culture would, alone, prove to be impossible.

A small acquisition to absorb technology (and talented people) makes sense. The cultural integration risks remain, but at a manageable scale, unlike what happened to Exxon in the early eighties when it burned $4B (that was real money, then) in a failed attempt to become an information systems company — you know, the Oil of the Twenty-First Century.

Let’s just hope Apple doesn’t talk itself into a “because we can” move.

JLG@mondaynote.com

 

iPhone Low-cost Numbers

 

For years, Apple’s been told its products were too expensive – and prospered mightily. Today, many suggest Apple should launch a low-cost iPhone. Will history repeat itself, or have the rules of the Smartphone Wars changed in ways that will force Apple to alter its strategy? 

Dismissing the prospect of a Low Cost iPhone isn’t all that difficult. Just look at Apple’s history. For years, the high tech pundits have hectored Apple for it’s inability to see the wisdom of the cheap. In the late eighties and into the nineties, they insisted that a low cost Mac was the only way the company could survive against the swarm of PC clones. Steve Jobs returned and righted the Apple ship, no LC Mac required.

A decade later, the netbook was cast as the killer torpedo that would sink the resurgent Mac business. Jobs famously dismissed the netbook as a cheap plastic device Apple would never stoop to make: “We don’t know how to build a sub-$500 computer that is not a piece of junk.”

At the September 2012 iPhone 5 launch, Tim Cook announced that the MacBook is the #1 selling notebook in the US (5:30 into this video). Couple that with the success of the iPad, and the netbook is dead. And thus, by analogy, there will be no iPhone LC. Apple doesn’t do cheap. The company will focus on a premium customer experience and enjoy a high profit margin. The race to the bottom will be left to Android clones. Move along, nothing to see.

Not so fast.

Using Apple’s history — and particularly the sorry netbook story — to dismiss the iPhone LC makes questionable assumptions. As Marx (Karl, not Groucho) liked to say: ‘History doesn’t repeat itself, it stutters’. Smartphones aren’t PCs, only smaller; the rules of the Macintosh game don’t apply to the iPhone. The Smartphone Wars are waged by markedly different laws, and are waged well by Google and Samsung, unencumbered by a PC past.

But let’s back up: What would a Low Cost iPhone look like, whom would it serve, and just how “low” is Low? The easiest way to picture the thing is to drag out your old iPhone 3G or 3GS. A plastic body, an “original-resolution” screen (no Retina here), a slow processor and even slower wireless connection. It’s not today’s iPhone 5, with its metal body, lovingly machined chamfers, Gorilla Glass, high-speed A6 processor, and 5 megapixel camera.

The phone would serve the prepaid market, it addresses customers with little or no credit. Everything is paid for with cash up front: You pay the full, unsubsidized price for the phone and you buy “minutes” (let’s call them units of wireless network utilization) in advance. Buying units for these devices is a simpler experience than I imagined: Go to the neighborhood drugstore, pick out a phone card by a (virtual) carrier such as TracFone, and the cash register prints an activation code you then enter into the phone. Simple, pervasive, and very successful — even in a “rich” country such as the US.

So far, Apple has avoided the prepaid approach. When we give $199 to Verizon for a $650 iPhone, the $450 subsidy is an act of faith by the wireless carrier. The philanthropic organization assumes we’ll pay our bill every month for two years, by which time the carrier has recouped the subsidy. This is the postpaid world that Apple understands.

As for the pricetag, let’s assume that an iPhone LC would cost about $100 to manufacture — that’s half the cost of the basic iPhone 5. If we apply a 60% margin percentage — the same as today’s iPhone 5 — the unsubsidized iPhone LC would sell for $299.

That’s too high. Let’s try lower numbers: 50% margin gets us down to $199; 30% to $149. To get to the magic $99 unsubsidized retail, with an un-Apple 30% margin, the iPhone LC would need to be manufactured for less than $75, about one third of today’s iPhone 5.

And even $99 may not be low enough. Go to Amazon and look for prepaid cell phones. The first models start at $6.99 (not recommended, I tried one at $8.99 for my visiting Mother-in-Law, that was a mistake). Real smartphones running Android 2.2 start at $49.99 – today! For another $10 you get 2.3. The $80.73 Kyocera Rise runs the much more modern 4.0 (Ice Cream Sandwich) version. (I checked prepaid prices in other countries and the situation is similar.)

In his earnings release conference calls, Tim Cook constantly refers to Apple’s interest in the vast prepaid market segment but so far it’s been all talk. The reason for the gap between words and deeds sits in plain view on Amazon’s prepaid cell phone page. As more devices enter the market, we can only imagine what the page will look like a year from now.

