apple

Apple: Q2 Thoughts

There was a time when clever individuals could sustain themselves by exploiting people’s ignorance and anxiety. Augurs studied the flight of birds to explain the will of the gods; haruspices practiced divination by inspecting the entrails of sacrificed animals. For fear of bursting into uncontrollable laughter, so the joke goes, the fortune tellers studiously avoided making eye contact with one another in chance street encounters.

Not much has changed.

Our modern-day haruspices, the Wall Street anal-ists, must struggle mightily to keep a straight face (although perhaps not so mightily–they’ve had a lot of practice).

Before Apple’s April 24th earnings release, Wall Street observer Karl Denninger put on his poker face in a Seeking Alpha post:

Profit margins on hardware are very difficult to sustain over 10% for long periods of time. Someone always comes after you and this is not going to be an exception to that rule. But that in turn means that you either must cut your own prices (and margins) to compete or watch your market share get diced up into little tiny pieces by a bunch of guys wielding machetes.

Colorful. And with a disclosure of his own AAPL posture:

Lightly short and more likely to add to that position over time than cover it, eyeing major support in the $400 area.

The entire longish post is enlightening, in a “special” way, as is his September 2010 Seeking Alpha post where he predicted serious trouble for Apple’s new tablet (for which he uses a nickname that, we’ll assume, elicited schoolyard snickers from his cohort in the Tea Party, a group he helped found. New age male sensitivity be damned.) And what was the trouble he saw when he fondled the sheep’s liver? RIMM was “coming after” Apple; they had just announced the QNX-based BlackBerry PlayBook. Don’t laugh.

The idea, here, is that Everything Becomes a Commodity. It’s a common fallacy among the Street watchers, a meme, “a unit for carrying cultural ideas”, in Wikipedia’s words. It’s built on the idea that market forces—competition—will erase all advantages at a “molecular” level. Yesterday, customers were paying more for product A because of some unique feature or service. Tomorrow, a competitor will provide the same (more or less) at a lower price. Commoditization always wins, say the sages. QNX is better than iOS so the PlayBook will, clearly, murder the iPad.

Fun aside, Mr. Denninger is but a member, if that’s the right word, of a class of ideologists who seem to be curiously unaware of their surroundings. Where is the ineluctable commoditization they predict?

It isn’t a new idea. When I landed in Cupertino in 1985, the Pepsi and Playtex marketeers that tagged along with the new CEO insisted that the tech game was over, personal computers are now commodities, marketing would have to do for Apple what the Leo Burnett ad agency had done for Philip Morris with its Marlboro Man campaign.

True, the Marlboro Man was an exemplary marketing success that made a huge monetary difference for an otherwise commodity product. Marlboro didn’t make a “superior” product–blonde non-mentholated 100mm filtered cigarettes are all the same. The only pieces tobacco companies could move across the chess board were imaginary and romanticized.

But high tech isn’t a commodity market. In very French words I told the young commoditizing Turks how wrong they were: Moore’s Law and good software would create the opportunities that make a difference. Commoditization isn’t ineluctable.

Are clothes all the same? Tube socks at Costco, perhaps. But for the rest of our wardrobe, material and cut (and brand) matters.

Food? Do we buy commoditized calories, or do we care for the difference that the quality of ingredients and preparation make? Fresh string beans and asparagus, lightly fried in butter and properly salted—you can’t get that from canned vegetables packed in a margarine sludge, ready to pop into the microwave.

Do we buy cars because they go fast and the wheels are (most of the time) round? I can hear the young Turks claiming that people don’t buy cars, they buy transportation (all while jumping into their BMWs). But when Detroit began putting accountants at the head of car companies, they rode the steep downhill slope of commoditization. That Audi is now one of the most profitable car companies on the planet tells us something about the importance of technology, design, manufacturing, and quality.

I used to refer to BMW as a good example for Apple: Don’t worry too much about market share. A well-made, well-marketed product will see its difference rewarded by the marketplace. And, indeed, BMW became larger than Mercedes Benz. And now we have Audi.

Quality shows, and Apple continues to show quality. Last quarter they enjoyed an incredible 47.4% Gross Margin. Higher than expected and very unusual for a hardware company.

As an ex-entrepreneur and a venture investor, I’m a fan of Gross Margin—it’s what you can spend. Revenue is nice, but it doesn’t tell you when and how much you can eat. Because Apple’s Operating Expenses have become such a small percentage (8.1%) of revenue, Apple’s Operating Margin approaches 40%. As Horace Dediu notes in his Which is best: hardware, software or services? comparison of Apple to Microsoft and Google, this is unusual for a hardware company:

Can this growth continue unabated? Probably not, both Microsoft and Google have shown that there’s a plateau, a margin level that can’t be exceeded. But their examples also show sustainability.

Of course, Apple execs are cautious forecasters. Their much second-guessed guidance for the next quarter calls for “only” 41% Gross Margin, significantly less than last quarter’s. But the commoditization predicted 27 years ago isn’t about to happen.

I’ll quote Horace Dediu’s May 1st post once again:

Apple is the most valuable company in technology (and indeed in the world) because it integrates hardware, software and services. It’s the first, and only, company to do all these three well in service of jobs that the vast majority of consumers want done.

A mere matter of execution…

JLG@mondaynote.com

Apple Is Doomed: The Phony Sony Parallel

In the weeks preceding the April 24th release of Apple’s quarterly earnings, a number of old canards sent the stock down by about 12%: Carriers are going to kill the iPhone Golden Goose by cutting back “exorbitant” subsidies; iPhone sales are down from the previous quarter in the US; inexorable commoditization will soon bring down Apple’s unsustainably high Gross Margin.

The earnings were announced, another strong quarter recorded, and the stock rebounded 9% in one trading session:

At least one doubter is finally convinced: Henry “The iPhone Is Dead In the Water” Blodget has become an Apple cheerleader, penning a post titled Yes, You Should Be Astonished By Apple. (Based on Henry’s record, should we now worry about the new object of his veneration?)

There has never been a dearth of Apple doomsayers. The game has been going on for more than 30 years, and now we have a new contestant: George Colony, an eminent industry figure, the Founder and CEO of Forrester Research, a global conglomerate of technology and market research companies.

Mr. Colony, an influential iPad fan, maintains a well-written blog titled The Counterintuitive CEO in which he shares his thoughts on events such as the Davos Forum, trends in Web technology and usage, and, in a brief homage, his hope that “Steve’s lessons will bring about a better world”.

We now turn to his April 25th post, Apple = Sony.

There are two problems with the piece: The application of a turgid, 100-year old “typology of organizations” that’s hardly relevant to today’s business scene, and an amazingly wrong-headed view of Sony and its founder, Akio Morita.

Colony offers the banal prediction that others have been making for a very long time, well before Dear Leader’s demise: With Steve Jobs gone, Apple won’t be the same and, sooner or later, it will slide into mediocrity. It happened to Sony after Morita, it’ll happen to Apple.

In an act of Obfuscation Under The Color Of Authority, Colony digs up (nearly literally) sociologist Max Weber to bolster his contention. Weber died in 1920; the 1947 work that Colony refers to, The Theory of Social and Economic Organization, is a translation-cum-scholarly commentary and adaptation of work that was published posthumously by Weber’s widow Marianne in 1921 and 1922.

From Weber’s work, Colony extracts the following typology of organizations:

1. Legal/bureaucratic (think IBM or the U.S. government),
2. Traditional (e.g., the Catholic Church)
3. Charismatic (run by special, magical individuals).

This is far too vague; these types are (lazily) descriptive, but they’re fraught with problematic examples, particularly in the third category: Murderous dictatorships and exploitative sects come to mind. What distinguishes these from Apple under Jobs? Moreover, how do these categories help us understand today’s global, time-zone spanning rhizome (lattice) organizations where power and information flow in ways that Weber couldn’t possibly have imagined a hundred years ago?

