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The job the iPhone is hired to do

In the latest quarterly report Apple changed how it reports product revenues. In previous quarters the iPhone and iPad were reported including accessory revenues while iPod accessories were reported under “Music” revenues.

“Under this new format revenue from iPhone, iPad, Mac and iPod sales is presented exclusive of related service and accessory revenue […] revenue from all Apple and third party accessory sales is presented as a single line item [Accessories.]“

Apple provided a document showing re-classified product summary data.  By measuring the difference between original revenue and re-stated revenue per product we can determine how much service and accessory revenue was being attached to each product.

I did this for two quarters as a sample:

Screen Shot 2013-01-24 at 1-24-2.16.14 PM

 

The analysis shows that the iPhone has been receiving about $15 of accessory attached value and the iPad about $25. Interesting trivia, but how is this insightful?

Consider the impact on this analysis of revenues/unit shipped:

Screen Shot 2013-01-24 at 1-24-2.31.52 PM

The iPhone obtained about $642 revenue/unit (shown above as the last datum in the green line). That compares slightly lower with last year’s $659/unit. However, the latest quarter is on the new basis and the data in the chart above shows old basis.

Here is the data with re-stated iPad and iPhone ASP:

Screen Shot 2013-01-24 at 1-24-4.29.37 PM

On a re-stated basis, without the extra revenue from accessories, the iPhone “ASP” (Average Selling Price) from a year ago becomes $646 (which, again, is not what is reflected in the graph). This is almost exactly the same as the current quarter. The iPhone “ASP erosion” therefore goes from 2.6% to only 0.7%.

Similarly, the iPad shown at $467 in the latest quarter does not drop from $593 last year but from $568. Its ASP erosion becomes 18% rather than 21%.

Interesting resilience with the iPhone and slightly better support for the iPad price. What does it mean?

Pricing power is the most important indicator of differentiation and it implies an ability to create value in excess of cost. Not only that but it also indicates whether a product is being “commoditized” by over-serving the market and being substituted by lower priced alternatives.

In the case of the iPhone the tenacious retention of its ASP indicates that the point of over-service has not been reached. Buyers are not yet switching in significant numbers to the older, cheaper variants available from Apple. If they were we would see evidence in the price first due to the change in mix.

Contrast that with the iPad where there is a far more marked erosion. That’s due to the introduction of the mini which is good enough to substitute for the larger version for many of the jobs it’s hired to do. We can safely argue that the iPad is good enough in smaller form factors and addressing larger markets.

But why isn’t this happening to the iPhone? Why isn’t the iPhone n-1 “good enough”? Surely consumers can do almost the same tasks with an iPhone 4S as they can with the 5. Why are they still buying the new phone?

The clue comes from the fact that the consumer is not the only buyer. It’s  operators who buy and re-price the product. They are hiring the product to sell broadband and the newest variant is still the best hire to do that job. This observation is crucial to understanding the growth dynamics of the iPhone and consequently, of Apple itself.

I repeat what I’ve mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a “commission” for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high. Also because it’s so good, it gets bought in large batches which allow Apple to schedule production efficiently.

This understanding gives us a solid basis from which to evaluate its growth potential.

  • Bags M

    Having worked for a wireless carrier, you are absolutely correct. In the US, Verizon, for example, wants its subscribers on its more cost-efficient 4G LTE platform. More heavily promoting the iPhone5 (a 4G device) vs the 4S or 4 variants therefore makes sense. It will be interesting to see if the logic holds up when the 5S or the 6 is introduced.

    • Bruce_Mc

      Horace:

      “In the case of the iPhone the tenacious retention of its ASP indicates that the point of over-service has not been reached. Buyers are not yet switching in significant numbers to the older, cheaper variants available from Apple.”

      Horace again:

      “The iPhone is primarily hired as a premium network service salesman.”

      Bags M:

      “In the US, Verizon, for example, wants its subscribers on its more cost-efficient 4G LTE platform.”

      It seems to me that, in order to truly test whether the iPhone 5 is over-serving the job it is hired for, Apple would need to come out with a less expensive, less feature-full phone that has LTE.

      Bags M:

      “It will be interesting to see if the logic holds up when the 5S or the 6 is introduced.”

      Right, I agree that would be a better way of testing. Another test would happen if Apple introduces a 4L model with LTE, and the 4L replaces the current 4 and/or 4S models and sells for less than the 5.

      • Steve

        Brilliant.

      • Bruce_Mc

        Thank you. Note also that an iPhone 4L would likely have a lightning connector. I’m sure Apple wants to stop making devices with the old 50 pin connector as soon as they can.

      • http://profile.yahoo.com/7SU5CTQUFLQVMEUJCEX252V5FQ silencio

        30 pin, but your point stands.

      • Bruce_Mc

        I stand corrected on the connector!

        I’m thinking by Nov – Dec of this year, Apple would like to be “all in” with Lightning, selling no devices with the old style connector. That means replacing/upgrading iPad 2 and older iPod touch, both of which seem possible.

      • jwoodgett

        Lightning-only would also mean the venerable iPod Classic will finally shuttle off this mortal coil.

  • http://www.isophist.com/ Emilio Orione

    Very interesting point of view.
    What job could the rumored iPhone mini be hired for?
    The iphone for premium network service and the mini for mainstream services?

    • Les S

      I think it’s a pretty good bet that Apple will sell a product that currently does the job of feature phone. A job that currently a lot of Android devices are doing. And the usage statistics seem to support that. It’s entirely possible that this new device will be light on data usage. Might even seem like a step back.

      • Les S

        Oh how much fun would it be if they could hire a phone to address low data usage needs and thereby price it at a very low end.

      • rationalchrist

        Current gen iPod nano based with cellular voice and no third-party app. Cellular data is restricted to built-in iOS app, no tethering, no cellular facetime, yes icloud, yes imessage, yes map, yes weather, yes stock, maybe email, maybe web (excluding video). Apple can even pay operators the wholesale price for those data usage.

      • Amed

        iPhone Click based on the iPod nano with a clickwheel and the company they bought iirc just over 2 years ago, it will be retina display and non plastic with camera but not LTE, for asia with africa and Sth america as extras, PAYG around $250 with all apple services and voice over 3g data. They wont enter the sub $150 market because there is no need.

      • JohnDoey

        The idea that Apple would do a new device with a click wheel is ridiculous. They are on their second generation of iPod nano with touch. The iPod OS has had touch for like 3 years. And the touch hardware is probably CHEAPER than the click wheel by now.

      • http://geekfun.com/ Erik S.

        Maybe, but why would Apple do such a thing, and why would people pay for it?

        It would hurt Apple’s margins and provide limited strategic advantage. I’d go so far as to suggest that it would be strategically counterproductive. It would hurt the Apple brand and undermine their opportunity as an aspirational purchase in economies that are advancing rapidly.

      • JohnDoey

        You just made the case that Apple should not introduce iPod nano, their most popular and profitable iPod ever.

      • JohnDoey

        iPod nano has got to be on its way to being a feature phone.

    • bennettp123

      If the iPhone is used to sell mobile broadband, then the iPhone Mini would be used to sell prepaid mobile broadband.

