★ The Phone Company
For a long time — the entire decade of the ’90s and the first few years of this decade — the story of Apple was the story of a company searching for a way to be something other than “the Mac company”. From a financial perspective of revenue and profit, the Mac was Apple, and Apple was the Mac. This was problematic on two fronts. First, it was an “all of their eggs in one basket” scenario. If the Mac had sunk, the company would have gone under. Second,...
-
★ Oh Joe You Didn’t
Joe Wilcox published a piece Friday titled “Apple was NOT more profitable selling cell phones than Nokia in Q3” (caps emphasis his). It’s in reference to the widely-cited (and linked from DF here) report last week by Strategy Analytics which concluded that Apple generated more profits than Nokia from mobile phone handset sales last quarter. Wilcox was skeptical — nothing wrong with that — and conducted his own investigation into the numbers: Well, hell, that sounds reasonable enough, right? Wrong. Apple and Nokia SEC filings tell a different story. Both companies announced third calendar quarter results a few days apart in mid October. For devices and services, Nokia reported profits of €785 million, which is about US $1.1 billion. Apple reported total profits — that is for all products — of $1.67 billion in its earnings press release, and later the 10-K filing. I searched the 10-K, and, as I expected, Apple doesn’t breakout iPhone profits. But it doesn’t have to for purposes of this discussion. I don’t doubt that Apple is more profitable per handset, since iPhone is a smartphone, than Nokia. But the numbers don’t add up to Apple’s overall handset profitability exceeding Nokia’s during third quarter, unless someone is making the bold assumption that all, or nearly all, Apple profits came from iPhone. They surely do not. What? Apple made only $700,000 on iPod, Macintosh, retail and software — $1.6 billion — on iPhone. No way. The disturbing lack of fact checking seems to be a trend when it comes to Apple these days. This is disturbing. Either Joe Wilcox has uncovered a massive, widely-reported error, or, he has made a fool out of himself. What Wilcox is arguing is that Apple only reported $1.67 billion in total profit for the quarter, so how could they possibly have made $1.6 billion from the iPhone alone? But that’s not what Apple reported at all. Perhaps if Wilcox had actually read more than just the first paragraph of Apple’s press release announcing the company’s earnings, he’d understand. Apple’s announcement stated: Apple today announced financial results for its fiscal 2009 fourth quarter ended September 26, 2009. The Company posted revenue of $9.87 billion and a net quarterly profit of $1.67 billion, or $1.82 per diluted share. These results compare to revenue of $7.9 billion and net quarterly profit of $1.14 billion, or $1.26 per diluted share, in the year-ago quarter. Gross margin was 36.6 percent, up from 34.7 percent in the year-ago quarter. International sales accounted for 46 percent of the quarter’s revenue. In accordance with the subscription accounting treatment required by GAAP, the Company recognizes revenue and cost of goods sold for iPhone and Apple TV over their estimated economic lives. Adjusting GAAP sales and product costs to eliminate the impact of subscription accounting, the corresponding non-GAAP measures for the quarter are $12.25 billion of “Adjusted Sales” and $2.85 billion of “Adjusted Net Income.” As everyone who follows Apple should be aware, Apple is accounting for iPhone sales over eight quarters. This practice is unusual, but it’s not complicated. This is how they’re able to give software updates to iPhone owners free of charge, and, conversely, because iPod sales are not accounted for on a subscription basis, why iPod Touch users must pay for the same updates. When Apple sold an iPhone last quarter it only accounted for one-eighth of the revenue and profits for that quarter. The remaining seven-eigths will be accounted for over the next seven quarters. Subscription-based accounting does not mean that Apple doesn’t pocket the cash from iPhones all at once. They do — at least since June 2008 when they switched to the model of being paid an up-front subsidy from the carriers, rather than the per-month revenue-sharing model they used with AT&T for the first year. It’s all just a matter of accounting. What Apple calls “non-GAAP measures” are its way of saying “this is how much money we actually made this quarter”. The “adjusted net income” of $2.85 billion is effectively what Apple would have reported as profit for the quarter if they weren’t using subscription based accounting for the iPhone and Apple TV. This is how Apple’s cash on hand has grown by $21 billion in the last three years, from $14.5B on 30 September 2006 to $36.2B on 26 September 2009. (Click “Balance Sheet” and “Annual Data”.)1 It is true that Apple does not specifically break out the revenue or profits from iPhone sales. But unless you think Apple is selling a lot more Apple TVs than most of us do, it’s pretty safe to say that the iPhone accounts for nearly all of the difference between Apple’s GAAP and non-GAAP reported profit, which difference came to $1.18 billion for the quarter. That suggests Strategy Analytics’s numbers are in the ballpark. It’s also worth noting that Nokia does not account for its handset sales as Apple does — Nokia accounts for them “normally”, up front, in the quarter in which they were sold. Even if Strategy Analytics’s $1.6 billion figure is a little high, they’d have to be wrong by over $500 million for their overall conclusion (that Apple made more profit than Nokia selling phones) to be wrong. Here’s another back-of-the-envelope calculation. Apple does release the total number of iPhones sold during each quarter. Last quarter it was 7.4 million. So take Strategy Analytics’s estimate of $1.6 billion in profit, divide by 7.4 million iPhones, and you get $216 in profit per iPhone, which, again, sounds like it’s in the ballpark. (Unsubsidized 16 and 32 GB iPhone 3GS models — the most popular iPhones — sell for $599 and $699 respectively, and Apple’s reported gross margin for the quarter was 36.6 percent.) As for Wilcox’s would-be exposé, I’m almost embarrassed to quote his concluding paragraph: As for Apple’s overall phone profits being higher than Nokia’s, don’t believe it. Just because dozens of Websites report something as true doesn’t make it so. Because of the extent of misreporting, I can’t say where the fault lies. The Strategic Analytics report, which again I haven’t seen, might have gone no further than present numbers showing that Apple makes more profit per phone than Nokia. That absolutely makes sense. But to assert that iPhone generated $1.6 billion profit during a quarter when all Apple products generated $1.67 billion is simple stupidity. Simple stupidity indeed. If you subscribe to the Market Share gospel, it’s perhaps very hard to wrap your head around the idea that a company with 2.5 percent unit sale market share generates more profit than a company with 35 percent market share. But the numbers aren’t complicated. The iPhone really is that big a deal. That Wilcox is so utterly befuddled by Apple’s iPhone accounting — convinced that Apple is generating far less cash than they actually are — makes me wonder how many analysts and investors are likewise confused about this. Probably many. So it’s worth noting that a recent accounting rule change may change the way Apple reports these numbers in the near future, such that Apple could report revenue from iPhones the way casual observers expect — in the quarter the sales occurred. Here’s what Henry Blodget wrote about the rule change in September: The new rule will allow Apple to recognize the iPhone hardware revenue and profit at the point of sale, while an estimated value for the software will be recognized over the life of the device. A change in accounting shouldn’t make a difference, but I’m guessing it will. Look for Apple’s stock to jump up if they make this change.↩
-
★ Regarding the Verizon and ‘iPhone Lite’ Rumors
There’s been much speculation this week regarding reports in BusinessWeek and The Wall Street Journal of talks between Apple and Verizon. To wit: that Apple is considering Verizon for a future iPhone and/or its mythical forthcoming tablet. This is not too complicated. Let’s just play “What’s in it for them?” Verizon — Would they want to sell some sort of iPhone model? Yes, of course. The iPhone has undeniably turned into a big deal. Verizon has nothing to do with it, and it is the single best competitive advantage held by AT&T, Verizon’s biggest rival. None of the iPhone rival devices Verizon has offered so far is any good or very popular (cf. the BlackBerry Storm), and the Palm Pre is exclusive to Sprint. AT&T — The iPhone means more to AT&T than any other phone it carries. Most people decide which carrier to buy a phone from, go there, then pick a phone. With the iPhone, people decide they want to buy one, and then they go to AT&T. Some number of iPhone owners switched to AT&T specifically and only because of the iPhone. In fact, there are some who switched to AT&T to get the iPhone despite the fact that, all things considered, they’d prefer to buy a phone from another carrier — often Verizon, which is widely regarded as having the best overall U.S. network coverage. It is very much in AT&T’s interests to keep the iPhone as an exclusive AT&T device for as long as it can. Apple — The iPhone matters to AT&T, but AT&T doesn’t really matter much to Apple. The U.S. is Apple’s (and the iPhone’s) biggest market, but it’s still just one country in a big world. In the just reported quarter, AT&T reported activating 1.6 million iPhones. But Apple reported selling just under 3.8 million total iPhones — so 58 percent were sold outside the U.S. AT&T isn’t Apple’s iPhone partner. They’re just Apple’s iPhone partner in the U.S. I think the U.S. tech press often overlooks this, hence some of knee-jerk skepticism that Apple would even talk to Verizon. Apple wants profit and they want market share. The trick is balancing the two. Surely Apple makes more money per iPhone with an exclusive deal, but they would sell more total devices if iPhones were available on both AT&T and Verizon. Yes, Verizon’s network is CDMA, not GSM, and so it would require Apple to produce different hardware. But there are some number of Verizon customers who won’t switch to AT&T but who would buy an iPhone from Verizon, and my guess is that that number is high enough for Apple to at least consider producing Verizon-compatible hardware. So, even if Apple would prefer to stick with AT&T exclusively, at least for another year, I’d find it surprising if they didn’t at least talk to Verizon just to hear an offer, and perhaps more importantly, to leak the flirtation to the press so as to keep the pressure on AT&T to offer Apple the best possible terms. But as for whether I think an iPhone on Verizon is actually imminent — as in “coming in the next few months” imminent — I doubt it. During Apple’s quarterly finance call last week, analyst Gene Munster asked why Apple has maintained its exclusive agreement with AT&T. COO Tim Cook said: On AT&T, Gene, we view AT&T as a very good partner. We believe that they’re the best wireless provider in the U.S. and we are very happy to be doing business with them. They have done a very good job with iPhone, they’ve put the full force and weight of their company behind it, it’s a major strategic thrust for them and so we’re very happy with the relationship that we have and do not have a plan to change it. And then Cook again, responding to a follow-up question regarding any “technical hurdles”: Well from a technology point of view as you know, Verizon is on CDMA and we’ve shown from the beginning of the iPhone to focus on one phone for the whole of the world and when you do that, you really go down the GSM route, because CDMA doesn’t really have a life to it after a point in time. Steve Jobs, famously, is known for pooh-poohing ideas or features only to turn around months or years later and declare them to be the best ideas or features ever, now that Apple has embraced them. Apple doesn’t announce big changes until it is ready to announce them, direct questions be damned. And so I wouldn’t count on Apple’s “not having a plan to change” the AT&T exclusivity lasting forever.1 But the CDMA comment does not sound like misdirection from a company planning to unveil CDMA phones this summer. That comment was specific, and it wasn’t something along the lines of we’re not going to do CDMA, but rather more along the lines of CDMA is on its way out industry-wide. That’s just not something Cook would say if Apple were planning to announce a CDMA phone in June — and without a CDMA iPhone, there’s no iPhone for Verizon.2 Ask again when Verizon’s next-generation LTE network is running, though. But that’s just the iPhone. If Apple is preparing to soon announce its supposed tablet / mediapad / whatever, and if said tablet / mediapad / whatever is going to support mobile broadband, it could well use EVDO from Verizon without contradicting anything Cook said about CDMA or the iPhone remaining exclusively on AT&T. (Brief Interpolation Regarding the Proper Perspective Regarding Any Rumored New Devices: Keep in mind that these tablet / mediapad / whatever rumors are growing to the point where if the WWDC keynote comes and goes without any mention of this device, the jackass contingent is going to blame Apple for not releasing it rather than blame the rumor reporters for being wrong. BusinessWeek’s report had the most details about purported new devices, but in terms of timing, only said “One of these devices may be introduced as early as this summer.” Point of this interpolation being that if — and this is a very real if — this really is a device Apple is preparing to release, fever-pitched rumors won’t make it appear any sooner than when Apple deems it ready.) Erring on the Side of Increased Market Share It’s my assumption that Apple’s long-term plan for the iPhone platform is patterned after Apple’s long-term plan for the iPod. Apple’s iPod strategy has been phenomenally successful, and there are many obvious parallels. The biggest difference is that the iPhone has succeeded far faster than the iPod did — Apple didn’t release the Windows version of iTunes until two years after the original iPod was released as a Mac-only peripheral. One of the key points in the history of the iPod was the release of the iPod Mini in January 2004. That’s when Apple expanded the iPod from a single product to a family of products, and the Mini proved to be a smash hit. The formula behind the iPod Mini was simple: Apple made a smaller, cheaper device with more or less the same technical specs as the original iPod from October 2001. Apple went on to repeatedly improve upon the iPod in two ways: on the high end by producing new devices with the same shape and price but with new features (additional storage, color screens, larger screens, video, etc.); on the low end by taking the existing features and making them smaller and cheaper. So here’s how I see Apple applying its iPod strategy to the iPhone. At some point the iPhone will expand to two form factors: A high-end iPhone with the same basic size and price as previous iPhones, but with significant new features. Obvious potential new features would be things like more storage space, more RAM, a faster CPU, an improved (and eventually video-capable) camera, 802.11n Wi-Fi, and superior battery technology. A new, lower-priced, smaller, and more adorable iPhone, with more or less the same technical specs as the original iPhone. Given that those specs include the 320  480 display, I wouldn’t expect something tiny, but remember that the original iPod Mini was “just” 35 percent smaller by volume than the then-current full-sized iPod. Shrink the iPhone’s forehead and chin and make it thinner — maybe a lot thinner — is what I’m thinking. Existing iPhone apps would run just fine on the new device, as it’d have similar, if not identical, CPU performance and RAM to previous full-sized iPhones. Such an iPhone sounds much like the “iPhone Lite” that BusinessWeek reported its source saw. The only question is when. Could be this year. Could be next year. But put me on the record for predicting it’ll happen before the end of 2010. The reason why Apple did this with the iPod, and why I’m convinced they’ll do it again with the iPhone, is that when it comes to managing the balance between per-unit profit and overall market share, Apple is determined to err on the side of market share. (Not as much with the Mac, however — the difference being that PCs are now a firmly established market.) Most gadget companies, when they have a smash hit on their hands, try to milk it. A typical company that found itself selling millions of $400 hard-drive-based digital music players would try its best to continue selling the same $400 hard-drive-based digital music players for as long as it could. Apple, despite an overwhelming 70 percent market share, aggressively added features and drove down its own prices, year after year after year. I’ve previously quoted the following passage from Steven Levy’s 2004 Newsweek interview with Steve Jobs, but it’s worth repeating here. The topic was the Mac’s long-stagnant (at the time) market share. If that’s so, then why is the Mac market share, even after Apple’s recent revival, sputtering at a measly 5 percent? Jobs has a theory about that, too. Once a company devises a great product, he says, it has a monopoly in that realm, and concentrates less on innovation than protecting its turf. “The Mac user interface was a 10-year monopoly,” says Jobs. “Who ended up running the company? Sales guys. At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.” In the near term, Apple could fuel explosive iPhone unit sale growth just by reducing the entry price. But at some point, looking a handful of years down the line, expanding the iPhone’s U.S. market share is going to require going beyond AT&T. The only question is when. Worth a footnote: Munster never mentioned Verizon by name. He simply asked about maintaining exclusivity with AT&T. Cook brought up Verizon on his own.↩ The CDMA/GSM schism has blocked Verizon users from even unlocked iPhones. I’ve long wondered how much more prevalent iPhone unlocking would be if Verizon had a GSM network.↩