Having downloaded the book, I understand the respect it engenders: It’s a monumental, very German opus, a mother lode of gems such as the one Colony quotes:

Charisma can only be ‘awakened’ and ‘tested’; it cannot be ‘learned’ or ‘taught.’

True. The same can be said of golf. But it does little to explain the actual power structure of organizations such as Facebook and Google.

Instead of shoehorning today’s high-tech organizations into respectable but outdated idea systems, it would behoove a thought leader of Mr. Colony’s stature to provide genuine 21st century scholarship that sheds light on – and draws actionable conclusions from — the kind of organization Apple exemplifies. What’s the real structure and culture, what can we learn and apply elsewhere? How did a disheveled, barefoot company become a retail empire run with better-than-military precision, the nonpareil of supply chain management, the most cost effective R&D organization of its kind and size? And, just as important, are some of these marvels coupled too tightly to the Steve Jobs Singularity? That would be interesting — and would certainly rise above the usual “Charismatic Leader Is Gone” bromides.

Now let’s take a look at the other half of the title’s equivalence: Sony.This is Muzak thinking. It confuses the old and largely disproven brand image with what Sony actually was inside — even under Morita’s “charismatic” leadership.

I used to be an adoring Sony customer, bowing to Trinitron TVs and Walkman cassette players. But after I got to see inside the kitchen (or kitchens) in 1986, I was perplexed and, over time, horrified.

Contrary to what Colony writes, there was no “post-Morita” decadence at Sony. The company had long been spiritually dead by the time of the founder’s brain hemorrhage. The (too many) limbs kept moving but there had been no central power, no cohesive strategy, no standards, no unifying culture for a very long time.

Sony survived as a set of fiefdoms. Great engineers in many places. (And, to my astonishment, primitive TV manufacturing plants.) During Morita’s long reign, Sony went into all sorts of directions: music, movie-making, games, personal computers, phones, cameras, robots… For reasons of cultural (one assumes), Sony consistently showed an abysmal lack of appreciation for software, leaving the field to Microsoft, Nokia for a while, and then Google and Apple.

Under Akio Morita’s leadership, Sony took advantage of Japan’s lead in high-quality device manufacturing and became the masters of what we used to call the Japanese Food Fight: Throw everything against the wall and see what sticks. When the world moved to platforms and then to ecosystems, Sony’s device-oriented culture — and the fiefdoms it fostered — brought it to its current sorry state.

Today, would you care to guess what Sony’s most profitable business is? Financial Services:

How this leads to an = sign between Apple and Sony evades me.

This isn’t to say that Apple can’t be contaminated by the toxicity of success, or that the spots of mediocrity we can discern here and there (and that were present when Steve was around) won’t metastasize into full blown “bozo cancer”. But for those interested in company cultures, the more interesting set of questions starts with how Apple will “Think Different” from now on. Jobs was adamant: His successors had to think for themselves, they were told to find their own true paths as opposed to aping his.

From a distance, it appears that Tim Cook isn’t at all trying to be Jobs 2.0. But to call his approach “legal/bureaucratic” (in the Weber sense), as Colony does, is facile and misplaced.

If we insist on charisma as a must for leading Apple, one ought to remember that there’s more than one type of charisma. There’s the magnetic leader whose personality exudes an energy that flows through the organization. And then there’s the “channeling” leader, the person who facilitates and directs the organization’s energy.

Is the magnetic personality the only valid leader for Apple?

JLG@mondaynote.com

[I won’t let the canards cited at the beginning go unmolested. See upcoming Monday Notes.]

Apple: The End Is Nigh

The end of iPhone/iPad One Size Fits All, that is. So far, Apple has managed to sell more than 300M iOS devices using only a single size for the iPhone and another for the iPad. I’m becoming convinced this can’t last much longer. Soon, I believe, we’ll see a range of physically distinct iPhone and iPad models.

I’m coming to this conclusion from three angles.

Let me start with an analogy by anecdote. It’s 1974, I’m sitting across the street from Burberry’s Haymarket emporium in London watching a gaggle of tourists come out of the store, each wearing the same dark blue raincoat and distinctive Burberry scarf. Once an icon of British gentility (as perceived by non-Brits), the commissariat of trench coats, scarves, and other country squire accoutrements, Burberry had lost their cachet by sticking to a taste-numbing repetition. The company that had invented a true 20th century oxymoron — the mass-marketing of exclusivity – had lost the plot.

Louis Vuitton, on the other hand, is the epitome of the oxymoron. Vuitton stays on top of its game by ceaselessly coming up with product permutations that combine the differentiation customers need without losing the brand identity they crave.

For the past three weeks I’ve been traveling in the US, France, and Spain. In Spain, particularly, I was struck by the number of iPhones I saw in street cafés, airport lounges, hotels, and restaurants. One high-end eatery in Palma de Mallorca equips its waiters with iPod Touches on which they show pictures of dishes to patrons and, with a tap, take their orders. I’m generally careful about drawing conclusions from such anecdotal samplings –they might not be representative of a broader reality — but when I returned to the Valley, I heard a Marketplace® story (audio and transcript) that confirmed my observation: Spaniards are so taken with their iPhones that they’d rather cut other expenses amid the severe economic crisis than go without this indispensable component of their identity.

How long before customers look left, look right, see everyone with the same phone or tablet and start itching for something different? My friend Peter Yared contends that the trend has already started in the UK where the “18-25 class” now favors the smorgasbord of Samsung devices as a relief from the iPhone uniform.

And, lest we think this preoccupation with fashion identity is beneath Apple’s Olympian taste, a look at the shelves of Cupertino’s Hypergalactic Company Store will bring us back to Earth:

We can argue that one-size-fits-all simplicity has served Apple well. I hear one European retail magnate deplore Apple’s inflexible (he actually said ‘‘totalitarian’’) policies even as he marvels at the low number of SKUs (distinct product references) that have produced Apple’s monstrous revenue. (A connoisseur, he also envies Apple stores where, as he put it, the cash register follows the customer.)

But Apple has long ceased to be marginal, on the brink of disaster, imprudently challenging established giants. Apple has become a dominant brand whose rise to ubiquity now requires a differentiation it didn’t need in pre-iOS years.

For the iPhone, how will differentiation manifest itself without veering into capricious, superficial variation?

Screen size? We know the key argument against a significantly bigger screen: Our thumb needs to reach across the entire surface for one-hand operation, a requirement widely held as non-negotiable. As for a smaller screen, the loss of functionality, app compatibility trouble, and touch-UI difficulties make “downsizing” improbable.

Shape? The elegant iPhone 4/4S industrial design is by no means obsolete. I personally consider it a classic, more so than the earlier, less innovative design. Still, alternatives will expand the iPhone’s appeal, communicate newness and differentiation.

Another angle concerns the iPad. Unit sales are climbing faster than the iPhone and sameness is — or soon will be — an issue. There’s an “obvious” solution: Our old friend, the rumored 7” tablet (measured on the diagonal).

In an August 2009 Monday Note discussing Apple tablet gossip, I went so far as to measure the width of men’s jacket pockets (5.5” to 6”, typically) and concluded that a 7” (diagonal) tablet would be nice. But I’m prejudiced, I like small computers. I loved my Toshiba Libretto and yearned for a similarly-sized MacBook. I’d given up on the prospect of a “MacBook Nano,” but I still had hopes for a pocketable tablet.

Wiser minds prevailed and we got the 9.7” iPad.

Still, the yearning for a smaller tablet wouldn’t die. In October 2010, when queried about a smaller iPad during the Q4 earnings conference call Q&A, Steve Jobs famously dismissed the idea, saying “7-inch tablets should come with sandpaper so users can file down their fingers.” Behold the nerve — and the lack of same in the audience! No one thought of asking about the iPhone’s even smaller screen.