    • handleym

      Horace’s discussion is very US-centric.
      The iPhone mini is not targeted as solving Apple’s “problems” in the US, it’s targeted at solving Apple sales in the developing world.
      I don’t know how this will play out, but it would not surprise me if Apple never even offers it for sale in the US/Europe/Japan type countries.

      For the target countries, phone dynamics are rather different. Operators are more interested in bringing non-consumers than pushing high-end data services. Contracts don’t exist, and even if they did, they wouldn’t change the fact that not much money is available to pay for high end phones.

      • Les S

        Maybe something like the Pebble but not as an accessory to an iPhone but as an iPhone mini http://getpebble.com/

      • http://twitter.com/WalterMilliken Walter Milliken

        There are serious engineering problems with a watched-sized smartphone, most notably the size and power of the cell radio, and possibly the size of the antenna as well. It’s a nice idea, but I don’t think the battery technology is there to support it yet.

        A short-range Bluetooth device like the Pebble uses a *lot* less radio power than a cell phone needs to reach the towers.

      • JohnDoey

        An iPhone is like 75% battery. There is no room in a watch for any kind of real juice.

      • JohnDoey

        All of Apple’s products are worldwide. They absolutely will not do a special cheap phone for India or something like that. They might do some kind of different financing in each region, but the product lineup is the same.

        And the problems that Apple is looking to solve when they design a device are the user’s computing problems, not Apple’s business problems.

        If you apply your logic to iPads, then iPad mini would sell only in the developing world, as a cut-rate iPad. Yet there is huge demand all over the world for iPad mini. And there continues to be huge demand all over the world for iPad.

        Actually, if you apply your logic to the Mac, then iPad would only sell in the developed world, as a cut-rate Mac. That’s just not how Apple’s products are designed.

        The current high-end iPhones were very specifically introduced as high-end phones, when “smartphone” meant “high-end phone.” Steve Jobs pitched the $499 iPhone as a drop-in replacement for a $299 smartphone and a $199 iPod, enabling the user to have one pocket device. So what about the user who has a $149 iPod and a $49 flip phone? Can’t Apple do a $199 phone for them, enabling them to have one pocket device? History suggests that Apple can and will. They did a full line of iPods, a full line of PC’s (Mac+iPad.) And both iPod touch and iPod nano already have antennas. How much longer can you make the pitch that the 3G antenna should be left out? Those 2 iPods already have all the expensive parts of a phone. It’s hard to imagine that they don’t get 3G, especially once the high-end iPhones are all on 4G.

    • poke

      If Apple did a low cost phone, my guess is it’d be aimed at the consumer, rather than the carriers. Perhaps it’d be classified as a 3G/LTE iPod or an iPad nano. They’d have a universal SIM and you’d be able to select your carrier service on the device. It’d be sold through normal retail channels unsubsidised.

      Actually, I think the “phablet” trend, which I had initially been dismissive of, might be an indicator that the “phone” aspect of mobile devices is no longer important. It makes sense that if people are using they’re devices more often for apps, browsing, texting, etc, then they’ll want a device with a form factor suited to those activities, rather than one more suited to making calls. The inconvenience of making calls on the device isn’t such a big deal if you don’t make a lot of calls (relative to other activities). So perhaps what Apple needs is voice capabilities in all its devices. You could, for example, keep a tablet in a bag and take calls, respond to messages, etc, using Siri on a bluetooth headset.

      • Les S

        Exactly my thinking. I have an iPhone and an iPad and I rarely use the iPhone for calls. When I do use the iPhone it’s in places where it’s not practical to use the full-sized iPad. I just got an iPad mini but haven’t really had a chance to try using it in places I wouldn’t have used an iPad before. I use my iPhone as a phone very rarely but it’s great for ultraportable data usage which in my case is sending or getting a text, using a map or figuring out if I’m getting ripped off at Best Buy. Maybe a phablet or iPad mini could address that and either a small accessory that works with either of these 2 kinds of devices to provide phone capabilities is the answer. Or maybe a small device for the ultraportable needs by itself but the iPhone as it exists today’s seems like it could easily be disrupted. At least for someone like me.

      • Sacto_Joe

        Yes.

      • neutrino23

        Exactly. It would be interesting to see an iPad mini with phone capabilities. Just use it with a headphone or BT earpiece.

      • JohnDoey

        iPad mini ships with FaceTime on it. You can take an iPad mini out of the box and call your girlfriend’s iPhone with it.

        There are also dozens if not hundreds of calling apps for iPad mini, and dozens if not hundreds of Bluetooth headsets. So whatever additional calling features you want, you can have them.

        Install the Skype app, ask Skype for a phone number ($5 a month or so) and pair your Bluetooth headset. And your iPad mini can take and make calls to and from any phone number.

        The thing is, almost nobody wants this. In practice, it’s a huge pain in the ass. A phone is not about making calls. It’s about being with you 24/7. An iPad mini is a hell of a small PC, but it’s a giant, ball-and-chain phone to have with you 24/7, everywhere you go. You are better off getting a cheap burner flip phone to go with your iPad mini if you want traditional phone calls and don’t want an iPhone for some reason.

      • Tatil_S

        Holding an oversized phones to my head is not my main concern, even though it still looks ridiculous to me. As soon as a gadget stops fitting into my jean pockets, it stops being an “always with me” device. If I need to carry it in a bag, however small, then I’d rather get a real tablet. I prefer a 10” screen for apps and browsing, but the lightness of iPad mini felt awesome when I tried it in the store, so the next step up from a phone is not a phablet, but a 7-8” tablet that I can hold in one hand for an extended period while reading, even if it requires two hands to navigate during other browsing or typing type activities. The next step up is obviously 10” or larger tablets, that are too heavy to hold in one hand comfortably.

        When I evaluate it this way, phablet does not fit into any of these categories. It just looks like an awkward compromise.

      • JaneDoe12

        I think phablets would be awkward too, but they’re very popular in Asia, including China (source).

      • Tatil_S

        Netbooks were popular for some time, too. Awkward compromises are prone to disruptions.

        Phones with 5” and above screen sizes may have been somewhat popular, because Android ecosystem is very weak for real tablet apps, making the sacrifices seem less significant. Besides, I only know of Samsung Note for achieving reasonable sales. If others are having hard time selling them, is that a good sign?

      • JaneDoe12

        A 5″ screen is a plus in some markets. One is China because of the size of characters in their alphabet (Scientific American). This might apply to other Asian countries, too.

        Barclays thinks that phablets will have a compound annual growth of 65% – 70% from 2013 to 2015. They forecast that 5–7 inch phones will account for 20% of smartphone sales in 2015. Samsung has 68% of this market now. LG is expected to come in 2nd this year at 8% market, and HTC, 3rd at 7.6% (WantChina Times).

        A survey by Accenture suggests that demand for smartphones in emerging economies is driven by desire for Internet access (SAP). Brazil, Russia and South Africa are frontrunners in the use of mobile devices for the Internet. And smartphones, because of their affordability are more likely to be chosen than the others (Accenture). Larger handsets have more utility than smaller so that gives phablets an edge, in my opinion.

        Here’s a good story about South Africa:

        “[Phone users'] spend on data is a barometer for the rapid increase both in the number of Internet users in South Africa and in the intensity with which experienced users engage with the Internet,” says Arthur Goldstuck, managing director of World Wide Worx.