-
★ Apple Reports First Quarter 2008 Results
Apple’s just-announced Q1 2008 results made for the best quarter in company history: The Company posted revenue of $9.6 billion and net quarterly profit of $1.58 billion, or $1.76 per diluted share. These results compare to revenue of $7.1 billion and net quarterly profit of $1 billion, or $1.14 per diluted share, in the year-ago quarter. […] Apple shipped 2,319,000 Macintosh computers, representing 44 percent unit growth and 47 percent revenue growth over the year-ago quarter. The Company sold 22,121,000 iPods during the quarter, representing five percent unit growth and 17 percent revenue growth over the year-ago quarter. Quarterly iPhone sales were 2,315,000. A few remarks, based on Apple’s new Q1 2008 and year-ago Q1 2007 summary data PDFs: iPod: Unit Sales vs. Revenue Growth Five percent year-over-year unit growth for iPod holiday sales is a clear sign that iPod unit sales growth is no longer explosive; last year’s unit sales number for the holiday quarter (21 million) was 50 percent higher than the previous year’s. Expect to see this number get jumped on, like it was by Dan Frommer at Silicon Alley Insider, who writes, “The iPod, which helped Apple revive its fortunes just five years ago, is on its way out.” But here’s the thing: iPod revenue growth continues to grow at about the same pace. Last year, iPod revenue was up 18 percent over the previous year; this year, it was up 17 percent. (Compare and contrast to Apple’s Mac hardware sales, which are up 44 percent in units and an almost identical 47 percent in revenue.) Think about that: a year ago, iPod unit sales were up 50 percent but revenue was up just 18 percent; this year, unit sales are up just 5 percent but revenue is still up 17 percent. How do you grow revenue faster than unit sales? By selling more iPods at the high-end of the product line. Can you say “iPod Touch”? Look at the numbers and it breaks out like this: last year, Apple booked $163 in revenue (not profit) per iPod sold; this year, the number was $181. The conventional wisdom, for years, has held that the problem Apple faces in the iPod’s market is that even if they manage to hold on to a large market share, the entire market is destined for commodity status — music and video players are going to get cheaper and cheaper every year, Apple is going to face increased competition on price, and the players Apple does sell will have to be cheaper as well. Think about what happened with, say, Sony’s Walkman, which debuted at a high price in the late 70s but within 20 years was selling for $30. What this line of thinking misses is that it’s wrong to think of the iPod simply as a digital Walkman. Better to think of the iPod as, say, “the best pocket-sized anti-boredom device Apple can make”. In 2001, that device was a simple hard-drive based 5 GB MP3 player. Today, it’s the iPhone and iPod Touch. The OS Without a Name Speaking of the iPhone, Apple sold almost exactly the same number of iPhones as Macs: 2,315,000 vs. 2,319,000. That’s impressive in and of itself. For comparison, Apple sold 1,119,000 iPhone during the preceding (debut) quarter. The price drop and expanding into non-U.S. markets certainly helped drive that growth, but it’s worth noting that many iPhone doubters dismissed the initial demand as nothing more than proof that Apple could sell iPhones to fanatics willing to wait in line on the opening day. I don’t see how anyone could doubt that the iPhone is a smash hit at this point. But here’s the other thing: Apple’s completely separate accounting for the iPhone and iPod Touch is merely an accounting distinction. In practical terms, they constitute a single software platform, that of the touch-screen based “OS X” that doesn’t really have a name. Apple doesn’t break down iPod sales by model, so we don’t know how many iPod Touches Apple has sold. But, presumably, that number is quite a bit larger than 4,000, and so thus, even in a quarter with 44 percent higher year-over-year Mac unit sales, Apple sold more “iOS X” (if you will) devices than Macs. The market for third-party software for the iPhone and iPod Touch is already big, and I expect that by this time two years from now, there will be more iPhones/iPod Touches in use than Macs. (Imagine the unit sale numbers for a $199 iPhone two years from now.) And one big difference, from Apple’s financial perspective, between the Mac and upcoming iPhone/iPod Touch software markets is that Apple will get some sort of cut from every app sold — assuming it works the way I expect it to, where approved third-party apps will be sold through the iTunes Store. This is a potential gold rush for indie Mac developers. iTunes Store Growth The other number from Apple’s data summary which indicates that Apple’s music-and-video business is thriving is the revenue growth for “Other Music Related Products and Services”, which is up 27 percent year-over-year. Apple says this category consists of “iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.” 27 percent growth sounds pretty damn solid for the four-year-old market-leading music store. I’m happy as hell to see the Mac numbers growing, but the plain truth is that the Mac clearly has a ton of room to grow — the iTunes Store’s 27 percent revenue growth strikes me as at least as impressive as the Mac’s 47 percent.
-
★ Microsoft’s Long, Slow Decline
There were two interesting Windows-related news stories last week. First, Joe Wilcox’s story on a report from NPD claiming that 91 percent of $1,000-and-higher retail computer sales now go to Apple. Second, Microsoft’s quarterly financial results, in which revenue fell $1 billion short of projections and declined 17 percent year-over-year. To be clear, Microsoft remains a very profitable company. However, they have never before reported year-over-year declines like this, nor fallen so short of projected earnings. Something is awry. What is particularly alarming about Microsoft’s numbers is that revenue from its Windows PC division suffered an even greater year-over-year revenue decline than the company as a whole: 29 percent. One explanation for that is that Windows 7, a major new update, goes on sale in October, and so it’s expected, somehow, that Windows revenue would decline in the months preceding its release. But Microsoft’s operating system business is not new, and it has never been particularly cyclical. Windows revenue, prior to this just-completed quarter, has only ever gone in one direction: up. Windows is at the core of everything Microsoft does that makes money. They sell Windows, then they sell software that runs on Windows. As Windows goes, so goes Microsoft, and right now Windows is heading south. One argument is that the fault lies with the global economy, not Microsoft itself. (This seems to be the argument Microsoft’s executives are making.) But not every tech company is suffering. Google is doing just fine, and Apple reported record non-holiday-quarter numbers for its just-ended quarter. Apple operates in the same economy Microsoft does, and Mac sales are up. And the numbers from the aforementioned report by NPD are simply astounding. It’s worth noting, though, that NPD’s report is specifically about retail computer purchases; Wilcox’s story doesn’t make that clear. But that they don’t represent all computer purchases doesn’t mean they aren’t astounding figures. Things have not always been like this. NPD conducted the same survey at the beginning of 2008, and at that point Apple’s share of the $1,000+ retail computer market was only 66 percent. Repeat: Apple’s share of this segment has grown from 66 to 91 percent in a year and a half. Apple has always only competed in the middle-to-high range of the computer market. But it was never the case, historically, that Apple sold a majority of middle-to-high-end computers. Even given that NPD’s numbers represent only retail sales, is there any reasonable doubt that Apple’s share of the non-retail market for $1,000+ computers is also growing? Apple’s strong growth in this segment is a sign that the market is turning against Windows. If for no other reason than that Apple has never entered the low-cost computer market, it’s always been the case that the most budget-conscious computer buyers were Windows users. But the converse wasn’t true — not all Windows users were cheapies. Today, though, Microsoft is increasingly left only with customers whose priority is price. A Simple Pointed Question During the late-’90s dot-com boom, it was standard operating procedure at many companies for professional web developers and designers to have two computers on their desks: one Windows, one Mac. One for primary development, one for testing in browsers on the “other” OS. (Virtualization wasn’t yet practical.) But which to choose as the primary platform? Many chose one, many chose the other. But it was an interesting test group, because they were exposed to both platforms. These web developers were not like the people who, in a form of tribalism, claim to despise one or other other platform without having actually used it. Web developers had to know both the Mac and Windows, at least with passing familiarity, and the truth is that many, if not most, preferred Windows. Today that is simply no longer the case. Microsoft has lost all but a sliver of this entire market. People who love computers overwhelming prefer to use a Mac today. Microsoft’s core problem is that they have lost the hearts of computer enthusiasts. Regular people don’t think about their choice of computer platform in detail and with passion like nerds do because, duh, they are not nerds. But nerds are leading indicators. This is true in many markets with broad appeal, not just computers. Microsoft is looking ever more so like the digital equivalent of General Motors. Car enthusiasts lost interest in GM’s cars long before regular people did; the same is happening with Windows. Or consider cameras. Companies like Canon and Nikon make most of their money from consumer-level point-and-shoot cameras. But they are intensely competitive at the high end of the market, too. Enthusiasts are valuable customers not just because they themselves buy expensive products, but because they, as enthusiasts, tend to recommend products in their area of expertise to others. The photo nerd who’s delighted with their $2,500 Canon SLR is likely to recommend a lot of $250 Canon point-and-shoots to friends and family. Vista was a disaster for Microsoft. Windows 7 is, supposedly, the light at the end of the tunnel. But the best consensus about Windows 7 is only that it’s not going to be a complete and total clusterfuck like Vista. That it’s something XP users will actually want to upgrade to. Something that, when it comes pre-installed on a new machine, will not prompt questions about how to downgrade to XP. But no one seems to be arguing that Windows 7 is something that will tempt Mac users to switch, or to tempt even recent Mac converts to switch back. It doesn’t even seem to be in the realm of debate. But if Windows 7 is actually any good, why wouldn’t it tempt at least some segment of Mac users to switch? Windows 95, 98, and XP did. Microsoft seems to have conceded that the enthusiasts who’ve switched to the Mac in recent years are gone for good. Their apparent goal for Windows 7 was merely to make something better than Windows Vista. If Microsoft were a healthy, functional, competitive company willing and able to honestly assess its own shortcomings — like the Microsoft of the ’90s that conquered the entire industry — their goal would have been to make something not just better than Vista, but better than anything else on the market, including Mac OS X. Some Joke The evidence is staring Microsoft’s leadership in the face that they have lost the most lucrative segment of the market, but, judged by their actions and public remarks, they seem to think it’s all a big joke. They should be sweating this but they’re laughing it off. Two weeks ago Microsoft held its annual Worldwide Partners Conference. There was a much-reported bit from the remarks of Kevin Turner, a former Wal-Mart executive who is now Microsoft’s COO. What caught people’s attention were Turner’s comments regarding having gotten a phone call from a lawyer at Apple regarding Microsoft’s “Laptop Hunter” ads. From Microsoft’s transcript: And so we’ve been running these PC value ads. Just giving people saying, hey, what are you looking to spend? “Oh, I’m looking to spend less than $1,000.” Well we’ll give you $1,000. Go in and look and see what you can buy. And they come out and they just show them. Those are completely unscripted commercials. And you know why I know they’re working? Because two weeks ago we got a call from the Apple legal department saying, hey — this is a true story — saying, “Hey, you need to stop running those ads, we lowered our prices.” They took like $100 off or something. It was the greatest single phone call in the history that I’ve ever taken in business. (Applause.) I did cartwheels down the hallway. At first I said, “Is this a joke? Who are you?” Not understanding what an opportunity. And so we’re just going to keep running them and running them and running them. That’s interesting insofar as it proves that Apple has an eye on Microsoft’s ads. But I’ve always imagined that this is pretty much what corporate attorneys do all the time when a competitor runs an ad that claims things which are not true. This is why you don’t often see direct price comparisons in TV commercials — prices change. And, in fact, a week later, Microsoft changed the ads to remove specific mentions of Mac prices. That silly lawyer. But the really interesting part of Turner’s remarks from the conference is what he said immediately preceding the above, when he first broached the topic of Apple: Now let’s talk about Apple. What are you going to do about those Apple ads? That was a year ago. Gosh, when I went home for the holidays, brothers, sisters, cousins — hey, hope you don’t have anything to do with marketing over there at Microsoft. What are you guys going to do about those Apple ads? Stay tuned, stay tuned, stay tuned. Wow. Did we punch right back? The PC Hunter ads, the PC Rookie ads clearly have been winners in the marketplace. Such winners in the marketplace that Apple’s laptop sales went up last quarter, and the rest of the industry’s declined. (Perhaps Microsoft would do better to measure the efficacy of their ads by their effect on sales, rather than by the number of phone calls they prompt from Apple lawyers.) Then comes the real insight into Microsoft’s thinking: I pulled this out of my Sunday newspaper. I have an old habit because I came from retail looking at the Sunday tabs and circulars that are in newspapers. This is straight out of my paper last Sunday. This is a comparison out of a leading electronics retailer that you can get a 13.3-inch Macbook for US$1199 from that retailer. Guess what. That same retailer, you can get the same PC with more RAM, a bigger hard drive, and almost a three-inch bigger screen for US$649. What an incredible opportunity. And so Microsoft’s official stance regarding Apple’s growing domination of the $1,000+ market is that Apple is charging hundreds of extra dollars in pure margin — $500 in the case Turner cited in his prepared remarks. The computers that Microsoft chooses to brag about on stage at a major conference are the $650 17-inch laptops advertised in Best Buy Sunday circulars. There’s no question that retailers sell tens of millions of cheap Windows laptops every year. But no one with a pair of eyes thinks such machines are of comparable quality to Apple MacBooks. Even without turning the machines on, anyone can see the difference in design and build quality. In fact, you don’t even need eyes — just pick them up and see which one squeaks. Apple is selling more MacBooks every quarter. Microsoft thinks it is sitting pretty because Best Buy has a 17-inch Dell for $650. Turner is not alone. Back in April, when the new PC Hunter ad campaign started, David Webster, general manager for brand marketing at Microsoft, said the following in an interview with Newsweek’s Dan Lyons: He says the idea was to turn Apple’s “I’m a Mac” campaign to Microsoft’s advantage. “We associate real people with being PCs, [but then Apple] ends up looking pretty mean-spirited, the way they go after customers,” he says. “It’s clear that’s who they are insulting.” At the same time he can’t resist taking a crack at the preciousness of some Mac users. “Not everyone wants a machine that’s been washed with unicorn tears,” he says. Quoting the above, I wrote: It seems clear that Microsoft’s stance on the Mac’s sales growth is that there’s nothing wrong with Windows or right with the Mac, but rather that there’s something wrong with Mac users. Microsoft is no longer ignoring Apple’s market share gains and successful “Get a Mac” ad campaign. But the crux of these ads from Apple is that Macs are better; Microsoft’s response is a message that everyone already knows — that Windows PCs are cheaper. Their marketing and retail executives publicly espouse the opinion that, now that everyone sees Apple computers as cool, Microsoft has Apple right where they want them. They’re a software company whose primary platform no longer appeals to people who like computers the most. Their executives are either in denial of, or do not perceive, that there has emerged a consensus — not just among nerds but among a growing number of regular just-plain users — that Windows PCs are second-rate. They still dominate in terms of unit-sale market share, yes, but not because people don’t recognize Windows as second-rate, but because they don’t care, in the same way millions of people buy metric tons of second-rate products from Wal-Mart every hour of every day. That’s the business Wal-Mart wants to be in — selling a zillion cheap low-margin items and turning a profit on volume. That’s not the business Microsoft is in. And in mobile software, the fastest-growing segment of the computer industry, Microsoft’s platform is both inferior and unpopular. Their plan to address this is to change its name. I’m not arguing that Microsoft will collapse. They’re too big, too established for that to happen. I simply think that their results this quarter were not an aberration, but rather the first fiscal evidence of a long, slow decline that began several years ago.