Seriously, what Jobs probably meant was that a simple reduction in the size of the tablet screen would mean a proportional diminution of the size of UI elements, a brute force solution Apple had avoided by allowing – and encouraging — device-specific resources. (As we know now, no one really uses iPhone apps in 2X mode on an iPad.)

Also, we ought to remember notable Jobsian ‘‘statements of misdirection’’: No video on the iPod; No body reads anymore (pre-iPad). And the vintage 2007  category winner: No native apps on the iPhone, use Web 2.0 technology!

When thinking about the insistent 7” iPad rumors, I start to worry that iOS developers will have to write or adapt their apps to a third target, the “iPad Nano”. (Don’t hold me to that monicker, I was sure the latest iPad would be called iPad HD, for its high definition Retina screen…) But when I consider the foreseeable volume for a smaller iPad, I become a bit more optimistic: Would multiples of 10M units sold in the first year induce a developer to invest in a new version? Very likely, yes.

Even more encouraging is this clever twist unearthed by A.T. Faust III in a March 21st blog post. If you shrink the original 9.7”, 1024×768 iPad display to a 7.8” diagonal screen, you end up with a 163 ppi (pixels per inch) display, higher than the original, lower than the new iPad (264 ppi), and exactly half the iPhone 4/4S (326). Most relevant, according to A.T Faust, 163 ppi is the exact pixel density of the first iPhone…which means that app developers won’t necessarily have to retool everything in their UI libraries. And the hypothetical 7” iPad would easily fit in a 5.5” -wide jacket pocket:

Lastly, there’s another reason for Apple to forget the sandpaper and, instead, throw sand into Amazon’s and Google’s (purported) 7” tablet gears. From the very beginning of the iPad and its surprising low $499 entry price, it’s been clear that Apple wants to conquer the tablet market and maintain an iPod-like share for the iPad. Now that Apple has become The Man, the company might have to adopt the Not A Single Crack In The Wall strategy used by the previous occupant of the hightech throne.

JLG@mondaynote.com

While we wait, futilely perhaps, I’ve decided to do a bit of field research and bought a Samsung ‘‘phablet’’, the Galaxy Note, this after giving my 7” Kindle Fire to one of our children. The Note’s screen is a mere 5”, an attempt to combine a phone and a tablet — with an “unmentionable” stylus. I’ll report back in a few weeks.

Apple Phlebotomy

The treatment for the blood disease called Polycythemia Vera (the name means “too many red cells”) goes back to the Dark Ages: Lance a vein and relieve the patient of a pint of blood. Phlebotomy treats the symptom but not the condition. There is no known cure; the blood-letting must be repeated indefinitely.

This is what comes to mind when I see how Apple intends to treat its Polycashemia Vera, its “too many greenbacks” problem. Over the next few years, Apple will bleed off $45B of excess cash through a combination of dividend payouts of $2.65/share per quarter and stock repurchase of $10B over three years. (Also, as Tim Cook has stated, the buyback is a means to “undilute” Apple employees’ stock grants. Horace Dediu has a perceptive analysis here.)

But why get rid of the excess cash? How dangerous is it? And what exactly is “excess”?

This is a matter of animated (and occasionally silly) debate.

On one side, you have die-hard company supporters who argue that there’s no such thing as too much cash, you never know what the future holds. Management should ignore the “evil Wall Street speculators” who call for dividends and stock buybacks, jeopardizing the company’s future just to line their pockets.

On the other side, shareholders (or, more accurately, the Wall Street fund managers who represent them) get nervous when a company’s cash reserves far exceed its operational needs (plus a rainy day fund). Management might develop a case of “acquisition fever,” an investment banker-borne contagion that breeds a lust to buy shiny objects for ego aggrandizement.

It’s a rational concern, and while Apple’s performance and cautious spending habits gives management a great deal of credibility, a cash reserve that’s rapidly approaching a full year of revenue (let alone operating expenses) became “really too much” and led to last week’s $45B announcement.

The $45B figure is impressive…but will it be enough to treat this chronic condition?

In Fiscal Year 2011, Apple grew its cash balance by $31B. Using very conservative growth estimates — well below the rates we’ve come to expect from Apple —we’ll assume an additional $40B for FY 2012, $50B in 2013, $60B in 2014…that’s another $150B. Even after the $45B phlebotomy, Apple’s mattress will swell by another $100B in the next three years, to a total of about $200B.

The patient will require repeated blood-lettings.

A gaggle of observers would like to remind us of their version of the Law of Large Numbers; not the statistical LLN, but the one that says, using a simple example, that while 50% growth is relatively easy for a $10M business, it’s nearly impossible at the $100B level. And, yet, this is very much what’s in store for Apple in FY 2012. With Q1 revenue of $46B already in the books we can expect the annual figure to peg at roughly $180B. (This isn’t a wild guess: AAPL pretty much sticks to the FY 20ZZ = 4 x Q1 FY 20ZZ formula.)

$180B would be an astonishing 70% increase in revenue compared to FY 2011 ($108B). Astonishing but not surprising; it simply continues a trend: 2011, the first full year of the iPad, was 66% above 2010, which was 52% above 2009. Even in the midst of the financial cataclysm, Apple’s 2009 numbers showed a 14% increase over 2008, which showed a “customary” 52% increase over 2007, the year of the Jesus Phone. FY 2007, in which the iPhone contributed a smallish $483M, generated a “mere” 28% revenue increase above 2006, the memorable year when iPod revenue surpassed Macintosh sales, $7.7B vs. $7.4B.

One conclusion sticks out: Apple has escaped the lay version of the LLN because it repeatedly breaks into new categories. The “foundation” Macintosh business couldn’t fuel such growth.

Can this last? Can Apple create (or co-opt) another $100B category, add a fourth member to its iTrio: iPod, iPhone, iPad? The rumored Apple iTV (whether it’s the black puck or a “magical” HDTV set) is offered as a candidate for another iPhone/iPad disruption. I’m skeptical. As discussed here and here, I don’t believe Apple can turn TV into another $100B iMotherlode. Unless, of course, Apple comes up with a $650 ASP (Average Selling Price) black puck that will be enticing enough to be bought in iPhone numbers and renewed as frequently. This would require content and (cable) carrier deals for which Apple’s cash might bend the wills of content and transportation providers.

Another possibility, advanced by a friend of mine, would be for Apple to disrupt the digital camera business. Not in the way the iPhone has already eaten into the “snapshot” market, but by offering a real, non-phone camera, with bigger sensors, lenses, and, as a result, bigger body. While technically far from impossible, a look at Canon’s and Nikon’s books shows this isn’t a $100B sector. Canon’s total revenue, including printers and professional non-camera optics, is $44B, with fairly thin margins (COGS in the 70% neighborhood); Nikon’s revenue is about $1B. Too small to move Apple’s needle.

So where does Apple turn for the next big iThing? Perhaps they don’t need to “turn,” at all. Recall Tim Cook’s oft-repeated party line: All our businesses have plenty of headroom.

Read the transcripts of past conference calls (here, here and here, courtesy of Seeking Alpha) or assay Cook’s recent appearance at a Goldman Sachs conference. The mantra is clear: We have a small market share in the huge smartphone segment; iPad sales are growing even faster than the iPhone’s; Mac revenue is growing at a healthy 25% pace in the (still) huge traditional PC market.

Up to the advent of what I can’t help call the Apple Anomaly, we had two bins for companies.

Bin One held stable companies, businesses with modest, predictable growth rates. As they didn’t require huge amounts of money to feed the engine, much of their cash flow was returned to shareholders as dividends. And, when they needed cash for inventories or plants, they could borrow it, issue bonds providing ‘‘guaranteed’’ income (I simplify).

Bin One stocks are boringly/pleasantly predictable.