        Businesses in these emerging markets that recognize this increasing use of smartphones for data transfer and transactional activity can position themselves to make transformational changes. One company that recognized early how it could benefit from mobile growth was Standard Bank, which is headquartered in Johannesburg, South Africa, and – with 15,000 employees and operating in 18 African countries – is the largest bank on the continent. Realizing they couldn’t bring brick and mortar banks to large swaths of the rural population in South Africa, Standard Bank harnessed the power of mobility to bring banking to the masses, so to speak. The result is Standard Bank is originating more than 7,000 new accounts per day, and hopes to put a dent in the poverty level across Africa (SAP).

      • Tatil_S

        “Barclays thinks that phablets will have a compound annual growth of 65% – 70% from 2013 to 2015. They forecast that 5–7 inch phones will account for 20% of smartphone sales in 2015. ”

        How many netbooks did Barclays expect to be sold in 2013, back two years ago? What makes Barclays call one gadget a 7” phone and another 7” tablet? Do consumer make such a distinction?

        I am sure there is a market for them if you’d rather have one device that can be phone and a sort of tablet, especially if that is the only personal computing device you can afford. Not many can buy a laptop and a smartphone. Yet, that does not sound like the high margin market that Apple tends to target. Anyways, we’ll see if that is a stable market preference or a fad based mainly on affordability.

      • JohnDoey

        I also don’t think consumers are thinking that they will have just one device. The cheap phones are just big.

      • JohnDoey

        > They forecast that 5–7 inch phones will account
        > for 20% of smartphone sales in 2015.

        And a 5 to 7 inch device is not a phone. That’s a book reader or media player. Maybe with a phone built-in, but it’s not a phone.

        And 20% of smartphone sales would be dwarfed by iPhone, all by itself.

      • JaneDoe12

        I think that Barclays was talking about the global market. I didn’t think Apple had 20% of that, but I’m very glad if they do.

      • disposableidentity

        I think the oversized smartphone would have three main markets. Developing countries where for many it would be a phone and a primary computer, trades & students.

        But I think people will “upgrade” to a smaller phone and other mobile devices (iPad, Notebook), as finances and circumstances allow.

      • JohnDoey

        > If Apple did a low cost phone, my guess is it’d be aimed

        > at the consumer, rather than the carriers

        All Apple products are aimed at the consumer.

        > Perhaps it’d be classified as a 3G/LTE iPod or an iPad nano.

        iPads are PC’s, and iPods are music players. If the device you are talking about is a phone, it will be branded “iPhone.”

        > universal SIM

        I’m pretty sure that idea is shelved because of worldwide carrier freakouts.

        > Actually, I think the “phablet” trend

        There is no “phablet” trend. That is just some Samsung marketing you saw, meant to excuse their lack of tablet sales and the giant size of the low-end phones that make up all of their sales. The trend is towards smaller devices, like it has always been. The trend is towards more Apple, who do not make a phablet, and whose latest phone is 20% smaller than the previous one. The trend is towards multiple devices, not one single hybrid/combination device.

        > might be an indicator that the “phone” aspect of mobile

        > devices is no longer important

        That is part of LTE 4G. There carrier connection becomes a data-only connection, there is no longer a separate voice phone in there. Right now it is transitional, most devices still have the voice phone in there.

        > apps, browsing, texting, etc, then they’ll want a device with

        > a form factor suited to those activities

        People want a form factor that is suited to their pockets and their bags and their hands.

        iPhone is not just a mini-iPad — it’s a whole bunch of pocket devices also, like an iPod, a camera, a wallet, a calculator, a pager, text messaging, and of course phone. More and more it’s going to become keys, another pocket device. I’ve had an iPhone since the beginning and an iPad since the beginning, but I run an entirely different set of apps on each. The iPad is my main PC. It runs Pages, Safari, iTunes, Netflix a lot. The iPhone is all pocket stuff: running Music, Camera, Calendar, Messages, an app that holds my passwords, an app that holds my project tasks.

        I hardly make any phone calls at all, but I have an iPhone still instead of going to 2 iPads because iPhone fits in my pocket. It’s much harder to commit to carrying an iPad (even an iPad mini) 24/7 day-in and day-out. I have my iPad with me when I’m working or at home, basically, and often a Mac also, but my iPhone is with me all the time.

        The 1995 office desk has a desktop PC and a desktop phone. The 2015 version of that is very definitely an iPad and an iPhone — not 1 iPad or 2 iPads. The iPhone not only replaces the phone but all the pocket devices, the 1-hand devices. The iPad replaces the PC and all the baggable devices, 2-hand devices (books, magazines, movie players, typewriters, musical instruments, art tools.)

        And a key thing to keep in mind is that working simultaneously on 2 iOS devices is very productive. A songwriter can run Pages on iPad to write lyrics while running GarageBand on iPhone to write music. You can run iPhoto on your iPad while you run a “how to use iPhoto” video on your iPhone. You can have a FaceTime conversation on your iPhone while referring to a website or document or email on your iPad. Once you have that going, you don’t try to figure out how to get back to one device. More likely, you get a third device.

        There are a lot of people with Windows notebooks that they bought for $599 who next time can get an iPad mini for $329 and an iPhone for free-with-contract and that is a much better computing solution for them. There is no pressure to have only 1 device that does everything badly (Windows 8, giant Android phones) because you can so easily have 2 devices that cover all the bases for less than the 1 device you used to buy from Microsoft and Intel. And the software and administration for iPad and iPhone are so much cheaper, the user comes out ahead again, even though they have moved to 2 devices.

        I think you have to have 2 devices because the device that you want to carry 24/7 is not necessarily the same one that you want to use for an 8 to 12 hour workday. There’s a 1-hand walking computer (iPhone) and a 2-hand sitting computer (iPad) and a production/development computer (Mac) and they all still have their place because we still walk, sit, and produce/develop. And they all keep getting smaller, faster, easier to use, more capable, and cheaper. We’re likely to have more of them, not less. They can specialize more into iPad minis and iPhone nanos, not generalize more into phablets or hybrids or convertibles.

        > So perhaps what Apple needs is voice capabilities in all its devices.

        They already have this. You can run Skype and many, many other calling apps on an iPad, including FaceTime. Skype will give you a phone number for $5 per month so you can receive calls from any phone. There is no need to buy an iPhone for calling. But what I think you are missing is that people don’t buy an iPhone for calling, they buy it because it fits in their pocket. Because it is small enough to carry everywhere so that you are online to receive calls and messages and notifications 24/7.

        iPad is a PC. A small PC, but still a PC. You use it and you put it back into your bag or you walk away from it. It doesn’t follow you around in your pocket like an iPhone does. As a phone, it feels like a landline phone you can take from place to place, not a mobile phone.

        I don’t think you get an iPad and get rid of your iPhone. You get an iPad and you get rid of your Windows PC, optical discs, viruses, license keys, BSOD, fans, all kinds of legacy cables, and a bunch of other headaches.

  • nuttmedia

    Always learn something new reading your posts. So assuming the job of a new iPhone does not change, the way to think about growth is to assess a new version’s capacity as a salesman. As LTE is still not broadly deployed worldwide, I would imagine its “skill” will be stable through at least the next fiscal period given the incentive for carriers to move users to the new network and begin generating a meaningful ROI on the buildout.