-
Why Dan Frommer and Scott Moritz Are Wrong on iPhone Sales
Daniel Eran DilgerSilicon Alley Insider's Dan Frommer says Apple's announcement of reaching its million mark goal in iPhone sales three weeks early is actually bad news for Apple and is convolutedly "below plan." He also says the announcement only props up the speculative conjecture by Scott Moritz of the Street that Apple's iPhones sales are somehow woefully below expectations. They're wrong, here's why.The PremiseFrommer wrote that Apple isn't selling iPhones as fast as planned and is set to only sell around half of its 2008 goal.His premise revolves around the idea that if Apple were selling iPhones at "a constant rate," a million phones in 74 days would be five million per year. However, because it sold over a quarter of those in the opening day and a half at the end of June, Frommer calculates that sales of the remainder in the 72 days since the first of July mean that Apple is only hitting a "3.6 million annual run rate."By the end of 2008, that would only result in 5.8 million units instead of the ten million goal Apple. [Silicon Alley Insider: Apple's iPhone: 1 Million Is Below Plan]Strike One: The Run Rate Myth.The most obvious problem with that idea is the fact that devices don't sell at a constant “run rate." Apple's iPhone sales took off at launch much faster than the original iPod due to the fact that a swell of early adopters were ready to buy it after being convinced over six months of anticipation. At the same time, many potential buyers held off on plans to buy the iPhone until they could read reviews and get a real sense of how it worked. Many were also locked into contracts with Verizon or Sprint. With only six months of advanced notice, it will still be a few more months before the majority of buyers who want an iPhone even get the chance to buy one without having to pay outrageous fees to cancel their existing mobile contract. iPhone sales are also now taking on the network effect of the iPod, as early adopters show their friends. All these factors have difficult to estimate impacts upon sales that make trying to figure a static “run rate? a very simplistic and pointless exercise.However, there is another factor that simply blows the entire idea of a static “run rate? out of the water. Last November, I predicted that sales of the Zune would bomb that winter because Microsoft had failed to critically examine Apple's historical sales patterns. Sure enough, the Zune was thrown against the rocks by Apple's riptide. Frommer's idea ignores that same reality by imagining that iPhone sales will schlep along at a linear pace. Had Frommer tried to calculate an "annual run rate" for the iPod based on a portion of third quarter sales at any point over the last half decade, he would never have been close to accurate. That’s because Apple’s iPod sales roughly triple every winter quarter.In 2002, it sold nearly as many iPods in its winter quarter as it did the first three quarters combined: 219,000In 2003, it actually sold more iPods in its winter quarter than in the first three combined: 733,000In 2004, it again sold more iPods in its winter quarter than in the first three: 4,580,000In 2005, it sold more than 4 million units every quarter, but still sold nearly three times as many in the winter: 14,480,000.In 2006, it sold more than 8 million units every quarter, and then sold over 21 million in the winter quarter.In 2007, it has maintained quarterly sales between 10.5 and 9.8 million per quarter.[Strike 3: Why Zune will Bomb this Winter]Strike Two: The Have it Both Ways Myth.One particularly annoying bit of analysts' talk about Apple's expectations is that they can't seem to decide if Apple's projections are bad because they are conservative lowballs, or if they are bad for being overly enthusiastic figures the company won't be able to reach. They often try to describe them as both, loading contempt on both sides of the scale. This makes them look very foolish. Do they think we have no memory, or are they just changing their stories back and forth in sheer desperation?Frommer tried to argue both sides at once in the same article. Recall that Apple only ever gave two iPhone sales goals: one million by the end of the first quarter of sales, and ten million by the end of 2008. In his piece, Frommer suggests Apple will only be able to sell 5.8 million iPhones by the end of 2008, based on that fallacious "run rate." That would be just over half of Apple's ten million goal. However, he then says that Apple's immediate short term goal was an unimpressive low ball, no doubt because Apple reached it three weeks early.Apple's stated goals must be a greatly frustrating logical conundrum for Frommer, because even at a “run rate" of one million in a quarter, Apple could only ever hope to sell six million iPhones by the end of 2008, another five quarters later. No wonder he's faced with trying to say that the immediate goal was too low and the longer term one is too high! Frommer needs to stop trying to pound round facts into square holes just so they can be stacked up like bricks the way he would like them to be.Strike Three: The Market Bearing Price Myth.While Frommer and Moritz are enamored with the idea that iPhone prices could only be cut if sales were in crisis, a variety of obvious market realities don't support that simpleton idea. Between now and the end of 2008, Apple has just two holiday seasons. If it wants to dramatically exploit its historical potential for selling roughly three times as many gadgets during the winter season, it makes sense to trade off unit pricing for volume sales, even if it could perhaps sell fewer at a higher price and make more short term profits doing so.Such a strategy isn't unique. Microsoft and Sony currently lose money on their new game consoles in desperate bids to establish their gaming and HD video playing platforms. Even so, this year they both cut prices again to accelerate volume demand. Nintendo purposely aimed low to capture volume sales using a more attractive price point. Given high demand for the Wii and extremely constrained availability, Nintendo "should" seemingly raise its console price and profiteer. It hasn't. While prices are clearly linked to demand, it is a common fallacy to think that the "right price" is always the highest the market will bear. Jobs' 99 cent pricing in the iTunes store is clearly not the top price consumers will pay for downloads. Music labels are fuming that other licensees such as Verizon will collect $2.50 or more for portions of a song sold as a ringtone. Jobs wants media prices low to induce volume sales and attract buyers to the legitimate market for music and movie downloads. Labels and studios want "market pricing," in part so they can jack up the price of popular music to exploit consumers, and in part so they can exploit artists by threatening to release their work at lower tiered prices and signal to the market that their careers are over.[Universal vs Apple in the iTunes Store Contracts][Nintendo Wii vs Microsoft Xbox 360 and Sony PS3]This All Happened Before.Dial back the clock twenty years, and you'll discover that Steve Jobs also fought with Apple CEO John Sculley over the price of the original Macintosh. The desire to use an expensive but pioneering amount of RAM and a futuristic new processor had inflated the price of the Mac, but the design team was still able to deliver it at a fairly attractive price point of $1,995. Scully determined that the Mac would still sell at $2495, delivering high profits to fund splashy advertising. Nothing on the market was really similar to the Mac apart from Apple's $9,995 Lisa. VisiOn for the PC similarly cost nearly $10,000 and did far less. Sculley thought that the market would bear anything Apple might charge. Andy Hertzfeld recalled on Folklore.org that in October 1983, "Steve Jobs strode into the software area one evening, looking angry. 'You're not going to like this,' he told us, 'but Sculley is insisting that we charge $2495 for the Mac instead of $1995, and use the extra money for a bigger marketing budget. He figures that the early adopters will buy it no matter what the price. He also wants more of a cushion to protect Apple II sales. But don't worry, I'm not going to let him get away with it!'"Jobs fought Sculley over the price increase, but Sculley prevailed. Sure enough, Macs did sell well out of the gate to early adopters at the higher price, but sales then began to stall. While Jobs couldn't cut the price for the original Mac to induce wider adoption in the mid 80s, he could choose to cut the price of the iPhone early and use interest in the iPod Touch to ramp users toward the iPhone. That price cut will dramatically boost sales this winter, just as iPod price cuts and feature refreshes do every year.Apple will earn less profit on individual hardware sales of the iPhone, and may even earn slightly less money overall this quarter than it might have selling the iPhone at $599. However, a $399 iPhone will dramatically boost the company's sustainable subscriber revenues and devastatingly cut into stationary rivals like Palm and the Windows Mobile licensees, giving them little opportunity retool and strike back with copycat products. [Price Fight - Folklore.org][Office Wars 3 - How Microsoft Got Its Office Monopoly]Strike Four: The Myth of Unlimited Availability.Another problem with idea that iPhone sales were in crisis--and that a price cut is a conspiracy to hide the truth--is that Apple sold out of iPhones in many of its retail stores throughout the first three weeks on sale.Carl Howe of Blackfriar's Communications tracked iPhone availability every day through July, and then animated the results in a movie that depicts just how constrained iPhone inventories in Apple's retail stores were. So not only did Apple meet its 94 day goal 20 days early, but it did so despite having no or few iPhones to sell in many of its stores during the first 21 days. Price isn't just related to demand, but also to supply.That also demonstrates the fallacy of Scott Moritz' assertion that Apple secretly planned to sell a million iPhones in a day and a half, and was sorely disappointed after failing to do so. How could Apple have planned on selling a million units in one day when it didn't even have a million units on the shelves of its stores during the first month? Remember, Moritz wasn't saying Apple had a delivery problem in getting enough units to stores as Nintendo is experiencing with its constrained supplies of the Wii. Instead, he tried to suggest that interest in the iPhone was far below Apple's estimates, and buyers were leaving it on the shelf like Windows Vista. The result, he claimed, was that "rivals were rejoicing."The only real rejoicing by rivals was that Moritz was volunteering to repeat the talking points handed to him by Verizon shill Roger Entner of IAG Research. Just hours before Apple announced it had sold a million units, Moritz tried to get some traction out of the idea that Apple had dropped the price in desperation to find another half million or so customers over the next three weeks. Apple isn't the typical tech company being run by visionless bean counters. It it were, it would have continued selling $600 iPhones at least through the end of September and then announced that it had sold its million. Apple had to push out new iPods in early September and fit the iPhone into the price range because next month it will be rolling out Leopard and a series of new software updates. Apple feeds the press in small, consistent, and regular feedings so reporters know what to write. If Apple were a big stupid company such as, say HP, it would parade out a mix of dozens of consumer and business products all together in one big event, and nobody would ever hear about any of it. HP did.[Why a million iPhones in 74 days is better than you think- Blackfriars][HP's marketing this week: fashionable but ineffective - Blackfriars][Unraveling Anti-Apple Panic: the iPhone Launch Success] [More on Scott Moritz and the Jim Cramer Misinformation Engine]Strike Five: It's Too Late to Deny the iPhone.The most comical part of Frommers’ analysis is that he’s trying to stuff a cat back into a bag and explain that there was never really any cat, long after everyone in the room heard the purr and pet the thing. Sorry, but the windows of opportunity to doubt the iPhone have long since closed.Real Windows Enthusiasts were aware of the need to deny the iPhone well before its release. They all chimed in with reasons why the iPhone wouldn't work, wouldn't offer what consumers want, and wouldn't sell well, all hoping that their non-stop misinformation campaigns would act as a self-fulfilling prophesy. They failed miserably.John Dvorak began his smear campaign immediately, appearing on CNBC to say that the iPhone was "trending against what people are really liking in phones nowadays, which are those little keypads.? He explained, “The BlackJack, the Samsung, the BlackBerry obviously pushes this kind of thing. The Palm, all of these. I guess some of these stocks went down on the Apple announcement, thinking that Apple could do no wrong. But I think Apple can do wrong, and I think this is it." Reader Jim Barrow sent in a link to a MarketWatch article from March, where Dvorak scribed a rambling diatribe entitled "Apple should pull the plug on the iPhone." He offered no factual basis for worrying that the iPhone might not work out apart from the offhanded comment that "there is no likelihood that Apple can be successful in a business this competitive," words which echoed Dvorak's 1984 observation that "the Macintosh uses an experimental pointing device called a 'mouse.' There is no evidence that people want to use these things."In April, Dvorak inflamed his 'pull the plug' rhetoric further in a TWiT podcast, where he reported to an audience of hundreds of thousands that the iPhone only delivered "40 minutes of talk time" and "the interface fouls up constantly.? Dvorak said that his inside information on the iPhone came from a "guy at Cingular who’s testing the product," adding, "he’s telling me confidentially and I shouldn’t be telling anybody."[John Dvorak: How Wrong Can One Guy Be?][Readers Write: Don't Write About John Dvorak Anymore]It'll Be the Death of You.Dvorak was joined by Rob Enderle, who called the iPhone “damned? and “not a very good phone? at every opportunity in the months before its launch, despite not really knowing anything about it, or even ever offering any rational criticism. Instead, Enderle appealed to fantasy fears of sexual assault, murder, and the violent death of children, all of which he suggested might somehow be related to the iPhone. Unaware that a password protected iPhone--or even a unauthorized unit without a configured service plan--can still be used to make emergency phone calls, Enderle wrote about, "an emergency situation where, say, a woman was being raped and couldn’t call for help because she didn’t remember her iPhone password." As I understand, with a Windows Mobile phone, even if the unit crashed while trying to place the call, at least the victim could use it like a brick as a blunt weapon. Enderle also feared that being unable to take out the battery would somehow making recharging it impossible, resulting an a scenario where one might end up on “the wrong side of town? with a dead iPhone and be murdered because of it. Being on the wrong side of town was apparently the source of most murders prior to the arrival of the cell phone, which somehow made it safe to be in bad neighborhoods. For those who unfazed by the prospect of one's own own grizzly death in relation to the iPhone, Enderle appealed to his readers to please think of the children, particularly the potential for their brutal decapitation in an iPhone-related collision. "If you are buying this phone for a child or another member of your family," Enderle warned, "please emphasize that entering data on this phone while driving is dangerous." In contrast, operating the slide out keyboards of an HTC brick phone, or using both hands to thumb type on a BlackBerry may or may not save your children as they drive off an embankment, but at least you'll know they didn't die at the hands of Apple's "damned" iPhone.