apple

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

What future for the Macintosh?

With Apple’s smartphones and tablets making so much money and taking up so much media bandwidth, one has to wonder: Is there a future for the Macintosh?

We’ll first take a look at broad trend numbers and try not to molest them too much. As we saw last week, they’ll confess to anything when under torture. After that, we’ll explore the significance of recent changes in the Mac ecosystem: the new MacBook Air and the Mac App Store. Finally, we’ll extrapolate a bit and attempt to answer the question in this note’s title.

Mary Meeker, the Wall Street analyst who recently left her Morgan Stanley pulpit for a Kleiner Perkins perch, just updated her highly-regarded Mobile Internet Trends presentation. From her 56 slides I extract this one:

2011 is the year when PCs will cede the market momentum lead to smartphones and tablets. The disparity between the old guard and the new Really Personal Computers become huge in 2012 and 2013.

This comes sooner than expected: Only four months ago, while she was still at Morgan Stanley, Meeker had this forecast:

The takeover wasn’t supposed to happen until 2012, but, as this review of Gartner and IDC numbers shows, the growth of mobile devices far outpaced the PC in 2010.

For Apple, the smartphone/tablet takeover happened even earlier. I just looked at the Q1 2010 numbers (for the September to December 2009 period):

And this was before the iPad.

For the same quarter this fiscal 2011 year, the iPhone and iPad brought in $15B vs. a “mere” $5.4B for the Macintosh line:

Let’s not forget the iPod Touch. It represents about 50% of the iPod’s $3.4B, with the total for all iOS devices representing 65% of Apple’s revenue. (I have no Apple TV numbers.)

This past year, the Mac business went down percentage-wise, from 28.4% of Apple’s total to 20.3% this past quarter, and operating margins are certain to be smaller than the almost obscene 60%+ Apple gets for its iPhone ($620 ASP against an estimated $180 BOM).

With these numbers, why bother with the Mac? Last October, Apple held a Back to the Mac event whose purpose was to answer that one question: Why bother?

In the first place, the Mac is a $22B business, #110 on the Fortune 500 list. Second, it’s growing nicely. See the numbers above: +23% in dollars (and 22% in units), with a stable ASP of $1313. That last number is the envy of the PC industry. Because of netbook sales, the industry-wide ASP hovers slightly above $530. (This is the net revenue to the manufacturer, not the retail price.) That’s why the largest PC maker, HP, makes only 5% in operating profit on their $10B quarterly sales. For HP, the Why Bother question applies. I’m curious to see what the new CEO, Leo Apotheker, will do about the low-margin commodity parts of HP’s lines of business.

Macintosh products, on the other hand, have avoided the ‘‘race to the bottomthat plagues  PC clones. The business is big, it’s growing faster than the rest of the industry, and it makes more money.

Then, last quarter, something changed:

Desktop unit sales were flat (-1%) while laptops took off (+37%). Compare this to the 2009 vs. 2010 units numbers in Apple’s 10-K (the yearly filing):

Back then, desktops were growing faster than laptops. So what happened last quarter? The answer appears to be the new MacBook Air.

To confirm this, let’s transport ourselves to a typical Apple Store. We’ll start in September 2010. The older MacBook Air is relegated to a low-traffic area of the store. It’s not “moving.”

Now look at the same store today. The Science of Shopping says the ‘‘high-value” area must be the first table on the left, because, statistically, that’s how we navigate stores. There we see six MacBook Airs: four 11” models and two 13” configurations.

Why the change?

The attractive price is part of the answer: The base 11” model sells for $999, low by Apple standards. But performance is the more important factor. The older generation Air was considered neat but sluggish. For the new machines, the slow hard drive was replaced with an SSD (Solid State Drive), and the word of mouth quickly spread: The new MacBook Air is fast! It boots up (and wakes up) quickly, plus it has a longer battery life, improved display… The former also-ran was transformed into a best-seller, especially the smaller 11” model (I’ll call it a neatbook in reference but not deference to Apple’s edict against using the n-word: netbook.)

Thinking of the Mac’s future, we don’t risk much when we assume SSDs will replace hard drives on laptops. Apple is on a drive to drive the drives out — at least in the mobile segment of the Mac line. (We’ll see how this manifests itself when the “Pro” configurations get refreshed later this year.) SSDs are still expensive but for how long? And how will Apple’s billions ($3.9B at last count) in advance purchase agreements with its suppliers impact prices?

We now move to the Mac App Store.

