POLL: What is the BEST Apple Product of 2008?

Sure, we still have a little over a month to go before the end of the year, but it's safe to say that Apple is done offering up new products in 2008. Looking back on the developments of the year, there are some pretty impressive things that have come out of 2008 in regards to Apple releases. I'm curious, though, as to what you think is the BEST of these amazing products. Here are the contenders: 1) Macbook Air - Apple kicked off the year by showing us this extremely thin, extremely...

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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!
2007 Apple Year in Review: Security

With the year rapidly coming to a close it's time for all those year-end retrospectives to pop up across the internets (and traditional media). 2007 was an especially busy year for Apple who introduced a plethora of revolutionary new hardware and software that has given fodder for post-upon-post to blogs old and new. When not contributing to TAB (or spying on the Caldari for the Amarr in EVE Online) my focus is on all things related to information security (i.e. my day job). With that in mind, I thought it would be interesting to do a “security year in review” as it relates to our favorite OS & hardware vendor to see where we've been and where we're headed, tossing in a bit of advice to help keep your holiday computing secure. Back To Where We Started�From January kicked off with The Month of Apple Bugs (“official” web site), a project whose sole intent was to show the world that even Apple has a chink in its dragon-scale armor. While daily flaws were revealed, none were earth shattering and the interest in their releases died down substantially very quickly into the project. The founders showed their lack of professional integrity when they admitted they weren't notifying vendors before releasing the exploits. If the project's integrity wasn't in question from the start, a contingent of vocal uses argued that various bugs had no security impact whatsoever, and it became painfully obvious that the project had to go fishing for issues in many cases since some of the bugs weren't even for Apple-released products. Number�Crunching According to the National Vulnerability Database, there were 79 common vulnerabilities & exploits (CVEs) for “Mac OS X” and 45 for “Mac OS X Server”. The same numbers for 2006 were 106 and 55, but these are difficult statistics to trend since the 2005 data shows 96 & 72 respectively. Overall, it does appear that the operating systems get harder to break through as Apple matures. Apple officially released 32 product and OS security updates, each fixing one or more vulnerabilities (with their latest one for Tiger [10.4] in November 2007 fixing over 40). Unfortunately, Leopard even had a few vulnerabilities as the 10.5.1 update fixed three security issues with the new firewall. New! Impoved!�Insecure! Two of the product highlights of the year were the release of the iPhone and Apple's answer to Microsoft Vista - Leopard [OS X 10.5]. The iPhone had detractors from the start, and some of them went off to find a way to make it do what they wanted it to do on their schedule. These hacks have been beaten to death in the blogs and there's even a central repository for them. Unfortunately, many of them require exposing and exploiting security vulnerabilities on the device in order to “free” them from Apple's iron grip. Apple has not been as quick as some would like to patch the device, but they have addressed the security issues as they come up and have done a better job issuing fixes and features than other smartphones (and I've had smartphones from other vendors). There were reports of broken phones after updates due to using these hacks and it's my firm belief that you get what you deserve when you decide to exploit security holes in order to gain functionality. Patience will have paid off for those users who decided to wait for Apple to do the right thing and release an API letting developers go beyond pretty iPhone-tailored web pages. While the iPhone stole the show for the year, Leopard was not without relevance since it may have been the most anticipated operating system release ever (well, perhaps Vista beat it slightly due to the constantly sliding schedule). How successful this release was is a topic for another post, but it was not without many new security features, including application sandboxing, code-signing, library randomization and a new firewall configuration (there was a slew of changes under-the-hood as well). These features were heavily scrutinized, with the new firewall taking an especially hard beating and was the subject of the aforementioned end of year 10.5.1 patch. Expect The�Unexpected The Mac platform gained even further popularity in 2007, but this visibility came at price. As more users flock to OS X we can expect to see hackers migrate there as well. The engineers over at McAfee's AVERT Labs identified a rise in crimeware on OS X, showing that the bad guys see profit in targeting this new playground. This was further demonstrated in November when the Net was abuzz with the news of a trojan horse aimed at Mac users. Then again, November is a rather slow news month. Sadly, 2008 may be a dangerous year for iPhone users with many researches flagging it as a prime target. Given how little problem Apple supporters have with handing over the platform to the enemy by identifying and exploiting vulnerabilities, I'm not surprised. Keeping Safe For The�Holidays 'Tis the season to demonstrate our wanton consumption and many happy individuals will be recipients of a brand new Mac later this month. While the out-of-the-box Mac experience is still a fairly secure one there are some things you can do to ensure that it stays that way. Even though new boxes will be shipping with Leopard, the Tiger Security Configuration Guide - approved by our friends at the NSA & Apple - provides a good starting point for boosting the security profile of your dektop. If you're really the adventurous type, you can even make your Leopard firewall experience a bit more secure. The advent of real malware on the Mac means that you should also definitely consider using anti-virus/anti-malware software. Thankfully, there are many to choose from. McAfee VirusScan 8.6 was the first Leopard compatible anti-virus product, with MacScan (more spyware-focused) and Sophos Endpoint Security & Control coming in shortly thereafter. Norton seems to be lagging behind, but it's in good company with the freely available ClamXav. For all those Airport Extreme recipients, you should definitely check out Glenn Fleishman's Take Control of Your 802.11n AirPort Extreme Network to ensure you've configured your network as securely as possible. And To All A Good�Night Overall, my take is that 2007 was a good year for Apple in terms of security. The Cupertino crew smacked down bugs as quickly as they arose and managed to build products with new features that have laid the foundation for even more secure applications and operating systems in the coming years. Despite the news that Macs are in the sights of more malicious malcontents, it remains the most secure and productive computing platform available today.