The prepaid market, without carrier subsidies, is already in a PC-like race to the bottom. For Apple to enter and prosper in this segment, it has to determine two things: What sort of premium can it get for a low cost iPhone, and what would the device mean for the rest of the product line?

Apple execs are fond of saying they’d cannibalize their products themselves rather than let competitors do it. Even if exquisitely executed and priced just so, it’s hard not to see the (putative) iPhone LC as the augur of a new era of lower Apple margins. In other words, the iPhone LC wouldn’t be born of a tactical decision to add a new set of customers, it would be a strategic move that signals a new phase in the Smartphone Wars.

Apple loves to control the game. So do Google, Microsoft, Samsung, and everyone else, of course, but Apple’s love is an unusually intense, deeply seated drive that stems from Steve Jobs’ own (carnal as opposed to deliberate) need to master and direct every aspect of the game.

In the PC business, Jobs pushed vertical integration down beyond hardware and software, and into its retail chain of Apple Stores, thus ensuring a tightly controlled delivery of the product experience. The same applied to the iPod and its integration with iTunes. The well-controlled media delivery and novel micro-payment system was a huge win: In 2006 iPod revenue outpaced the Macintosh line.

The iPhone started with Apple fully in control. AT&T stood aside and let Apple run the table, handle all aspects of the customer experience (except for call quality). Later, the App Store extended Apple’s control of the game. The iPhone became an app phone and a phenomenal success.

(We also have the counterexample of Apple TV, an exception that proves the rule. TV content owners, distributors, and carriers haven’t let the Cupertino company seize control of the customer experience, and thus Apple TV remains a “hobby”.)

Apple is still in control of its iPhone ecosystem… but things have changed. Now the company faces Google and Samsung. Google isn’t just Android, it’s also a provider of a wide set of services such a Google Maps, Gmail, Google Docs and Drive, Google Voice, and on and on. Samsung is more vertically integrated, makes its own smartphones components, and spends more marketing money ($13B last year) than anyone else.

In today’s smartphone scene, can Apple still enjoy the control — and the ensuing profit potential — it craves? And if not, how will it react? Tactics or strategy?

JLG@mondaynote.com

The enduring Apple TV Fantasy

 

We all want TV Done Right, free of the Soviet Era set-top box, UI and opaque contracts. We imagine Apple will put all the pieces together. But what’s desirable and “obvious” might not be so simple or soon…

“When I go into my living room and turn on the TV, I feel like I have gone backwards in time by 20 to 30 years,” Apple CEO Tim Cook told . NBC’s Brian Williams “It’s an area of intense interest. I can’t say more than that.”

These words — and similar ones in a substantial Bloomberg interview — launched yet another round of frenzied speculation about the mythical Apple TV.

Piper Jaffray’s Gene Munster insists that an Apple TV in 2013 is a sure thing. “It will be the biggest thing in consumer electronics since the smartphone“. (Of course, Munster has been saying this every year for the last three years…)

Another analyst, Wells Fargo’s Maynard Um, agrees that the device is inevitable, if only because a full-fledged television is “more in tune” with Apple than a simple set-top box.

Hmmm…

First, let’s take a calmer look at Tim Cook’s words. As many have noted, there’s nothing new here. Cook said essentially the same things at the D10 Conference last May and has repeated the message on earnings conference calls. The only changes to the Apple TV script in the past twelve months are the stated number of black pucks sold in the last fiscal year (more than 5 million), and an upgrade from “hobby” to “intense interest”. The actual meaning of this “interest” is widely open to interpretation.

Speculation aside, Cook has one thing right: The set-top box experience does place one back in time by 20 to 30 years:

– We still can’t order channels à la carte or search the program grid. For the latter you have to go to your tablet. And forget about the former.

– You can’t buy your own set-top box; you have to rent it from your carrier. For STB makers, there’s no incentive to build a better product.

– Add in the contorted rights and packages games played by the content providers and you end up with today’s mess.

The solution? Channels, shows, special events should all be presented as apps. Click, pay, and play, with standard fare for free. Catch the 6 pm news when you get home at 9:30; watch two programs side-by-side with Android 7 or iOS 9, all on your screen of choice: smartphone, tablet, PC, or TV.

The technology isn’t an issue. There’s enough bandwidth on cable (or pretend-fiber) networks, plenty of storage on servers, and all the required computing power in current or future TV boxes, from Apple and its competitors.