The Mac App Store was launched on January 6th and, but for a few bugs, appears to be a success. My first impression: Nice…it helps the small-scale developer who otherwise can’t get shelf space.

True, the App Store is a boon to developers — the creators of Pixelmator, a well-crafted, easy-to-use Photoshop subset, made one million dollars in revenue in three weeks. But that’s not the Store’s only — or even most important — benefit.

Let’s start with the convenience for the user. As with iTunes tracks and iOS apps, the Mac App Store circumvents the usual e-commerce obstacles. The site, the download, the payment system, the installation and updates…the workflow is smooth. No serial numbers, no DVDs, no waiting. And you can install the same applications on more than one machine by simply confirming your Apple ID, no further payment required.

And let’s talk price… Mac software prices are coming down. A sharp-tongued friend of mine “hopes” Adobe opens a 24/7 War Room. Why? “Because the market price for Mac software just got divided by three.” Nuance and exaggeration aside, he’s right. When Pixelmator was launched in the second half of 2007, it was priced at $59. Now, much improved, it sells for $29 on the App Store (albeit “for a limited time”) with a free upgrade to an upcoming 2.0 version.

Apple sells its own productivity apps (word processor, presentation, and spreadsheet) for $19.99 each. It’ll be interesting to see if, how, and when Microsoft or even Adobe use the App Store and how they’ll price their products.

Now, an IQ test. This…

…or this…

Both are available today. Which do your prefer? The $199 DVD (protected by a serial number) that you buy at the physical store and install on a single machine, or the $79 product you download and install as you see fit on any of your machines?

The difference in price is, of course, the main attraction, but freedom from serial numbers is also important. When I switched machines using the Migration Assistant, everything moved over without a hitch, files, applications, settings, even the desktop background…or so I thought. A few weeks later, I fired up Aperture and, unlike the rest of my applications — even Microsoft Office — it demanded a serial number. A foraging expedition produced the Aperture 3 DVD, but that didn’t placate the cerberus because that was an upgrade DVD. I needed to come up with the SN for Aperture 2. I erased the program and bought Serial Number Freedom — and legal multi-machine installs — for $79.

All of this leads one to wonder if Apple will rid its stores of “boxed” software, thus fulfilling another of their goals: fewer SKUs, a simpler store.

So, what’s the future for the Mac?

There’s the promise of “regularity,” apps that only use published APIs. This is both a controversial topic and a way for Apple to redeem past sins. Restricting hacks could mean less room for developer creativity, but it will also mean a more reliable system and, for Apple, more freedom to make changes “under” the applications once enough of them are “regularized.”

This takes us to a more speculative train of thought: Moving to the ARM architecture.

When you experience the 11” MacBook Air on a relatively slow 1.4 GHz Intel processor, you can’t help but wonder how it would feel on multi-core ARM hardware. Porting an OS to a new processor is no longer rocket science, but moving third-party applications is much harder — unless they’ve been distributed and regularized in such a way that makes the transition smooth and transparent.

Then we have the next OS X version, dubbed Lion. Last October, Steve Jobs emphasized the point that Lion’s simplified UI borrows the “magic” of the iPad. We’ll have to wait for the product, slated for a Summer ’11 launch, but that didn’t stop my friend Peter Yared, a serial entrepreneur and sharp blogger, to offer a suggestion: “Take that iPad-ified MacBook Air one step further. Look at the Toshiba Tablet PC; there’s a pivot inside the display’s hinge:

Twist the display and it becomes a tablet:

Imagine what Apple could do with this!”

As I was writing this note, I found Andy Ihnatko, a respected technology journalist, appears to be thinking closely related thoughts in this MacWorld piece.

I worry about the complications: OS + UI + mechanical challenges but…Apple might have the people and guts to pull it off. We’ll see.

End notes:

No MicroNokia kremlinology today. I’ll write about it in a few weeks, after the dust settles. In the meantime, you can look back at past Monday Notes such as last September’s Nokia’s New CEO: Challenges or last February’s Mobile World Clusterf#^k. And, of course, Elop’s Burning Platform memo, highly unusual in its brutal frankness.

As always, look for penetrating analysis on Horace Dediu’s Asymco. And for another type of “penetrating” commentary and BS detection, see Brian Hall’s The Smartphone Wars — they both rose to this week’s challenge.