    As to what comes next is then of issue. Aside from NFC, no other technology pops to mind that might get carriers’ pockets excited… Alternatively, perhaps that is the point where Apple moves to adjust their pricing umbrella, a la iPod, and cannibalize themselves with an iPhone alternative (math, mini, nano, jr… pick a favorite). Might focusing on how the job will be done in China give us the best clue?…

    Intermediary customers to the ultimate end-user is a tricky game to play and sustain successfully. Jobs’s “orifice” analogy relays the best sentiment on such a position. What might ultimately be the best disruption… changing the product, or changing the game?

    • JohnDoey

      The game is changed. People want their carrier to be a wireless Internet Service Provider now and that is all. The carrier game has changed so much you may just have forgotten how it used to be. One reason Verizon passed on the original iPhone is Apple wouldn’t take out the Wi-Fi.

      • nuttmedia

        That’s exactly what I am talking about. IP-related services are eroding the carriers’ existing revenue model, compelling them into the tier-pricing structure that is almost universally loathed… Still not where the end-customer would want things however so opportunity still exists…

        Verizon was never a seriously viable launch carrier given their CDMA infrastructure. GSM was the only rational business choice, which meant AT&T or T-Mobile; and since T-Mobile ran at a less-typical frequency in the US as compared to global standards, all the gravity went in one direction.

  • http://twitter.com/jiaqili Jiaqi Li

    On the call, Tim did mention the iPhone 4 was supply constrained throughout the quarter. If supplies of the 4 weren’t constrained, wouldn’t this lead to ASP erosion?

    Also pointed out on the call by an analyst is that LTE rollout globally has been slower than expected. Therefore, the job the iPhone 5 was hired to do (sell LTE service) may not be applicable in many markets, therefore the iPhone 4 and 4S are “good enough”.

    • Henry

      But iPhone 5 was also constrained for much of the quarter. If both were unconstrained the whole quarter, it’s not clear to me which direction ASP would change.

    • LTMP

      If supplies of the iPhone 4 weren’t constrained, the ASP might well have eroded, but the margins might have improved.

      The market for used iPhone 4 and 4s is robust. It will be interesting to see if there is a bump in future sales due to the number of new iOS users starting out with a used phone. Apple might not get the revenue and earnings from used phones, but they could get the second sale to these users. Certainly they could see an increase in accessories.

      I wouldn’t be too surprised to see Apple get into the “pre-owned” market in the near future. They are well situated to both buy and sell used phones to service the pre paid market.

    • gctwnl

      The iPhone can hardly sell LTE service outside the US (esp. in Europe) as in most countries it does not support the right bands (frequencies) of LTE (that is, those of the best providers with the best coverage). Apple’s list of supported LTE operators is shockingly short.

      • JohnDoey

        As of iOS 6.1, something like 34 more carriers are supported for LTE.

  • Karthik

    Is it possible to correlate the iphone price erosion vs. increases in mfg costs? Given that the erosion is only 0.7%, wouldn’t it make sense to keep the production levels for the 5 much higher than 4S as its pretty clear that 5 can clearly use more capacity.

  • RyanZAG

    Would it be possible to break down the data by country? I think this would be
    important in proving the point – in USA, iPhones are sold
    by carriers in order to sell their premium plans. However, in Europe and
    countries such as China, most iPhones are sold unlocked and separate
    from carrier plans.

    If the trends across both types of countries differ, then his conclusion should be correct.
    If the ASP trends are the same even without carrier participation in the sale, then the conclusion doesn’t hold up.

    • nuttmedia

      Interesting point… underlines the importance of the iTunes ecosystem to acquisition and switching costs.

    • http://www.facebook.com/thijsvanderwall Thijs van der Wal

      Anecdotal evidence: My GFs (free on a 2y €40/m contract) 4S got stolen last weekend, and because she is hooked to the iOS user experience & depending on a smartphone for her job, she immediately bought the cheapest unsubsidized iPhone that gets the job done for her: a new 4 8GB for €388 from Apple.

    • http://twitter.com/MalHaz Malte Hazard

      Do you have any numbers for the “unlocked and separate” claim? I live in Germany – and before that in Sweden – and to me it seems that most people by their smartphones on contract. Actually, the staff at the “smartphone court” in Saturn are from the different carriers.

      • thbf

        http://www.cellular-news.com/story/57685.php.
        Good question-I was hoping someone knowledgeable would comment. But I found the above article and it is a good read on where the pre v. post Pay market may be heading in Europe and why.

  • praxis22

    I can see the carrier side of it, use the phone to sell broadband, I don’t understand why people buy the broadband to use on a phone. It has data caps, and connection issues, unlike domestic cable & PSTN broadband.

    • snoof

      Think phone = mobile computer. Try using a cable hookup in a car.

  • dmx

    would Apple keep the first generation iPad mini on the market with a price tag of $229 – $249 when they release the second generation iPad mini with Retina display and A6X processor? iPhone 5 maybe the crown jewel for now but here is what Tim Cook said during the conference call “On iPad in particular, we have the mother of all opportunities here, because the Windows market is much, much larger than the Mac market is”. I really love the iPad mini and only wish I have bought a 32G with cellular.

    • eN

      They need to improve the software for content creation on the tablet first. iMovie on iOS is really not suitable for creating videos. It lacks precision and is consequently not fun to use. How about iTunes U? Well, they’re missing content. If only they had launched a year or two earlier then we wouldn’t have superior offerings like Coursera, which are only accessible to PC’s. I’m all for tablets replacing PC’s for serious tasks, but you have to produce the software that allows for this to happen. If Apple hasn’t been seriously working behind the scenes on this, we could see Office available only on the Surface while Apple languishes with yet another incompatible Pages offering.

      • JohnDoey

        > They need to improve the software for content creation on the tablet first.

        No, that is not true. The typical iPad user has a much better set of content creation tools available to them than the typical Windows user, and that is all that matters because iPad competes with Windows at the same price points and for the same users and same jobs. In theory, you can spend thousands of dollars to rig a Windows system to sort of replace a Mac for content creation, but that is not what happen in practice. In practice, the average Windows system costs $400 and $0 is spent on 3rd party software, while over 90% of the systems sold at $999-and-up are Macs, where all the pro content creation is done. Photoshop costs $600 — $200 more than a whole Windows system. Most Windows users would love to have something like the $5 iPhoto from iOS.

        Also, the typical iPad user produces much better content creation work output than the typical Windows user because iPad apps require less training, less computer-specific knowledge (like what is a gigabyte) and they get out of the way and enable users to do better work. iPad also has a color safe workflow and always has a great screen, so iPad users produce photos and other work with better color than Windows users. Most Windows systems have a display that is too dark or too light or even cannot render whole colors, which leads the user to screw up their photos by over-lightening or over-darkening them. And iPad generates modern file formats and ISO standard audio video.

        And any kind of drawing or painting or photo work is already heads and shoulders above the same work on Windows simply because of the iPad touchscreen, which is necessary for that kind of work. Very few Windows systems have touch or have an art tablet attached.