20 Years of Image Editing: Photoshop from 1.0 to CS4

� �From its humble beginnings on a grad student's Mac Plus to its complete photo-editing domination, Photoshop has changed the world in 20 short years.� Photoshop is everywhere. And while fundamentally it is the standard professional-quality image editor, it’s also a cultural touchstone with a reach that extends to advertising, fashion magazines, television, film, and the news. Lighter versions like Photoshop Elements, Photoshop.com, and even Photoshop Mobile on the iPhone have distilled its power for the masses, and sites like PhotoshopDisasters.blogspot.com chronicle painful misuses for everyone to point at and giggle about. “Photoshop” the verb was even added to Webster’s dictionary in 1992.In such a Photoshop-saturated society, it’s easy to forget that the software hasn’t been around forever. Since February 2010 marks the 20th anniversary of Photoshop 1.0, now is the perfect time to revisit everything from Adobe’s systematic dismantling of its competition to the way the software was used to make Katie Couric “lose weight.”�Two Decades of Photoshop�We give you every single Photoshop release, plus the effects of Adobe's software on its competition and our culture.�1987�Release: Thomas Knoll, a PhD student at the University of Michigan, creates a program called Display for his Mac Plus. It can display 256-shade grayscale images on a 1-bit black-and-white screen with dithering.�1988�Release: Display is renamed Photoshop, and the Knoll brothers (Thomas and John, an effects expert at Industrial Light & Magic [ILM]) license the first version to Barneyscan, a slide-scanner manufacturer. Approximately 200 copies of version 0.87 ship bundled with the scanners.Cultural: The first working version of Photoshop appears at Apple, and the era of Photoshop piracy begins as engineers pass it around amongst themselves and gape in awe.�1989�Release: John Knoll demos Photoshop for Adobe's primary art director Russell Brown and founder John Warnock. Adobe signs a distribution deal with the Knoll brothers.�1990�Release: Photoshop 1.0 ships. It requires an 8MHz processor and 2MB of RAM. The software fits on a single 3.5-inch floppy disk. Key features include color correction, image optimization for output, Curves, Levels, and the Clone tool.Cultural: Photoshop is used extensively at ILM during postproduction work on The Abyss.�1991�Cultural: ILM continues to use Photoshop to create digital composite shots for movies like The Rocketeer, Hook, and Terminator 2: Judgment Day.Release: Photoshop 2.0 (code-named Fast Eddy) ships with CMYK support, Duotones, the Path tool, and rasterization of Illustrator files. But the HSB and HSL color modes in 1.0 are gone.Cultural: John Knoll covertly releases a program to revert Adobe Photoshop's "eye" application icons back to the original "1HR Photo Shop" icon.Release: Adobe releases an SDK for third-party plug-in development. Later in the year, Aldus (developer of PageMaker) releases the Gallery Effects plug-in package.�1992�Release: Kai Krause releases Kai's Power Tools, a popular plug-in set for Photoshop featuring graphically rich (and often bewildering) visual interfaces.�1993�Release: Photoshop 2.5 (code-named Merlin) ships with 16-bit image support, palettes, Quick Mask, Dodge and Burn tools, and the Variations visual color-correction tool. This is the first Photoshop version available on Windows as well as Mac.�1994�Cultural: Time magazine runs a cover photo of O.J. Simpson that was photoshopped with very dark color correction, creating controversy over how African Americans are portrayed by the media.Release: Photoshop 3.0 (code-named Tiger Mountain) introduces image layers, often considered the most important feature ever added to the program.Release: Alien Skin Software delivers the first drop-shadow effect plugin for Photoshop.Competition: Adobe acquires Aldus, keeping PageMaker on life support by burying Windows-only image editor PhotoStyler.Competition: HSC Software introduces Live Picture, billed as a next-generation nondestructive image editor, for a whopping introductory price of $3,995.�1995�Competition: HSC Software lowers Live Picture price to $995 in one fell swoop, angering early adopters who paid full price.Competition: Quark introduces XPosure image-editing software at the Seybold Seminars in Boston. Developed in conjunction with Japanese electronics giant JVC, the product boasts a nondestructive filter featuring "lenses"... but it never ships.�1996�Release: Photoshop 4.0 (code-named Big Electric cat) ships with nondestructive adjustment layers, Actions, macros, grids, guides, the Free Transform tool, and a radically redesigned user interface. Photoshop 4.0 LE (Limited Edition) is bundled with a wide range of image scanners.Competition: Macromedia ships its xRes image editor, which also features nondestructive image editing. Although it soon became another footnote in image editing hisotry, you can still see a bit of its DNA in Adobe Fireworks.�Next Page: Photoshop Timeline continued >> 1997�Competition: Former Apple CEO John Sculley becomes chairman of Live Picture and tries to salvage Live Picture technology for web applications.�1998�Release: Photoshop 5.0 (code-named Strange Cargo) ships. New features include the History palette and its multiple undos, editable type, layer effects (now called Styles), spot colors, ICC color management, and the Magnetic Lasso tool. CMYK files go to 64-bit (16 bits/channel). The new 3D Transform plug-in is the forerunner to the 3D menu in the current Extended version, and this is also the first Photoshop that supported integrated online updating.Competition: Live Picture is spotted selling in mail-order catalogs for under $100.�1999�Release: Adobe ImageReady 2 becomes part of Photoshop 5.5, allowing animated GIFs and sliced JPEG images. This release also adds the Extract command (for isolating images from their backgrounds), the Art History Brush, and Save For Web.�2000�Release: Photoshop 6.0 (code-named Venus in Furs) includes vector-based shapes, content layers (solid, gradient, and texture fills), Layer Styles, the Liquefy filter, a tool options bar, layer-based slicing for HTML work, and an extensive interface overhaul.�2001�--- �2002�Release: Photoshop 7.0 (code-named Liquid Sky) ships with the Healing Brush tool, a revamped brush engine, integrated image browser, custom workspaces, and even a spell checker. It's the last version that runs under OS 9.Release: Adobe releases the consumer-oriented Photoshop Elements package, which replaces the earlier LE versions of Photoshop that were bundled with many third-party scanners and digitizers.�2003�Release: Photoshop 7.0.1 update includes support for RAW image formats via the Adobe Photoshop Camera Raw plug-in.Release: Photoshop CS (code-named Dark Matter), included in all Adobe Creative Suite editions, has layer groups, the Shadow/Highlight and Match Color tools, text on a path, the Lens Blur filter, custom keyboard shortcuts, and JavaScript support. CS is the first version to require activation, have Standard and Extended versions, and a PDF manual.Cultural: Photoshop CS also includes code to automatically detect attempts to scan currency banknotes, fueling many conspiracy theories.�2004�---�2005�Release: Photoshop CS2 (code-named Space Monkey) ships with Bridge (which replaces integrated Browser), Smart Objects, Spot Healing tool, Vanishing Point and Red retouching tools, HDR (high dynamic range; 32 bits per channel) merging abilities, and the Lens Correction filter. A rather significant but subtle addition to CS2 is the ability to select more than one layer at a time.�2006�Release: Adobe releases a public beta of Photoshop Lightroom, an image-management database aimed at professional photographers.Cultural: Newswire service Reuters is caught in a scandal when it's busted using Photoshop to enhance smoke plumes in an image of Beirut.Cultural: CBS's official photo of news anchor Katie Couric is photoshopped to shave a few too many pounds off her frame.