JLG@mondaynote.com

Apple’s bet on publishing

Apple’s upcoming subscription plan is making large publishing companies hysterical. Rightfully so. Some of them built a complete business model for the iPad based on a commercial agreement that is now being revoked. Apple is not only changing the rules, but it does so in the worst possible way — in their usual cold My Way Or The Highway manner. But one of the most interesting aspects of the maddening change is the strategic thought behind Apple’s move.

Let’s rewind the tape.

When publishers began to create content applications for the iPhone and the iPad, they found the in-app purchase feature was the perfect monetization tool: one click on the “buy for $0.99″ button… another on “confirm”… Done. Simple, seamless, friction free. And a 30% cut for Apple’s content delivery and payments services.

Weirdly enough, breaking its well-known controlling habit, Apple left open the possibility for the publisher to sell subscriptions directly to the reader. From the app, the user who wanted to buy a subscription was redirected to the publisher’s website. There, bypassing the iTunes payment system, the publisher collected the required personal and billing data. This direct connection to the reader was so attractive it drove many publishers to build their own subscribers recruiting machine on it (some even take inspiration from wireless carriers and  subsidize iPads in exchange for a two years subscription).

In the treacherous transition to digital, retaining control over subscriptions is crucial. Magazines, whose historic readership is mostly based on subscriptions, insist on preserving this model in the digital world. To get an idea of the subscriber’s importance, consider the following: a newsweekly will spend $150-200 to recruit a print subscriber through tons of direct mail, gifts, special offers and incentives. For a yearlong subscription, all bonuses included, the per-copy price could go as low as 30 cents, while the newsstand price will be around $4.00 or $5.00. The explanation for the gap: advertising money, which represents the bulk of the industry’s revenue. A subscriber is, by definition, a regular consumer; it is part of a well-defined readership that won’t require a complex supply chain able to adjust the number of copies shipped to European airport kiosks or Chicago newsstands.

For daily newspapers, the equation is more complicated. With a few exceptions, their subscription base is not as strong as the magazines’s. This makes dailies more sensitive to copy sales fluctuations influenced by the news cycle, the look of a front page or even the weather. And, above all, the advertising market likes regularity. In the digital world, those who choose the paid-for model therefore want to gather as many subscriptions as possible. Forget the clever the single copy micropayment system, for digital publishers, subscriptions are the Holy Grail. A strong subscriber base will provide: a) a recurring revenue stream, b) a more attractive delivery medium for advertisers who like the subscription’s predictability and, c) cash “float” because subscription fees are paid upfront. In addition, the smartest publishers use CRM to increase the per-subscriber yield and sell ancillary products.

For publishers, regardless of price consideration, subscribers and their related data are critically important.

The bad news hardly came as a surprise to many of us who found strange that Apple allowed content providers to bypass its transaction system for the most promising part of their revenue stream. In the long run, how could Apple limit itself to its 30% cut on a $0.99 purchase, and leave a $100 or $150 yearly subscription unmolested? It was just a matter of time before Apple decided to plug this revenue leak. The grace period was probably the time needed to build a subscription system able to match the App Store’s global scale.

Apple could have acted nicely and notified publishers that, sometime in the first half of 2011, it intended to deploy a new version of its App Store along with its own subscription system — with the unpleasant effect of closing down the direct subscription loophole. Publishers would have bitched and moaned, but the parties would have negotiated a deal in which the Cupertino guys would have yielded one sixteenth of an inch to frustrated but resigned contents providers (come on guys… we all know it had to end that way). This is just a matter of balance of power. Apple will soon be a $100 bn/year company and the combined revenue of the US publishing industry both for magazine and dailies is less than $60bn.

No kid gloves in Apple’s secretive world. Three months ago, without explanation, Apple began withholding approval of new apps using the subscription loophole. Wondering publishers were left without answers.

Then came terse emails recalling the §11.1 of the App Store Review Guidelines :

11.2     Apps utilizing a system other than the In App Purchase API (IAP) to purchase content, functionality, or services in an app will be rejected

with the following the punch line :

For existing apps already on the App Store, we are providing a grace period to bring your app into compliance with this guideline. To ensure your app remains on the App Store, please submit an update that uses the In App Purchase API for purchasing content, by June 30, 2011.

Bam! Publishers, consider yourself “served” — as in subpoena, not service…

Needless to say, most media companies went ballistic. On this side of the Atlantic, anti-trust watchdogs have been called in. Last week, the French National Daily Publishers Association (SPQN) — encouraged by the Finance Minister Christine Lagarde(!) — said it will ask the Competition Authority to look into the matter. In Belgium, the Minister of Economy is prompting an inquiry into Apple’s possible breach of the law. The European Commission’s involvement is likely — and should not be overlooked by Apple.