        You can plug any SLR into iPad and import RAW photos and iPad can render them. Unlike Windows systems. There are a million things like this where iPad excels and Windows falls flat.

        iMovie for iOS is not about precision editing. It is about very quickly making dramatic improvements to video that you just shot before uploading it to YouTube. Removing unnecessary footage and adding titles and transitions makes a huge difference to the quality of your video, and takes almost no time and effort in iMovie for iOS. For $5. And all of the technology is based on Final Cut and the OS X video frameworks. The output you make is real video. And if you don’t like iMovie, Avid is also available on iPad.

        GarageBand on iOS is a dramatic innovation over any music and audio production tool on any computer. On iOS, when you want to write a guitar part, the interface morphs into a guitar. It is an amazing tool that will be talked about 20 years from now as a key moment in music production history. It might be the very first great computerized songwriting tool. And since the documents it creates open right up in Logic in a music studio, it is being used right now by many professional songwriters, as well as casual users. Also $5.

        In fact, iPad is so good at some kinds of content creation that it replaces a Mac in some cases. For example, I used to have a small recording studio built around a Mac, and an even smaller mobile recording studio built around an even smaller Mac, but today the mobile recording studio is built around an iPad and iPhone. I still only use pro quality Apogee audio hardware, but now the mobile setup runs for about 8 hours on batteries and weighs less than 1 kilo, and takes less than 5 minutes to setup. And the surprising thing is the recordings are much better because there is just to computer/engineering overhead at all. The thing is, about 80% of my recording is mobile. So I’m working about 80% on iPad/iPhone and only about 20% on Mac. And all the Mac work is mixing and final production stuff. And when I am mixing, my iPads turn into mixer controls that run the Logic mixer in the Mac.

        So you are totally 180 degrees wrong about iPad and content creation. For pro content creators, iPad and iPhone are essential Mac accessories, enabling us to capture or generate content everywhere we go, all day long on batteries, and then easily transfer that work to a Mac for editing and production work later. For everyone else — who also needs to generate a lot of content today — their Windows systems that had a Web browser and almost nothing else on them are very, very easily outclassed by an iPad with an HD video camera in it and a ton of video editing, audio and music production, drawing, painting, photography tools all a tap away.

        Plus there are something like 100,000 hardware accessories for iPad, and many are specifically for content creation. There are audio mixers and piano keyboards that have an empty space on top where you put an iPad! The idea that iPad is not good enough for content creation in some way is crazy. iPad has embarrassed Windows for content creation and in some ways has embarrassed even the Mac.

        Microsoft Office is irrelevant. The office computer is no longer just a typewriter replacement. And even where Microsoft Office is used, it is often now just a front end for a database of office documents with versioning that is better served by a lightweight iPad front end for the user. Further, Microsoft Office is still stuck in a 1985 mouse/Word workflow, even on Surface, which is also irrelevant because of lack of sales. And what is “Microsoft Office” anyway? Is it the Web version? The XML-based format? The binary format? What? Microsoft Office itself is so fragmented that for many people, Pages/Numbers/Keynote on iPads is like a breath of fresh air. The stuff just works! And Keynote continues to be the choice of world class presenters, and iPad continues to be the very best presentation device.

        There are now 500 million iOS devices and about 1 billion Windows PC’s. The iOS devices are growing very quickly, and the Windows PC’s are shrinking. The fact that Microsoft Office is not on iOS is of much greater concern for Microsoft than the fact that Microsoft Office is not on iOS is for Apple.

        In business computing, the single largest trend is iPad-as-briefcase. There is no hot Microsoft Office -based trend in business computing right now. People aren’t upgrading Windows XP systems to Windows 8 to get some new version of Microsoft Office that they feel they MUST HAVE or someone will drink their milkshake. The only MUST HAVE today is an iPad.

        I have a friend who is a real estate agent and longtime Windows user. Years ago, he wanted to shoot walkthrough videos of the houses he had for sale and put them on YouTube, but it always involved hiring professional video people and so much turnaround time and expense that it was never worth it. Then he got an iPad just to use to surf the Web, but within a few months, he was shooting walkthrough videos and editing them in iMovie and uploading to YouTube himself. That is a common type of iPad story. Many, many people have unfulfilled computing goals after years of using Windows that they are fulfilling now that they have iPads. It’s a giant success story. My friend failed to make his videos for years with various different Windows PC’s and then succeeded with his very first iPad. And no training. And $5 of 3rd party software.

        So you are just totally 180 degrees wrong.

    • Bruce_Mc

      Yes, the Windows market is well worth going after with the iPad. However, there is another market of people who have never owned a Windows or Mac computer. I believe this “tablet as first computer” market is very large worldwide, and is currently being served by Android tablets that cost significantly less than the iPad mini.

      • http://geekfun.com/ Erik S.

        Perhaps, though I’d point out that Google is currently competing with itself in that market. I could be wrong, but think the Chromebook program seems to be best suited to competing with non-consumption in emerging markets (even though Android seems to have achieved a better foothold)

      • JohnDoey

        No, that is not correct. You actually could not be more wrong.

        In the first place, Android tablets are not PC class, they are book readers and media players, equivalent to an iPod. That is why they are priced like iPods. If you have never owned a computer and you buy an Android book reader, you still have never owned a computer.

        Secondly, the most important feature to the “tablet as a first computer” user is ease of use. iPad has it, Android does not. Android is challenging for computer nerds, that is part of the reason that they like it. iOS is made for consumers (iPod users) while Android is made for computer users. Android is for people who think iOS devices don’t have enough SD card slots, or who want to “root” their device. That is the exact opposite of the “tablet as a first computer” crowd. Those users also need Genius Bar, they need App Store’s audits, they need iOS’ rock-solid reliability, they need a virus-free system. Android offers none of that.

        At $329, iPad mini is among the cheapest PC’s ever offered. The average sales price of a Windows system is $400, that is 20% more than an iPad mini. iPad mini compares to other cheap PC’s, which almost exclusively run Windows, not to media players, which run iPod OS, Kindle OS, Android, and other systems. iPad mini runs native C/C++ PC apps, same as Mac, iPhone, Windows, Linux, Unix, and the game consoles. Android devices run baby Java phone apps like a 2005 smartphone. Further, iPad software is the cheapest PC software ever offered. Keynote is $10, iMovie is $5, iPhoto is $5. On Windows, that software is 10 times the price or more.

        So what you are doing is like if we were discussing a new kind of motorcycle that is more lightweight and inexpensive than any that came before, and yet has very high-end construction (iPad mini) and you pointed out that you can get a bicycle (Android) for 20% less than that motorcycle costs. Yes, we know. The fact that iPad mini only costs a little tiny bit more than a crummy no-name Android book reader only speaks to the fact that iPad mini is a giant bargain.

        What is amazing is how a $329 Acer netbook in 2010 was called an amazing value in PC’s, and a $329 iPad mini in 2013 — you are saying that is too expensive. Even though the iPad mini can do 10 times as much for double the length of time on batteries and is half the weight. Why? Because people are buying book readers for $249? One has nothing to do with the other, except that you don’t have to buy a book reader if your PC purchase is an iPad.

      • Bruce_Mc

        “the most important feature to the “tablet as a first computer” user is ease of use. iPad has it, Android does not.”

        If someone owns an Android phone, an Android tablet would be easy for them to use. Perhaps even easier than an iPad.

        “The thing is, even if you didn’t mean to, you just concern trolled Apple. Apple doesn’t need your concern.”

        I am not trying to live up to your standards of posting.