�2007�Release: Photoshop Lightroom 1.0 ships.Release: Photoshop CS3 (code-named Red Pill) ships with native Intel processor support, Smart Filters, the ability to import and process video, significant interface revisions, the Black and White conversion tool, far more support for editing images with more than 8 bits/channel, and a seriously improved Clone tool.�2008� Release: Adobe launches the Flash-based Photoshop Express app on Photoshop.com, offering limited image-editing functionality and online storage.Cultural: Iran's state-run media agency releases a photo of a missile test, altered to add a fourth missile. (The third missile from the right is a clone of the second missile.)Release: Photoshop Lightroom 2.0 is released, adding 64-bit operation, multiple-monitor support, localized image corrections, and enhanced editing abilities.Release: Photoshop CS4 (code-named Stonehenge) ships with OpenGL acceleration, Content Aware Scaling, 64-bit support for Windows Vista (but not Mac!), improved RAW image processing, and auto layer-alignment tools.�2009�Release: Adobe makes Photoshop.com available for the iPhone as a free mobile edition, delivering limited image editing on the run.Release: Adobe launches a public beta of Lightroom 3.0, featuring better grain- and noise-management tools.�2010�Cultural: Photoshop turns 20! China is the traditional gift, but we'd prefer CS5.�Next Page: The Evolution of Photoshop Splash Screens >> Making a Splash�We’re so used to seeing a splash screen every time we open Photoshop that we hardly pause to glance at it any more. But really, the wild, way-out splash screens on the beta versions of Photoshop over the years are a lot more eye-catching. Peep this gallery of the beta splash screens next to their official-release counterparts. (Click to enlarge)�Version 2.5��Version 3.0��Version 4.0��Version 5.0��Version 6.0��Version 7.0��Version CS��Version CS2��Version CS3��Version CS4� �Next Page: Vintage Photoshop Toolbars >> Vintage Tools�The photoshop toolbar has evolved over the years too--first to add more tools, then to streamline its appearance and take up less space.��Next Page: Interview -- Photoshop Unmasked >> Photoshop Unmasked�Two Adobe power players talk about Photoshop's birth, evolution, and future.�Adobe’s Senior Creative Director Russell Brown and VP of Product Management for Professional Digital Imaging Kevin Connor are two of the brightest stars in the Photoshop galaxy—they’ve rung up 38 years of Adobe experience between them. Brown even won an Emmy in 2008 for his Dr. Brown’s Photoshop Laboratory show on tv.adobe.com. We probed their giant, Photoshop-filled brains with these chin-scratching questions…�Mac|Life: What are your first memories of seeing Photoshop?Russell Brown: My first viewing of it was when John Knoll gave me a demo in 1989. I recall that he created a soft-edge selection mask and painted into it with a soft-edge brush. Wow! This was downright amazing. Nothing like it was possible on the Macintosh or PC at the time. Technology like this was only available on high-end prepress systems. I knew that what I was seeing was a serious new tool that was going to change my life.Kevin Connor: Prior to joining Adobe, I was working at a small startup company. We had one copy of Photoshop installed on one of the Macs in the office, and I remember stepping through the menus and tools just to see what they could do. It was probably version 2.5. I also remember a freelance designer we worked with at the time marveling at all that could be accomplished by manipulating color channels.�Mac|Life: Russell, is there a specific Photoshop feature that you can't live without?RB: That would most definitely have to be layers. Nothing can replace layers. I’m sure that about 90 percent of our users might say the same thing.�Mac|Life: Kevin, how do you see Photoshop evolving over the course of the next decade?KC: A number of trends will influence that. From a technology standpoint, the big trend is computational photography. Increasingly, software algorithms are being used to derive photographs that could not be directly captured using traditional optics and sensors. Today, this technology can give us seamless panorama photos or wide-angle shots with no distortion, but in the future, it may even give us the ability to manipulate a photograph in three dimensions, adjusting vantage point and focus after the capture. Ultimately, it can also lead to software that is smarter about understanding the contents of a photo and can manipulate it as more than just a collection of pixels.Another trend that will affect Photoshop’s future is the distribution of workflows across the web and mobile devices. It may not make sense to move all of Photoshop into a web-based application, but certain things may be done better on the web or on the road, and products will start to blur the line between the desktop, the web, and other devices. As we manage these big changes, we also need to continue to evolve the Photoshop interface so that these new capabilities can fit in naturally, while older capabilities can be refreshed and improved. Of course, it’s hard to say yet precisely what you’ll see in five years or 10 years, but these are things we’re already working on today that we expect to influence the product for some time to come.�Mac|Life: Russell, any particular online Photoshop resources you'd recommend to our readers?RB: Definitely. In fact, here's a list of my favorite websites for Photoshop information:>> blogs.adobe.com/jnack/>> www.photoshopuser.com/psuser.htm>> www.mogo-media.com/welcome-pst.php>> www.photoshopnews.com>> www.lynda.com>> www.russellbrown.com�Mac|Life: Do you think there will ever be a viable competitor to Photoshop?KC: There’s always competition, but if we do our jobs right, people just don’t notice! I’m being a little facetious, but my point is that Photoshop is a very big target, and companies both big and small have continuously taken aim at it. They just haven’t generally been successful.�
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!
Four Safe High-Tech Plays

With so much uncertainty and turmoil in the markets these days, investors need to choose stocks that combine safety with solid growth prospects. In choosing such low-risk, core holdings, one principle that has served us well over the years has been to focus on “franchises.” In the investment world, “franchise” is a term most people associate with Warren Buffett. It refers to a company that has a secure and sizable share of its market. Even better is if the company has a secure place in a growing market. It's easy to identify franchises in sectors like consumer products or fast-food. Just ask any 5th grade class to name some companies they've heard of, and they will rattle off names such as Wal-Mart (WMT), Procter & Gamble (PG), Johnson & Johnson (JNJ), Coca Cola (KO), etc. However, there's one sector where it gets a little harder to spot the true franchises. Yet this sector has proven very rewarding in the past, and will continue to do so... TECHNOLOGY FRANCHISES FOR A TURBULENT WORLD No matter which nation leads the world in the future – China, the U.S., or some other – technology will remain an important sector. The question, when looking for safer bets, is whether there are any real franchises in the technology arena. After all, technology constantly evolves, making it hard for any company to hold onto dominant market share for the long term. On top of that, technology hasn't been around nearly as long as other sectors. Companies like Coca Cola or Johnson & Johnson began over a century ago. Technology, as we normally think of it, incorporates digital electronics, which only got