Multiple lawsuits by antitrust bodies or trade associations could be seen as pointless: it will take years — in a market that moves at lightning speed — and it will burn huge sums in attorneys’ fees. On another hand, it could be a way to obtain better conditions in the App Store subscription system: a better rate than the usual 30% and, even more important, access to user data.

Frustrations aside, Apple’s move is not the end of the world. For the App Store, if Cupertino relinquishes control on a minimum of consumer data, the damage is bearable. As for pricing, a well-managed transaction platform with big volumes could cost as low as 15% of revenue, or less. If customers want the comfort and the ease of use of the App Store, fine. It would be foolish to ignore them. Simply, as a rule of good management, a premium platform should be reflected in the retail price: a subscription priced at $99 on the publisher’s platform should be set at $119 on the AppStore — this is similar to the situation where a MacBook is more expensive than a comparable Wintel laptop.

From a broader standpoint, Apple’s move could even result in an opportunity for publishers. Apple’s Apps system is fantastic for software or games, but not necessarily for content applications (see previous Monday Notes on the subject:  iPad publishing: time to switch to v2.0 , Rebooting Web Publishing Design , Key Success Factors for a tablet-only “paper” ). In fact, an HTML5 website, designed for the iPad and the iPhone could be a good solution: it could give access to any kind of store — proprietary or multi-titles such as a kiosk — in which publishers will retain control over every critical dial. For media store development, the technology is on the publisher’s side. Scores of vendors are about to propose one-click payments, from PayPal Mobile Express check-out to… cell phone carriers working on systems where users buy online and are charged on their mobile bill.

In other words, there is life outside Apple.

One of the most interesting questions is Apple’s underlying strategy. In a nutshell, Cupertino is betting on “many small” rather than on “few big ones”. Let me explain. Publishers, such as The New York Times, Condé Nast or Le Monde are good at managing subscribers; they purposely maintain sizable staffs and they want to replicate their know-how online. On the contrary, small publishers can’t come up with the resources required to go after subscribers. The new App Store is designed for them. Suppose a group of 15 good reporters, focusing their work on high value editorial. Monetizing their work is a headache. Now Apple comes and says:

“Guys: our full-feature App Store will take care of all your hassles. For a flat 30% fee of your sales made on iPhone and iPad (and maybe on Macs though the new Mac App Store), we take care of: content delivery, its referencing, the back-office, the payment system, and we wire the money to your bank account every month.  And, Hey!  If by any chance you want to sell ads within your app, we can do that too in return for a 40% fee. All you need to do is to focus of what you are good at –producing a sharp e-publication, whether it is a tech blog, or a nicely designed architecture magazine — and price it wisely (preferably low, forget about the physical newsstand). We take care of the rest. One more thing. Consider what we did with the iPod, the number of iPhone and iPad sold last year [see Jean-Louis' column below],  you get the picture: we are aiming at global domination for content delivery mobile devices.”

Say Apple makes this pitch to a respected blog making a mere ARPU of $2 per visitor and per year from ads. Will it resist?

frederic.filloux@mondaynote.com

Inside Apple’s numbers

On Monday last week we hear Steve Jobs is taking another medical leave of absence and, on Tuesday, we get a look at Apple’s numbers for Q1 2011 (which is actually the last quarter of 2010).

Brian Hall provides this crisp summary:

• Sales: $26.74 billion, up 70.5% year over year
• Profits: $6 billion, up 77.7%
• EPS: $6.43, up 75.2%
• iPhone: 16.24 million units, up 85.8%
• iPad: 7.33 million units, compared with Wall St. consensus of 6.15 million
• Mac: 4.13 million units, up 23%
• iPod: 19.45 million units, down 7.3%
• iPod touch: More than 50% of total iPod sales
• Gross margin: 38.5%, compared with guidance of 36%
• Revenue guidance for Q2: $22 billion
• EPS guidance for Q2: $4.90
• Gross margin guidance: 38.5%
• Apple stores: $12 million average revenue per store, up 69% from Q4
• Cash and marketable securities: $59.7 billion, up from $51 billion in Q4.

MacWorld put together a more detailed but still digestible review that includes a history of quarterly profits since 2007, as well as units and revenue numbers by product line. Very well done.