    • Walt French

      What is it with the notion that the only lower-cost alternatives that Apple will be able to do, are last year’s models?

      Sooner or later — as with the Mini — Apple will have devices tailored to a range of needs and budgets, across its MacBook (check), iMac (check), iPad (check), iPod (check) and iPhone (stay tuned) lines.

      And when they’re not too busy making huge changes (to me, the iPhone5 is SOOO much nicer in so many ways, than the 4 that it replaced), they’ll be better able to tune their lines to better-defined needs.

      Shocking forecast, eh?

      • http://www.facebook.com/people/Shameer-Mulji/1685212657 Shameer Mulji

        +100

      • http://geekfun.com/ Erik S.

        I think you make an excellent and important point. Many people are stuck thinking of the future in terms of the past. That leads them to miss all sorts of important differences.

        I think the most important difference is that computing technology has always been expensive or expensive enough that its has had to justify itself based on general utility. Now though, it is well down the road to being cheap, cheap enough that we already buy different devices to do different “jobs.” As things get cheaper still, personal technology budgets might contract somewhat, and existing classes of device will become more capable, but I think a substantial amount of it will end up going to new classes of device. Some of them may be used as an alternative to another device for certain jobs or conditions, but i think others will be used more or less simultaneously, and in a coordinated fashion. We will end up enlisting multiple devices as collaborators in accomplishing a given job, and for a different job, we might assemble a different “team” of devices, even though some of the players may be the same.

        Over a decade ago I bought Apple stock because they seemed the player best equipped to making computing an integral part of people’s lives outside of the workplace. Today, for many of the same reasons, I think they are probably best equipped to help us make use of multiple computing devices in a coordinated fashion. At this point though, that is really just an article of faith. I was going to say that Apple hasn’t delivered anything on this front yet, but I realize that AirPlay and the Remote App for iOS could be considered baby steps in this direction.

      • JohnDoey

        No, it is not an article of faith to think that Apple can enable you to manage a world of multiple coordinated computers. They have proven that again and again. The Digital Hub, iTunes+iPod, all the App Store and iCloud stuff.

        Even before you might have had multiple computers, Apple was the best at integrating multiple apps. For example, the standardized key shortcuts across applications and superior clipboard of the Mac compared to anything else. In a sense, each window on the Mac is a separate computer that Apple enables you to manage in a coordinated fashion. Today, the apps are breaking out of the windows and getting their own hardware, but the issues are still the same.

        The funny thing is, people act as if Apple is new. Apple is the oldest PC vendor (1977) and the oldest vendor of ARM mobiles (1993.) The ARM mobile architecture that is at the center of smartphones and PDA’s before them was co-created by Apple. The first killer app for PC was the spreadsheet, and it existed only on Apple II for the first 5 years of the PC era. So you don’t have to have faith in Apple. It is everybody else that you have to put your faith in. Why you would buy a computer from Google or Samsung or Microsoft is the question.

      • JohnDoey

        Apple already has a complete set of price points. PC’s are $329 and up, mobiles are $49 and up (unsubsidized.) If you start at the high-end of the mobile lineup and work down, you can see that what is missing is not necessarily any devices, but rather wireless options, which are reduced as you move down in price:

        - $599 iPhone 5 has 4G, 3G, 2G, Wi-Fi, and Bluetooth
        - $499 iPhone 4S has 3.5G, 3G, 2G, Wi-Fi, and Bluetooth
        - $399 iPhone 4 has 3G, 2G, Wi-Fi, and Bluetooth
        - $299 iPod touch has Wi-Fi (added 2008) and Bluetooth (added 2010)
        - $149 iPod nano has Bluetooth (added 2012)

        When iPhone first shipped, there weren’t any iPods with any kind of wireless. Since then, the trend has been for iPods to adopt more and more wireless. If the trend continues, it’s not hard to imagine a lineup where traditional iPhones have 4G and traditional iPods have 3G and they are all branded as iPhones. The 4G models would be pushed through postpay channels and the 3G models through prepay.

        About 75% of the profits in the phone market are in the high-end, which is all going to Apple. The other 25% of the profits in the phone market are at the same price points as iPod touch and iPod nano, and Samsung is taking all of those. So if Apple’s goal is to get those profits, remove a price umbrella, and maybe kick Samsung in the pills, then turning iPods into iPhones is the obvious way to do that.

  • Bruce_Mc

    So Apple provides a “premium network service salesman” to the carriers and makes money doing so. Yet AT&T and Verizon are losing money as they employ this “salesman.” I can think of a dozen questions about that.

    • jawbroken

      They “lose” money upfront from the subsidy and more than make it back over time, like any similar financing agreement. Does your bank “lose money” on your mortgage? Not really complex.

      • Bruce_Mc

        My bank doesn’t file a quarterly statement saying they lost money just because I take out a mortgage. But it looks like you are right. It looks like carriers almost expect to lose money in a quarter that they sell a lot of iPhones, and then make it back in following quarters. I didn’t know that…

      • Walt French

        Yes, their reporting policies seem to run directly counter to smart accounting.

        In the latest Qtr, AT&T showed ~ $900 mm data revenue increase on ~ 9 mm new smart devices (incl non-phones), or $100/qtr. Methinks if surging sales were late in qtr (December, ya think maybe?), the incremental revenue per new smartphone is quite a bit higher. Not to mention the new customers who come to AT&T instead of some net that has lower prices but not high-speed data.

        So AT&T gets data and other revenues enough to pay off the subsidy in a year or less. Assuming actual costs of providing the service resemble Europe’s, it’s got to be one of the most profitable businesses they could’ve hoped for.

    • JohnDoey

      AT&T and Verizon don’t lose money on iPhones, they lose money on the hundreds of other things they are doing.

    • http://www.asymco.com Horace Dediu

      Losing money?

      • Bruce_Mc

        My mistake, I was overreacting to the quarterly losses posted recently.

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  • Dan

    This underscores why extreme build quality is not important. The hardware is a trojan horse for network service and OS/Apps. Apple should focus on cheaper/easier to produce hardware with marketing “magic” like the 3GS. Sexy and desirable products are not always the most well made ones, and vice versa. Tim Cook’s iPhone 5 approach needs to end.

    • http://www.facebook.com/flavio.teixeira Flavio Teixeira

      I think there’s a lot of Tim Cook’s approach that needs to be changed. Sitting at over $130 billion dollars for example, when clearly he doesn’t intend to do anything bold enough to protect Apple’s market position and not distribute that money to stockholders is a good example of how harmful a “do nothing” strategy can hurt a company. Second Apple needs to hire a professional presenter to talk during these earning calls. Tim’s response to every question is “we want to produce the greatest products” when in fact it’s an arrogant position to ignore real demand for smaller, bigger, cheaper phones, which, if not sold by Apple, will be sold by their competition. Samsung must be very happy with Apple’s strategy of “holding their ground” and ignore the world around it. If you can disseminate iOS devices now to the globe, why choose to be elitist and then have to run after Android market share 20 years later when it’s clearly too late? That’s their game plan now. To go after Windows market. But Apple could simply stop or at least slow down Android penetration now and not try 20 years later when it’s too late. I miss Steve Jobs. I can clearly see how the strategy here would be more aggressive and clever. The Apple iTV won’t take off because Cook is not Jobs. You would need Jobs to cleverly negotiate with cable and satellite.