its start in the 1950s when the first silicon transistor was built. So the longest lived technology firms have only been around 60 years. That's not quite long enough to really be called a franchise, and may be one reason Buffett has seldom invested in tech stocks. That said, we do have a few recommendations in the tech sector that come as close to franchises as you are likely to find. They may not be the fastest growing tech stocks, but they are well established with steady growth, and we believe they will be around for the long haul. Pick #1: Intel (INTC) The first such company that comes to mind is Intel. The company's roots go back to one of the inventors of the transistor, a man named William Shockley. A rather authoritarian, egotistical, and paranoid man, Shockley had a hard time earning loyalty from co-workers and employees. At one point, eight of his researchers at Shockley Semiconductor (known as “The Traitorous Eight”) left his employ to found Fairchild Enterprises. Later on, two of the eight, Robert Noyce and Gordon Moore, created Intel. Noyce has since passed away, but Moore remains Intel's largest shareholder and his proteges continue to run the company. (Moore is also famous for penning 'Moore's Law.') In terms of age and lineage, Intel certainly resembles a franchise. Admittedly, the company has had its up and down periods. But today, it has a near monopoly as a manufacturer of microprocessors whose designs remain firmly based on the transistor. Intel has also ventured into other types of chips. While it's too soon to say whether these new product lines will succeed, we suspect they will. Even if they don't, microprocessors are an essential component of all computers and many other devices, and Intel's dominant position in them should guarantee the company's longevity. Naturally, Intel's size and maturity makes it difficult for the company to grow as fast as it once did, but it should continue to grow well for many years. It has an exceptional balance sheet and extraordinarily high free cash flow. As much as any company can be assured a role in future technology, Intel is a number one choice. Pick #2: Microsoft (MSFT) What other tech firms could qualify as franchises? Obviously, Microsoft comes to mind. Like Intel, Microsoft has a long lineage, one that stretches back to the original operating system for the personal computer, DOS. Along with Apple (AAPL), Bill Gates's company was also the first to develop a graphic user interface (GUI) that greatly added to the PC's popularity. Though Gates has more or less retired from Microsoft, one of his colleagues and former Harvard classmates, Steve Ballmer, runs the company today. Microsoft has been through fewer wars than Intel, and it may be losing some of its franchise. Open source software, including Linux is a real threat. However, the majority of servers and PCs today do run Microsoft operating systems. In the applications area, Excel is unchallenged as a spreadsheet. It may be a little soon to declare Microsoft a real franchise, but the company has been around since the advent of personal computers. It's grown rapidly into a mature but solid company. In the wake of the recent financial crisis, it's one of the few companies in the world to still hold a AAA rating. Pick #3: Qualcomm (QCOM) Our third top pick is Qualcomm, which has patents centered on the CDMA platform used in the majority of the world's cellphones. The patent portfolio alone is a strong argument for calling this company a franchise. In addition, the head of Qualcomm today is the son of the company's founder. Qualcomm has been through its share of battles in the past, both legal and technological, yet its product still dominates its market. Recently, Qualcomm's stock suffered a huge drop in price on news that earnings may be less than expected. However, it is the nature of franchises that even when earnings dip they can still retain market share and bounce back. If you believe that mobile telephony and web browsing will continue to spread throughout the world and that the company's long-term earnings growth remains certain (which we do), then you will see Qualcomm as a strong buy today. Pick #4: Visa (V) Our fourth pick, Visa, you may see as more of a consumer franchise – and a questionable recommendation given the economic climate. However, the company, while public only since March 2008, is certainly a tech franchise, owning the world's largest payment network. The company leverages its worldwide network by collecting fees for its use from credit card issuers, while steering clear of the consumer default risk. Other card companies, like American Express, have their own data networks too, but they also take on some of the default risk. The brand was created in the 1970s, and has only gained steam with the proliferation of plastic payment. The company's stake in credit cards is impressive, but debit cards have been a larger part of growth in recent quarters as credit card issuers have cut credit lines and increased fees. The company maintains a 75 percent market share in debit cards. Both its universally recognizable (and trusted) brand name, and extensive data network create a moat around the company's business, and we see this franchise as a buy. And now for a runner-up, which is also worth acquiring... A Close Runner-up: Apple (AAPL) Despite calling it a runner-up, we also rate Apple as a buy. Apple was the first real PC line and the main inventor of the graphic user interface. Apple lost the race early on to Microsoft because it ran its company a little differently and it was harder to create applications for Apple computers. But more recently, under the influence of one of its founders, Steve Jobs, Apple has become one of the most remarkable tech stories of the past decade. The company has established its brand on many products and has a strong balance sheet. And the shares are not overpriced. Is Apple really a franchise? We think it's too soon to say. If Jobs's grandson were running the company, we might concede the point. However, we think Apple is run too much like a small entrepreneurial enterprise with one creative guy at the top who calls all the shots. It remains to be seen whether the baton of leadership can be successfully passed on to someone else without the company faltering. In the meantime, and assuming Jobs stays healthy, Apple should remain a very dynamic and profitable company. You may be wondering why we haven't included companies like IBM or Hewlett-Packard in our list of top lower-risk tech picks. Well, those are great brand names, but they are stamped on very different product lines than what they started with. For instance, IBM originally made mainframe computers; today it's mostly a service company. In other words, it has not established a long-term major position in one market. Finally... A FEW WORDS ABOUT CHINA We noted two main things about last week's conference in Davos, Switzerland. First, there was no discussion of China's conflict with Google (GOOG), as apparently the Chinese can not only censor the internet, but they can also prevent the topic from being addressed in an international forum. The other important item was that China, though it fully expects to meet its growth target this year, is worried about rising commodity prices. The reason they're worried must naturally be that they will be buying a lot of commodities. Considering that China also expects slow growth in the developed world, the implication is that China's commodity consumption must be climbing very rapidly. So we continue to like China as a place to invest, and we view commodities as a growth arena. However, feel free to balance out your portfolio with the four lower-risk tech companies we mention above. They are a great balance between franchise and dynamism.Disclosure: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.
