July 2012
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Month July 2012

Asymmetric Competition

Thanks to Angel Lamuno for sending me to a dry and boring lecture by Dr. Israel Kirzner from Feburary 1988. It got me thinking again about competition and how confusing it can be.

The lecture was in part about how the word “competition” is used by economists with directly opposing meaning from that of the layman and how that leads to confusion about the role of free markets.

I won’t dwell on that, but instead I want to explain how this word can also be contradictory in meaning when applied in everyday usage in business analysis. Nowhere is this more evident than when we argue whether Apple competes with X or Y or Z.

Does Apple compete with Android or Google or Samsung? How could Apple compete with Google and yet cause it to be the default search engine in Safari thus enriching their competitors? How could Apple compete with Samsung and yet select their semiconductors for the heart of its most important and profitable product? And how could the people across the table from Apple agree to terms on these deals while being sued by them?

Some have tried to characterize this situation as “coopetition” or the co-habitation of conflicting strategies for a balanced optimum. I find this characterization uncomfortable and unsatisfying. The balance sought will be very fragile and change daily and no optimization is practically possible. It seems contrived.

Rather, I think about these situations as examples of asymmetric competition. This is competition where companies are rivals but they have different definitions of the basis of competition. In a way, they are like gladiators who have weapons which cannot be brought to bear or wielded effectively to counter the opponent’s.

Consider the following question: does the iPhone compete with the Galaxy SIII?

Estimating third and fourth quarter iOS shipments

In the 2011 Annual Report(10K) published October 26th Apple states:

The Company anticipates utilizing approximately $8.0 billion for capital expenditures during 2012, including approximately $900 million for retail store facilities and approximately $7.1 billion for product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.

The history of these expenditures is shown below (the blue bars are statements from 10K reports including the one above shown as the right-most bar): Three 10Q reports so far this fiscal year have given us updates on asset values and the change in these values are shown as the right-most yellow bar. The asset value change suggests $3.9 billion has been spent so far of the $7.1 billion budgeted. Thus we can estimate that about $3.2 billion remains to be spent in the fourth fiscal quarter (thus bringing the yellow bar to parity with the blue bar in the chart above–a parity that was achieved or exceeded for five out of the last six years).

Assuming $200 million of the fourth fiscal quarter budget will be for land and buildings[1] results in an estimated $3 billion remaining for product tooling and manufacturing process equipment and data centers.

The history of spending for various cost centers is shown below.[2]

Apple's growth scorecard for the third fiscal quarter 2012

As the following revenue growth table shows, the second calendar quarter of 2012 was not like the recent past.

The bottom line growth (earnings) is the slowest since Q309 which had a difficult comparison with Q308 when the iPhone 3G launched and saw 800% iPhone growth. This past quarter also had a difficult comparison with 150% iPhone growth a year earlier and 122% earnings growth.

This is shown in a different way in the following graph:

Scoring my performance on the third fiscal quarter forecast

Did I get anything right in last forecast?

The table below shows the scores for my various estimates[1]

Last quarter I managed a B+ overall but this quarter was a C+. The iPad estimate was a complete failure mitigated slightly by a, directionally at least, correct call on the iPhone. The failure on iPad dragged down revenue and EPS while the accuracy on iPhone improved the gross margin. iPod and Mac estimates were consistent with recent performance.

The error on iPad is a harsh lesson which shows how the category is still unpredictable. With only four quarters where we could measure y/y growth, and with those quarters showing 183%, 166%, 111% and 151% growth, I assumed that the 150% growth was sustainable.

Padcast: Reviewing Apple's Third Fiscal Quarter 2012

Here is the second Perspective “padcast” where I discuss:

  1. Top and bottom line growth
  2. iPhone, iPad, iPod and Mac revenue growth
  3. iPad vs. Mac
  4. iOS product mix
  5. Other product line growth
  6. Gross Margins by product
  7. Pricing and revenue per unit by product
  8. Cash and cash growth
  9. Guidance and whether results were a surprise to management

The discussion is an audio presentation with animated, interactive motion charts which can be manipulated by the user.

It’s available as an in-app purchase for $0.99 on the iTunes app store via the Perspective iPad app.

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Cracking the India Code

In my last podcast (Impatient for Growth) I mentioned my frustration at Apple’s slow entry into emerging markets outside of China. I cited Tim Cook’s comments that he did not see an opportunity there in the short term. He mentioned the multi-level distribution challenge which I took to mean the difficulty in setting up Apple stores (in itself due to restrictions on foreign owned retail chains) and the absence of device/service bundling.

This requires more analysis and the best place to start is to look at the data available.

The market potential is enormous. Globally, there are 6 billion mobile cellular subscriptions (end of 2011, ITU) and 86% penetration, but only 1 billion have mobile broadband subscriptions (which make ownership of a smartphone worthwhile).  In India there are 893 million subs (vs 986 million in China).

In 2011 142 million mobile cellular subscriptions were added in India, more than in the Arab States, CIS and Europe put together.

So the potential and growth are spectacular. But that is just 2G. Mobile broadband (i.e. 3G) is rare. Globally, developing countries have only 8% mobile broadband penetration vs. 51% in the developed world. Mobile broadband is a proxy for mass adoption of the iPhone (though perhaps not for Android inasmuch as it’s employed as a feature phone).

The situation for 3G in India is even worse than the overall developing world.

5by5 | The Critical Path #47: Impatient for Growth

This episode is recorded on the day after Apple’s second quarter earnings release. We go through all the income statement updates and discuss what went wrong (almost everything) and what went right (precious little). We use statements by management about India to answer the question of where the emerging market potential is for iPhone. Putting aside some of the missed opportunities or bad timings, the quarter is reviewed as less than the stellar performance we’ve become accustomed to but not bad all things considered.

via 5by5 | The Critical Path #47: Impatient for Growth.

A preview of Apple's performance in Q2

In anticipation of the earnings release tomorrow, I prepared a iPad-enabled audio-visual chart-based discussion of my expectation for product-level performance.

I discuss six topics in a historic context and the reasoning behind my expectations for the just-ended June quarter:

  1. Units by product line
  2. Unit growth
  3. Gross Margin percent (profitability) by product
  4. Pricing power in terms of revenue per unit sold
  5. Contribution to revenues for each product
  6. Contribution to margin for each product (i.e. profitability)

The discussion is packaged as a “padcast” which means you need to have an iPad and the Perspective App available on the iTunes App store in order to view the content.

It’s available for $0.99 here.


The Future of Apple: A panel session at Fortune Brainstorm Tech

My thanks to Adam Lashinsky of Fortune for inviting me to Fortune Brainstorm Tech in Aspen this week. I was asked to participate in a panel session with Gene Munster of Piper Jaffray to discuss “The Future of Apple”. The session was moderated by Adam.

Here is a full video of our conversation: FORA.tv – Future of Apple.