[SCO, Linux, and Microsoft in the History of OS: 1970s][Mac OS X vs Linux: Third Party Software and Security]Pure Concentrated Evil with a Multitouch Screen.Brian Lam of Gizmodo published an impassioned plea to boycott the iPhone shortly before its launch, due to the fact that Cingular had purchased the AT&T name, a brand Gizmodo's writer correlated with "monopoly tactics" in the late 70s. Gizmodo hasn't ever called for the boycotting of Verizon Wireless, which is well known for its anti-consumer tactics and which shares just as much blood with the old AT&T as its Baby Bell sibling Cingular, nor has it ever urged the boycott Microsoft products due to "monopoly tactics." Gizmodo also failed to boycott any other GSM phones that are tied to AT&T.Gizmodo's Lam and Enderle then teamed up with Slate's David Sessions in an article purporting to expose Apple's rated battery life for the iPhone. Sessions complained about the attention the iPhone was getting, and tried to dismiss Apple's announcement of a two fold increase in battery life over what was originally advertised. Unbelievably, Sessions and friends could only explain away the iPhone's jump in talk time by crediting its glass screen, saying that "glass transmits light more efficiently than plastic." That and some witchcraft.However, all of these individuals sharply reduced their squirt rate of false information after the iPhone's successful launch. In day and a half, Apple sold 270,000 iPhones compared to the 500,000 Palm OS Treos, 1.03 million RIM BlackBerrys, and 1.51 million Windows Mobile phones that were sold worldwide in the first 90 days of 2007.Apple has since nearly matched highflying RIM in sales during July, despite being limited to a single carrier and only offered for sale in the US. At this point, denying the iPhone is like saying the Earth is flat. It might be fun to do at a Renaissance Faire, but pretending to seriously doubt reality is not a good career move unless you work for the Street--or perhaps Rupert Murdoch, as Dvorak does.[Secret iPhone Details Lost in a Sea of Hype and Hate][iPhone Sales vs Zune, Palm, RIM, Symbian, Windows Mobile]And Now: a Warning.Let it be known that anyone who publishes further misinformation or blows out similar inanity will risk being instantly awarded a Zoon on the spot. No complicated voting, no tedious application process. New Zoon nominees will be rubber stamped with the same effortless fast tracking as the ECMA declaring Microsoft technology as an international standard.In fact, I’m going to totally Zoon Dan Frommer and Scott Moritz right now, as well as John Dvorak, Rob Enderle, Brian Lam, David Sessions, and even Roger Entner. And John Sculley. And while I’m handing out an intellectual property construct that costs me nothing to distribute, I will also award Steve Jobs with a Zoon for the whole two month “just kidding? iPhone pricing situation, although I might take half of it back if I get a $100 coupon that doesn’t force me to spend $500 to actually use it. So let that be a warning to you out there on the Tubes thinking about how to linkbait an article at the expense of the progress of technology. I have a rapid firing gun full of Zoons and I’m not shy about cranking them out. Be sure to post any nominees.What do you think? I really like to hear from readers. Comment in the Forum or email me with your ideas. Like reading RoughlyDrafted? Share articles with your friends, link from your blog, and subscribe to my podcast! Submit to Reddit or Slashdot, or consider making a small donation supporting this site. Thanks!
-
Will Google's Android Play DOS to Apple's iPhone?
Daniel Eran Dilger Today's broad array of smartphone operating system contenders are offering lots of potential answers to a problem that only requires one. It appears the market has two options ahead: either pool generic hardware makers behind a single operating system and deliver a smartphone marketplace that resembles the Windows PC market, or watch them fall to a dominant leader and have a smartphone market that resembles Apple's iPod ecosystem. This decision isn't going to be made by a class of intellectual elite, or by government mandate. it's going to be made by the market itself. Here are the factors that will influence the outcome, either marginalizing Apple's iPhone into a niche as the company has twice experienced previously at the hands of DOS in 1981 and Windows in 1991, or positioning it as the dominant leader as Apple has achieved for itself with the iPod since 2001. The third segment in this series looks at Google's Android and the Open Handset Alliance as a possible “DOS-attack” against Apple's iPhone. Subsequent segments will look at Nokia's newly opened Symbian and other mobile contenders challenging the iPhone. Will the iPhone Meet its Match from a Modern Day DOS? Will Windows Mobile Play DOS to Apple’s iPhone? Will Google's Android Play DOS to Apple's iPhone? Will Symbian Play DOS to Apple's iPhone? Google Acquires Android. In 2005, Google purchased a startup named Android, which had been in business for nearly two years. The secretive startup was known only to be working on software for mobile phones. It was being run by a who's who of mobile industry veterans, including Andy Rubin, the founder of Danger. Rubin had earlier worked at WebTV along with Chris White and Andy McFadden, both of whom had also joined Android. Richard Miner of Orange and Nick Sears of Tmobile also brought their mobile provider experience to Android. At the time of the acquisition, Google didn't announce any plans for Android and instead only told BusinessWeek, “We acquired Android because of the talented engineers and great technology. We're thrilled to have them here.” It appeared that Google was only going to be expanding its search services for mobile phone users, along the lines of the Google SMS answer system it had recently released. Google Buys Android for Its Mobile Arsenal - BusinessWeek Windows XP Media Center Edition vs Apple TV: The Fall of WebTV The GPhone Myth. As reports began to leak out about talks between Google and hardware makers throughout 2007, rumors began to fly about “the GPhone,” a competitive offering that was supposed to take on the iPhone. Some phone enthusiasts hoped Google would jump in to rescue the struggling OpenMoko project and turn it into a viable project that could attack Apple's new smartphone. In October 2007, I printed the Great Google GPhone Myth, taking apart the idea that Google would be directly competing against the iPhone, and describing that Google was really working on a free alternative to Windows Mobile as a conduit for getting its search and related services on a broader variety of mobiles. Google's services were already on the iPhone. In November, Google played its hand: it had organized a consortium of companies called the Open Handset Alliance to develop open standards for mobiles. The first product from the group would be Android, a mobile operating system built on the Linux kernel. Google wasn't getting into the phone handset business at all; it was only making sure that its mobile search products would not risk being marginalized by the threat of Windows Mobile on phones in the same way Microsoft had been working to leverage its PC monopoly to push Google search off the Windows desktop. The Great Google gPhone Myth Introducing Android: Leader of Linux. Two weeks later, Google released an early version of the Android software. On top of a Linux kernel, Android uses a specialized version of a Java Virtual Machine that takes Java language code and turns it into what Google calls “Dalvik bytecode” rather than Java bytecode as a standard JVM would. This allows Google to leverage existing and familiar Java language tools without paying Sun for a Java license. Like Mac OS X and its fraternal iPhone OS, Android includes a variety of open source libraries, including SQLite and WebKit. On top of that, Google developed a series of frameworks that handle the tasks Cocoa Touch does on the iPhone. Android also bundles a set of applications. While Apple adapted its existing Mac OS X to work in a mobile environment to create the iPhone OS, Android is more like a customized Java environment running on a specialized mobile Linux variant: elements of maturity in an otherwise experimental new platform. What is Android? -Google Android was by no means the first mobile OS using Linux. Both Palm and its amputated ACCESS software arm have Linux-based mobile platforms. Nokia has Maemo, which it uses in its Internet Tablets, and also recently acquired Trolltech and its Qtopia mobile Linux platform. Motorola has teamed up with MontaVista Software to use its Mobilinux. Intel created the Moblin project for mobile Linux, aimed at Internet devices. Google's OHA also isn't the first consortium to attempt to standardize a mobile Linux platform. The OSDL started the Mobile Linux Initiative to define requirements for hardware; the Consumer Electronics Linux Forum (CELF) then worked to define various phone profiles aimed at the Japanese market; the Linux Phone Standard (LiPS) Forum tried to do the same thing in Europe. In 2007, LiPS was folded into the new LiMo Foundation, along with the OSDL. All of these committees have had some overlap and some complementary features. Several of Google's OHA partners are also LiMo members, including NTT DoCoMo, Wind River, and Motorola. So why didn't Google just join LiMo? “LiMo, very candidly, wasn't moving fast enough,” OHA board member John Bruggeman told CNET. Google hopes to herd the Linux cats into a progressive, structured platform that can battle against Symbian and Windows Mobile to succeed as the new DOS of smartphones. Will Google fracture or unify mobile Linux? The Presumption of the Necessity of DOS. The previous segment examining Windows Mobile pointed out how the PC industry as a whole assumed that Microsoft's desktop Windows monopoly would easily take over dominance in the MP3 player market, pushing Apple into a niche position. This was expected because DOS had pushed Apple's early computers into a reduced role starting in 1981, and Microsoft had repeated this again in 1991 when the DOS world migrated to Windows, effectively pruning Apple's Macintosh into a Bonsai platform. The inability of one company to dominate any product category has been frequently repeated by PC industry pundits as a given, despite the fact that history is full of examples of this happening. Sony dominated personal music players for two decades under the Walkman brand even while equally large competitors tried to push it from this position; Nintendo has similarly owned handheld gaming despite ill-fated efforts to grab a piece of its pie by products running a generic platform such as Microsoft's WinCE (Gizmondo), Linux (GP32), and Symbian (N-Gage). In fact, outside of the Windows/DOS PC, there are actually few examples of a generic platform taking over an industry. Nearly every other consumer-facing product uses proprietary platforms: car makers, stereo equipment, appliances and so on typically all use designs custom to their maker. The paradox of the Windows PC market has been that Microsoft's broadly licensed software supposedly saves hardware makers from investing in software development while ensuring compatibility, when in reality it adds significant costs to PC makers while limiting their ability to differentiate themselves. That explains why PC makers have been perpetually merging together and going out of business while Microosft has rolled in money over the last two decades. Parallel efforts to copy Microsoft in broadly licensing an operating system have regularly failed: IBM's OS/2, Apple's Mac OS, Palm's PDA OS, even Microsoft's own efforts to duplicate Windows dominance in other markets, from copy machines to PDAs to smartphones to SPOT watches to music players. The closest copy may be Symbian, but its customers are partners, not simply consumers of a generic third party's operating system as Windows licensees are. That indicates it is not necessary to duplicate the dominance exercised by Microsoft over the PC industry in the smartphone market. Google's Android and Symbian exist more as technology sharing pacts among manufacturers, but both aspire to take Microsoft's DOS role among smartphones. However, the idea that Apple's iPhone must be dethroned by a modern-day DOS, whether Windows Mobile, Android, or Symbian, is not just debatable, but does not sync with the reality of more recent events. Apple's recent history of the iPod further refutes the idea that a software analog to Microsoft is needed. The iPod Emergence: Apple & Pixo vs IBM & Microsoft. Apple's iPod in 2001 made no effort to clone the DOS business model; it actually did the opposite. When Apple entered the market, there were a number of existing MP3 devices using custom software, hardware designs, and DRM codecs. The iPod used off the shelf components to deliver a custom MP3 player using third party software, but Apple also added its own technologies: easy to use sync with iTunes, a fast Firewire interface that made uploading music far faster than the prevailing USB 1.0, and an attractive industrial design. With the iPod, Apple played the role of IBM in 1981, using Pixo's embedded operating system to enter the market quickly, just as IBM had used DOS. The difference was that Apple didn't direct any market attention toward Pixo and added a lot of value on top of that core embedded OS. A modern day Compaq couldn't simply clone the hardware and license Pixo to run on it in order to compete against the iPod, because the iPod was much more than just generic hardware running Pixo software. As the iPod developed, Pixo's role diminished and was eventually displaced. Just like IBM, Apple jumped into a new market just as demand was beginning to explode. Apple made MP3 players far more attractive to a general audience by delivering greater playback capacity than most entry level devices offered, along with an ease of use that encouraged buyers to jump in at the higher end of the market. That left Apple with not only the lion's share of the market, but also by far the most profitable segments of the market. Two decades prior, IBM badly fumbled its play with the early PC and ended up irrelevant in the PC world by the late 80s, sideswiped by Microsoft's DOS and the cloners who were licensing it in parallel, notably Compaq and later HP and Dell. Steve Jobs had witnessed that happen, and was determined to not let it happen again to Apple. Rather than being manipulated by a software middleware vendor as IBM had, Apple worked to incrementally develop the iPod market itself. After consuming the hard drive-based player market, Apple took on the Flash RAM-based market with a tiny hard drive system used in the iPod Mini, and followed up with Flash-based devices of its own in the Nano and Shuffle. This allowed Apple to progressively serve an increasingly wider market, incrementally growing upon an established foundation. With the iPod, Apple became, in effect, an IBM with its own internal Microsoft. Microsoft's Failure Despite Features. In contrast, Microsoft entered the music player market by promoting music player hardware reference designs around WinCE. However, it was unable to ship a finished design until the iPod had become firmly established around 2005. Later branded as PlaysForSure, the devices were sold by various hardware makers and all purported to support the same DRM and the same music subscription services while also offering a broader array of hardware that presented video before the iPod did, supported wireless before the iPod, and so on. Despite these unique features, all of those PFS designs still failed. Microsoft blamed the failure of PFS upon its music store and hardware partners and decided to take Apple on itself in 2006. It relaunched a Toshiba PFS player as its own device under the Zune brand, adding WiFi music sharing features and a larger display than the current Pods had. It failed dramatically as well. Did Microsoft's attempts to float a new DOS among music players fail because of Apple's success, or due to Microsoft's own problems? The failure of the Zune, which followed the iPod model rather than the DOS model, seems to suggest that Microsoft itself was to blame. Consider too that Microsoft's Windows Mobile phones, which use the same underlying operating system as its failed PlaysForSure music players and the Zune, had similarly flopped even before Apple could release a charismatic phone equivalent to the iPod. Of course, when the iPhone was released, it hit Windows Mobile hardest. The iPhone made Windows Mobile Smartphones look ridiculous and underpowered, and made Windows Mobile Pocket PC phones look clumsy and awkward, despite the fact that they both supported a variety of features the iPhone didn't, including the ability to edit documents, capture video, send MMS, and so on. Simply adding on features did not enable Microsoft to compete against Apple. The only conclusion that can be drawn from all this is that competing against Apple requires more than just having a feature arsenal. Microsoft's failures in themselves do not necessarily mean that Google's Android will fail in its attempts to float its own smartphone platform. Why Microsoft’s Zune is Still Failing Microsoft’s Zune, Vista, and Windows Mobile 7 Strategy vs the iPhone Will Google Succeed where Microsoft Failed? Microsoft's