★ 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.�↩
★ 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, the potential for growth was severely limited by the fantastic success of Windows. The iPod was Apple’s first breakthrough success after the Macintosh. During some quarters in recent years, iPod revenue has run even with or (in holiday quarters) exceeded Mac revenue. The iPod solved both of the problems Apple faced as “the Mac company”: its eggs were now divided between two baskets, and they’d entered a field with room for significant growth. Last year, immediately after its debut, Steve Jobs began describing the iPhone as the third leg of the company. The numbers Apple released yesterday for its fourth quarter of financial year 2008 (July through September) back this up. The main thing you must keep in mind regarding Apple’s reported numbers for the iPhone is that they’re using subscription-based accounting for it. When you buy a Mac or an iPod today, Apple reports the entire sale as revenue for this quarter. When you buy an iPhone today, however, Apple reports the revenue split evenly over eight quarters. Apple’s interpretation of U.S. accounting regulations is that this is only way they can provide free feature upgrades over the course of two years. That’s why iPhone OS 2.0 was a free update for existing iPhone owners, but a paid update for iPod Touch owners. In the long run, Apple doesn’t make any more or less money from this. It’s just a method of accounting for the money they have made. (Indirectly, Apple clearly hopes that it helps sell additional iPhones, on the grounds that people enjoy getting “free” OS upgrades.) But in the short run, Apple’s iPhone revenue and profit are underrepresented in the company’s quarterly results — only one-eighth of the revenue from iPhones sold during the just-completed quarter appear in the quarter’s results. It also makes the iPhone numbers hard to compare against those of the Mac and iPod. So, Apple is now providing two sets of quarterly numbers. First, GAAP results with subscription-based accounting for iPhones and Apple TV. (GAAP stands for Generally Accepted Accounting Principles.) Second, a new set up numbers — non-GAAP results — which, more or less, show what Apple’s quarterly numbers would look like if they weren’t using subscription-based accounting for the iPhone and Apple TV. Here’s what Apple CFO Peter Oppenheimer said during his opening remarks of yesterday’s analyst conference call: As we reported in our press release, iPhone unit sales grew significantly in the September quarter, resulting in a material increase in the amount of iPhone revenue and product costs that had been deferred for recognition in future periods. Specifically, deferred revenue from iPhone and Apple TV sales grew to $5.8 billion at the end of the September quarter, an increase of nearly $3.8 billion from the end of the June quarter. If iPhone revenue was not deferred, iPhone would have represented 39% of Apple’s revenue in the September quarter. This means, I think, that Apple generated more revenue last quarter from iPhone sales than from either Mac or iPod sales. The iPhone, just 15 months old, is perhaps already the strongest of the company’s three legs. And it’s not like iPod or Mac sales are down — compared to the year-ago quarter, Mac sales are up 21 percent in terms of units and 17 percent in terms of revenue, and iPods are up 8 percent in units and 3 percent in revenue. And in terms of the momentum of the iPhone OS as a platform, keep in mind that the iPod Touch is put on the books as an iPod, not an iPhone. (And Apple does not break those “iPod” numbers out into specific models; no one other than Apple’s top executives know exactly how many iPod Touches have been sold.) Steve Jobs rarely appears on Apple’s quarterly analyst calls. I’m pretty you can count on one hand Jobs’s appearances on these calls over the last 10 years. Typically, Jobs has appeared when Apple has bad news to announce. (His appearance yesterday seems to have been about addressing Apple’s plans for weathering the current worldwide economic downturn.) Here’s what Jobs had to say in his prepared remarks regarding Apple’s revenue and profit from the iPhone: As you can see, the non-GAAP financial results are truly stunning. By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the reported net income of $1.14 billion. Adjusted net income that is more than double our reported income — if this isn’t stunning, I don’t know what is, all due to the incredible success of the iPhone 3G. I would like to now highlight two remarkable milestones resulting from iPhone’s outstanding performance last quarter. The first is that Apple beat RIM. In their most recent quarter, Research in Motion, or RIM, reported selling 6.1 million BlackBerry devices. Compared to our most recent quarter sales of 6.9 million iPhones, Apple outsold RIM last quarter and this is a milestone for us. RIM is a good company that makes good products and so it is surprising that after only 15 months in the market, we could outsell them in any quarter. But even more remarkable is this — measured by revenues, Apple has become the world’s third-largest mobile phone supplier. I know this sounds crazy, but it’s true — as measured in revenues, not units, Apple has become the third largest mobile phone supplier. Let’s look at the ranking — Nokia is clearly number one at 12.7 billion; Samsung number two at 5.9 billion; Apple is number three at 4.6 billion; Sony Ericsson, number four at 4.2; LG, number five at 3.4 billion; Motorola, number six at 3.2; and RIM number seven at 2.1. Pretty amazing. So, last quarter: (1) the iPhone was a bigger revenue and profit generator than either the iPod or Mac; (2) Apple sold more iPhones than RIM sold BlackBerrys; and (3) Apple trailed only Nokia and Samsung in worldwide mobile phone handset revenue (and they’re not far behind Samsung). Jobs followed with this caveat: Now, both of these things, beating RIM in units and becoming the third largest mobile supplier in revenues are amazing feats but part of this was the result of expanding into over 50 countries and there’s no guarantee that sustained sales will equal initial sales. And who knows what the future results will be, given the worldwide economic slowdown but we actually outsold RIM last quarter and ranked as the third largest mobile phone supplier in revenues. Not bad for being in the market for only 15 months. He’s right that no one knows what the results will be for the current quarter (which start three weeks ago, and runs through the end of December) — but we can make an educated guess. Because it encompasses the entire holiday season, Apple’s October-December quarter has always been the strongest for iPod sales. A year ago, iPod sales went from 10.2 to 22.1 million from Q4 (Jul.–Sep.) to Q1 (Oct.–Dec.). Two years ago, they went from 8.7 to 21.0 million. Three years ago, 6.5 to 14.0 million. In terms of a multiplier, that works out to 2.17, 2.41, and 2.15, respectively. I.e., Apple consistently sells a little more than twice as many iPods in the holiday quarter than in the preceding quarter. We only have one year of data for the iPhone. Last year, Apple sold 1.1 million iPhones in Q4 2007. It went on to sell 2.3 million iPhones in Q1 2008 — a multiplier of 2.09, very much in line with previous years of holiday-quarter iPod sales. So, it seems quite possible that Apple could sell twice as many iPhones during the current quarter as it did in the just-reported quarter. If they did, that would be 13.8 million iPhones. Even if they fall short of that mark, they seem poised to sell about 20 million iPhones in calendar year 2008 — more than double their oft-stated goal of 10 million. Many analysts doubted that 10 million iPhone goal for the year; Apple might in fact sell 10 million iPhones in a single quarter. Even if sales are flat in the current quarter, it seems almost certain they’ll sell more than 10 million units in the first six months after the iPhone 3G went on sale. As for where this growth positions the iPhone industry-wide, recall Microsoft’s projections for Windows Mobile licenses this year: The warning signs were there. After boldly proclaiming that it would sell “more than” 20 million licenses to its Windows Mobile operating system by the end of its fiscal year on June 30, Microsoft later scaled that prediction back to “nearly” 20 million units. This week, however, the software giant conceded it did not hit its target: The company sold just 18 million units in the fiscal year. So not only is Windows Mobile growth significantly slower than what Microsoft had publicly anticipated, but the iPhone seems set to surpass unit sales of all Windows Mobile phones combined next year. In fact, given that Apple acknowledged during yesterday’s conference call that, including October sales to date, they’ve already surpassed 10 million iPhones sold for calendar year 2008, the iPhone may well already be outselling all Windows Mobile phones combined. The entire iPhone platform is only 15 months old. The cheapest model still costs $199. The room for growth in this market is unlike anything Apple has ever seen. So the question is: Despite continuing strong iPod sales and record-breaking Mac sales, how long until the iPhone is undeniably the primary product and platform made by Apple? My answer: Not long. And I think Apple’s executive team sees it the same way.