But there’s an obstacle in the tangled, encrusted business models that the Comcasts, CBSs, and Disneys cling to out of fear that Apple will wrest control of their content, that they’ll be disintermediated a la iTunes or the iPhone/iPad App Store.

Second, I simply don’t believe Apple will make, or even wants to make, a TV set. To realize the dream, as discussed previously, you need to put a computer — something like an Apple TV module — inside the set. Eighteen months later, as Moore’s Law dictates, the computer is obsolete but the screen is just fine. No problem, you’ll say, just make the computer module removable, easily replaced by a new one; more revenue for Apple…and you’re right back to today’s separate box arrangement. And you can spread said box to all HDTVs, not just the hypothetical Apple-brand set.

If carriers and content owners can be tricked, bribed, sued, or otherwise made to see the light and wisdom of higher revenue per subscriber, the TV Done Right will descend from Heaven in the form of a next generation Apple set-top box, not a TV set.

So why is Tim Cook talking about Apple TV at all?

The simplest explanation is that he’s simply answering an interviewer’s question. Possible… but not likely in such tightly choreographed exercises.

A cheekier possibility is that the answer is a head fake. Cook, a noted College Football fan, is trying to draw Google offsides, to provoke then into yet another embarrassing Google TV moment. And maybe even goad Microsoft into another WebTV dud.

Amusing… but not likely.

In Google’s case, the failed experiment has been digested and the next iteration will be much sharper. (Note well that Google’s subsidiary Motorola is putting its set-top box business up for bids, with “vendor financing possible”…)

For Microsoft, the company is happy with its successful Xbox ecosystem and its ability to provide TV content through its game console, even if that content doesn’t flow onto its phone and tablets as nicely as they would like. In any event, Tim Cook wishes Steve Ballmer no ill — au contraire, Cook wants Ballmer to stay on the job as long as he keeps helping his friends in Cupertino.

A more serious interpretation: Apple’s CEO is indicating that he’ll continue to invest talent and money until the TV obstacles are finally surmounted. In other words: “Join us and ride the wave that will sweep away the competition”.

Speaking of the competition, Sony is trying to break free from its profitless HDTV past by building a new 4K TV business.

If you have the opportunity, treat yourself to a 4K TV demo at a Sony Store. The spectacle is stunning: You see the delicate capillaries on a baby’s eyelids, feathers on birds, minute details on street scenes without any of the blurring you get on today’s HDTV.

With 3,840 by 2,160 pixels on an 80-inch TV screen, the 4K boasts 4 times the resolution of 1080p (1920 by 1080)… and an even greater price tag ratio: $25K vs $2K or less. The 4K TV is delivered with a server that contains full-resolution movies because cable and satellite carriers provide no such content — and have no plans to do so.

Sony has a valuable asset in its movie library and a need to push its new 4K TV technology. Could this portend an Apple-Sony alliance? The two companies have worked well together in the past, a CEO-level conversation could easily happen. But even if an Apple TV box provided a strong showcase for a Sony 4K TV set, carriers would still have to be shown how to milk the opportunity.

On still more sober musings, let’s consider Apple TV’s place in the company’s business. In the 2012 fiscal year ending last september, Apple’s total revenue was $156B. 5 million Apple TVs translates into $500M; that’s 0.3% of the company’s total.

Why bother? In 2014, Apple’s revenue could exceed $250B. Even if Apple TV sales were to grow by ten times, they would still represent no more than a 2% fragment of the total.

The answer is that Apple TV isn’t meant to generate revenue but to enhance the value of the more muscular, profit-making members of the ecosystem: iPhones, iPads and, to a lesser extent, Macs. In a similar, grander, and now well-understood way, iTunes isn’t in the business of making money by itself. iTunes made the iPod larger than the Mac in 2006, and it made the App Store possible — and the iPhone and the iPad as profit engines.

For Apple TV, is there a path from today’s supporting role to a $50B size, to 20% of Apple’s revenue in 2014? (Gene Munster thinks there is.)

My belief is that Apple TV sales numbers will continue to increase as the device is slowly, patiently improved and the ecosystem is enhanced. In a not-too-distant future we’ll see explicit Apple TV apps, similar to those on iPhones and iPads.

And someday, Apple will reach a limited agreement with a carrier such as Comcast. The enhanced experience will create a wedge — and will spur competitors. As a result, TV will at last become “modern” — sitting down in front of your TV set will no longer send you time traveling to 1992.

JLG@mondaynote.com

——————
Late update, an amusing coincidence: a just-discovered “Apple TV set” at Lyfe, a modern Palo Alto eatery.
With my apologies for the low quality pictures, this is the menu on five TV sets, side-by-side in portrait mode:

And, if you’re curious, you discover five Mac Minis bolted to the back of the TV sets:

Gene Munster should take a look.