For the official word from the mother ship, we have Seeking Alpha’s transcript of the earnings call where Tim Cook, Apple’s COO, and Peter Oppenheimer, CFO, read prepared remarks and answer carefully choreographed questions from analysts.

And if you’re ready for some long form reading, we have SEC filings. For the quarter just ended, there’s the Form 10-Q (55 pages). For the entire fiscal year 2010 ending last September, Form 10-K (116 pages…).

You don’t have to read them all–or at all, it’s an acquired taste–but if you decide to indulge, take a moment to feast your legal eyes on the faux handwringing in the Risk Factors section (a.k.a CYA Central). Then head for the good stuff, the Management’s Discussion and Analysis section starting on page 28 in the 10-K, and page 20 in the 10-Q. Company execs use the MD&A to walk us through the key elements of the business.

From that sea of words and numbers, I’ll extract three trains of thoughts.

First, the significance of the iPad business.

14.8M iPads were shipped in just nine months. This in a previously marginalized or verticalized category: Tablets. By comparison, the first iPhone didn’t reach 10M until it was a year old.

Looking at quarterly iPad unit sales:

• 3.3M units for the launch quarter ending in June
• 4.3M for the following three months
• 7.3M units for the period just reported.

At last year’s D9 conference Steve Ballmer dismissed the iPad as “just another PC”. (This is standard Microsoft decorum. In 2007, he scoffed at the iPhone.) Well, then, if the iPad must be counted as a PC, it just captured 7% of the global PC market last quarter.

This explains why Acer and Asus, leading netbook makers, are rushing tablets to the market and why Lenovo, another PC titan, is starting a mobile division. All in all, 80 tablets were announced at CES a few weeks ago. The iPad is about to get some serious competition but, based on the 7.3 million units shipped last quarter, most forecasters feel confident in predicting 30 million iPads or more for the year.

Deloitte, the large accounting and consulting firm, now calls 2011 The Year Of The Tablet. They, and other market research firms, don’t agree with Ballmer. They put the iPad in a new category: Media tablets, and they see Apple’s share as somewhere between 87.5% (where do they find that .5%?) and 90% of the market. (I’m not sure the media tablet moniker will stick. These devices already let you do much more than “consume” media.)

Last quarter’s iPad revenue, $4.6B, is almost as large as the Mac’s $5.4B… and this is after only nine months while the Mac will soon be 27 years old. (For another Monday Note: the Mac business, growing by 22% last year, versus 14% for the entire PC industry, with a closer look at the MacBook Air’s impact, present and future.)

The 10-Q also gives us revenue-per-unit:

• $629 for each iPad
• $649 per iPhone

(Company execs quote ASPs of $600 and $625 in the call transcript but they’re probably excluding ancillary services and accessories.)

The iPad’s lower ASP may seem counterintuitive, but recall the iPad’s introduction last January when the $499 base price took everyone by surprise. Pre-launch speculation pegged it somewhere between $800 and $1,000. It felt like a turning point, it looked like Apple wanted to remove price as an excuse for not buying, that they wanted to occupy as much terrain as quickly as possible. And they did, with a barrage of ads that started soon after the launch and are still going on.

This was followed by two more aggressive price moves, the $99 Apple TV and, more important, the $999 MacBook Air.

Apple’s overall Gross Margin has declined from 39.4% last year to 38.5% last quarter, but that’s better than the 36% level the company had predicted in October. In other words, the more assertive prices seem to have worked: Revenue grew 70% year-to-year without harming profits, which grew by 77%.

(Again, we’ll leave the iPhone’s $649 ASP for another Monday Note, probably around the time of the Mobile World Congress, next month in Barcelona. If we are to believe Apple Insider, Apple has become the world’s largest mobile phone manufacturer — by revenue. As Apple execs “neglected” to brag about beating the incumbent, we’ll wait for Nokia’s quarterly numbers coming out in a few days, January 27th.)

The second point: The Apple Stores.

In FY 2010, revenue across all Apple Stores was $9.8B. This is 15% of Apple’s total sales, with 317 stores open at the end of the reporting period, 44 more than the year before.

But I want to know the revenue per employee. Obligingly, the 10-K mentions 26,500 “full-time equivalent” employees by the end of FY 2010. A simple division yields $370K per employee. There were significantly fewer employees at the beginning of the year so we can safely assume a full-time employee brings in about $400K/year, a ratio that must be the envy of the entire retail industry.