Bin Two companies are ‘‘hot’’, fast-growing high-tech businesses. They require lots of cash, most often harvested on the stock market. Cash-flow and future requirements are such they rarely issue a dividend.

Bin Two stocks are pleasantly/dangerously hot.

Apple straddles both bins: it generates obscene amounts of cash and it still grows much faster than the rest of the high-tech world.

Summarizing Tim Cook’s position: Yes, we’ll pay dividends and buy shares back. And No: We have no intention of becoming a stodgy Bin One company.

Apple’s CEO implicitly assumes the people he leads will continue to come up with winners in each category, an assumption respectively disputed and wholeheartedly endorsed by the usual suspects. So far, doomsayers haven’t had a great run. But just you wait, they say: In The Long Run Apple Will Fail. They will be right, of course, but when?

In the meantime, the company is still left with a $100B cash “problem.”

This must be by design: Apple’s Board could dial cash down to, say, a healthy $40B. Why not do so?

One possible explanation is that Apple is playing a game of “projection,” they’re creating the perception that they can buy or do anything they want: Wage a price war against Samsung, corner the supply of critical components and force competitors to pay more, create a second source for key modules, buy major distribution channels.

The problem with such speculations is that Apple is already doing some of the above. For example, keeping the intuitively more expensive (display, battery, LTE module) new iPad at the same price points as the iPad 2 continues the price war Apple started with the original iPad’s surprising $499 pricetag.

Also, Apple has already disclosed that it has committed some of its cash as forward payments to suppliers. And strategically creating or even buying a semi-conductor plant to cut Samsung off won’t cost tens of billions. For reference, the latest Intel fabs cost in the neighborhood of $5B each. In any event, one can’t see Apple’s culture adapting to the esoteric semi-conductor manufacturing sector.

This leaves distribution. Could the company acquire, say, Best Buy or an international equivalent? These companies are (relatively) inexpensive: Best Buy’s market cap is less than $10B —for a reason: lousy margins that, in theory, Apple could prop up. But, in reality, hese are complicated businesses and would be a nightmare to restructure: Imagine getting rid of all the brands, pruning and retraining staff. Highly implausible.

We know Apple’s business model: Make and sell high-margin hardware, rinse and repeat every year, everything else is in service to the elegant hardware experience of the Dear Customer. If we stick to our search for places to invest $100B, we’re left with a big question mark.

The only scenario left for the big number is a hedge against political risk in China or against an economic Nuclear Winter. Apple would use its cash reserve to pull through and reemerge even stronger than its competitors.

JLG@mondaynote.com

Apple’s Grand User Experience Unification

Apple just announced Mountain Lion, the 10.8 version of the Mac operating system, scheduled for delivery in late summer of this year. I dutifully installed the developer preview; it works, mostly (see here for PCMag’s list of notable features, and here for a quick video tour.). More important is that less than a year after the introduction of OS X 10.7, we now have two data points and can draw a line…and the slope confirms our expectations: Mac OS X begat iOS but, now, iOS fathers Apple’s Unified User Experience.

iOS leadership came about for two reasons.

First, the numbers. You’ve probably seen this “viral” Asymco graph, compliments of Horace Dediu, that compares the installed base growth for various Apple products, alive and historic:

Quoting Horace:

The iOS platform overtook the OS X platform in under four years, and more iOS devices were sold in 2011 (156 million) than all the Macs ever sold (122 million).

No one, Apple execs included, expected such an explosion. But here we are: The son of OS X is now the Big Daddy and everything else must line up behind it. Imagine an alternate universe in which Scott Forstall, Apple’s iOS czar, hadn’t won the decision to pick a version of Mac OS X as the software engine for the iPhone. (Scott is also the “father” of Siri. He convinced Jobs to buy the company and to put substantial resources behind it after the acquisition.)

Just as important, iOS provides a fresh (or “fresh-ish”) start. iOS is a rebirth, rid of (many) sins of the past. Because it must run on less of everything — RAM, MIPS, screen, power –engineers were “forced” to shed the layers of software silt that accumulate inside any OS. This gave iOS designers and coders the opportunity to rethink the User Experience (UX), and to pass these ideas back to the Mac.

As examples: The multi-finger trackpad gestures, inherited from iOS, are welcome additions to OS X, they help us find our way in a maze of application windows. So are the full-screen apps with their felicitous and subtly size-conscious ways of hiding and revealing menubars and the Dock. The animation may differ between the smallest 11.6” MacBook Air and a large 27” screen, but physically it feels the same.

Under the hood, we discern an iOS-inspired ways of installing and uninstalling applications. In another trick learned from iOS, Lion manages application state from fully on to fully off and, more interestingly, various levels of readiness in between.

[For an in-depth and opinionated discussion of the technical aspects of OS X Lion -- including glimpses into the Mac’s possible future -- you can spend $4.99 on Mac OS X 10.7 Lion: the Ars Technica Review. It’s available in Kindle e-book form, but not as an Apple i-Book. You can also turn to Fraser Speiers’ lucid discussion of iOS multitasking here, with videos here.]

In 2007, while clearly coming from the same company, the Mac and the iPhone had markedly different UXs. The phone’s small screen was the biggest reason for the differences. When the iPad came out in 2010, some folks joked that the new device was simply a Brobdingnagian iPhone, perfect for the fat-fingered. But the size-appropriate translation of the iOS UX onto a much bigger screen hinted at things to come…and, indeed, later that year Apple announced its intention to further adapt iOS user interface ideas and fold them into the Mac.

If the Mac is a now-traditional personal computer, the iPad is a more personal one, and the iPhone is really personal. (This should please Messrs. Ballmer and Shaw at Microsoft. According to their hymnal, there is no shift to a post-PC era, it’s turtles, err… PCs all the way down to smartphones.)

For a company that prides itself on simplicity and elegance, it only makes sense that Apple would offer a consistent UX across all its devices, a GUUX, a Grand Unified User Experience. Apple customers should be able to move easily and naturally from one device to another, selecting the best tool for the task at hand. Add another unification, iCloud storage services, and Apple can offer more reasons to buy more of its products.

It’s a lovely, soothing theory.

In reality, the Grand Unification isn’t there yet. We still face antiquated limitations, bad bugs, aging applications, and capricious flourishes.

Let’s start with the menubar at the top of the OS X screen. It worked well on the original Mac with its small screen and lack of multitasking, but on today’s 21.5’’ or 27” displays and the many applications they contain, the menubar is bad ergonomics and leads to confusion. Novice and experienced users alike are often misled: If you unintentionally click outside the app window, the menubar at the top of the screen becomes associated with another app, or with the Finder:

On apps such as Pages, it gets worse: You have to deal with two menubars, the one inside the app window, and the one at the top of the screen. Why does Apple cling to this antiquity?

(Friends tell me that it would be difficult to move the top menubar into the app. Perhaps…but more difficult than moving from the undebuggable OS 9 to the Unix/NextStep-based OS X?)

In Microsoft’s Windows, each app window carries its own menubar, there’s no need to move to the top of the big screen to access the File menu, there’s no confusion about the context of your action. Furthermore, when you close an app’s last window, the app quits. Apple recently started doing something similar, but it’s apparently limited to a few utility programs; big apps don’t quit when their last window is closed.

Why not take a few good ideas from Windows?

Moving to bad bugs, the Mac’s Mail app is still an abomination, an app that was either poorly architected or poorly implemented or both. It keeps quitting or freezing on my machines. All on its own — meaning with no prodding by this user — Mail will spin the dreaded beachball for tens of seconds. Is it talking to itself?

Another of my favorite apps, Preview, will suddenly lose part of its mind:

With the Mountain Lion announcement, Apple execs tell us that OS X is now on a once-a-year release regimen. Great…but what about iWork apps? When will they be updated?

