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Month November 2011

Is Innovation Valuable?

I began thinking carefully about Apple in 2005 when the stock was priced at around $55/share. I remember that the events which made me consider Apple in a different light were the launch of the iPod shuffle and the launch of the Mac mini. Both moves signaled to me that the company was serious about competing with non-consumption. At that point I thought that the company was a potential opportunity as an investment.

But I also remember that many people at the time thought that the stock price was too expensive. At $50, the company was much more expensive than the year before. The stock started 2004 at about $11/share. The reason it had climbed so much was that the iPod began to be a real world-wide growth phenomenon. Buying Apple was buying into the iPod and many said the price was unsustainable given such a strong dependency on fickle consumer tastes. It was a much riskier proposition than that of competitors like Dell and HP which made product for reliable buyers like enterprises.

Indeed, by 2006, the shine was off. In the first half of 2006 the stock collapsed from $85 a share to $50, a fall of 40%. It was becoming clear that with mobile phones taking on more music playing features, the iPod was not going to be a big story for long. What’s more, Apple had just announced that they were switching to Intel for the Mac product line. Investors saw just how vulnerable the company still was and considered that the Mac brand was in jeopardy as it transitioned to becoming a Windows-friendly machine.

However, in 2007 the company’s value recovered with the introduction of the iPhone. Suddenly there was a new product to drive sales. Nobody knew by how much or how but there was a sense that the iPhone was enough to keep Apple from oblivion.

Yet, again, in early 2008 the company lost 40% of its valuation. In a rather inexplicable period following the launch of the MacBook Air, the company’s shares went into free fall. Inexplicable because the company continued to deliver solid growth with 2008 calendar quarters showing between 32% and 155% EPS growth.

Then the recession came. It caused another 40% share price collapse. Growth slowed to a range of 11% to 61% during 2009. As the marco “headwinds” blew over, by the end of 2009, with the help of a lukewarm response to the iPad, the company’s value recovered to its 2007 level. In the mean-time its earnings more than doubled.

It may not appear to be the case, but throughout this volatile period, the investment thesis remained fairly constant:

The Global Smartphone Market Landscape

There is finally enough information to try to give an estimate of the smartphone market as a subset of the overall phone market.

The chart to the left shows the overall picture.

To sum up: The smartphone market has now reached over 30% of shipments. Non-smart devices are at 69% of total. The individual phone platform shares are as follows:

  1. Android (and Android-like): 17.6%
  2. iOS (iPhone only) 4.4%
  3. Nokia Symbian: 4.3%
  4. BlackBerry: 2.76%
  5. Bada: 1%
  6. Windows Phone 0.5%

The past quarter was the first where there is evidence of significant non-seasonal decline in incumbent platforms. Both RIM and Symbian saw two sequential drops in volume. The iPhone had a seasonal (or, more accurately, transitional) decline. Windows Phone had a very modest increase in share from 1.3% to 1.7% share though this is well below a margin of error in the estimate.

Android (and Android-like) shipments ballooned to nearly 70 million but sell-through could be about 10 million less. Nearly one in five phones sold is now powered by an Android variant. A remarkable story since the share was zero less than three years ago

Of the vendors involved, here is the division of share:

Sponsor: Textastic (and why this app is indicative of disruptive change)

I’ve always thought of the iPad as a low end computer. There was a time when the PC was considered to be a low end computer. Based on the prevailing definition of computing when it was new, the PC was also belittled as not a real computer.

However, the microcomputer quickly took over some small jobs from its big brothers the Mainframe and Mini-computer. One of the first jobs it took was that of data entry or text editing. Then followed “spreadsheets” and then came “word processing” and eventually presentations. Curiously, there were no such concepts as spreadsheets or word processing or doing presentations in mainframes. In reality, the new computer did not need to find a raison d’être by displacing accounting and engineering functions–things which sold big iron.

With the puny new personal computer came completely new definitions of what computers should be used for.

With the new touch-based devices of today, we are seeing similar migrations of utilization to new jobs to be done. The simpler creative tasks migrate first and the advanced (or emergent) uses follow. Like with the microcomputer, the first common creative task for tablets happens to be text-based editing.

For proof we have this week’s sponsor. Textastic is an app which brings a perfectly adequate text, code, and markup editor to the iPad. As one would expect, it supports syntax highlighting (in more than 80 languages) and is extensible with TextMate-compatible syntax definitions and themes. It has all the features one would expect from a good editor.

But like the PC’s new graphics enabled new interaction models, the touch interface allows for innovation in character selection: A cursor navigation wheel simplifies text selection and the extra row of keys above the keyboard makes it easy to type common programming characters.

It has all the support a mobile coder/writer may want: HTML and Markdown preview,  sync with (S)FTP and WebDAV servers as well as Dropbox. It even includes a built-in WebDAV server that allows you to quickly transfer files to your iPad wirelessly from your Mac or PC.