While I’m at it, I also want to get an idea of the Gross Margin for Apple’s retail business. I have a French peasant view of the world: Forget the revenue numbers, its the Gross Margin that really matters, those are the dollars that feed you. We know the operating profit–the 10-K says it was $2.4B, 24%–but what about the Gross Margin?

It’s moderately complicated. If this isn’t your cup of numbers, please skip to the result.

We know Apple’s overall Gross Margin, 39.4% last year; we have numbers for indirect sales and retail, $55.4B and $9.8B respectively. How do we extract retail’s GM? We’re facing one linear equation with two unknowns: the GM for indirect (non-retail) sales and the GM for retail sales. Weighted by their respective sales volumes, they compound to the known 39.4% total Gross Margin number.

I use a simple trick: I assume two components for the retail GM. First I apply a “standard” retail discount. For this exercise, I use 30%. Once I’ve done that, the discounted number becomes of the same nature as indirect sales. The second margin component of the retail GM is therefore equal to the (unknown) indirect GM.
Having “fixed” one variable, the retail discount, we now have one linear equation with one unknown, the indirect Gross Margin, x:

Retail Sales * (30% + 70% * x) + Indirect Sales * x = Total Sales * 39.4%

or, with actual sales numbers, in billions:

9.8 * (30% + 70% * x) + 55.4 * x = 65.2 * 39.4%

Now, copy the line above and paste it into WolframAlpha:

and you’re done:


Isn’t this fun?

The result: 36.5% GM for Apple’s indirect $55.4B sales and, after compounding the assumed 30% retail discount, we arrive at an approximate 56% GM for Apple’s retail stores.
(No warranties expressed or implied.)

Thus, each Apple Store employee can dine on 56% of $400K. That’s $224K. Probably enough to pay salaries, rent and HVAC…and leave change for the shareholders.

That was last year. In the quarter just reported, Apple’s retail business grew 95% year-to-year to $3.9B. Using Apple’s historic seasonality (4xQ1 for the full year; 5xQ4 for the following year) we can project at least $16B for Apple retail in FY 2011.

That’s 16% of the $100B revenue number Apple could approach this year…

Much has been said about the Apple Store as a sterling example of everything that can go right in retail: record sales volume per square foot, traffic numbers, profitability, aesthetics (more at Apple’s architecture firm: Bohlin Cywinski Jackson), and customer service.

Most important, the Apple Store proves Apple’s ability to execute on a global scale.

Which leads me to my last point: The Silence of the Lambs. Wall Street Analysts.

If you go back to the earnings call transcript, there’s a conspicuous absence. There’s no mention of Steve Jobs.

The supposedly aggressive Wall Street analysts didn’t ask a single question about Steve’s medical leave of absence, its nature, duration, Apple’s contingency plans. How come?

The answer in a single word: Access.

A few years ago I asked a journalist friend about a sycophantically fellatious piece that a colleague of his had written for a respected business daily. The writer had followed a key software executive as he toured the company’s R&D offices around the world. In dulcet, reverent tones, the journalist reported how the missus dominicus spread the gospel, blessed projects, and occasionally, but rightfully, disciplined errant local chieftains.

‘How come?’, I asked. ‘This isn’t reporting, this is simply disgorging the party line!’

His response: ‘It’s all about access. This is a huge company that’s an important source of news, great fodder for the paper and its journos. It’s a quid pro quo. In order to get access to the top execs, to get the juicy tidbits, sometimes you have to strap the kneepads on…’

Before its earnings call, a company decides which analysts will be allowed to ask questions. The opportunity comes with an understanding. If you don’t do your part, your conference call line will never open again, you’ll have lost access.

And we can’t blame Apple: All companies do it. At least the ones that bestow enough prestige.

Nonetheless, I don’t buy the criticism of Apple’s decision to keep a tight lid on Jobs’ medical condition. In the first place, no less than ex-SEC commissioner Arthur Levitt believes Apple has met its legal disclosure obligations.

Further, Apple’s behavior is consistent. Critics might find it unpleasant, but they shouldn’t be surprised. Fault-finders would lead a happier and more productive life if they recognized that this is the way it was, is, and always will be.

Speaking of which, of modus operandi, one of Steve’s signal achievements is the management team and culture he’s installed since he took the reins in 1997 and engineered Apple 2.0. The vision, the panache, the demanding aesthetics, the (more than) occasional swish of his rhetoric rapier could obscure the fact that he’s built one of the best–perhaps the best–business machines this industry has ever seen, run by a uniquely competent and cohesive management team.