I have a long list of iWork bugs, and some are really embarrassing. Take a simple Numbers graph and copy it into Pages:

Works fine…but it loses its title and legend when copied into Word. It must be Microsoft’s fault, right? No, the same thing happens when the chart is moved to Apple’s own Preview:

(When I tried it again, just to make sure this wasn’t a “luser” error, Preview crashed on me.)

Speaking of Microsoft Word, the US version knows the punctuation rules for both US English and French. Not my version of Pages…which is why I have to keep Word around.

Some apps aren’t merely not improving, they seem to be going downhill. The Lion version of Address Book made it harder to manage multiple books, and the app ignores some of Apple’s own UI conventions, such as double-clicking at the top of the window to minimize it.

I’ll finish this litany with Apple’s skeuomorphic flourishes. This apparently is a new fashion: Make computer objects look more like the “real” thing in order to provide familiarity. Sometimes, as with the faux stitched leather and bits of torn paper in the iCal app, familiarity breeds contempt:

The Address Book is even worse, I won’t reproduce it here.

Sure, a good UX needs to extend a welcome mat, but we don’t need extraneous, functionally pointless simulacra of the physical world. Perhaps these details are just a case of brainstorm hysteria in Cupertino: “Idea: Put a rod and hoops at the top of each window, hang drapes on the side and give users a choice of styles!”

Apple must choose between its established Bauhaus elegance and 70‘s Rich Corinthian Leather:

Let’s end on more measured notes.

  • Bugs and brain flatulence aside, a Grand Unified UX is the right idea. Who will argue against making it easier to move from one Apple device to another? Especially when using fresh and successful iPhone/iPad constructs as the model.
  • Lion and Mountain Lion are transitional versions, and the awkwardness shows…but they’re moving in the right direction. Mountain Lion, even in its buggy preview form, shows a large number of nice improvements over Lion.
  • It’s been a very long time – three years — since the latest iWork release. But this lull is very likely due to Apple’s focus on the first set of iOS releases. Sooner or later, we’ll see a fresh iWork that cures the most glaring bugs — and that makes OS X and iOS file formats more compatible.

Lastly, having spent a little more time with Mountain Lion, I hope we’ll get the newer version of Safari ASAP. At the top of the list of neat improvements: we’ll be granted the ability to search directly from the URL bar. Yes, finally, just like Opera, Firefox, Chrome and Internet Explorer…

JLG@mondaynote.com

Steve, Please Buy Us A Carrier!

We’re at the end of the 2011 iPhone 5 launch. The demos went well; Steve Jobs has come back on stage to thank everyone and conclude the proceedings, “…but before you go, just One More Thing. I’d like you to meet someone.” And the CEO of Deutsche Telekom walks onstage. “Deutsche Telekom owns a company you know as T-Mobile USA, but let’s start calling it by its new name: Apple Wireless.”

An audible gasp — louder than the one when Jobs announced the $499 price for the iPad – and then the room erupts in applause. At long last, iPhone users will enjoy the level of carrier service and support that is their birthright.

This is fiction, of course, wishful thinking. But bear with me…

The idea came up during a “what if” conversation with my wife Brigitte, while walking along University Avenue in Palo Alto. What should Apple do with its almost beyond comprehension $76B in cash? The COO of the Gassée family is creative and practical, an abstract painter turned “lumber VAR”–she builds or rebuilds houses in Palo Alto. She’s not enthralled by technology and takes a utilitarian view of computers, phones, navigation systems, tablets…an attitude that provides a useful counterpoint to my sometimes overly-enthusiastic embrace of anything that computes.

She immediately nixes a big acquisition that could dilute Apple’s culture, an aspect of the company that’s integrally important to Steve. She has no interest in financial engineering and concludes that Apple will continue to make small acquisitions that pose few cultural challenges–but small buyouts won’t solve the cash “problem”. What to do with all that money?

As we chat, we walk by the wireless carrier stores: T-Mobile, a couple AT&T retailers (one is shutting down), Verizon and, next to the Apple Store, Sprint, a big store with a bored sales staff that easily outnumbers the customers. “Why doesn’t Jobs buy a carrier?” she asks, “He’d easily do a better job than these people….”

As befits our well-debugged relationship, I immediately launch into a critique of her suggestion: “This is a terrible idea, on so many counts!”.

First, there are regulatory problems. Getting FCC approval for a new iPhone is one thing; wrestling with Washington bureaucrats for spectrum allocation is another.  Apple’s maverick culture, its blatant spite for government bureaucrats and Congress windbags won’t do well there.

Second, carriers are capital intensive: Their return on equity (the profit-per-dollar invested in the business) is way below what Apple enjoys, in spite of its having “way too much cash for its own good.” For example, last quarter, AT&T’s Net Income was $3.6B for $113.8B in Equity, a ratio of 3.16%. Apple’s numbers were $7.3B for $69.3, a ratio of 10.5% — more than 3 times AT&T’s.

And just imagine the other carriers’ reactions. Not only would they kick Apple products from their networks and stores, Apple would find itself in court for anticompetitive practices, for unfairly favoring its own wireless arm.

One can see Apple’s stock losing 10% on the day of the announcement and critics would have yet another field day: “Apple does it again, their Walled Garden™ just grew taller walls!”.

But it’s also a beguiling idea. Let me count the ways.

Imagine the dancing in the streets. Apple would be finishing the job it started when it broke AT&T’s err… back, when it took over content distribution with iTunes. We don’t like carriers; we experience their service as both poor and expensive, to say nothing of their impenetrable and ever-changing contract pricing:

(Not to pick on AT&T. Every carrier offers a similar, bewildering array of entrapping offers.)

By contrast, imagine Apple’s simpler pricing. Three tiers to fit your appetite for data: $49, $79, $129 per month. No gimmicks, no SMS surprises, no fees piled up at the bottom of the bill: Just the price in your contract, plus taxes. If you approach the data limit for your plan, you get an SMS offering to upgrade you to the next level–but only for this month. No underhanded up-sell.

With $76B in cash and another $10B or so per quarter, a carrier is certainly within Apple’s budget. AT&T, with its $167B market cap, is probably out of reach (and too complicated, too many businesses), and Verizon ($97B), with its dying landline business and unionized workforce, isn’t in keeping with Apple’s ways.

But consider another carrier, T-Mobile USA. It no longer offers landline services, it’s non-union, and it’s affordable—it got a $39B offer from AT&T. Acquiring T-Mobile from its parent company Deutsche Telekom offers several advantages.

To start with, it prevents an abomination before the lord: It kills AT&T’s predatory acquisition attempt. Furthermore, as my friend Peter Yared noted, Apple might very well have big mounds of cash sitting outside the US, potentially subject to taxation if repatriated. Problem solved. Peter Oppenheimer, Apple’s CFO, shows up at Deutsche Telekom’s HQ in Bonn bearing a smile and an RSA dongle: “You have a Mac I can use to make the wire transfer?” No, they don’t. But a nice 30-year Anniversary Lenovo PC will do for the transaction.

Once the deed is inked, the hard work starts. This will probably be a two-year exercise.

Decisions will have to be made. Tactfully convert existing T-Mobile users to iPhones or free them go elsewhere? (The competition will, of course, welcome these ‘‘victims’’ with open arms.) Retrain employees or offer them a decent exit package?

But the big task, the goal of the acquisition: Play the Apple vertical integration game and adapt the network to support one and only one type of smartphone, Apple’s.

Other cellular networks have to serve a wide range of devices — from basic phones to gluttonous high-end smartphones — and support a mess of protocols: Ancient ones with layer upon layer of patches, more modern ones with their factory-fresh bugs. Contrast this with Apple Wireless’ simpler task of serving one type of phone, one type of protocol. Given the two-year time frame, let’s assume the protocol will be a stable variant of what markitects call LTE or 4G. And, from there, voice and data coexistence, smoother video calls, voice-mail on iCloud, and so on.