Microsoft's Mojave Attempts to Wet Vista's Desert

Daniel Eran Dilger Nearly two years after Windows Vista was finally released, Microsoft has remained unable to shake off its reputation as being slow, incompatible with existing hardware and software, and generally a poor and overpriced product that nobody wants. Microsoft is now trying to reverse Vista's bad reputation by insisting that the software's problems are not technical but rather just the fault of ignorant customers duped in part by Apple's “Get a Mac” campaign. What's Vista's real problems, and will Microsoft's “Mojave Experiment” help solve them? Blame Apple! Microsoft CEO Steve Ballmer has joined Windows Enthusiast pundits in theorizing that Vista's image problems are primarily the result of Apple's advertisements that regularly poke fun at the problems in Vista. The company has now taken aim at shooting at the messenger with a $300 million ad campaign. In July, Brad Brooks, Microsoft's VP of Windows Vista consumer marketing, addressed the company's business partners at its Worldwide Partner Conference, saying, “We've got a pretty noisy competitor out there. You know it. I know it. It's caused some impact. We're going to start countering it. They tell us it's the iWay or the highway. We think that's a sad message.” Another sad message Brooks had to deliver was that Vista's problems aren't really the fault of Apple. “We broke a lot of things,” Brooks admitted. “We know that, and we know it caused you a lot of pain. It got customers thinking, hey, is Windows Vista a generation we want to get invested in?” Vista: Pay it Forward! Brooks also noted that “Windows Vista is an investment in the long term. When you make the investment into Windows Vista, it's going to pay it forward into the operating system we call Windows 7.” Pay it forward? Is Windows 7 going to be a free upgrade to Windows Vista users, in the same way Apple is expected to offer the next Mac OS X 10.6 Snow Leopard release to existing users of 10.5 Leopard? That's highly unlikely, as Microsoft can't sustain its egregious profits collected through the Windows monopoly by giving away updates for free. Windows Vista raised the price of Windows, putting a new definition on the phrase “pay it forward.” Myths of Snow Leopard 7: Free?! Microsoft Admits Windows Vista Mistakes, Criticizes Apple Ads - InformationWeek Reality Impairment at Microsoft Talking out one's ass appears to be a job requirement for all Microsoft executives, starting at the top. A serious case of reality impairment has resulted in the paradox of the company both admitting that Vista is flawed and “broke a lot of things,” while at the same time maintaining that Vista's reputation is entirely the fault of stupid customers and a comically unflattering portrayal by its competitor. In the “Mojave Experiment,” Microsoft plans to dispel the notion that Windows Vista is problematic and incompatible by publishing a series of videotaped interviews with users who arrived with negative impressions of Vista and left excited about the new operating system. This was achieved by presenting the users with a demonstration of “Mojave,” a new operating system that Microsoft later revealed to be Vista, much to the surprise of the interviewed users who'd heard so many bad things about it. However, the Mojave Experiment is so full of false information and saccharine gloss that it couldn't possibly appeal to anyone smart enough to turn on a PC. Even setting aside the fact that the ad experiment basically seeks to blame users for being dumb, the attempt by Microsoft to paint over Vista's problems is transparent and flawed, for a number of reasons. What's wrong with Mojave. Microsoft can't seem to decide whether it wants to admit that Vista has problems or not, and its waffling back and forth just makes the company look increasingly disingenuous. Is Vista a poorly launched, flawed product that the company is working to fix as quickly as possible, or is it awesome and wildly successful and just the victim of bad press? Microsoft tries to tell both stories at once, which is purely dishonest. In contrast, Apple said from the start last year that its Apple TV product was a “hobby” attempting to break into a difficult market. Critics lambasted it for not immediately taking over the market like the iPod had or iPhone later did. Apple's more recent problems in launching MobileMe were quickly noted by the company along with the intent to address complaints about it rapidly. Microsoft isn't alone in being able to stumble, but its complete lack of candor makes it hard to understand if the company realizes that it even has problems to solve. With Vista, Microsoft has issued a flurry of giddy press releases claiming widespread adoption based on the number of licenses sold and naming it “the fastest selling operating system in Microsoft history,” ignoring the fact that Windows sales are increasing simply because they are tied to PC sales. Microsoft has no competition in the PC operating system market due to its monopoly position, so it could release Windows Wet Toast and still sell it faster than XP and ME and 98 Special Edition and every other version of Windows in the past that was tied to an increasingly younger and smaller hardware market. Vista Sales to Non-Users. Many of Vista's “sales” were free vouchers distributed with PCs sold in the holiday season prior to its launch. Even more than a year and a half later, PC makers continue to put Windows XP on their systems, even those sold with a Vista license, while corporate users almost always remove the default Vista to install an earlier version of Windows. There's also a busy third party industry developing around removing Vista for consumers. In late July APCMag cited Jane Bradburn, a manager for commercial notebook sales at HP, as saying, “From the 30th of June, we have no longer been able to ship a PC with a XP license. However, what we have been able to do with Microsoft is ship PCs with a Vista Business licence but with XP pre-loaded. That is still the majority of business computers we are selling today.” The arrangement is supposed to end by January 2009, but HP is trying to extend the deadline because customers simply don't want Vista installed. EWeek also noted that between April 2007 and May 2008, its survey of business users indicated that Vista climbed from 2% to 5%, but that Windows XP jumped from 74% to 83%, three times the adoption of Vista. That growth came from migration from older versions of Windows. Even in its wildest projections, EWeek says Vista will only reach 28% adoption in businesses by the end of 2010. CNET reported that a Jully 2008 survey by systems management appliance company KASE found that 60% of companies surveyed have no plans to deploy Windows Vista, a ten percent increase in disinterest from late 2007. A full 42% were actively exploring Vista alternatives, and 11% had already made the switch to Mac OS X or Linux. Microsoft is simply lying about the level of Vista excitement, and it's gotten too obvious for the company to continue to do so. XP still killing Vista in sales volume: HP 60 percent skipping Vista, so Ballmer looks to Apple | The Open Road The Truth Is… oh Look a Distraction! At the same time, Microsoft notes on its Vista website “we know a few of you were disappointed by your early encounter. Printers didn't work. Games felt sluggish. You told us—loudly at times—that the latest Windows wasn't always living up to your high expectations for a Microsoft product.” That's some brutal honesty for a company with a knack for spinning wild fantasies about fictitious product enthusiasm for a product never actually put to use in many cases. At the same time however, in trying to refute away Vista's real problems, Microsoft uses a variety of tactics that just return to blind fantasyland. Microsoft is a Marketing Company, not a Tech Company. The company plays its Mojave Experiment hand on a new website, incidentally designed using Adobe Flash rather than the company's own Silverlight. Despite the site's oddly designed, usability-impared interface, it's still possible to pull out lots of details from the experiment that say as much about Microsoft's crafty, misleading marketing as they do about its technical problems, underling the simple fact that Microsoft is first and foremost a marketing company that flogs third rate technology products. Mojave took 140 people and asked them to score Windows Vista. The average response was 4.4. After demonstrating Vista SP2 under the name “Mojave,” respondents ranked Vista at 8.5, a stunning improvement. But what were they ranking? Microsoft notes that “many said they would have rated it higher, but wanted more time to use it themselves.” That sounds good at first blush, but it really indicates that the responses were biased by hyped up enthusiasm rather than facts, and that participants realized it, reserving their final judgement until they could actually see more. The “Mojave Experiment” What does Mojave Prove? Mojave tries to represent that Vista's bad reputation is the fault of ignorant consumers who have heard bad things that aren't true about Vista, and have made up their mind without getting the facts. At the same time however, Microsoft also publicly admits that Vista “broke a lot of things” and that specifically, “Printers didn't work. Games felt sluggish.” Did Mojave clear up mistaken notions for participants, or did it just erect smoke and mirrors in a carefully controlled demonstration that skirted around Vista's real problems, including those Microsoft admits? That's a question that answers itself. Mojave didn't send uses home with Vista in a Mojave package and then ask them how well it worked with their existing peripherals and games, or how fast it was in comparison to their existing PC software. This is Not the Droid You're Running Vista On. Instead, Microsoft sat them down in front of a HP Pavillion DV 2000 with 2GB of RAM. That's what HP called its “entertainment powerhouse” laptop, although HP only shipped it with 1GB RAM. Microsoft maxed out the RAM for the purposes of the test, making the laptop a bit more expensive than its usual street price of around $1050. According to Windows enthusiast Joe Wilcox, PC laptops actually cost $700, “half as much” as Apple's laptops. At least that's the Average Selling Price for consumer retail PC laptops according to NPD's Stephen Baker, compared to Apple's $1500 ASP. Wilcox insisted that his spin on NPD's figures couldn't possibly be biased because he wrote his article on a MacBook Air running Leopard. However, his $2,700 laptop did help drive up Apple's stellar ASP for its laptops well above the entry price for Mac Books, discounting his theory that revolved around the assumption that every Mac buyer pays the average price of all the laptops Apple sells. Wilcox and Microsoft are both disingenuously dancing on both ends of the truth. Many consumers are actually buying cheap laptops at Target that can't run Vista ideally, while Microsoft demonstrates its Vista on a considerably better equipped system in the Mojave Experiment to suggest that Vista doesn't have the performance problems that users have heard about from the majority of their peers who bought cheap PCs and are seeing Vista run particularly sluggishly on them. Should You Pay Twice as Much for a Mac? I Did! You Get What You Pay For. The fact that Apple sells more high end laptops to pro users at retail, and that it does not sell anything in the range of the cheap junk being hawked at big box retailers like Wilcox' Target