But yes, there is only one Steve. We all hope to see him soon on stage or driving around Palo Alto. (Don’t ask about the license plate.)

JLG@mondaynote.com

PS: Thanks to John Gruber, I found this advertising executive’s insightful homage to Jobs and Apple, saying things like:

‘Yeah, it’s just some metal, plastic and silicon. And, yes, Apple makes a lot of money. But those two observations miss completely the point of Apple. It’s about inspiration, hope and an embrace of the future and humanity’s place within it.’

The full text is here.

—-

LimpingMe: Apple’s Cloudy Service.

by Jean-Louis Gassée

Friday morning, I stop at Il Fornaio to get my last caffeine fix of the morning. Once arrived at the office across the street, I realize I “lost” my iPad. Not to worry, I’ve done this before. Find My iPhone will tell me where it is. It worked a couple of months ago when I left an earlier 3G iPad at a California Street burger joint. When I came back, 10 mins later, the iPad was gone. I fired up the iPhone app and saw the lost puppy still was in neighborhood. I got in my car as I saw the iPad move South on El Camino Real, ending up around a Hobee’s restaurant. Going there and asking around got me nothing. I remotely locked the iPad, displayed a message asking to call me. No joy. I then wiped it, that is erased its contents from my iPhone. Only a consolation, but an important one.
Still, thanks to the presence of mind of an IT consultant who was asked to unlock an iPad “found in a bus”, I was reunited with my tablet a few weeks later.
Interestingly, Apple recently made Find My iPhone a free service. Before, you had to be a $99/year MobileMe subscriber. This is another confirmation of Apple’s business model focus, anything and everything in the service of the real margins engine: hardware.
Still on the positive side, Back to My Mac, another MobileMe service, was recently and discreetly improved: it now works through (most of) aggressively firewalled corporate networks. This makes Screen Sharing (an Apple VNC implementation) even more useful.

So, MobileMe works, right?

Let’s see, I must have forgotten this iPad on the counter as I picked up my latte. It’ll be just a minute, I’ll log on MobileMe and confirm its location. No such luck, the system doesn’t know me anymore. Breathe three times, slow down, this is just a typo. Nope.
Same on my iPhone. Foraging around, I notice the App Store update tells me something like my password is locked because of a security problem.
Sigh. I go back to my computer and click on the Lost Password link. I land on a page offering to email a link to a password update page to my alternate email address. Done. I answer questions, set up a new password, log out and back in to my Apple ID account. No problem, I’m recognized again.
But back to MobileMe, no joy. I’m still locked out.
Another path to the Apple ID password restoration page, answering more questions. Success. New password. Out and back in. Success.
But no, I’m still locked out of MobileMe and can’t locate my iPad.
I still get MobileMe mail. But not for long. When I try and change the password to the latest one, I’m out. And reverting to the old one doesn’t work either.

One could see this as a banal security incident. Perhaps someone tried to log into my account and tripped the alarm system. I ended up on the phone and on email with a competent and pleasant support person and, around dinner time, I was back in business with a fresh temp password, changed to a new one of mine and a new secret question this morning. What’s to complain about?

Unfortunately, many things.

Let’s start with iDisk. A great idea if you want to share and synchronize files between machines. In practice, things can turn mystifying as some but not all files stubbornly refuse to synch between computers. I went to Apple’s support pages on the matter for guidance and to related discussion forums for empathy and reassurance about my mental state. Those dives weren’t entirely comforting. I tried progressively aggressive remedies and ended up having to nuke the entire set up — after careful backups — and rebuild the connections. Today, things work nicely, but I no longer try to sync “the most recent version” of a file, the burns still hurt. I just store and retrieve as I move from one machine to another as I write pieces like this one.
Unnamed Apple friends roll their eyes and tell me to go Dropbox myself. Not the Drop Box in my Public folder but the very successful backup and syncing service. The company is well-financed, supported by noted philanthropists such as Accel and Sequoia.
Still on Cloud services, we have iWork.com, not to be confused with the iWork suite for Macs and iPads. Not even a hobby. Contrary to the likes of Google Docs, Office Live and other Zohos, iWork.com won’t let you edit documents online.