And that’s just T-Mobile. Need more spectrum? $10B, three months of net cash flow, gets you Sprint.

Another possibility, admittedly remote, is to use tight wireless network integration with iCloud to create an inexpensive “smart dumbphone”.

What I mean is: Today’s iPhone is an app phone. It has enough hardware oomph to run a wide range of applications, all “wired” to a screen size. Because of this, cutting the iPhone’s bill of materials in half is well-nigh impossible — an “iPhone Nano” would be a much more difficult proposition than the iPod Nano. Apple would need to send developers back to their Xcode.

A better alternative would be to jettison native apps altogether, to go back to the Summer of 2007, when Steve Jobs promoted Web 2.0 apps for the first iPhone. Today, the pitch would be HTML5 Web Apps. We can already see a few good ones on iPhones and iPads, such as the new HTML5 Kindle app:

Or the nicely interactive iPhone manual, which feels like a “real” app:

A putative iPhone Nano on the no-less putative Apple Wireless network would be a dumbphone with HTML5 smarts and tightly integrated (I’ll use the P-word) proprietary services to make it sing and dance.

(As it happens, someone else already came up with the name Cloud Phone, see Trevor Sheridan’s post on the Apple’N’Apps site.)

As for the reaction from competing carriers, one has only to turn to the history of Apple Stores to get an answer. Existing retailers didn’t ditch Apple products when the company started its own retail chain. In fact, Apple Stores set a new standard in pre- and post-sale service. As a result, competing retailers raised their game. One can expect a similar reaction from AT&T and Verizon when faced with Apple Wireless.

So, yes, it’s a beguiling idea, but…

Would buying a carrier make sense financially? Look at AT&T’s iPhone ARPU, reported at more than $100/month. For Apple Wireless, this translates into more than $1B per million iPhones on its network. In 2010, T-Mobile’s ARPU was approximately $50/month for its 33.7 million customers. It’s tempting to look at the potential billions in service revenue and pronounce Apple Wireless the next big revenue opportunity.

But service isn’t Apple’s way of making money. Their one and only goal is selling devices. Everything else is in support of that goal. Execs, starting with the CEO, will wax poetic about the crystalline purity of software, more/better/faster content, new iCloud services; but what really counts is device revenue and profit. In the iPod days, iTunes didn’t make money, but it boosted device volume and margin. For today’s $100B Apple, a couple of billions in iTunes revenue is nice, it pays the bills, but it doesn’t move the needle. The iPhone is what does.

A wireless carrier owned, operated and integrated by Apple would only take two or three years to generate (much) more revenue than iTunes. But would it sell twice as many iPhones? Probably not.

It’s a nice fantasy, a carrier with the service quality and simplicity we get today when we enter an Apple Store. But for the fantasy to become reality, Apple Wireless would need to give birth to services that generate significant new hardware opportunities – opportunities that would need to be unavailable through Verizon and AT&T (otherwise, what’s the point?).

Another way to deflate the fantasy is to consider the US-only nature. Apple can’t and won’t go around the world and buy wireless carriers. With China soon to become Apple’s largest and most profitable market, the company isn’t about to lose sight of that prize, to be distracted by the complicated task of acquiring and integrating a US carrier.

That was the reverie…

Back to reality, why can’t carriers stop playing their games and show us some decency?

JLG@mondaynote.com

iCloud: How vs. What

Once a year in San Francisco, Apple summons its third-party application engineers to the World Wide Developers Conference. Since Steve Jobs’ return to the company the event has grown in attendance and importance. One turning point was the 2002 introduction of OS X, a genuinely modern Mac OS, built on a Unix foundation. Then there was the 2008 WWDC featuring iPhone native apps and the epoch-making iOS App Store. (Yes, “epoch-making” sounds a bit grand, but it really was the birth of a new era.)

This year’s program was more loaded than usual, offering three main topics: A major OS X release, dubbed Lion, slated for this Summer; a new version of the iPhone/iPad/iPod Touch for the fall (iOS5); and iCloud.

The two-hour keynote is worth your while. Always entertaining, Steve and his co-presenters convey the massive effort that went into moving Apple’s engineering armies on these three fronts — with a mere 2% of revenue in R&D expenses.

But let’s focus on iCloud.

Apple has often been involved in feature-list schoolyard squabbles of the Mine-Is-Longer-Than-Yours type. Two years ago, Steve Ballmer, our favorite rhetorician, scoffed that the MacBook is an Intel laptop with an Apple logo slapped on the lid. He might as well have noted that all cars have wheels — round and black, mostly — and then gone on to sneer at brands commanding higher prices than your basic Chevrolet. (I’ve owned half a dozen of the latter.) In the world of cars, the value of the How is well understood: All cubic inches aren’t born equal.

For computers, we’re getting there. The PC market is in the doldrums: Shipments are stagnant, Apple claims a 1% drop in Q2 2011 vs Q2 2010 while, during the same time period, Mac shipments grew 28%. It can’t be the Intel processors, it is How they are driven.

Unsurprisingly, Apple’s iCloud announcement has been met with the same type of misunderstanding: ‘OK, after all these years, Apple finally makes the plunge into the Cloud. The Cloud is the Cloud. Or, rather, Google is the Cloud. What’s the BFD?’

A strong dose of skepticism is warranted. Even Steve calls MobileMe, his company’s previous effort, ‘Not our finest hour’. Both What and How fell frustratingly short of the standards of polish, simplicity and agility Apple is known and financially rewarded for. MobileMe’s 2008 vintage was plonk. This led to apologies, subscription extensions, and management changes. Improvements followed, including the well-regarded Find My iPhone service.

But both What and How remained deficient.

The feature list barely differentiated MobileMe from other services. Mail, Calendar, Address Book, Photo Galleries, Web Hosting, File Storage are offered elsewhere on the Web by a long list of companies: Google, Yahoo!, Microsoft, DropBox, Flickr… Google, followed by Microsoft and others, also offer Web Apps, Google Docs being the best known example, an “Office Suite” in the Cloud, accessible anywhere, from any computer with a Net connection and a decent browser. This led many, yours truly included, to wonder: Does Dear Leader “grok the Cloud”? Does Apple have it in its DNA to do be a serious participant in the Cloud Computing revolution.

MobileMe’s reliability remained subpar, often showing evidence of “silos”, of poorly interconnected modules, a Cloud Computing cardinal sin, as recounted in the What I Want for my Mac Monday Note.

Against this tattered backdrop, iCloud walks on stage. The most striking difference with MobileMe and other Web-based offerings already mentioned, is the shift away from the browser. I’ll use a word-processor document to illustrate. In both cases we’ll assume you’ve already stated your credentials, login and password for Google, Apple ID, and password for iCloud. With Google Docs, you fire up your browser, enter the URL for your service, compose or edit a document, file it in a folder in Google’s Cloud, and it’s ready for you from any computer anywhere.

With iCloud, you fire up your word processor, Pages for the time being, and compose. No saving, no URL for a Web service. You get up and leave. In the queue at the airport you remember something, you fire up Pages on your iPhone and add the brilliant idea that just came to you. But how do you access the Pages document from your Mac at the office? You don’t have to “access” it, it’s already there on your iPhone, your iPad or, sitting at the gate after security, on your MacBook. Your document was automagically saved and pushed to your device. No hands, the system does it for you — and propagates the edits you just made.

(This is why, the week before the WWDC, Apple published “universal” — meaning iPhone + iPad + iPod Touch — versions of Pages, Numbers, and Keynote. I’m not sure I would want to write this Monday Note on an iPhone but, in a pinch, I can fix a mistake using the small device.)

This is the BFD, this is the How. Such behavior is available or will be extended to all applications and content.

The Google model sees everything through a browser. Apple’s iCloud model uses local apps transparently interconnected through the Cloud. Browsers Everywhere vs. Apps Everywhere.