Apple Can Finish What Microsoft’s Sinofsky Started

 

In 2007, Microsoft introduces a new version of Windows called Vista, a grand name for what turns out to be an embarrassing dud. (Memories of my first and determining interaction with Vista can be found here.)

Steven Sinofsky, once a Bill Gates technical assistant and, at the time, head of Microsoft Office development, is given a shovel (and a pad of pink slips) and told to clean the stables. To create a new, respectable version of Windows in a mere 30 months will require great discipline, a refusal to compromise, the rejection of distracting advice, relentless attention to the schedule, as well as the merciless pruning of features and people who get in the way. Sinofsky had it all: superb technical skills, the dogged drive of a rassar, and the political will to mow down the obstacles.

In July 2009, Microsoft unveils Windows 7, a product widely acclaimed as absolving Vista’s sins, and Sinofsky is promoted to president of the Windows division, a title parsimoniously bestowed.

Sinofsky immediately begins work on the next version of Windows, following his proven strategy of adding solid, well-defined details while maintaining backwards compatibility and avoiding the rat trap of “feature creep”. But something happens along the way: In early 2010, the iPad comes out. Although the device is initially misunderstood by Microsoft — Steve Ballmer speaks of “slates and tablets and blah blah blah” — it doesn’t take long for the Redmond company to realize that it needs an answer, it needs to defend its PC empire against the interloping tablet that has been so warmly embraced by the public.

The company changes course and Sinofsky gets a new mission: Windows 8 isn’t going to be a mere clean-up job, it’s not an “embrace and extend” improvement, but a new ”reimagined” Windows, a PC Plus that will straddle the PC and tablet worlds. The new OS will provide a radically new look-and-feel, a touch-screen interface in addition to a keyboard and mouse (or trackpad), and it will stray from the comfy x86 monogamy to also work on ARM processors.

A little over three years later, right after delivering Windows 8, Sinofsky is abruptly sacked.(Excuse me, he’s “amicably” sacked… by his own “personal and private” choice).

Windows 8, Windows RT, and the Surface tablet are now on full display, as are the reviews — and they’re not pretty. As summarized in this June 2012 Business Insider piece, the pundits were concerned and baffled right from the start:

“Worst of all, the traditional desktop is buried — it’s just another Metro app — but there are still some things you can only do from the desktop, and some only from Metro.” (Matt Rosoff)

“In my time with Windows 8, I’ve felt almost totally at sea — confused, paralyzed, angry, and ultimately resigned to the pain of having to alter the way I do most of my work.” (Farhad Manjoo)

“Windows 8 looks to me to be an unmitigated disaster that could decidedly hurt the company and its future… The real problem is that it is both unusable and annoying.” (John Dvorak)

Perhaps these were simply hasty judgments meant to capture eyeballs, maybe customers would ignore the critics and embrace Windows 8. But no. Five months later, Paul Thurrott, the author of the respected Windows Supersite blog, gives us this post:

“Sales of Windows 8 PCs are well below Microsoft’s internal projections and have been described inside the company as disappointing.”

As head of HP’s Personal Systems Group (PCs and printers, a $55B/year business), Todd Bradley’s opinion of Microsoft’s latest creations carries considerable weight. Last week, in a long CITEworld interview, Bradley wasn’t impressed:

“I’d hardly call Surface competition.

CITEworld: Why not?

TB: One, very limited distribution. It tends to be slow and a little kludgey as you use it. I just don’t think it’s competitive. It’s expensive. Holistically, the press has made a bigger deal out of Surface than what the world has chosen to believe.”

As reported two weeks ago, I quickly encountered Windows 8′s split personality when I tried to use my new Surface, but I wanted the bigger picture.

Was Windows 8 running on a PC — Microsoft’s home turf — really an “unmitigated disaster”? I head over to the big Microsoft Store in the Stanford Shopping Center to buy the full version of the new OS — and they don’t have it. The upgrade version, yes, but no copies of the “System Builder” DVD that you need for a complete, from-scratch installation. Curious.

I head back home, order a copy from Amazon, buy an additional license from Microsoft for my second machine, and two days later I’m in business. The installation process is flawless (one with VMware Fusion, the other with Parallels), but things quickly go downhill. The problems I had with the Surface are just as distracting and frustrating on a PC: One moment you’re in the new, elegant, and, yes, reimagined User Interface, the next moment you’re foraging in the old Windows 7 Desktop. And, of course, existing Office apps have no place in the new UI.