demonstrated inability to successfully enter consumer markets for MP3 players and smartphones has given observers little faith that the company will somehow turn things around in late 2009 when its next generation of devices are expected to be released. However, prior to that the first fruits of Google's efforts to build its own smartphone operating environment will arrive. Will Google's Android take over Microsoft's crown as the “DOS vendor” among smartphones? Supporters of Google's Android project point to some parallels between Android for smartphones and Windows on the PC: Android will allow hardware makers to differentiate in ways that can offer features Apple can't (or doesn't want to); it should allow software developers to offer features Apple does not allow on the iPhone; it embraces open, hobbyist experimentation in ways that Apple currently isn't; and it opens the potential for content providers that Apple is not interested in allowing. Openness is Android's key competitive feature. Will all this openness allow Google to unseat the iPhone to become the primary platform developers want to participate in, and subsequently soak up the market for third party hardware makers that Windows Mobile serves? While Google currently has no market share due to the fact that no Android phones have yet shipped, it does have broad vocal support from a variety of the same kinds of hardware manufacturers that supported DOS and Windows and helped to make those platforms successful in the desktop PC market. HTC and Android. The first Android phone is expected to be the HTC Dream; Taiwan's HTC (High Tech Computer) also manufactures Palm's Treo Pro phone as well as many of the most visible Windows Mobile devices. In addition to models produced under its own name, HTC also sells Windows Mobile devices under the Dopod brand, as well as no-name phones branded by providers, such as AT&T, Orange, Sprint, T-Mobile, Verizon Wireless, Vodafone, and others. HTC will also be building the XPERIA X1 Windows Mobile phone for Sony Ericsson. HTC was quick to throw its support behind Android despite its long term alliance with Windows Mobile. Why would it so enthusiastically support an unproven platform from a company that has no experience in consumer hardware platforms? One can only assume that HTC is not happy with the current state of Windows Mobile, and desperately wants another “DOS” to succeed where Microsoft's has so spectacularly failed. As an Original Design Manufacturer for Palm, HTC watched as Palm adopted Windows Mobile in place of the Palm OS and subsequently fell even deeper into crisis. Palm's only successful phone since has been its Palm OS-based Centro. HTC undoubtedly sees Android as its ticket to becoming the next Dell, but without a similar dependance upon Microsoft. Android for mobile phones is essentially playing the role of Linux for PCs, except that it has the backing of a major company behind it. Can Android Take on the iPhone with Openness as its Feature? As great as this sounds, it's important to consider that Linux on the desktop has made no significant progress in eating into Windows dominance after a decade of trying. Being open, free, flexible, and decentralized hasn't been enough of an advantage to get consumers to migrate from Windows to Linux in any fraction of significance. Similarly, in the music business, Linux-based MP3 players have had no impact on the iPod, despite offering more features, flexibility, support for additional codecs, and so on. In the mobile phone area, Linux enjoys a sizable portion of the smartphone market, but this is almost entirely due to phones sold by Motorola in China, where the advantages of Linux' openness are void. Motorola's Linux phones offer nothing to users in terms of openness or flexibility, and are really no different in terms of features than other appliance 'feature phones' based upon closed operating systems. And again, a key problem with assaulting Apple in a feature war is that neither the iPod nor the iPhone became popular by being “highly featured.” They both delivered perhaps 80% of the functionality found in all other devices in the market. Rather than trying to match every feature and cater to every niche as Microsoft had with Windows Mobile, Apple's devices did a few things very well at launch, and incrementally developed into full featured devices that still lack some of the more unique features of their competitors. Further, in terms of openness, the demographic that embraces Linux' characteristic freedoms is not the same as the demographic that buys smartphones in quantity and then pays for data service. This is a critical fact to consider because a big part of the iPhone's success stems from the fact that it is being pushed by mobile providers who want to capture the cream of the market willing to pay a premium for data services. The Frankenphone. Combining the fractured aesthetic of HTC's Windows Mobile phone hardware with Android's software, based upon Linux' perpetually unfinished DIY openness and Google's Java-like development platform, will not result in a product similar to the iPhone. Instead, it will look a lot like phones that have already failed in the market. Apple's advantage comes from slick hardware designs with a close attention to detail, combined with software that purposely does less so that it can do what it does better. Even Apple's own conservative attempts to broaden its software capabilities with iPhone 2.0 have resulted in instability problems that can be blamed upon both Apple's early releases of its phone operating system and software from inexperienced third party developers new to the platform. Would the current frustrations with iPhone 2.0 be somehow mitigated by additional openness that also embraced all kinds of variables from different hardware makers with less quality control than Apple, a loose committee of additional cooks working to serve up operating system features targeted at every possible conceived need, and a wider third party software group with fewer constraints on illegal behaviors? The Failure of Open. While it is politically unpopular to criticize the well meaning efforts of open source contributors, the failure of Linux on the desktop, the failure of the vaporware Indrema game console, and the failure of the OpenMoko project to deliver a workable phone within a year of its deadline all underline the serious problems open development faces in the world of consumer oriented devices. Open has simply failed to deliver on its promises in the world of consumer hardware. OpenMoko was supposed to release its first mobile phone to consumers for $250 several months in advance of the iPhone. When the iPhone shipped, the group then announced new plans to get its phone out by the end of 2007. Instead, this spring the group announced new plans to move to an entirely different development platform, and ship its phone mid year for $400 with limited functionality and incomplete software outside of basic GSM phone features. Linux's notable successes, from Motorola's Linux phones to the Tivo DVR to Linksys Routers, have often come without any associated openness or freedom, and were instead delivered simply to provide their manufacturer with a free kernel to build upon. This indicates that while Linux may find its way into an increasing number of smartphones, it will likely not be accompanied by the glorious freedom of an open development environment Google has said it would offer with Android. Apple iPhone vs the FIC Neo1973 OpenMoko Linux Smartphone Can Google Succeed Where Open Has Previously Failed? Despite “openness” being Android's strongest competitive feature compared to Apple's iPhone, Google recently revealed that its wide-open development model is intentionally gravitating towards a closed association of top tier partners due to practical considerations. In July, Google accidentally sent out a notice that revealed that it had been seeding private SDK updates to only a subset of its contributors, angering those who believed that Android would be as open as Linux on the desktop or the OpenMoko project. Further, Google has restricted initial development to higher level APIs just as Apple did, further indicating that Google itself realizes that being wildly open to impress a minority of hobbyists will not result in the commercial success of its new platform. That serves to neuter Android's primary advantage over the iPhone. Without delivering on the premise of being wide open, Android is really just a less mature set of Java libraries used to create a specialized binary that runs on a Linux foundation. Unlike Apple's iPhone, Android phones won't have a slick user interface developed by professional artists, nor the iPhone's legacy of mature software development frameworks crafted over the last thirty years, nor the iPhone's tightly integrated hardware with award winning industrial design, nor its marketing power tied into the iPod and Apple's retail stores. Android won't be an open iPhone, it will only be a Windows Mobile phone with a better kernel that runs specialized Java software instead of Win32 or .NET code. Don't expect consumers to be impressed by that. The Biggest Missing Feature. There is one remaining factor that strangles to death any last remaining hope that Android might assassinate the iPhone and assume the crown of the “DOS of smartphones.” That is: Android delivers zero price advantage to consumers. In 1981 and 1991, consumers who wanted Apple computers faced the sticker shock of a somewhat arrogant price tag. Apple sold its computers, as it still does, at the higher end of the market, but there was simply far more range in prices available. In 1981, that meant the Apple II was $2600 and the new Apple III was $3500, even before you added a monitor. On the low end, Commodore sold its far less powerful, but “still a computer” Vic-20 for $300, while IBM entered the market with the IBM PC at $3000. Over the next few years, Apple focused on delivering additional sophistication at the same price, releasing the $10,000 Lisa and then the $2,500 Macintosh. IBM continued selling PCs in the same $3,000 to $10,000 range, but other DOS PC vendors began selling machines at prices that ranged as low as $1500. That left Apple with a roughly $1000 price premium over low end PCs. The products weren't really comparable, but consumers only saw the huge price difference. In 1991, Apple was still selling moderate to high-end Macintoshes for $3,800 to $10,000; the crippled Mac LC was $2500, and obsolete-at-birth Mac Classic ranged from $999 to $1500. Windows allowed PC makers to ship a functional $1500 PC and claim a rough approximation to Apple's $2500 entry level system, maintaining that apparent $1000 price premium. Today, pundits are lucky to find a Dell or HP system that is even a couple hundred dollars less than a comparable Mac. However, in the smartphone business, the iPhone 3G is now the same price, if not less, than generic competing phones on the market. Even more significant is the fact that the price of the phone hardware is nearly nothing compared to the cost of the service plan. This fact simply eases any price premium that could cause buyers to flock to a smartphone running a generic operating system over buying the iPhone 3G, regardless of whether it runs Windows Mobile or Android. 1990-1995: Planting Software Seeds Android Partners Have Already Failed. That same pricing principle similarly prevented buyers from considering many of the alternatives to the iPod. While Apple's original iPod models were more expensive than many of the first MP3 players on the market, they were price competitive with models offering similar features. By 2004, it was Apple who was undercutting MP3 competitors on price. Microsoft offered zero price advantage when it began selling the Zune, a major factor in its failure, but Microsoft simply couldn't out-price the iPod; it was already losing money offering the Zune at the same price as the iPod. Apple now has tremendous market power in buying RAM and other components that will prevent any competitors from being able to offer a huge discount over the iPhone's $199 price tag. Even if competitors were to give their phones away, they would only offer a $200 discount to users who would then still need to pay the same mobile fees to use the phone. Android's other partners, including Samsung and LG, have already failed to capture any significant market share in the music player market. Are they going to maintain their position as smartphone makers now that they face similar competition from Apple, its iPod ecosystem, its iTunes Music and Apps Store, Apple's retail store experience, and other factors that are pushing the iPhone? If they can, it is not obvious how partnering with Android will help. Other Problems for Android. Android was announced in early November 2007 and was followed with an early preview SDK within a couple weeks, a month ahead of Apple's initial announcement of the iPhone 2.0 SDK. However, between March and July 2008, Apple delivered nine progressive releases of its SDK, opened its App Store, and sold 60 million apps, raising $30 million to support iPhone software development in just the first month. It has since released three more SDK updates to developers related to iPhone 2.1, which is expected next month. Android just published its first open SDK beta update earlier this week, warning developers that “applications developed with it may not quite be compatible with devices running the final Android 1.0.” Additionally, Android still has no phones available. By the time the HTC Dream is expected to launch, Apple will have an installed base of around ten million iPhone (and iPod touch) users supporting software development through iTunes. The business model for selling Android apps is no better than that for selling jailbreak iPhone apps: there is no iTunes Apps Store to promote them, so users will have to track them down on their own. Android developers also have no real freedom that jailbreak iPhone developers lack. The only difference is that there are ten million iPhones to sell jailbreak apps to, and currently zero Android phones. If selling a jailbreak iPhone app sounds like more trouble than its worth, imagine trying to sell Android apps to a non-existant audience. Now add the official iPhone App Store into the mix, where publicity, promotion and profits are booming. What platform is going to have the most applications? How many users will flock to a smartphone platform with no apps? The wisdom of releasing a desirable phone and achieving a significant installed base before releasing an SDK makes a lot more sense in retrospect. Additionally, while Apple has a decade of experience in shipping regular updates to Mac OS X and its Xcode developer tools, Google has only shipped a random assortment of web-oriented SDKs (a number of which have been abandoned) as a tangent to its core business of selling advertisements. When the Android SDK 1.0 is finished later this year, developers will not only lack an installed base to sell their apps to, but will also have no high profile market for selling their apps in, and subsequently no financial incentive to develop applications that add value to the Android platform, just like Linux on the PC desktop. Around the same time, possibly within the next month, Apple will be shipping its second major OS release: iPhone 2.1. Apple will also be upgrading its entire user base to the new software so that developers will have a cohesive platform to target. This mirrors the efforts Apple has taken to upgrade its Mac OS X users to the same reference release. Mobile developers will be seeing money pouring in via iTunes while crickets chirp in the Android section of various mobile online stores. Apple’s iPhone Vs. Other Mobile Hardware Makers: 5 Revenue Engines Same Same, But Different: DOS Model Problems. Android developers will also have a series of other problems to manage. Like Windows Mobile, Android is intended to support everything, from BlackBerry-style keypad phones with a small touchscreen to the simple Windows Mobile Smartphone form factor lacking a touch screen to iPhone-like full size touch screens. Also like Windows Mobile, Android phone makers will have the option to leave off Bluetooth, WiFi, GPS location services, graphics hardware acceleration, and so on. Each Android phone will also have unique camera hardware, support for different video and audio codecs, and varied support for other differentiating proprietary services demanded by mobile operators. This will force developers to to make complex decisions regarding the lowest common denominator they choose to support. So while the iPhone will have a cohesive feature set, a managed software environment, and a functional market, Android will be a loose federation of hardware makers