      • jawbroken

        Almost nothing in this comment appears to be true and the speculative parts don’t appear to be reasonable guesses. The dividend and share buyback schemes happened under Cook. Jobs didn’t do for the Mac or the iPhone what you say he would do now. Very cheap to shallowly call on the name of the dead to support whatever argument you want to make rather than arguing its merits yourself.

      • http://www.facebook.com/flavio.teixeira Flavio Teixeira

        Exactly what is Apple doing to stop Android advance other than “making the greatest products in he world”? Had they made a new (not old version) cheaper version of iPhone 2 years ago, the company would not have given this much ground to Samsung. It’s a fact that Jobs (yes he’s dead and we can still speculate on what he would have done) didn’t do that back when Mac lost market to Windows, but precisely because of that experience is that I think Jobs would not let that happen again and would react to Samsung by offering the rest of the world, that doesn’t have subsidies from the carriers, an entry into iOS via an affordable version of the iPhone. So in fact I think my speculation is pretty reasonable. Excellent management is a good balance between sticking to your guns and reacting to exterior factors. The exact way Apple did by launching the iPad Mini. Getting a cheaper version of NEW iPhone (not 4 or 4S – most people will prefer the newest cheaper available version than the rightly perceived outdated version) out is going to be a difficult pill because that will cause margins to drop so its a tough situation but as Cook stated it’s better to cannibalize your own products than let others do it for you so as I see it, there’s no better way out than to launch a new cheaper version. As for the cash, point was Apple could certainly have bought something that would hedge its position. The dividend comment is only in the (current) case they continue to do nothing with it.

      • Steve Setzer

        Flavio, it’s truly a fact that Jobs did nothing when Mac lost market share to Windows, because Jobs left Apple BEFORE Windows 1.0 shipped in 1985. Moreover, those of us who computed in the 1980s remember that Windows 1.0 was a total flop, and 2.0 not much better. The first successful Windows version was 3.0, which shipped in 1990 — five years after Jobs left Apple.

        These facts are readily ascertainable with a bit of web searching. Moreover, in looking back to the 1980s one must realize that “Apple market share” includes both Mac and Apple II (or Apple ][ if you prefer), and that “Microsoft market share” includes separate figures for “WIndows” and “DOS.” One probably should account for both MS-DOS and PC-DOS (created by Microsoft for IBM but essentially the same product).

        If you can get your facts right, I think we’ll all be glad to engage your theories and analysis.

      • Steve Setzer

        Correction to my own post: for many years Windows market share overlapped with DOS; they weren’t really separate. Every Windows 3 machine was also a DOS machine, but not all DOS machines ran Windows, even in the 1990s.

      • http://www.facebook.com/flavio.teixeira Flavio Teixeira

        Steve, thanks for the clarification on the timing. BTW I was an Apple IIe user, albeit in Brazil, and I remember Windows 3.0 starting to succeed as you pointed out :) However the fact that Jobs left Apple before does not invalidate my criticism of Apple’s “do nothing” strategy 2 years ago when it was much more feasible to stop Google/Samsung alliance or certainly diminish their expansion. And since Jobs wasn’t at Apple when Windows started taking its market share then, more reasonable is the speculation that Jobs would be somewhat reacting more aggressively and rapidly to Samsung/Google expansion. For Apple to keep growing one should not focus on how many iPhone 5s it can sell. As Google has shown, this is war. Apple must flood the rest of the world with iOS devices before Samsung does in order to increase/preserve the iOS ecosystem and that’s the story here IMHO. I always hoped and believed that the iPhone would be an awesome gateway for people to migrate from Windows to Macs. As Cook said the upside in the desktop market is huge for Apple, but not if Apple lets Android expand. This is a great opportunity for Apple to convert PC customers into Mac customers. And in South America, India, Russia, China, etc, that means giving customers an affordable iPhone. As for production constraints I keep thinking about that $130 billion…

      • masquisieras

        Money can only buy you expensive production, not cheap one so you are buying a expensive “part” (production capacity) to sell a cheaper product. No one want to have unused production capacity so the only way to get the scale of production involved in short time would be to pay for building it from scratch very fast (expensive and complex) or pay enough that pay to break previous compromises (hugely expensive). Way to throw money away.

        The thing is, Apple say it intended to get 1% of the phone market and every body laugh, it has now about the 10% and growing but you would like to grow faster because the old guard is selling feature Phones with and operating system that allow them to call them smartphone, although they are sell and use as feature phones , with no or very low cap data plan and low internet and app usage.

        Add that even if it have the production capacity it would need the network relationships to really move them.
        So Samsung has began building the production capacity and commercial relationship in 1977 as wikipedia but Apple should be able to replicate it in 5 years because…

      • masquisieras

        And Flavio where can Apple get the magical production capacity.

        Samsung already has the production capacity it has just converted from producing one kind of phone to another. It was the second phone maker of the world from a long time and when Nokia fell , it has became the first eating part of space left by Nokia.

        Apple has to grow it from scratch.

        So Apple is basically production limited at the high end (“low volume”) so it should send itself to the big volume production, very logical. Going for market share when you are not capable to produce the numbers needed to cover that market share I am sure is going to be a very successful strategy.

      • Space Gorilla

        If you look at the ‘best customer segment’ Apple dominates. Yes, Android is flooding the market with cheap devices, yay Android is the new default feature phone with low margins, that’s hardly a victory.

      • Walt French

        @Flavio wrote, “what is Apple doing to stop Android advance other than ‘making the greatest products in he world’?”

        I’m sure that every word in those quarterly investor calls are spoken with the utmost sincerity.

        But Apple — like Amazon, Microsoft and probably Google — really IS run as a business. Their job is to use shareholders’ and other stakeholders’ resources for the best result.

        Which may tangentially include ego gratification — eg, telling the Mrs that you designed a really gorgeous plastic molding for some new product’s wallwart. But the real goal is a little closer to Jobs’s famous “put a ding (sometimes, ‘dent’) in the universe,” to create something that helps a LOT of people make their stay on the planet a teensy bit more meaningful/enjoyable.

        That means not the MOST phones, but a LOT of really nice ones. Phones that you can sell at a steadily high enough price that you can plow back the proceeds into the next phone, one that even more people will find even nicer.

        If you can do that, a lot of money rolls off the assembly line into investors’ pockets. A lot of people around the world get good jobs designing, building, selling and supporting them. A lot of people love using ‘em. High market share with thin margins? Yeah, it’s not a money-losing proposition, but the stakeholders don’t necessarily do as well as under Apple’s approach.

        You only need a few seconds’ recollection to look at the mass-market leaders of yesteryear: by maximizing short-term volumes, which includes keeping costs low enough to discourage not-very-innovative competitors, Dell and HP talked themselves out of their catbird seats. Microsoft got lulled into color-by-the-numbers complacency.

        Here’s my credo: I believe that Apple wants almost everybody on the planet to be able to use / benefit from / enjoy the sort of products that the iPhone epitomizes: clever; helpful; leveraging all your ordinary intelligence, creativity and curiosity but not requiring any that you might not have. Well, *meant* to epitomize. Obviously, nobody reaches Nirvana by buying a gizmo.