Another important feature is the demotion of the PC as the media hub or, if you prefer, the untethering of our iDevices from the personal computer. From now on, content and apps are purchased, downloaded, updated wirelessly, PC-Free. And seamlessly propagated to all devices with the same Apple ID.

The demos look good, the iCloud technical sessions at the WWDC went well. But the full-scale implementation remains to be field-tested. For the document editing example, Apple used an iPad to iPhone and back example, and merely mentioned the Mac as a participant later in the presentation. Annoying details such as iWork file format incompatibilities between Macs and iDevices need closer inspection as they might make reality a little less pristine than the theory.

For developers, the new APIs just released will enable more applications to offer the seamless multi-device updates just demonstrated.

If iCloud works as represented, it will be very competitive — and the price is right: free for the first 5Gb of documents. (Content such as music or video and apps don’t count in those 5Gb.)

The “free” iCloud reminds us of Apple’s real business model. They want to sell lots of devices, everything else supports this goal. It seems iCloud’s easy, executive-proof How will sell a lot nicely interconnected Apple hardware. For competitors, weaving together a Brand X laptop, a Brand Y smartphone and a Brand Z tablet won’t be as easy or inexpensive.

To be continued as competitors takes Apple’s theory apart and as both developers and the company move the iCloud story into reality.

JLG@mondaynote.com

For further perspective, a few links:
- A prescient (April 15th, 2011) “Cutting That Cord” piece by John Gruber.
- A 10,000 feet overview by Philip Ellmer-Dewitt, in Fortune’s Apple 2.0.
Pascal-Emmanuel Gobry thinks iCloud annoys Google and humiliates Microsoft.
- John Paczkowski’s take in All Things D: iCloud: The Mother of All Halos.
- Business Insider thinks Microsoft had a service “just like iCloud” for Windows Mobile.
Walt Mossberg’s iCloud take, interviewed by Charlie Rose.
- Steve Jobs’ “It Just Works”, as seen by MG Siegler on TechCrunch.

Carnival Barker Edition: Show me your iOS licensing certificate!

Apple is doing it wrong, Apple is living on borrowed time! Apple will Fail Again!

This idea, this meme, isn’t new. For more than 30 years we’ve heard a number of versions of the “Apple is doomed” requiem.

December 12th 1980 — the day of Apple’s IPO, coincidentally — I’m in Geneva, signing my employment agreement with Apple. My mission: start Apple France. Back in Paris I meet a chorus of naysayers: You’re deranged. Look at the respectable companies you’ve worked for: HP, Data General, Exxon Office Systems. (They don’t know that I can’t wait to leave the latter.) And now you’re going to work for these California hippies? They don’t have CP/M; the Apple ][ has a 40-column screen and lacks standard 8” floppies…and Fortune Systems is coming up with a Wang emulator that will wipe Apple off the planet’s surface!

The latest Dies Irae comes from a trio of highly skilled artists: Henry Blodget of Wall Street and Business Insider fame; Fred Wilson, co-founder of the VC firm Union Square Ventures and an eloquent and insightful blogger (AVC blog); and Dan Lyons, the sharp and eerily hilarious author of the Fake Steve Jobs parody blog (currently on hiatus), now writing for the Daily Beast and Newsweek. (See here, here and here but a few examples of their refrain. Google will oblige with more.)

I’ll start by intoning their cantus firmus.

In 1984, Apple comes out with a superior personal computer, the Macintosh. And then they lost the market to an inferior genus: the IBM PC clone.

Why?

Ignoring universal advice — including Billl Gates’ — Apple arrogantly refused to license the Mac operating system, leaving the field to Microsoft’s technically inferior product. DOS and Windows clones proliferated and almost exterminated the Mac, relegating it to a minuscule, irrelevant market share.

With the iPhone — and out of the same deeply ingrained arrogance — Apple is making the same mistake. Apple won’t license its iOS software platform. As a result, Android-powered smartphones and tablets will do to the iPhone and the iPad what Windows did to the Mac.

The story ends with Andy Rubin at the wheel of the Android steamroller. Behind him we see Henry, Fred, and Dan throwing rose petals on themselves and singing I Told You So.

(I have personal reasons to like Android. Several of my Be associates moved on to Google where they were instrumental in the creation of the platform. I admire what the engineering team accomplished in a very short time. There’s little wonder that Nokia and RIM have lost their footing. One of my two smartphones is an Android device, from Motorola; I see everyday why the platform is so successful. And as an iPhone user, I’m glad Google is fueling Apple’s competitive fires.) More

Inside Apple’s Q2 Numbers

This last week, Apple announced their 2011 Q2 numbers. Philip Elmer-DeWitt, whose Fortune Tech Apple 2.0 blog I enjoy and recommend, provides a crisp summary:

• Sales: $24.67 billion, up 82.8% year over year
• Profits: $5.99 billion, up 95%
• EPS: $6.40, up 92%
• iPhone: 18.65 million units, up 113% (!)
• iPhone sales up 155% in the U.S., thanks in part to Verizon, and up 250% in greater China
• iPad: 4.69 million units, compared with 7.33 million in Q1.
• iPad sell-through was 5.1 million units, given the decline in inventory
• Mac: 3.76 million units, up 28%. Asia-Pacific Mac sales up 76%.
• iPod: 9.02 million units, down 17%. More than 50% iPod touch
• iTunes store: Sales of $1.4 billion
• Gross margin: 41.4%, compared with guidance of 38.5%
• Apple stores: 71.1 million visitors, up 50%
• Store sales: $3.19 billion, up 90%
• Cash and marketable securities: $65.8 billion, up from 59.7 in Q1
• Revenue guidance for Q3: $23 billion
• EPS guidance for Q3: $5.03
• Gross margin guidance for Q3: 38%

For a more discursive and animated survey, Brian Hall’s News Wrap on $AAPL quarterly earnings is sprinkled with salty comments about other bloggers and media outlets. You needn’t agree with everything Brian writes, form or substance, but if you want to follow what he rightly calls The Destruction of Everything by the smartphone wave, his postings at The Smartphone Wars Community are required reading. Often insightful, never boring.

Another favorite with a wide readership and great comment threads: Horace Dediu’s Asymco. After Apple’s earnings release, Horace evaluated his own performance and gave himself a sober B. (He usually deserves an A, but chose to downgrade himself for his 10% overestimate of iPod shipments and for whiffing the iPad number–more on that later.)

Such honesty is remarkable. Philip Elmer-DeWitt gives Horace a tip of his hat while savaging Wall Street pros’ forecasting performance: “Most professional analysts blew it in Q2, but you wouldn’t know it from their postmortems.” Fun reading, especially if you hold cynical views of Wall Street earnings forecasts and whisper numbers games. (More exhaustively cruel and graphic details of the pros’ rout can be found in this additional Apple 2.0 post.)

Speaking of misses, Business Insider looked at preliminary comScore numbers in early April and proclaimed the iPhone Dead In Water. Even with iPod Touches thrown in, ‘‘Apple share has actually fallen.” Less than three weeks later we get fresh comScore numbers for the US:

Initial research indicates that Apple’s iOS platform, which resides on iPhones, iPads and iPod Touches, has a combined platform reach of 37.9 million among all mobile phones, tablets and other such connected media devices, outreaching the Android platform by 59 percent.

(These are the numbers Apple’s COO Tim Cook referred to in the April 20th conference call covering the company’s Q2 earnings. Seeking Alpha provides a transcript of the call as well as the animated Q&A.)

comScore has equally interesting numbers for Europe:

Initial research indicates that Apple’s iOS platform, which resides on iPhones, iPads and iPod Touches, has a combined platform reach of 28.9 million users in the five European markets, outreaching the Android platform by 116 percent.