selling the same random features found on Windows Mobile today, with a chaotic development environment that lacks any central market for users or developers. And it will be run as an experiment by a company with no experience in consumer hardware or platform development. The Missing Tap. One specific example of the “DOS model problem” is that Android currently does not support multitouch. It's not touched on in the API, and Google quietly tap dances around its omission. Why no multitouch? Because multitouch screens are expensive, and most OHA hardware members are more interested in making a profit in a competitive phone market rather than impressing consumers as Apple did with the iPhone. Most existing smartphones, even those trying to directly rival the iPhone, use a stylus driven, pressure sensitive tap screen or a simpler, cheaper touch technology that lacks support for sensing multitouch. The iPhone's screen can actually sense up to five fingers at once, but the primary feature multitouch offers on the iPhone is the two fingered tapping and the pinching effects everyone associates with it. Android could certainly support multitouch if there were a demand for it, but that's the point: Google knows that its hardware partners are cheap and unlikely to put out hardware that actually competes with the iPhone. Instead of using expensive technologies that deliver clever yet largely invisible functionality, OHA members, just like PC makers, are far more likely to add flashy, impractical gadgety fluff that's cheap to tack on, such as slide out keyboards, neon tubes, and scratch and sniff stickers. That's how you impress gullible nerds on the cheap. Google itself is blowing smoke and erecting mirrors to distract from the reality that it being a “DOS vendor” means supporting bargain basement hardware from penny pinching duplicators. Android has been demonstrating some “wow” features such as a Street Maps app that pans around based on an internal compass in the demonstration phone. The problem is that that kind of thing only makes for a fun demo. Nobody needs to twirl around their phone in the air to see a view of the other side of the street, but everyone who has used an iPhone will wonder why they can't pinch to zoom out. Even worse, most Android phones aren't going to have a compass built into them, so Google is demonstrating features most Android users won't be able to use. That Sounds Like Microsoft… Google's design decisions are beginning to look a lot like Windows Vista; rather than actually working to make laptops boot faster, Microsoft came up with the idea of adding a small screen to the back of Vista laptops so users could check their email without having to wake the system up. But this was a stupid idea for a number of reasons, the most obvious being that most users just want a laptop that boots up quickly. Few laptops got the mini screen, but every user who tries Vista on their laptop will wonder why it doesn't boot up as fast as Mac OS X Leopard. In the same way, Google is advertising features for Android that most users won't ever see in their actual phones while ignoring things people will expect based on their exposure to the iPhone. Android is simply selecting the wrong features. Android will offer the advantages of supporting MMS, recording video, and the list of other features Windows Mobile already supplies. Those features didn't stop Apple from firing past Microsoft in the smartphone arena however, just as the Zune's highly touted WiFi and screen didn't phase iPod buyers. Incidentally, just months after the Zune, Apple had not only demonstrated a larger display but a higher definition multitouch screen, and not only WiFi, but functional WiFi that could be used to browse the web or check email. This suggests that Apple, with its faster release schedule, won't stay behind any of the leading features potentially offered by Android for very long. Android partners, however, will find it as difficult to catch up with Apple's unique features, just as Microsoft has been stymied to keep up with Mac OS X, the iPod, and the iPhone. The underlying reason: both Google and Microosft are tasked with maintaing support for a huge variety of hardware options demanded by all their partners. Apple has the unique circumstances to do only what it needs to do itself. Android in Windows Mobile's Shoes. Like Windows Mobile, Android faces a difficult market. In the US, it competes against the popular BlackBerry in corporate markets and the iPhone among consumers. Worldwide, it competes against entrenched market leader Nokia. The difference is that Google, unlike Microsoft, has no in. Windows Mobile was adopted by Windows-bound IT shops despite its weaknesses. Nobody has any preexisting reason to try an Android phone apart from hobbyists and open software enthusiasts, a demographic that has done little to move Linux on the PC desktop. Google also lacks Microsoft's installed base; it's starting from zero. The smartphone industry initially doubted Apple's chances of making much progress with the iPhone, despite the company having the Mac platform, the iPod, retail stores, platform development experience, marketing savvy, industrial design prowess, and so on. Google doesn't have any of those things. Mobile Providers vs Android. Apple also started with an exclusive partnership with AT&T, a three legged race that demanded effort from both. Google is hoping that hardware makers handle the hardware details and that mobile providers will be excited to sell its Android phones. While hardware makers such as HTC clearly appreciate having found a free alternative to Windows Mobile, it's not obvious why providers would be excited about Android, as it promises an openness that most mobile providers strongly oppose. AT&T took a big risk in getting behind the iPhone, as the phone encouraged users to use email rather than fee-based SMS and MMS, it supported WiFi for data access, and it bypassed AT&T's MEdia Net services to plug into iTunes instead. Verizon refused to parter with Apple and grant it those kinds of concessions. Is AT&T going to take a similar risk to partner with a phone that is not exclusive to it, and is Verizon now going to open its arms to support phones that do not exclusively support BREW, VCast and its other proprietary services? While Android may well eat into Microsoft's Windows Mobile business by stealing away its hardware makers, it seems unlikely that Android will ever serve as more than free alternative to Windows Mobile in a market where Windows Mobile is increasingly irrelevant. Android may have the dubious distinction of swallowing Microsoft's mobile business the same way Microsoft ate up the Palm OS, but even if it accomplishes that goal, Google will likely find itself unsustainably hungry immediately afterward. It will also find itself swimming in a shark tank of hungry rivals, including Nokia's Symbian, RIM's BlackBerry, and Apple's iPhone. Symbian is the final generic platform vying for the opportunity to play DOS in the smartphone market. The next article will examine Nokia's chances in its bid to match Microsoft's PC dominance in the mobile market while setting out in a new venture to copy Android's open software model. Did you like this article? Let me know. Comment here, in the Forum, or email me with your ideas. Like reading RoughlyDrafted? Share articles with your friends, link from your blog, and subscribe to my podcast (oh wait, I have to fix that first). It's also cool to submit my articles to Digg, Reddit, or Slashdot where more people will see them. Consider making a small donation supporting this site. Thanks!
-
Apple 2010 Q1 earnings announced... and they're magnificent
Filed under: Apple FinancialApple's press release discussing the FY10 Q1 earnings (the December '09 calendar quarter) has been transmitted to the ether, and the SEC has the form 10-Q. You can read the whole thing at Apple's investor relations page, but let us sum up: goodness gracious. Earnings per share (under GAAP rules) were at $3.67, with a total revenue number of $15.68B; net profit was $3.38B. Mac sales for the quarter hit 3.36 million and iPhone sales came in at 8.7 million (under analyst estimates of 9.1 million). The company has over $23B in cash and short-term investments. Ahead of today's earnings news, AAPL was up over 2.5 percent for the day, closing at 202.87; market mood monitor Piqqem had analyst estimates largely bullish at $2.07 EPS and $12.05B in revenue. Join us momentarily for our liveblog of the analysts' call at 5 pm ET. One more thing: a quote from Steve Jobs. "The new products we are planning to release this year are very strong, starting this week with a major new product that we're really excited about." Us too. Disclosure: I hold a small, long-term position in AAPL. See the full release below.Apple Reports First Quarter Results All-Time Highest Revenue and Profit New Accounting Standards Adopted CUPERTINO, California-January 25, 2010-Apple(R) today announced financial results for its fiscal 2010 first quarter ended December 26, 2009. The Company posted revenue of $15.68 billion and a net quarterly profit of $3.38 billion, or $3.67 per diluted share. These results compare to revenue of $11.88 billion and net quarterly profit of $2.26 billion, or $2.50 per diluted share, in the year-ago quarter. Gross margin was 40.9 percent, up from 37.9 percent in the year-ago quarter. International sales accounted for 58 percent of the quarter's revenue. Apple sold 3.36 million Macintosh(R) computers during the quarter, representing a 33 percent unit increase over the year-ago quarter. The Company sold 8.7 million iPhones in the quarter, representing 100 percent unit growth over the year-ago quarter. Apple sold 21 million iPods during the quarter, representing an eight percent unit decline from the year-ago quarter. During the quarter Apple elected retrospective adoption of the Financial Accounting Standards Board's amended accounting standards* related to certain revenue recognition. Adoption of the new accounting standards significantly changes how the Company accounts for certain items, particularly sales of iPhone(R) and Apple TV(R). "If you annualize our quarterly revenue, it's surprising that Apple is now a $50+ billion company," said Steve Jobs, Apple's CEO. "The new products we are planning to release this year are very strong, starting this week with a major new product that we're really excited about." "We are very pleased to have generated $5.8 billion in cash during the quarter," said Peter Oppenheimer, Apple's CFO. "Looking ahead to the second fiscal quarter of 2010, we expect revenue in the range of about $11.0 billion to $11.4 billion and we expect diluted earnings per share in the range of about $2.06 to $2.18." Apple will provide live streaming of its Q1 2010 financial results conference call utilizing QuickTime(R), Apple's standards-based technology for live and on-demand audio and video streaming. The live webcast will begin at 2:00 p.m. PST on January 25, 2010 at www.apple.com/quicktime/qtv/earningsq110/ and will also be available for replay for approximately two weeks thereafter. *Retrospective Adoption of Amended Accounting Standards On September 23, 2009, the Financial Accounting Standards Board ratified Emerging Issues Task Force (EITF) Issue 08-1 and EITF Issue 09-3, resulting in the issuance of accounting standard updates ASU 2009-13 and ASU 2009-14. Apple was required to adopt the new accounting standards no later than the first quarter of fiscal 2011. Apple elected to adopt the new standards during the first quarter of fiscal 2010, as reflected in its Quarterly Report on Form 10-Q for the quarter ended December 26, 2009, which was filed with the SEC on January 25, 2010. The Company also filed a Form 10-K/A to amend its Form 10-K for the year ended September 26, 2009 solely to reflect the retrospective adoption of the new accounting standards to the periods presented in that report. Additionally, Apple filed a Form 8-K that included selected quarterly financial schedules reflecting the impact of retrospective adoption of the new accounting standards and reconciling the application of old and new accounting principles to historical income statements, balance sheets, cash flow from operations, deferred revenue and summary data information. These financial schedules will also be available on the Company's website at www.apple.com/investor. The new accounting principles result in the Company's recognition of substantially all of the revenue and product cost for iPhone and Apple TV when those products are delivered to customers. Under historical accounting principles, the Company was required to account for sales of both iPhone and Apple TV using subscription accounting because the Company indicated it might from time to time provide future unspecified software upgrades and features for those products free of charge. Under subscription accounting, revenue and associated product cost of sales for iPhone and Apple TV were deferred at the time of sale and recognized on a straight-line basis over each product's estimated economic life. This resulted in the deferral of significant amounts of revenue and cost of sales related to iPhone and Apple TV. Because Apple began selling both iPhone and Apple TV in fiscal 2007, the Company retrospectively adopted the new accounting principles as if the new accounting principles had been applied in all prior periods. Consequently, the financial results of each quarter from fiscal 2007 through fiscal 2009 have been revised. The Company believes retrospective adoption provides analysts and investors the most comparable and useful financial information and better reflects the underlying performance of the Company's business. For additional information refer to the "Explanatory Note" in Apple's Amendment No. 1 to its Annual Report on Form 10-K for the year ended September 26, 2009. This press release contains forward-looking statements including without limitation those about the Company's estimated revenue and earnings per share. These statements involve risks and uncertainties, and actual results may differ. Risks and uncertainties include without limitation the effect of competitive and economic factors, and the Company's reaction to those factors, on consumer and business buying decisions with respect to the Company's products; continued competitive pressures in the marketplace; the ability of the Company to deliver to the marketplace and stimulate customer demand for new programs, products, and technological innovations on a timely basis; the effect that product transitions, changes in product pricing or mix, and/or increases in component costs could have on the Company's gross margin; the inventory risk associated with the Company's need to order or commit to order product components in advance of customer orders; the continued availability on acceptable terms, or at all, of certain components and services essential to the Company's business currently obtained by the Company from sole or limited sources; the effect that the Company's dependency on manufacturing and logistics services provided by third parties may have on the quality, quantity or cost of products manufactured or services rendered; the Company's reliance on the availability of third-party digital content and applications; the potential impact of a finding that the Company has infringed on the intellectual property rights of others; the Company's dependency on the performance of distributors and other resellers of the Company's products; the effect that product and service quality problems could have on the Company's sales and operating profits; the Company's reliance on sole service providers for iPhone in certain countries; the continued service and availability of key executives and employees; war, terrorism, public health issues, and other circumstances that could disrupt supply, delivery, or demand of products; potential litigation from the matters investigated by the special committee of the board of directors and the restatement of the Company's consolidated financial statements; and unfavorable results of other legal proceedings. More information on potential factors that could affect the Company's financial results is included from time to time in the Company's public reports filed with the SEC, including the Company's Form 10-K for the fiscal year ended September 26, 2009 and its Form 10-Q for the quarter ended December 26, 2009. The Company assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. TUAWApple 2010 Q1 earnings announced... and they're magnificent originally appeared on The Unofficial Apple Weblog (TUAW) on Mon, 25 Jan 2010 16:47:00 EST. Please see our terms for use of feeds.Read|Permalink|Email this|Comments iPhone - Apple - Steve Jobs - Financial Accounting Standards Board - IPod
-