It’s time to shed the physical and mental burdens of the PC era. Create anywhere, anytime with Textastic for iPad. Just $9.99 at the App Store.

5by5 | The Critical Path #13: The Innovation Anomalies

The Innovation Anomalies

Episode #13 • November 16, 2011 at 11:00am

Dan and Horace talk about innovations in emerging economies related to mobile service and how they might foreshadow changes in the developed world. We also discuss why some industries seem to be exempt from disruptive innovation and suggest that there are boundaries societies set to how value can be re-defined.

This show pushes beyond the boundaries of company and industry analysis and touches on the limits or “sound barrier” of innovation itself.

The end of the dedicated portable device

On October 27th, Nintendo published half year results for the fiscal year ending in March 2012. Management stated that the company lost over $900 million with a negative outlook. Nintendo cited weaker than expected sales of Nintendo DS hardware and 3DS software and Yen appreciation as the main reasons for the miss. Is this the end of Nintendo?

Before we look more closely, here is a quick summary: The company is exclusively involved in selling game hardware and software. Their console platform is the Nintendo Wii, which will be followed by the Wii U late in 2012. The Nintendo DS and Nintendo 3DS are the company’s portable game consoles. The Wii and the DS are nearing the end of their product cycles. On the software side, the company is known for gaming titles such as Super Mario and Zelda. Nintendo also pioneered the licensing model to allow third-party developers to produce games for its hardware products.

A closer look

Apple's Guidance Deficits

Every quarter Apple’s management issues a “guidance” or forecast of their own earnings in the following quarter. Over the years, this figure has been nearly useless because not only is it not accurate, the error itself has been wildly variable. I plotted what I call the Earnings Guidance Deficit for Apple based on the formula (Actual EPS diluted – Guidance)/Guidance.

The higher the value in the bars above, the more the company underestimated

Sponsor: Koombea. Mobile and web app development

My thanks to Koombea for sponsoring this week’s posts and feeds.

Koombea designs and develops mobile and web apps for clients. They’ve mostly been serving startups in tech incubators such as Y Combinator, TechStars and AngelPad. The results have been good enough for clients to raise a combined $50 million in early stage funding during the last 18 months alone.

They’re also applying the same methodologies while working on mobile projects for larger companies like Motorola and BMC software.

They have a lot of experience building and shipping iOS, Android and Rhodes apps.

They’re also avid readers of Asymco and getting to know the audience through comments. If you have projects requiring their type of expertise (and even if you don’t) consider reaching out and talking to them via koombea.com.

 

Pac-Man

I recently posted a comparison between the profit capture of phone vendors in 2007 and the most recent quarter:

The idea was to show what a disruption looks like. A phenomenon where an entrant with none of the advantages of incumbency takes the profits away from companies privileged with ideal market access and knowledge.

The view of profit shift is the ideal view since it shows the “bottom line” impact and thus the denouement rather than more nuanced sub-plot. However, we don’t always have access to profitability data. Sometimes we only have access to revenue estimates.

Fortunately revenues have a similar story and are often a good proxy. Consider how the evolution of revenue shares occurred in the same market:

How many iPhones are being discarded in the US?

In the recently posted US Smartphone Landscape I used comScore’s data to paint a picture of the growth of smartphones in general and the shape of the mobile platforms in the US. The source was survey data measuring the installed base. If we compare the installed base sequentially, we can get the increase (or decrease) of a particular platform. Comscore reports monthly but we can also summarize the data at a quarter-by-quarter basis.

There is another source however for the US market, at least for the iPhone: operator activations. They report iPhone activations, shown below.

Can we use activations together with installed base data to learn something about the market? Yes, with some caveats.

Apple's Income Statement at a glance

This is the cascading view of Apple’s financial performance in the third calendar quarter. It only includes information that is already in the income statement but shows the relative growth of the individual product lines, their cost structures and the relationship between fixed (Operating) expenses and their variable (cost of sales) expenses at a glance.

In the past I would publish current and year-ago data, but in this quarter’s summary I present three years’ history of quarterly data. Note that the full view is quite large (2,220 x 886 pixels).

Here are some handy tips on how to read the chart:

  • The “top line” is the size of the first column in each quarter’s chart.
  • The “bottom line” is the size of the last column.
  • The blank areas are what Apple pays suppliers.
  • The red area is what Apple pays to the government.
  • The Pink and pale blue area is what Apple pays its “exempt” employees. (Other Income and Expense is also included but is nearly invisible).
  • The Green area is what is declared as earned and becomes the “E” as part of the P/E ratio. (Note that not all of this goes to the Cash account as the cash flow statement will reveal).
  • The colored areas in the first column labeled with product name and “GM” (for gross margin) represent what Apple keeps from the sale of each product after paying expenses tied to producing that product.
  • The ratio of sold areas to the corresponding white areas below in the first column represent the margin (as a percent) per product line
  • You can observe the trend over three years by tracking each of these quantities from left to right.

The scale of the chart is shown by the line near the top representing $30 billion.