The link above yields interesting demographics, parsing Mobile, Smartphone and iPad users by gender and six age classes:

… the heaviest skew toward 25-34 year olds (23.4 percent) in relation to the total mobile audience (17.3 percent). iPads also exhibited an above average skew in the 18-24 year old age segment.

Regard Asia. In China the iPhone is +250% year-to-year (vs. +155% in the US). The number is especially interesting because this ought to be where iOS goes to die, snuffed out by a swarm of locally produced cheap handsets running Android or its mutant cousins Tapas and Ophone. You’ll recall Stephen Elop, currently Nokia’s CEO, cautioning against aggressively priced MediaTek based Android devices in his Burning Platform memo.

Instead, Chinese customers appear to insist on The Real Thing. We now hear that the Shanghai Apple Store does more volume than the historic 5th Avenue location, with a new store, China’s largest, in the works.

(Let’s pause a moment to pay tribute to Bernard Cywinski, of Bohlin Cywinski Jackson, who recently passed away. Among his firm’s portfolio: Apple Stores and Pixar’s HQ.)

The Mac numbers are smaller but no less interesting. Sure, more than half of Apple’s revenue — and certainly more than half of its profits — come from iOS devices, but the Mac keeps growing faster than the rest of the PC industry…for the 20th quarter in a row. See this Apple Insider piece from which I extract the following tables:

A couple of observations. First, IDC and Gartner have substantial disagreements, such as – 42% vs. – 25% for Acer. Second, Mac unit sales grew by 28%, not 9.6% (IDC) or 18.9% (Gartner). Admittedly, the + 28% number is Apple’s worldwide number, but the US, which includes a majority of retail sales, represents more than 40% of total revenue. Mac sales growth in the US isn’t likely to deviate much from the overall + 28% figure. Caveat IDC vel Gartner emptor. More

What I want for my Mac

by Jean-Louis Gassée

I was a happy man. After twelve years of Windows use at work — the usual Outlook excuse — I was about to be saved by Vista.

On January 30th 2007, 8:00 am, the doors opened at Fry’s in Palo Alto. I showed up early to claim my prize, a 17” HP laptop with Vista factory-installed. I walked in and found that I was more than first in line — I was alone. Unfortunately, I didn’t take this as a warning. I bought the macho machine and completed the expedition with a $400 Office 2007 DVD.

That same morning, I flew to an industry conference, sat in the last row (as usual) so I could play with my new machine — and began to realize my mistake. I had become comfortable with Windows XP, deriving geek pride from my ability to juggle firewall settings, virus and malware countermeasures, I answered the Genuine Windows Advantage challenges and made coffee while the system checked for updates.

But Vista defeated me. I cracked. I walked down University Avenue to the Palo Alto Apple Store and bought a black MacBook (and Parallels software so I could still run Windows XP during the detox period).

The following Monday, my VC partners did a double take when they walked into the conference room: They saw the big Apple logo on the laptop and Microsoft Outlook projected on the big screen. Four years later, one by one, my partners are moving to the Light Side. (I also have a Dell netbook running Windows 7 — but it’s for “research.”)

During those four years, (some of) my Apple prayers have been answered: I have a new 11” MacBook Air, a neatbook I can really use on an airplane — even when the large gentleman sitting one row ahead suddenly reclines the back of his seat. Some days I wish I had a Mac as small and pocketable as my 2001 Toshiba Libretto but, all in all, my 11” Air is the most pleasant laptop I’ve ever owned, even more so than my dearly departed (stolen in Paris) 1991 PowerBook Duo.

Enough nostalgia, I also have unanswered prayers. We’ll start with two easy ones.

My iPad, which I use less often now that I have the MacBook Air, has 3G connectivity. On my laptop I have to use a modem, the Verizon MiFi 3G. It converts the cellular data connection into a WiFi hotspot in my pocket and can support up to five ‘clients’. I use a similar but even smaller device from Orange when I’m in France. I could, of course, use my Android phone as a hotspot (again, for ‘‘research’’), and there are recurrent rumors that someday AT&T will let my iPhone play the same role, but I’d like to cut out the middle man. Now that we know the Verizon iPhone 4 uses the bi-sexual ecumenical CDMA/GSM radio chip, there is hope that all future mobile devices from Apple, MacBook Air included, will have worldwide cellular connectivity.

Less important, but still helpful for this klutz who breaks toes in the dark against furniture, I’d like Jon Ive, Apple’s design guru, to take a weekend afternoon and whip up a black envelope for my laptop. The one he designed for the iPad spares me embarrassment and money every time I drop my tablet.

More difficult: I’d like a MobileMe that works.

MobileMe is erratic, the Back to My Mac feature works, then stops working, and then works again for no apparent reason. Synchronization between machines is so haphazard I finally switched to DropBox — it’s free for up to 2GB of impeccably Cloud-synced files, and a mere $10/month for 50Gb. DropBox hasn’t always worked well on OS X, but the latest version seems to be stable and manages to sync data for a large number of platforms and applications. As an example, it syncs my 1Password passwords across all my desktop and mobile devices, including Android and Windows.

As described in a previous Note, I bought the family pack for OS X and iLife updates even though the ‘’single” version can be installed on any number of machines. That alone probably gets me into the lower tier of the Friendly Idiot database somewhere in Apple’s Cloud, but the fact that I also pay $100/yr for MobileMe upgrades me to Platinum status.

Two days ago, I left a Word file open on my office iMac. At home, when I realized my mistake, I thought I could reach into the office using Back to My Mac, close the file and then open the copy that had been stored/synced through DropBox. Back to My Mac refused to work that night, but I could still open the file from DropBox and continue writing.

At the office the next day, the “old” document was tagged for deletion when I opened the newer version from DropBox. It sounds complicated and it is: Subtle conflicts of timing and location can make syncing difficult for normal humans.

I thought that’s why we have Apple, the non-IT company that caters to The Rest of Us, but, unfortunately, its Cloud services are messy, unpredictable, and filled with rigid silos. The Apple Cloud is supposed to smooth the seams of synchronization but fails to do so because information isn’t properly shared between its various functions.

I experienced another example of Cloud rigidity when I bought a new $99 Developer subscription. I used the Apple ID and the credit card I use all the time for MobileMe and iTunes purchases. The sale went through, Apple took my money…

…but right after the successful cashectomy a cranky algorithm complained about inconsistencies and refused to activate my subscription. Instead, I got an email message asking me to send a notarized copy of my ID by fax:

I’m sure the robot meant well; perhaps its poorly-fed algorithm causes it to bark at shadows. I emailed twice, requesting help and conceding that I may have contributed to the problem. But, ahem, why did you take my money? And why resort to such antiquated means to resolve the situation? Can’t a human use judgment and an email or phone call to correct the misunderstanding?

24 hours later, no one had gotten back to me.

So, why am I enrolling in the Apple Developer Program? I want to test an early version of the next OS X release, Lion, which is rumored to borrow some of the look and spirit of the iPad. In last November’s Monday Note, I criticized the Finder for being too complicated. I’m curious to see if Lion will simplify the UI, fulfill its promise of moving to a more intuitive way of organizing and navigating the content of our machines.

[Apple Insider just published a neat series of posts covering many of Lion’s new features.]

(Interestingly, the new developer release is distributed through one of Apple’s Cloud services, the Mac App Store, the one that continues to enthusiastically embrace my Apple ID — and credit card.)

Still, if I could have only one wish, what would it be?

Without a doubt, it’d be a working MobileMe. Free? Nice, but I’ll take working over free.

[This isn’t my lucky week. After I wrote the above, I bought the $0.99 FaceTime app for Brigitte’s Mac and for mine. This turned into another obstacle course of inconsistencies in Apple’s Cloud, to say nothing of UI trouble. Who tests these things? Engineers or mere mortals?]

JLG@mondaynote.com