★ Reading Between the iPhone OS 4.0 Lines
A few months ago, I heard suggestions that Apple had tentative plans to release a developer beta of Mac OS X 10.7 at WWDC this June. That is no longer the case. Mac OS X 10.7 development continues, but with a reduced team and an unknown schedule. It’s my educated guess that there will be no 10.7 news at WWDC this year, and probably none until WWDC 2011. Apple’s company-wide focus has since been focused intensely on one thing: iPhone OS 4.1 The number one priority at Apple is to grow mobile market share faster than Android. Anything that is not directly competitive with Android is on the back burner. Several of the “tent-pole”2 features in iPhone OS 4 that Apple promoted at yesterday’s event are directly related to this. Multitasking “Multitasking” is a catchall term that, in the context of iPhone OS 4, encompasses several different things. On an OS like Mac OS X it’s simpler to understand — multiple apps (and faceless background-only processes) operate simultaneously. On an OS like iPhone OS, that’s not how it’s going to work, and for good reason. Memory and CPU are severely constrained on mobile devices compared to regular PC hardware. Apps don’t run in windows, they run on the full screen. So when you leave one app and switch to another in iPhone OS 4, the GUI — the visual interface — is not going to continue updating in the background. What will happen, if the app is updated to support the new OS 4 APIs (which, I expect, all actively-maintained apps will be), is that the app will stay in memory but stop processing. Switch back and it’ll start processing again, right where it left off. Think pause/resume, as opposed to the current iPhone OS model of quit/relaunch. The VOIP and background audio processing examples do not involve the full app continuing to run in the background. The way these things work in iPhone OS 4 is, more or less, that the app registers with the system for what specific things it wants to do in the background. When the user leaves one app for another, the app that is being put into the background receives an event from the OS telling it that it is about to be paused, and at this point it has a chance to store its state, ask for time in the background to complete a task like a file upload, and register specific threads that will continue performing specific lightweight tasks like audio playback. Take Pandora for example. When in the background, what will be running is a faceless (no UI) thread that just streams audio. Only when you re-activate Pandora — tap its icon to open the full app — will the entire app start running again. When the system is running low on memory, it will automatically quit the least-recently used app that is paused in the background. Users should not notice this, except that when next they go back to such an app that has been reaped by the system to reclaim its memory, it might take a few moments longer for the app to be ready, and it will be like today, where the app itself will be responsible for restoring context. And, thus, apps still must be written in a way that assumes they might be shut down by the system with only a few moments notice. The result is that switching between two or three recently used apps will feel very snappy. Users do not have to think about or even be aware of concepts like launching and quitting. Those are implementation details. They just have to think about opening, or perhaps better put, going to one app at a time that will take up the full screen. Sort of like how you go to a web site — you go to apps on the iPhone. And, now, for apps like Skype and Pandora, users can think about apps that can continue to do stuff (play audio, receive incoming VOIP calls) even when they’re not open. There is nothing about the new iPhone OS 4 multitasking that a user must learn. They might just notice that “switching back” to recently used apps, via the same old home screen icons, is snappier. For the most part, using background-capable third-party apps will be just like using the background-capable system apps from Apple. It’s an efficient, clever way of making switching more useful and quicker. It’s also very much like the “multitasking” system Android has had in place all along. My understanding of how multitasking works on Android is that it’s pretty much like what I described above for iPhone OS 4: GUIs do not continue to update (and consume CPU time) in the background, but apps stay in memory when you switch from one to another, until the system runs low on memory, at which point it starts automatically and silently quitting the least-recently used ones. Background Android apps can register faceless threads to “do stuff”, like play audio. I don’t think such background threads on Android are limited to specific things like audio playback and VOIP as they are on iPhone OS 4.0, but Android’s multitasking model is far more like what Apple just announced for iPhone OS 4 than it is to a traditional PC OS like Mac OS X or Windows. One neat feature of Android is a listing in its Settings app that shows you where your battery life has been consumed since your last charge. In my use of a Nexus One, very little is consumed by apps in the background. Battery life on the Nexus One is consumed mostly by the display and by the wireless networking. I suspect that’s largely true for the iPhone from version 1-3, and will continue to be true with iPhone OS 4. Like copy-and-paste, it was inevitable that Apple would add multitasking to iPhone OS eventually. Whether it was always planned for this year I do not know, but once Android became Apple enemy number one, multitasking became a must-have catch-up feature. Adding it now takes away the first item on the Android-vs.-iPhone talking points list. (And despite its similarities to Android’s model, Apple is, of course, pitching it as original and innovative.) As for why the iPhone 3G and second-generation iPod Touch don’t get multitasking with iPhone OS 4, that’s easy — those machines only have 128 MB of RAM. The 3GS and third-generation Touch both have 256. (The 8 GB iPod Touch still being sold today is like the iPhone 3GS — second-generation hardware. It will not get multitasking with iPhone OS 4.) “Paused” apps on iPhone OS 4 are still resident in memory, so there’s just no way it would work with only 128 MB total (some of which, remember, goes to the system itself). The CPUs in the 3GS and latest iPod Touch are faster too, and that’s a factor, but I believe RAM is the central reason. iAds and Google Ever since the Apple-Google rivalry turned into a war, there’s been increased speculation that Apple might launch its own search engine. The thinking is simple. If Apple wants to go to war with Google, then they’ll be tempted to go after Google’s crown jewels — search. Search is still and may well always remain Google’s most popular service. But Google doesn’t make money from search. They make money from advertising. If you want to fuck with Google, you go after advertising revenue.3 Now, it’s true that much — most? — of Google’s ad revenue comes from ads that are displayed alongside search results. Google search generates a tremendous amount of ad revenue. But that’s last decade’s battle. It doesn’t make much sense for Apple to take on Google in search, given Google’s tremendous lead in the space and Apple’s utter lack of expertise in the field. It takes longer for Mac OS X’s Spotlight to search my MacBook Pro’s hard disk than for Google to search its index of the entire web. The war for search is old. Where’s the next battlefield for advertising? Mobile devices is one guess — a guess shared by Google and Apple. And here’s a field where Apple is ahead, not behind. Again, just like with multitasking, the idea that Apple would build support for advertising into iPhone OS is obvious, something that I suspect they might have pursued sooner or later even if Android did not exist. There’s a tremendous amount of money at stake. Now that Android is considered the number one threat to the iPhone, though, mobile advertising became an immediate priority. Jobs’s pitch for iAds during the event yesterday wasn’t even coy about it being a fuck-you to Google. He emphasized first the idea that on mobile, unlike the desktop, search is not a good venue for advertising. The idea being that on the iPhone, people aren’t searching, they’re using apps, and therefore the prime space for ads on mobile devices is right there inside apps. I’m not arguing whether Jobs is correct about search not being good for ads on mobile — I don’t know — but clearly, when he says “search”, he means “Google search”. So that’s knock one against Google. Jobs then showed examples of iAds — rich, cinematic, interactive software ads. They look like native iPhone software, but they’re written in straight HTML5 (so it’s a bonus fuck-you, to Adobe). The word Jobs used repeatedly was emotion. They’re intended to be about design and feeling. It’s about a venue for advertising that can feel like good TV commercials and full-page magazine ads. That’s knock two against Google. Google ads may well be effective, but they are not emotional. Consider the Toy Story 3 iAd Jobs demoed. What kind of ad through Google could compare to that? There’s a solid slice of the DF audience that firmly believes that all advertising is contemptible bullshit. They’ve already skipped to the end of this article. Some advertising, no matter the medium — TV, newspaper, magazine — is junk. But some is art. Commercial art, of course, but art nonetheless. Online advertising — mobile or not — has been largely devoid of this caliber of advertising. iAds is Apple’s attempt to create high-caliber ads for mobile. Jobs seemed more enthusiastic about iAds than anything else in the show yesterday. So the anti-Google message with iAds was two-fold: first, search isn’t good for mobile ads; and second, Google — logical, engineering-driven Google — will never provide an ad platform for emotional advertising like design-driven Apple can. Jobs’s iAds pitch was not directed to consumers. It was directed to creatives in the ad industry — and creative developers who want something better than text ads inside their apps. Miscellany I detected one other veiled insult against Google during the event — Jobs’s emphasis during the multitasking segment about how seriously Apple values the privacy of iPhone users, with regard to data and location information. In the way that the standard knock against Apple is that they maintain too much control over the App Store, the standard knock against Google is that they don’t value user privacy. Jobs’s message: You can trust Apple. At the outset Jobs claimed Apple has sold 50 million iPhones to date and 35 million iPod Touches. They don’t reveal updates to those numbers all that often. Game Center is not about Google, since Google doesn’t have a gaming social network. (Yet?) But it sure seems like a shot against Facebook. Want to play Scrabble or compare your scores against your friends? Game Center aims to supplant Facebook for that sort of thing. iBooks for iPhone is not surprising. (At the press event for the iPad debut in January, someone asked Phil Schiller whether there’d be an iBooks app for the iPhone, and he paused, smiled real big, and said something like “That’s an interesting idea.”) Just like with the Kindle, metadata for bookmarks and your current page sync wirelessly between iBooks on different client devices. If only the iPad’s iWork apps had this sort of wireless syncing. Next question: where’s the Mac client? Or will they build it into iTunes for the Mac and Windows? Shipping the iPad, of course, was a major priority, but like any new project at Apple, it was shipped by a team working in secret. Most of the company found out the details of the iPad when the rest of us did, and that’s why the iPad won’t get an iPhone OS 4 update until version 4.1 later this year — the plans for 4.0 were set and long in development before the iPad was revealed.↩ “Tent pole” is Apple company lingo for major features in a product that can be promoted to customers. I hear it frequently from friends at the company, but can’t recall it being used in a keynote address before.↩ If Microsoft still had the set of balls it had in the 90s, Internet Explorer would have been updated years ago to block web ads by default, including those from Google.↩
-
★ Notes and Observations Regarding Yesterday’s ‘Let’s Rock’ Apple Special Event
Overall Scope The overall takeaway from yesterday’s news is that Apple’s music and iPod business is right on track. There was nothing exceptional or particularly surprising, but the incremental improvements and changes were significant. A solid year’s worth of progress. One thing that wasn’t mentioned, though, and which has figured prominently in past music-related special events, was growth. In past events, the overview of iPod sales has included charts showing tremendous year-over-year sales growth. Not yesterday. Instead, the charts emphasized only market share and total unit sales since 2001. The news there is good — Apple has sold a grand total of 160 million iPods since 2001 and today commands 73.4 percent of the U.S. retail market (followed by Sandisk at 8.6 percent and Microsoft at 2.6) — but the lack of any braggadocio regarding growth indicates that the market is saturated. That’s not to say unit sales are decreasing, only that they’re no longer accelerating. Of course, one reason iPod sales growth has slowed is that iPhones aren’t included in the tally. (There was no mention during the event of how many iPhone 3Gs Apple has sold so far, however.) Growth can only come where there’s room to grow, which is why even Mac sales are growing faster than iPod sales. Speaking of Macs, contrary to speculation, there were no announcements regarding new Mac notebooks. Such speculation was misguided; Apple has held an iPod/music special event in September or October every year since 2001, and, to my knowledge, has never once used such events to announce new Mac hardware. Those of you holding out for a new lineup of MacBooks will have to wait until October 14, according to sources who, as they say, are familiar with Apple’s hardware plans. iTunes 8 The high-level new features in iTunes 8.0 are the new “Genius” recommendation engine, a revamped iPhoto-like grid view, a new visualizer, and improved accessibility on both Mac OS X and Windows.1 The Genius feature is exposed in two ways. First, you can create a new on-the-fly “genius playlists” by selecting any one song and clicking the Genius button at the bottom of the window. This creates a 25–100 song playlist based on songs in your library that the genius algorithm determines goes well with the song you started with. (The button is disabled if you select multiple songs, so you can’t start with, say, two songs and ask for a genius playlist of tracks that go well with both.) Second, there’s a new Genius Sidebar on the right side of the iTunes window. After opting in to the Genius system, the sidebar contains recommendations from the iTunes Store based on the first song in the current selection. (If you have more than one song selected, the Genius Sidebar only shows recommendations based on the first song in the selection.) The recommendation engine seems pretty damn smart. The genius playlists are a clever idea, like the shuffle feature but with a hint. After a few hours, I like the results better than either my own manual playlists or purely random shuffles. The store recommendations in the sidebar seem equally good, but imperfect, in that it sometimes recommends songs which I already have in my library, ripped from CDs. At first I thought the problem might be with the Genius engine not recognizing songs that weren’t purchased from the iTunes Store, but that’s not quite it, since it does correctly recognize most of the ripped-from-CD tracks in my library. For example, the Genius Sidebar’s recommendations based on The Beastie Boys’s “Sabotage” included “Intergalactic”, a song I already had in my library. The problem seems to be with track metadata; if, say, the album name on the track in your library doesn’t exactly match with the album name in iTunes, it doesn’t recognize it as the same song. If I select “Sabotage” and click the Genius playlist button, I get this error: Invoking the “Update Genius” command in the Store menu, as prescribed in the dialog, had no effect. The album name on my version of the track, ripped from CD and filled in by iTunes using the CDDB database, is “The Sounds of Science (Disc 2)”. The version from the iTunes Store has the album name “Beastie Boys Anthology - The Sounds of Science (Box Set)”. Changing my copy’s album name to match the iTunes Store’s made no difference either — iTunes still claims “Genius is unavailable for the song ‘Sabotage’.” The new visualizer is stunning. The