It’s no wonder that customers aren’t keen to buy Windows 8. As a recent survey shows, “about one-third of Windows 7, Windows Vista and Windows XP users who are ready to buy a new personal computer say they intend to switch to an Apple product.

According to the Thurrott post mentioned earlier, the inside story is that Sinofsky was let go because of his “divisiveness”, that his departure isn’t a consequence of Window 8′s poor numbers. But if we imagine a different reality, one in which Sinofsky stands before a big Mission Accomplished banner, where critics rave about the beauty, harmony, and impeccable polish of a Windows 8 that runs flawlessly on PCs, laptops, tablets, and Surface-like hybrids…do we think for a moment Ballmer would have shown Sinofsky the door?

I think the real story behind Sinofsky’s removal contains elements of both personality and (Windows 8) performance. It’s no secret that Sinofsky made a lot of enemies while he pulled off a not-so-minor miracle with Windows 7. As a reward for his accomplishment, he was given a much more difficult assignment. Windows 8 had become a 21-blade Swiss Army knife: a great list of features on paper, dubious usability in practice. Add the need to adapt the operating system and the sacrosanct (and golden goose) Office applications to the new ARM processor and you end up with a Mission Impossible.

The same traits that made Sinofsky an extremely successful turnaround artist after the Vista mess — his monomaniacal pursuit of a clear goal — became liabilities in this reimagined world. He slipped and fell, the enemies saw their chance, the bayonets came out. Even supremely gifted [redacted] have a sell-by date.

Of course, none of this says anything about who came up with the mission. Was it Ballmer’s idea or Sinofsky’s? Microsoft isn’t talking.

Now let’s turn to Apple. The “recomplicated” Windows hands the Cupertino company an intriguing opportunity. They can capitalize on Microsoft’s misstep, extend a welcoming hand to the Windows users who intend to switch to Apple, and make the iPad the sine qua non of what a Post-PC device should be. (I use the “Post-PC” moniker for lack of a better one. For me, it doesn’t stand for the end of the PC but for its broadening into three instances: classic, tablet, smartphone.)

From the beginning, the iPad, designed to be a new genre, not a derivative, came with limitations. Yes, you could do some productivity work, but iOS’s lack of multi-tasking, a favorite whipping boy of the critics, made it difficult. To be sure, the OS supported concurrent activities inside the device, but running several applications at the same time was a no-no. The processor couldn’t handle it and, even if it could have, battery life would have been terrible.

So whether it was divine inspiration or simply a bowing to necessity, Apple shunned the temptation to make a PC-only-smaller, and created a whole new genre of personal computers. Microsoft couldn’t resist and gave us Windows Mobile with a Start button.

Almost five years have elapsed since the birth of iOS. (We’ll give a quick but deep hat tip to its ferocious and now deposed champion, Scott Forstall, and leave the discussion of his own exit for a future Monday Note.) With the latest iPad hardware, we have a fast processor and there are even faster ones in the making. Does the more muscular hardware and road-tested OS portend a future that supports the running of two applications side-by-side in a split-screen arrangement? Or perhaps a slidebar that reveals and hides the second app.

This isn’t exactly an original idea: Samsung just released a firmware update providing a split-screen multitasking view. And, of course, as explained here, the Snap feature in Windows 8 provides a neat way to run two apps side-by-side on a laptop or tablet.

Today, preparing a Keynote document that incorporates elements from other apps requires clumsy mental and physical gymnastics. Having access to the source and destination documents at the same time would be a welcome relief and a boost to business uses.

There are other quirks. You can edit a Mac-originated Pages or Numbers document on your iPad, but no such joy awaits users of Apple’s well-loved Preview. Upload a Preview PDF into iCloud from your MacBook and then grab your iPad and see if you can find it… No, you need to use DropBox or the (excellent) Microsoft SkyDrive. (One “explanation” for this state of affairs is the strong security that pervades iOS. Inter-application communication can open backdoors to malware, which is still quite rare in iOS. But if it can be done for Pages and other iWork apps…)

Now that all OS X and iOS software is under one hat, Craig Federighi‘s, perhaps we can expect these workflow speed bumps to be ironed out. Multiple concurrent applications, a document store that’s common to all apps… This is Apple’s opportunity: Stick to its guns, keep laptops and tablets clearly distinct, but make iPads easier to love by business users. The comparison between a worst-of-both-worlds Surface hybrid and the iPad would be no contest. iPad mini for media consumption, everywhere; iPad for business and everything else.

Apple can finish the job Sinofsky started.

JLG@mondaynote.com