both result in Mac laptops fetching a higher ASP. That fact also means that Mac buyers will be happier with their purchase and have a more favorable impression of Mac OS X because they're running it on a better system. That's all obvious stuff. However, selling people cheap laptops that don't work well, and then demonstrating a fake “new operating system” that appears to work well when running on a faster machine full of RAM is simply a dishonest bait and switch scam. Wilcox does nearly admit that PC makers are already stretching their credibility as they attempt to sell cheap boxes based on price alone, citing Baker as saying, “We aren't seeing any particularly substantive moves down in price on the Windows side, either in desktops or notebooks.” PCs can't get cheaper because they're already unprofitable and consumers are already disgusted with their performance when running the increased overhead of Vista. Wilcox also sets up a tilted comparison between a Dell PC desktop with integrated graphics and an iMac with dedicated graphics and claims a price advantage for Dell, although noting that, while “Dell offers more for less than the iMac,” “that 'more' also means Windows Vista, which won't satisfy some shoppers.” Why Aren't Shoppers Satisfied with Vista? Like Microsoft, Wilcox and his Windows Enthusiast pundit friends can't seem to decide if Vista has any real problems or if it's all just an unfair taint suggested by Apple's Get a Mac ads. However, while Apple has taken shots at Vista's incompatibility with printers and other hardware and its scarce updates that have been few and far between over the last year and a half of its being on the market, Apple also notes in its Get a Mac ads that Macs can run Vista, and can run it faster than PCs. So Apple isn't inventing and publishing false reports on Vista, it's merely advertising its Mac hardware as superior to PCs. The Vista flaws Apple's ads have referenced are flaws Microsoft itself has admitted to its partners, so the Get a Mac umbrage frequently voiced by Windows Enthusiasts is both hypocritical and ridiculous. However, in the Mojave Experiment, Microsoft downplayed those well-known faults by only carefully demonstrating certain features on a high end machine, and without actually exposing Mojave/Vista users to 'a lot of things Vista broke,' 'printers that didn't work', or 'games that felt sluggish.' It Can't Even Print. In response to complaints that Vista doesn't work well with existing PC hardware, Microsoft's Mojave website says that “the Windows Vista Compatibility Center lists compatibility status for over 9,000 products (5,500 devices and 3,500 software programs).” It even notes 2,000 printers, 200 scanners, and 500 cameras specifically. That sounds good until you realize that Apple ships support for over 3,100 printers in Mac OS X Leopard, a product that is targeted primarily toward education and consumers and which is not expected by users to run on any old hardware that might be in use by PC users. Vista is supposed to run on 95% of the world's PCs, and yet it doesn't even match the printer drivers that ship with Leopard, a number which does not include all of the third party drivers available for the Mac. Oh, but there's more. Not only did Microsoft dance around the truth to feed its Mojave Experiment participants a carefully controlled stream of garbage, but it also inadvertently revealed more serious problems related to Vista, which I'll consider in the following article. Did you like this article? Let me know. Comment here, in the Forum, or email me with your ideas. Like reading RoughlyDrafted? 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Plan B

Last week I presented my best guess why Microsoft would want to buy Yahoo. What was it that made Yahoo worth $44.6 billion to Bill Gates? Based on what I believe is a pretty profound understanding of the innards of each company, I said it came down less to competing with Google and more to transforming Microsoft into a new company operating under new rules and successful in a new era. Anything else simply didn't make sense to me. Ganging up on Google might sound good, but combining corporate cultures is difficult and in the short term -- which is all that matters to most companies today, seeing their trajectories simply as a succession of short terms -- it could only help Google and hurt Microsoft/Yahoo. If Microsoft was serious about its bid for Yahoo, then there had to be some bigger prize for Redmond that went beyond simple market share. But what if Microsoft wasn't serious about its offer? Well then things start to get REALLY interesting. Certainly Microsoft's offer for Yahoo has thrown that company and several others into a tizzy. Yahoo can't be getting much work done, that's for sure. And if you believe the press reports, AOL and News Corp have been dragged into the strategizing, too, and are subject to disruption. For Yahoo, as the primary target, overall efficiency in the company will have dropped instantly by 20 percent just because people will be talking at the watercooler rather than doing their work. And Yahoo wasn't a very efficient place to begin with. This alone has some value for Microsoft, where I will guarantee you the distraction is far less. Screwing with the minds of Yahoo has value to Microsoft and screwing with AOL and News Corp, too, well that's just a bonus. You can see that Yahoo is concerned about Microsoft's real intentions in its response to the Microsoft bid. The Yahoo board said the bid undervalued the company, but Yahoo spokesmen (not the board) carefully added that regulators might block the deal and Microsoft was offering no financial guarantees. If Microsoft were to come back to Yahoo with a sweetened bid nearer to $50 billion and a guaranteed $1 billion termination fee if for any reason the deal should be blocked or fall through, I'm guessing Yahoo would respond much more favorably. It's up to Microsoft now to prove its intentions. There is good reason to believe, however, that Microsoft's intentions are anything but good. Redmond's real goal may be simply to poach people from Yahoo, and this deal could help them do just that. There is plenty of historical precedent for such behavior. Back in the 1990s, for example, Microsoft made many approaches to Borland, a company that was giving it fits in the programming languages business at the time. Borland's products were simply better (and a lot cheaper) than Microsoft's. Bill Gates had also been stung by the defection of an important Microsoft executive, Rob Dickerson, to Borland. Failing to buy Borland at a good price, Microsoft took to recruiting Borland employees, sending limousines during lunch hour with Microsoft signs in their windows to Borland's Scotts Valley, California headquarters to pick up techies for job interviews. Microsoft reportedly took this technique to an even higher level around the same time when it tried to buy Intuit, which at that point was primarily known for its Quicken home finance application. Microsoft wooed Intuit and won the company in 1994 with a $1.5 billion all-stock offer. Another reported incentive to Intuit was Microsoft's threat to throw $1 billion into development of competing products if Intuit didn't sell out. Already in antitrust trouble with the Department of Justice, Microsoft eventually dropped the offer, paying Intuit a $46.25 million termination fee. But according to at least one Intuit techie who jumped to Microsoft shortly thereafter, the primary purpose of Microsoft's bid was actually to get information on Intuit's programmers, NOT to buy the company. Unlike Borland, where Microsoft paid a PR penalty (and later scored a lawsuit) for sending limos to the parking lot and interviewing anybody who would get in, by entering a formal due diligence period with Intuit, Microsoft got access to many details, including Intuit’s product plans and employee records. By the time they bailed on the deal, Microsoft had a very good idea exactly which Intuit employees to recruit to both improve Microsoft Money and to hurt Quicken, QuickBooks, and TurboTax. It is a testament to Intuit that the company survived. Now jump to Yahoo, where exactly the same process could be in effect. At a minimum Microsoft is forcing competitors to act when they would rather not. If Yahoo succumbs Microsoft will gain exactly the sort of inside information they got from Intuit. Yahoo is a huge company plagued with pockets of inefficiency (pockets of efficiency?). A failed Microsoft bid, even one involving a termination fee, could lead to horrific results for the company. Remember that Yahoo is staggering here while Intuit was at the top of its market and its game. I'm not saying this is what's happening, by the way, just that it concerns me. I guess we'll have to wait and see. And while we are waiting, most of the technology world has been hanging out this week in Barcelona, learning about the future of mobile technology at the 2008 Mobile World Congress, which sounds like a government agency but is really just a trade show for cellphones. Google is there announcing a new version of its Android open source software developers kit for building Linux-based mobile phones that will work well in the Google ecosystem. But unless it is happening behind closed doors and I am unaware of it, nobody in Barcelona is looking at a true Google Phone or gPhone, which won't hit the market until later this year. The whole concept of the gPhone is problematical both for the market and for Google, itself. I'm making a distinction here between Android phones introduced by any number of vendors and a true GOOGLE phone — a gPhone — actually sold under its own brand by Google. Microsoft doesn't sell PCs, you may notice, because to do so would step on the toes of their hardware OEMs. Okay, the xBox 360 is a lot like a PC, but it is still a lot more like a video game and Microsoft was around for 25 years before it dared sell an xBox. So conventional wisdom says Google won't sell a gPhone, preferring instead to see the world repopulated with Android phones, instead. But Google is not like other companies, which means they are sometimes bolder and sometimes more foolhardy, because a Google-branded gPhone — two of them, actually — is on the way. Here is what little I know, dropped in my lap this week by a loyal reader (you know who you are). There are two gPhones slated for release with the first coming in September and the second probably not appearing until after Christmas. Given that the first is the high-end model and the second is cheaper, Google will probably expect to make as much money as possible on the higher-margin units at Christmas before revealing the budget model even exists. How Apple-like, eh? Both will include WiFi, which makes me wonder if a VoIP client will be there, too. The high-end phone will look somewhat like a Blackberry Pearl, but the screen flips up and there is a keyboard for texting. No word on pricing for the high-end phone, but the second model is intended to be less than $100 — AFTER Christmas. The actual manufacturer of these gPhones will be Samsung (rumors to this point had indicated HTC, so this is a change) and Google is still talking with both T-Mobile and Verizon as potential carriers (rumors also said Verizon had passed — not). That means there are both GSM and W-CDMA versions in the works. Given AT&T's success with the iPhone I can't imagine Verizon will let the gPhone pass, but it will be interesting to see if Google will be able go with a nonexclusive deal and get both U.S. carriers. Nah.