old one remains available (View → Visualizer → iTunes Classic Visualizer) but it’s hard to see how anyone wouldn’t prefer the new one. In the details, iTunes 8 introduces a few noteworthy changes. The Preferences dialog has been simplified. Podcast settings are finally adjustable on a per-podcast level. Visually, in the new grid view, Apple has introduced yet another new scrollbar flavor — black ProKit-esque buttons with a dark gray background. But the scrollbar thumb itself is the same as iTunes’s regular slate-blue scrollbar thumbs (which don’t look like system-standard thumbs) — except when the window is not frontmost, at which point the scrollbar thumb changes to dark gray, rather than light gray. New grid-mode scrollbar, active. New scrollbar, inactive. And speaking of background windows, the main iTunes window now supports click-through for a small number of elements, including everything in the toolbar (e.g. the playback controls) and scrollbars. iTunes 7.7 did not support click-through for these elements. NBC and HD TV Shows NBC withdrew its TV programming from the iTunes Store last year. As of yesterday, it’s back. It’s hard to see that NBC gained much of anything in the form of concessions from Apple. NBC executives stated publicly that they wanted Apple “to take concrete steps to protect content from piracy, since it is estimated that the typical iPod contains a significant amount of illegally downloaded material.” I.e. they wanted Apple to somehow magically prevent iPods and iTunes from playing NBC content obtained from sources other than the iTunes Store. That didn’t happen. NBC also wanted variable pricing for its shows. They sort of got that, in that library content — old shows like “The A-Team” — are available for just $1 per episode. But NBC also wanted to raise prices for episodes of popular new shows, and that did not happen. Standard-def episodes of all new shows on iTunes remain at $2. High-def shows are $3, but that’s not variable pricing — it’s the same for all HD shows, not just NBC’s, and as far as I can see all HD TV shows in the iTunes Store are also available in SD. There are no shows which are only available in HD. It’s a win for everyone — Apple, NBC, and customers — that NBC shows are back, but there’s nothing NBC has today that they wouldn’t have had if they’d never pulled their shows from iTunes a year ago — except for millions of dollars in lost revenue. New iPods The hard-drive-based iPod Classic continues to fade toward irrelevance. Last year it was available in two capacities, 80 and 160 GB. The bad news is that it’s now down to a single capacity, 120 GB. The good news is that it’s in the same slimmer form factor as last year’s 80 GB model, and at the same $249 price. To my recollection, this is the first time that the size of the highest-capacity iPod has gone down year over year. Jobs stated during the event that the 80 GB model out-sold the 160 GB model, but for those people who value maximum storage capacity above all else, a 40 GB drop is significant. The design effort regarding traditional click-wheel iPods all went toward the new Nanos. On the outside, they’ve returned to the long-and-narrow form factor, abandoning last year’s “fat Nano” design. And they’re now available in a full spectrum of vibrant colors: all six colors of the original Apple logo, plus pink, silver, and black. In a change from previous years, all colors are available in both capacities — 8 GB for $149; 16 GB for $199. On the inside, Apple added an accelerometer, which allows the display to rotate when you rotate the iPod. Video plays horizontally, and when you rotate the iPod to horizontal while playing music, it switches to Cover Flow mode, just like with the iPhone and iPod Touch. You can create “genius” playlists directly on the Nano. It even has a voice recorder, which works if you connect a microphone. Even the iPhone doesn’t ship with a voice recorder app.2 The iPod Classic gets none of these new features other than genius playlists. The new iPod Touch gets closer to being a thinner iPhone sans phone. The original iPod Touch lacked hardware volume controls and an external speaker; the new Touch has both. Significant price reductions bring the prices closer to the selling prices of the subsidized iPhones: 8 GB for $229, 16 GB for $299, and 32 GB for $399. (I strongly suspect these new prices for the Touch are the margin-reducing “product transition” Apple alluded to in its quarterly finance call in July.) The portable gaming angle was promoted heavily during the event, and is the crux of the “Funnest iPod ever” slogan. Apple is clearly positioning the iPod Touch as a competitor to handheld gaming devices from Nintendo and Sony. Discussing the 2.1 release of the iPhone OS (available as an update for iPod Touches now; slated for release for iPhones this Friday), Jobs was brutal regarding the quality of the 2.0 release, saying: “2.1 software update is a big update. It fixes lots of bugs. You’ll get fewer call drops. You will get significantly improved battery life, for most customers. We have fixed a lot of bugs where if you have a lot of apps on the phone, you’re not going to get some of the crashes and other things that we’ve seen. Backing up to iTunes is dramatically faster. And so just a lot of bugs have been fixed.” His tone wasn’t so much apologetic as it was scornful.3 One gets the feeling Steve Jobs was about as happy with the problems in the 2.0 iPhone OS as the rest of us. Even if you’re not hearing or vision impaired, you may well benefit from these accessibility improvements. Better support for Mac OS X’s Accessibility APIs directly correlates to improved UI scriptability of the app itself. These two tweets from Nicholas Riley show one example — using AppleScript to determine whether iTunes is talking to AirPort Express. That wasn’t possible until iTunes 8.0.↩ There are numerous voice recorder apps available in the App Store, of course.↩ In the video stream from the event, this bit starts around the 48:35 mark.↩
-
Scott Woolley Attacks Apple TV in Forbes, Gets the Facts Wrong
Daniel Eran DilgerScott Woolley of Forbes tried his best to paint Apple TV as a colossal failure, but his article is based on supposition and false comparisons, and demonstrates he doesn't know much about the video distribution industry he writes about. Woolley described Apple TV as a flop, comparing his own unit sales estimate against the record breaking sales launch of the iPhone. Of course, lots of successful products might look like a flop compared to what appears to be the most successful consumer electronics product launch in history. Apple TV Sales.Woolley estimated sales of 250,000 Apple TVs, but he really doesn't know how many have sold, because Apple doesn't isolate sales numbers and it counts revenues of the Apple TV over a subscription basis like the iPhone. Apple rarely isolate product sales for any individual items, a competitive game played by most manufacturers. Instead, the company has typically reported revenue buckets for computers and iPods, and only occasionally breaks down sales for specific models or classes of models, such as laptops and desktops. It's therefore no surprise that Apple isn't publishing Apple TV figures. Woolley is doing his readers a disservice to speculate that "apparently the truth is too humiliating." Either he doesn't understand basic marketing, or he knows he's presenting a false angle to whip up a frenzy of ignorant sensationalism. As evidence of the Apple TV's "lack of sizzle," he only cites the fact that some Circuit City employee had "trouble locating the product's small kiosk," and that at a nearby Apple Store, the Apple TV had been "shoved aside" to make room for more iPods. Hobbies and Jobs.Jobs has described the Apple TV as a 'hobby' several times, once in talking to employees about his vision for Apple's future business. He described the Mac and iPod as two legs of a chair, and hoped the iPhone would act as a third leg. The Apple TV, he noted, might work out as a fourth leg in the future, but until then it was being run as a hobby and the focus was on establishing the iPhone.A hobby is something you do primarily for fun or experience, not as a profitable exercise, although hobbies can turn into big business. Thirty years ago, Steve Wozniak's hobby was wiring together electronics. Steve Jobs' hobby seems to be taking ideas and turning them into profitable businesses, as he did with Woz's computer design (Apple is now worth $120 billion), NeXT (sold to Apple in 1996 for over a half billion), and Pixar (sold to Disney for $7.4 billion in 2006). So when Jobs says he has a hobby, he's not talking about painstakingly putting ships into bottles. Lots of people dismissed the iPod in 2001; that product did take a few years to get established, but has since attained explosive growth. Many pundits also announced that Apple would become the iPod company and let go of its Mac sales, but Apple has also dramatically increased Mac sales over the last two years, in large measure due to the move to Intel processors[Inside Apple TV]Success Is Failure, Up is Down.Woolley says Apple execs ignored the product in its last quarterly earnings reports. Apple did spend its time talking about the iPhone, record Mac sales, and improved gross profit margins. Apart from the highlights of what it wants to talk about, what Apple executives say in earnings reports conference calls is largely based on what analysts on the call ask them.In the previous quarter, Tim Cook answered a question about Apple TV sales by saying, "we just started shipping on the third week in March. We're off to a very good start and we're going to continue investing in this area. We're very, very excited about the long-term potential of the product," but added, "we're not releasing the exact unit shipments."Apple never bragged that it would sell millions of Apple TV units per quarter, as it did with the iPhone. The company isn't making big money on the Apple TV. Its price--compared to the components inside it--indicates Apple knew the box wouldn't be a high demand seller, or it would logically set a higher price target. There's little money to be made in selling and supporting a $300 box full of nearly $250 in hardware. Instead, Apple offers the unit as an alternative way for consumers to make use of the developing video market in iTunes. [RSS: How Apple Will Change TV in 2007]Sustainable Platform Development.This slow growth strategy requires the playback pieces to be in place while the content lines up. Assembling both ends of a platform and distribution chain is the classic catch-22: which comes first, the eggs or the frying pan? Do you crack open eggs and let them sit out while you set out to obtain a frying pan, or put the pan on the flames and then go to the store to find eggs? Ideally, you have them both lined up before things get cooking.Apple had already added TV content to iTunes, and was selling respectable numbers of shows to users with 3" iPod screens or hunched over their PC. When it added movies, it couldn't really market the idea of rapid growth in iTunes without a TV-centric playback system. Apple is still working to add movie content to iTunes, but now it has a marketable way to sell them. [Brent Schlender's Apple TV: Fortune Dud or Fortune FUD?]Measuring Success By Accomplishment. Apple doesn't have to make fantastic money on the Apple TV for it to be a success, just as Sony and Microsoft can afford to actually lose money--billions in the case of Microsoft--if only sales of their game consoles take off at some point and establish a critical mass of a platform. That being the case, why would Forbes tear into Apple TV for not outselling the iPhone? The simple answer is that finding problems with Apple's ongoing strategy is so difficult that only a cheap shot that skirts reality can even hope to make the company look bad.Apple TV exists as a product to legitimize the company's movie strategy. Expanding sales of movies and TV content will help sell the iPod and retain a commercial availability of legal content for Mac users. Really, the main point of the iTunes Store is to save Apple from being ostracized by Microsoft in a dystopian world where all media is tied to Windows. Apple didn't have to destroy the market for Windows Media to establish iTunes as a success; that was just a nice bonus. After just short of a year of existence, iTunes certainly isn't the best movie selection on the web. However, while its easier to find more movies elsewhere, those sources don't offer the benefits of Apple's tightly integrated and well conceived ecosystem. [Universal vs Apple in the iTunes Store Contracts]Apple TV vs Netflix.One of the best options today is Netflix; it has nearly everything, but it involves waiting for days to get the DVD you request. If you get an unplayable DVD, you have no recourse but to wait out a few more days to get a replacement. Netflix has recently moved to offering subscribers instant playback over the web for a good variety of titles, but the service is Windows only and offers very low quality. It's a great way to watch a documentary or slapstick comedy, but it's not a cinematic experience, it's a YouTube experience. That leaves Netflix a very good option for people who like to watch lots of movies. For less than $20 per month, you can cycle through several movies a week and always have at least a couple DVDs available to watch. You pay a monthly fee whether you use the plan a lot or not, so if you go without updating your queue or are busy with other things, you pay for content you're not watching, just as with a cable subscription.The downsides to Netflix--and DVD rental in general--is that DVDs can't easily be accessed on demand, or kept in a digital library that's available to any TVs in the house or any iPods for portable playback. [Apple TV: Using DVDs and other Video Sources]Pulling the Woolley.Forbes' Woolley didn't mention Netflix. Instead, he boasted up TiVo, the Xbox 360, Slingbox, a yet to be delivered product from Poloroid, and Vudo, a small startup that sells downloadable movies for $20 each. All are apparently in far better shape than the Apple TV hobby, which is a great flop of a failure, according to Woolley. Except that he withheld the truth:the staggering, multibillion dollar losses of Microsoft’s Xbox every year over the last half decade.the regular, multimillion dollar losses at Tivo over the last several years--it lost $52 million last year, and another $19 million in the most recent quarter ending in July.Polaroid Corporation went bankrupt half a decade ago. Its name is being licensed by a holding group. Vudo is an interesting box offered by a group of WebTV and TiVo refugees. It's a $400 box with very similar features to the Apple TV. It also features rentals and has hardware support for 1080p and Dolby Digital surround. It demands a 3 Mbit Internet connection. Slingbox is a streaming device that transmits a video signal over a network. It has nothing to do with Apple TV.So Wolley paraded out some real failures, some vaporware, a promising potential rival, and something completely unrelated. That's proof of the Apple TV's great failure? In contrast, it looks like Apple is among the few companies with a viable plan for video distribution, and stands among the minority who can actually earn any profit at all.[Ten Myths of the Apple TV: 5.1 Audio][Ten Myths of the Apple TV: Xbox and Hardware][Apple TV: Turn DVI into HDTV; HP Drops Microsoft]Wholly Weaselly Woolley.Not content with simply blowing out some ignorant misinformation, Woolley then went on to castigate Jobs for choosing to "shut out millions of Web downloads on YouTube" with the release of Apple TV in a "parochial and proprietary approach" that forced users to get all their content from the iTunes Store. Except that isn't the truth at all. Is every feature Apple adds to is products now going be described as a "freedom previously withheld by Jobs' arrogant tyranny" in retrospect? What a weaselly, desperate spin! Woolley also stated that "NBC Universal scrapped its deal to sell movies and shows via iTunes, making Apple TV even less appealing." While admitting that Apple backed out of negotiations with NBC Universal after the studio made absurd demands, Woolley called Apple "sulky and pious" for doing so. Sounds like Woolley couldn't find a story and had to make one up with the help of a thesaurus. One should expect more from Forbes. For his sloppy efforts in crafting a sensationalist headline, Scott Woolley gets a Zoon.What do you think? I really like to hear from readers. Comment in the Forum or email me with your ideas. Like reading RoughlyDrafted? Share articles with your friends, link from your blog, and subscribe to my podcast! Submit to Reddit or Slashdot, or consider making a small donation supporting this site. Thanks!