MobileMe other offerings involve photo galleries. They work nicely but expensively. For $200/year one gets MobileMe and 60Gb of storage. For $100/year, Google will get you 400Gb and the free Picasa/PicasaWeb combo, which also works nicely. Actually nicer as it accepts bigger uploads than MobileMe.
For Web sites, MobileMe can be combined with the free iWeb desktop application, they work really well. But iWeb was left behind in the latest iLife iteration, no update. And, contrary to Google, MobileMe won’t host your domain name.

iTunes is a terrific product. Without iTunes there would be no iPhone, no App Store, no Ratatouille on my iPhone. And yet, it gives us a glimpse of how disjointed Apple’s Cloud services are. From time to time, for no stated reason, I’m asked to reenter the security code on my credit card. A security precaution or a bug? Amazon asks once and my credentials are valid in the US as well as on Amazon.fr, for example.
Not with MobileMe. This morning, after a full update of my Apple ID account, including the credit card security code, I’m asked again for it on iTunes when I re-synced my Apple TV which started by declaring my Mac wasn’t authorized. This got me a “This Mac is already authorized” message when I asked iTunes for the connection. Same trouble on my iPad when I updated an application. The new and improved password was accepted, but I had to state credit card security number again, for a free update, mind you.

Continuing to iCal. In the Mac, there is a Preference panel for MobileMe. You state your Apple ID, a mac.com or me.com adress and your password. (It used to be you didn’t need the suffix, just the first part, luser rather than luser@me.com, but that was too simple, let’s leave it to Google to accept spj for spj@gmail.com.) OK, you might think you’re done, you’re authorized. But no, if you have a MobileMe account in iCal, it doesn’t work. Hello iCal account, it’s me@me.com again and my password is moimême.

In the process of working with the Apple support person, I got another peek at how disjointed things appear to be in MobileMe. This individual explained that the new password validation process didn’t do anything. Yes my Apple ID account appear to work with the new password but, for unexplained reasons, the update didn’t propagate. I got a couple of emails to verify my information and was (no longer) surprised to see that the screen snapshot the support tech emailed me had obsolete information. I also fell into a Secret Question trap: Yes, you can design the question and the answer. But better make sure you remember everything down to the last detail. In particular, the answer recognition is case-sensitive: “boarding school” will get you locked out if the correct answer is “Boarding school”. Making progress in the obstacle course, I now have a simpler one word answer with an unforgettable capitalization.

MobileMe was launched in 2008, with a little bit of grandiosity: the new service was offered as Exchange For The Rest Of Us. That proclamation was quickly withdrawn. In August 2008, I wrote a less than laudatory Monday Note piece on the new service’s difficult beginnings. Sacrebleu! I shouldn’t have done that, such an infraction got me a robust personal attack from a Guardian of the Apple Faith who frequently posts on one of the dedicated Apple blogs. The individual, who otherwise produces very good, thoroughly researched pieces, applied his skills to a long litany of my misdeeds. That was good for my soul but didn’t do anything for the disquisition. So it goes: slam the man if you can’t take the argument apart.
In this vein, as an experiment, David Pogue, the NY Times tech expert, once wrote a two-part review of an Apple product, one laudatory, the other critical. You can guess what happened: rabid Apple fans latched on the negative half and labeled him anti-Apple; others, who object to Apple’s products or ways, focused on the positive half and accused him of having sold his soul to Apple. (See David’s piece here. A little tip of the hat to the NYT geeks, and to their bosses who didn’t get in the way: when you hit the Shift key twice on a NYT page, you see paragraph signs, like this ¶. A right click will get you the URL to that paragraph, as the relevant one on Pogue’s piece. Neat. Well… It doesn’t always work.)
Back to the MobileMe early days, Steve Jobs apologized to MobileMe users a bit later and extended their subscriptions.

Two and half years later, things are better, but MobileMe still looks disjointed, half-hearted, not very competitive. And certainly devoid of the flair and finish of most other Apple offerings.
When Steve returned to Apple, the difference between Mac 1.0 and Mac 2.0 was the team of computer scientists Jobs brought with him from Carnegie Mellon, Xerox Parc and Inria. They successfully remade the Mac OS into a modern operating system. Today, much engineering effort seems to go into securing the lead Apple got with iOS. Think hardware margins.
It would be a shame for Apple to leave its Cloud flank unguarded by not enforcing the high standards of OS X and iOS in its Cloud services.
Steve secured Apple’s independence from carriers for iTunes, the App Store and installed apps on its devices. A similar independence or preeminence in Cloud services is equally strategic.
Put another way, it’s a great opportunity.

We’ll review Google’s array, or disarray, of such products in a future Monday Note once the dust from this past week’s three announcements (books, Chrom Web Apps and Chrome OS) settles.

JLG@mondaynote.com