        But despite all the helpful urging and advice from you & others, Apple doesn’t know how to build devices that will achieve that result with everybody, so they’re taking it one step at a time. Better to maintain a claim on “first class,” their thinking obviously goes, than to gain the probably-temporary crown of “best selling.”

        It’s not religion; it’s obvious that Coca-Cola can be widely enjoyed without constant innovation. But it’s Apple’s way.

        There’s nothing particularly wrong, or even questionable about your ideas. It’s just that putting all the time & energy into playing your competitors’ game, keeps you from realizing your own. Yes, you have to watch out for the competitor skating up fast behind you, but if you lose sight of where the puck WILL be, you WILL get knocked out of the game.

      • http://www.facebook.com/flavio.teixeira Flavio Teixeira

        Walt, I agree with everything you said. I’m just afraid that if we are not gaining marketshare on this “new” smartphone market, will mean to slowly (or fast) lose it. And I think that concern is what probably changed the sentiment on the stock bringing it down so much in so little time. It’s ridiculous that a company like AMZN has a P/E that it does and Apple is in the single digit. The earnings were awesome. The Mac, iPad mini and iPhone had supply constraints throughout the quarter. But I do think that Google and Samsung will not stop at serving the bottom 80% that doesn’t shop. They will eventually get to the top of this product pyramid because Google knows that’s where the real browsers and consumers of their ads are. This is a war for everything Apple: iTunes, Apps, laptops, tablets, phones and will eventually, if Apple allows, get to an Android desktop. This is an “all or nothing” for Google. When I buy an iPhone I want to sync to my Mac calendars, I buy music on iTunes, Apps and so forth. It’s about the ecosystem and in Google’s case, about that and the online advertisement. Sticking to their guns is what brought Apple to where it’s now. And it’s an awesome company. The greatest. Going forward adjusting to what’s happening around it, is a must, otherwise Apple’s relevance won’t stay the same but rather diminish.

      • Walt French

        I can’t comment about the stock, but let me encourage you to disconnect from the “we are winning/losing” mindset long enough to get some fresh air & perspective.

        Apple may have The Next Huge Thing up its sleeve for September. Or, it may twiddle and tweak its current products (as it did today). It faces competition from new directions. Whatever: you and I will not live or die because of Apple.

        I’ve had a personal computer since the ’70s, and I’ve been in awe of Apple ever since the Mac. Mostly, there are oh, so many things that they’ve done that *I* never could’ve imagined, and they’ve made huge differences in people’s lives.

        I think if they keep doing that, the company will be more than OK. We, as customers, will get more than we pay for. Shareholders — realistic ones, anyway — will be happy again. I count myself lucky for bumping into Horace, who helps me understand how Apple is so successful, and that in turn reminds me of ways to be more successful in what I do.

      • http://geekfun.com/ Erik S.

        I think you are making the mistake of seeing the future in terms of the past. That can be useful, but don’t mistake it for something it is not.

        You are worried that Apple isn’t doing enough to win market share in the new smartphone market now and will have to chase Android decades hence? I’d suggest that by that time, no one is really going to be worried about the smartphone market, at least not for its own sake.

        The smartphone market captures our attention because it is the first product category to emerge after computing got cheap enough that everyone in the developed (and increasingly, in the developing world as well) world could afford one or more general purpose computing devices. Things are just going to pick up steam from here. By favoring profits, Apple is going to be in the position to afford to drive the innovation that makes these new product categories spring into existence.

        Indeed, we only need look to the recent past to see that this has already been playing out, and that Apple has been at the forefront, and making good money along the way. Before smartphones Apple was doing better than most PC makers with the transition to Laptops, and the iPod was the harbinger of this new era of proliferating personal computing devices. Then, of course the iPhone, which was far from the first smartphone, yet totally disrupted the category and launched its growth. Next, the iPad, and after that, well, we will have to wait and see, but Apple’s holistic approach to user experience is going to give at advantage in introducing a new category and weaving it into people’s lives and the devices they are already using.

      • http://www.facebook.com/people/Shameer-Mulji/1685212657 Shameer Mulji

        “Second Apple needs to hire a professional presenter to talk during these earning calls. Tim’s response to every question is “we want to produce the greatest products” when in fact it’s an arrogant position to ignore real demand for smaller, bigger, cheaper phones, which, if not sold by Apple, will be sold by their competition. ”

        If you actually listened to a lot of the conference calls Steve Jobs took part on, he would trumpet the same line of “wanting to produce the greatest products.” Even when he was interviewed during the All Things D conference he said the same thing. I could be wrong, but I don’t think that’s PR. That’s genuine.

    • http://geekfun.com/ Erik S.

      Apple has two customers, the carriers and the end users. The carriers may not care about build quality, but it influences end users, the very end users that the carriers are paying a premium to Apple to help them attract and retain.

      People are loyal to Apple because Apple gives them a great user experience. Great build quality is part of that, together with the OS, the packaging, the retail experience, the support experience, the upgrade experience, the ease of buying apps, etc.

      You sound like another one of the self-appointed experts who have no clue why Apple has been so successful and yet are sure they know what Apple needs to do differently to continue to succeed. The stock market may be buying that BS, but I’m not. Apple’s approach served them with the iPod and is serving them well with the iPhone and iPad. It has also allowed them to gain outsized profit share and improve their market share in the laptop and desktop market, a mature market where they had and still have a small portion of the installed base and market share.

      I think it will continue to serve them as the consumer technology markets evolve and adapt to the march of Moore’s law.

      • JohnDoey

        No, Apple has only one customer: the end user.

    • JohnDoey

      No, that is incorrect. Apple’s profits come from hardware sales. The software and services are simply part of the hardware. There are no Trojan horses and there is no marketing magic. A 1992 Mac came with a “CD-ROM” feature and a 2012 Mac came with an “iCloud” feature. The user absolutely does not care that the former is a hardware feature mostly and the latter is a software feature mostly, with integrated online services. Not only does the user not care about that, they pay Apple so that they don’t have to care about that.

      That is why the more computer science training or I-T training a person has, the more likely they are to misunderstand Apple. They immediately want to dissect the Apple product into software, hardware, operating system, and so on, and they miss the point entirely. Apple’s customers pay Apple to integrate all that stuff into one hardware product.

      Half of Apple’s sales go to repeat users who buy without hesitation because they expect the Apple gear to continue to be the best. The other half of Apple’s sales go to new users who are jealous of the repeat users. Your strategy would piss off the repeat users and cause the new users to stop being jealous of them.

      The thing is, your strategy was already tried at Apple after a boardroom coup in 1985 that ousted Steve Jobs. Your strategy didn’t work. Apple had to ask Steve Jobs back and then he had to rebuild the product line, the company, and the user’s trust.

      And iPod did pretty well without ever shipping any with low build quality.

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  • Mason

    So can I interpret this as that a cheaper iPhone would prevent Apple from selling the premium ones?

  • http://fortune.com/apple20 Philip Elmer-DeWitt

    Horace: Do you have comparable data on the ASP of Samsung’s smartphones?

  • jointdoc

    Off Topic (Explanation of Apple’s recent results)

    … Nice review of Apple’s supposed “miss” this past quarter

    http://www.postsateventide.com/2013/01/the-mysterious-case-of-apples-missing.html

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