TUAW Exclusive: Aaron Patzer on the future of mobile finance, Mint.com, and Quicken on the Mac

Filed under: Software, Internet Tools, TUAW Interview At the age of twenty-six, Aaron Patzer founded the financial website Mint.com. In many ways Mint was much like an Apple product: it had a simple interface, it was easy to understand and use, and many of Mint's early adopters became very loyal evangelists. Word of mouth spread, and just 18 months after its launch (Mint officially went public in 2007), Mint had added its one millionth user. To the dismay of many, Mint sold to Intuit in September 2009 for $170 million. I say dismay because many users of Quicken products had been less than thrilled with Intuit's offerings for some time, and some people were concerned what a twenty-year-old company that seemed stuck in its ways would do with a popular user-friendly Web 2.0 startup. Out of all the negative press, perhaps Mac users could be forgiven for having the most anxiety over the acquisition. Many had abandoned Quicken Mac 2007 in favor of Mint.com. Mac users wanted to move on from the stale Quicken ecosystem and go with something simple and easy. Now, that simple and easy solution had moved to where the users had escaped from. Luckily, Intuit wasn't like other companies who buy smaller start-ups just to eliminate a competitor. Intuit recognized that Patzer and his team possessed the much-needed original financial software ideas and UI design mojo to put a spark in their aging products. In November 2009, Intuit made Aaron Patzer VP/GM of Intuit's Personal Finance Group -- which left him in charge of Intuit's personal finance offerings, including Quicken for Mac. It was January 2008. At Macworld Expo, Steve Jobs had just unveiled the MacBook Air. Over at Intuit's booth, the company was previewing an anticipated update to Quicken Mac 2007 - one that didn't require Rosetta to run and didn't have an un-Mac-like UI. Unfortunately, the UI that Quicken ended up with consisted of a Cover Flow-esque interface. It was 2008 after all, and Cover Flow was the hot new UI element, but this was a finance app. We didn't need glitz when we just wanted to see how much cash we had in the bank. That aside, the single-window interface was a welcome change. Intuit announced that Quicken Mac 2007's sequel, Quicken Financial Life for Mac, would ship in the Fall of 2008. Fall 2008 came and went. At Macworld Expo 2009, Intuit previewed a new beta of Quicken Financial Life for Mac and delayed its release again until Fall 2009. I was an early tester of the new beta, and it was buggy; the user interface looked friendlier than it actually was - in other words, the beta was everything you had come to expect from an Intuit product for the Mac. July 2009 came around and, no surprise, Intuit announced it was delaying Quicken Financial Life again, this time until 2010. 2010 - four years after the last version of Quicken for Mac came out (2007 was released in 2006). This time Intuit released a statement all but admitting that the company had failed at providing the Mac with usable financial software: Feedback from Mac customers led us to rethink our approach to developing Quicken for Mac. We went back to the drawing board and are making changes to everything from what the program does to how it looks. We spent extra time building a reconcile mode for the new register, a robust Windows-to-Mac transfer function for new Mac users (and existing customers running Quicken on a Windows virtual machine), and redesigned the experience to make it look and feel like a native Mac application should. At the same time, Intuit announced Quicken Financial Life for Mac would be available for pre-order from Intuit's site on October 12, 2009. Guess what happened? That's right. But at least this delay was only two months. By the time the product actually did go live with pre-orders many, including myself, thought it was too little, too late. Luckily though, something happened at Intuit between the pre-order delay in October and the December pre-order release: Aaron Patzer was put in charge of Quicken Essentials for Mac (they scrapped the Quicken Financial Life name for a reason I'll get to in a moment). I interviewed Aaron by phone yesterday and he had a lot of things to say about the frustration Mac users have with Intuit. Perhaps that's because he experienced the same frustration with Quicken - and that frustration led him to found Mint.com. Speaking with Aaron, I could hear the passion in his voice for simple products that allow users to easily access their data in a straightforward way. Those original ideas and UI design mojo I mentioned earlier? Aaron put them to work right away. "When I first saw Quicken Financial Life, it had Cover Flow for no reason," he laughed. Cover Flow? No reason? Gone. "Quicken for Mac 2006 and 2007 were C/C++ programs that looked like bastardized versions of the Windows product. Little things matter," he told me. "In the old apps you would think you were supposed to press Command-A to select all of the entries in your registry, because that's what Command-A does on a Mac - it selects all. But in Quicken Mac 2007 it would actually bring up your accounts list. It's little things like that, that you could tell the people [writing the program] weren't real Mac aficionados." Aaron himself uses a 15" MacBook Pro. The team that he spearheads for Quicken Essentials is a group of "Mac guys who live and breathe this stuff." The team consists of "five or six developers and three guys on QA with product managers coming on and off and the graphics guys switching between the Windows and Mac versions." Speaking of Quicken on Windows, Aaron himself wrote the spec for the next version of Quicken for Windows (2011, due out later this year). Why is that important? Because Aaron has a clearly defined vision of what the future of financial software will look like. "You'll start to see the mess of all the [Intuit] products merged together. Longer term it shouldn't matter where you use your financial application, whether it's on the Mac, Windows, or Linux. I want to get everything to parity [on] the features and actually do the back-end so it's all a consistent single data model - probably based on Mint - and then just skin the front ends (applications) to look like a Mac product, to look like a Windows product, to look like an iPhone or an Android app - to take advantage of the unique advantages of those platforms. But the back-end would be the same so you can just migrate any time you want to from Mint.com to Quicken Essentials for Mac to your Android phone or iPhone." Well, that sounds awesome, but what about people that have years worth of old Quicken data? "Eventually we will make it so you can just one-flip click your 20 years of data into the cloud and pull it down on any of these devices - that's the holy grail and it'll take over a year to do that,' he says. "But you can see that already in using the new QEM - it's using a lot of the same user experience paradigm (the way you budget on the Mac, the way you click through the pie charts) and that makes the back-end easier." That's the larger picture, and after listening to Aaron's enthusiasm, if anyone can make it happen, it'll be him. Let's get back to Quicken Essentials for Mac, though. "It's called Quicken Essentials for Mac because it's what we consider to be essential for most users - about 80% of users." It's not just what Aaron and his team think is essential; it's what people tell them they want. "We do a lot of usability studies, that's why Mint turned out the way it did. We applied the same to QEM. We went to people's homes and watched them use it. The majority of them just want to know: How much do I have? How much do I owe? How much do I spend on gas and food? How many times do I go to this restaurant? How many times do I go to Starbucks? What investments do I have? Let me set a budget to control my spending." Yeah, but what about the thing many arm-chair reviewers talk about? "Only 6% of users across all platforms use bill pay," Aaron says. "Most people still go to their bank's website to pay a bill." What about other requested features, like deeper investment tools? That's where the future of Quicken on the Mac comes in. Intuit isn't abandoning the Mac platform anytime soon; in fact, they're embracing it: "For the next version of Quicken for the Mac we are planning two SKUs: Quicken Essentials and a Deluxe version which adds the deeper investment tools - history of investments, stock lots (buying shares of one stock at different times), etc." You may rightly point out that Quicken for Windows and even the old Quicken for Mac supported these investment tools and that Quicken for Windows supports bill pay (for the paltry 6% who actually use it), but give it time. Aaron has only been on QEM for four months now, but has already helped completely reinvent Quicken on the Mac in that short timespan (yes, it's finally a Cocoa app). Though many may complain of the lack of investing/bill pay features, I can only liken Quicken Essentials for Mac to QuickTime X. Both apps have been rewritten from the ground up to replace clunky legacy code that would have slowed their scalability in the future. Just as QuickTime X is missing some of the features of QuickTime 7, Quicken Essentials for Mac is missing some of the features of Quicken Mac 2007 - for now. But because of the clean-sweep rewrites, these new applications are just the launching point for the programs into a better, more feature-rich future. I've been playing with Quicken Essentials for Mac for a few days now (I'll have a full review of it on February 25) and I can already tell you, I'm a convert. I abandoned Quicken for Mint, but QEM has brought me back into the fold. It's worth it for the Cocoa rewrite alone. What else does Intuit have in store for the Apple community? Aaron told me that after Mint releases its Android app, the team will be adding features to the next iPhone version. Some of those features include adding manual transactions - the ability to enter checks that haven't cleared yet, and an easier way to enter cash. "Doing that on the iPhone is probably the most useful way to do it because you are usually paying cash in a cab or buying a quick coffee with it." Another thing under consideration is an ATM locator. "We know which bank accounts you have so we can tell you which ATMs in your area are not gonna charge you a fee." Also expect to see an iPad app. "Yes, it's something we've been looking into. Ideal implementation would be Mint's pie chart that you can click through and dive into to see Food-Dining-McDonald's, etc. Where you could use pinch to expand and contract." But the iPad app won't be available at launch and probably not before late summer at the earliest. What about Aaron's brainchild? I use Mint for all my US accounts, but what about my UK bank accounts? Will the rest of the globe soon be able to utilize Mint.com? "Mint is working with the Global Division at Intuit, planning how to internationalize our code base." As Aaron points out, that's one of the advantages of such a large company taking over a Web 2.0 startup - the startup can use the company's resources to go further than it could have on its own. As for that large company? Well, something tells me that acquiring Mint and Aaron Patzer is the best thing that could ever have happened to Intuit - and you can take that to the bank.TUAWTUAW Exclusive: Aaron Patzer on the future of mobile finance, Mint.com, and Quicken on the Mac originally appeared on The Unofficial Apple Weblog (TUAW) on Wed, 17 Feb 2010 20:00:00 EST. Please see our terms for use of feeds.Read�|�Permalink�|�Email this�|�Comments Apple - Aaron Patzer - Quicken for Mac - Intuit - Quicken

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TUAW Exclusive: Aaron Patzer on the future of mobile finance, Mint.com, and Quicken on the Mac

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