April 2013
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Month April 2013

The Critical Path #82: Adding Rows

The Apple Q1 financial performance review with a short look at the impact of warranties on gross margins. The growth question: why financial analysis cannot offer insights into new product creation, and why makers of things think different. Finally, a new installment into Asymcar: why the process of car making is over-integrated, over-serving, and over-concentrated.

5by5 | The Critical Path #82: Adding Rows.


Happy Birthday iTunes Store

iTunes (including software and services) revenues in Q1 topped $4 billion and were 30% higher than (re-stated) 2012 Q1 revenues. Accompanying this revenue figure were additional data points from the company:

  • Cumulative app downloads have surpassed 45 billion
  • Payments to developers reached a cumulative total of $9 billion
  • Payments to developers were $4.5 billion in most recent four quarters
  • Now paying $1 billion to developers every quarter
  • 800 apps are downloaded every second
  • iOS app revenues doubled since year-ago quarter
  • App Store accounted for 74% of all app sales in the quarter (citing Canalys)
  • App stores reach customers in 155 countries (850k Apps, 350k iPad apps)
  • iTunes music downloads are available in 119 countries (35 million songs)
  • Movies are sold in 109 countries (60k titles)
  • iBookstore is available in 155 countries (1.75 million titles)

This data allows for a few inferences:

Margin call update: About those changes in service policies

In the March quarter, our gross margin was 37.5%. It was at the low end of our range. We had a few items that on balance resulted in us reporting at the low end. They included mix, in particular, selling more iPads than we had planned, including getting iPad mini into our four- to six-week channel inventory range, some changes in our service policies that required us to make provisions for prior quarter sales, and we had some unfavorable adjustments.

– Peter Oppenheimer, Apple CFO, FQ2 2013 Earnings Conference Call

[my emphasis]

Thanks to Philip Elmer DeWitt for bringing this quote to my attention in the comments to Margin Call 2.

I was curious about the “changes in service policies” and what that might have meant, especially since they seem to have been retroactive (provisions for prior quarter sales).

The 10Q offers more details:

Accruals for product warranty for the three months ended March 30, 2013 include $414 million associated with product sales in prior fiscal periods reflecting the impact of changes to certain of the Company’s service policies and other estimated warranty costs. Of this amount, $224 million is associated with product sales in the first quarter of 2013, and the remainder is associated with product sales in 2012.

– Apple 10Q, Note 6, Page 17, second paragraph.

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Margin Call 2

I expected Apple’s margins to improve  last quarter. They didn’t and so the question I needed to answer is why. Here is a history of Apple’s gross margin and operating margin as reported since late 2005:

Screen Shot 2013-04-25 at 4-25-9.26.53 AM

For a company selling hardware these are extraordinarily high margins. They are higher than those of Google and have narrowed the gap with Microsoft,  neither of which has a high proportion of hardware sales:

Asymco Workshops Australia 2013

Screen Shot 2013-04-24 at 4-24-6.38.35 PM

I will be in Australia in May and thought to invite local readers to join me for a few hours of in-depth discussion on the future of our industry.

I plan to have an event in Sydney on the 3rd in the morning (9:00 to noon at the Radisson Blu 27 O’Connell. Press Room) and in Melbourne on the 6th in the afternoon (1:30 to 4:30 PM at Victoria University City Flinders Campus: Level 12, Function Room 4, 300 Flinders Street, Melbourne, VIC, 3000).

Nominally, the topic will be: The history and future of computing using disruptive analysis.

I will present recent material (including the latest data from Apple) and we will have a few hours of Q&A.

Tickets are $120 and seating will be limited to 100.

You can register here: Asymco Workshops Australia 2013.

The Critical Path #81: Continuous Flow

We cover misleading headlines with respect to the iPhone at Verizon while questioning the ebb and flow of media tone on Apple news. We also dive deeper into Asymcar and how to think about car manufacturing. Finally, how to approach industry analysis regardless of your industry.

via 5by5 | The Critical Path #81: Continuous Flow.

The job the iPhone is hired to do, part II

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.

The job the iPhone is hired to do 

The original post on the hiring of the iPhone by operators was anchored in data about the revenue per unit (or price) that the product was able to obtain. The remarkable resilience in the exceptionally high average price showed that the iPhone was still getting a premium for moving users to higher levels of spending on network services.

The evidence was circumstantial however: By knowing the price and knowing it was far higher than competing products and knowing that much of it was paid by the operator and not the consumer (at least not up-front) implied that it was the iPhone, and only the iPhone, that was hired as a network service sales tool.

Now we have more evidence thanks to Ben Thompson (@monkbent). I illustrate the data here as an x-y scatterplot.

Screen Shot 2013-04-23 at 4-23-11.21.37 AM

Interview with Chosun Daily of Korea about Apple

The following interview took place by email on April 15th, 2013.

1. What are the truth and false about the ‘Apple shock’ currently? In what perspective should we see this?

First, I’d point out that during Steve Jobs’ time the company suffered many such shocks. The stock fell many times far further than it just did for trivial and irrational reasons. Recently Warren Buffett himself pointed out that his own company had 50% drops in value four times in the past. Share prices are not always good indicators of potential and markets are not always efficient. I catalogued the dramatic share price declines in Apple during the last decade here.

Second, I’d point out that the number of people watching and commenting on Apple has grown almost as fast as its sales and earnings. When Apple was small the people who studied Apple were few. (You could see this today for other, modest tech companies. There aren’t 50 analysts writing reports every day and 2000 bloggers tweeting about Lenovo even though it’s a successful and growing PC company.) Because of this growth, I would guess 80% of the observers have not observed Apple’s prior painful episodes first hand. For them this is the first time a “dominant” Apple has slowed. The amplification of so many voices raising alarm makes it seem truer, but it isn’t.

Third, the failures being cited are not significant. In terms of increased competition, before Samsung there was Nokia and Motorola and the mobile Operators and Microsoft and Dell and many others long forgotten. They were all about to “defeat” Apple. As a quick example when Apple was “the iPod company,” iTunes was considered vulnerable and fragile due to DRM concerns or the Beatles not being on it. Microsoft was launching “Plays for Sure” and Zune and Creative was suing Apple over patents. These battles are long forgotten. Before those there were concerns about the viability of the Mac that go back decades. At the time those were actually very valid concerns. At the time Apple did not have half a billion users. It depended on one product. But what saved them was a process of development of new products not the products themselves. iPod faded, Mac faded. What mattered is that they created new things to replace them.

Finally, what is not commonly understood is that the mechanism for creating things at Apple is unchanged. Its functional organization is inherently unstable and chaotic, sometimes looking like it will derail. But that’s the way it was designed to be. You just have to have faith that it’s a system that works. Those who did in the past were well rewarded.

2. What possibilities out of 1~10, do you think, Apple will suffer the same downfall as Steve jobs has left the company in the past in current?

Lumia: Is the light visible?

The following graph shows the history of smartphone volume shipments from Nokia.

Screen Shot 2013-04-18 at 4-18-1.48.21 PM


Lumia sales have increased to 5.6 million units last quarter. Up from 4.4 during the previous quarter. Symbian devices have nearly disappeared from the market with only 0.5 million shipped.

This puts an end to Symbian sales after over a decade since sales start and two years after it was declared that sales would end.

The bad news remains that smart devices as defined by Nokia are still not profitable. If volumes grow it’s possible that the cost structure (without further cuts) can be sustained and perhaps the business will get its footing.

The level of 6 million units/quarter is about where HTC and RIM are today but only half of what ZTE and Huawei are probably shipping. As a hardware business it might work, barely. It certainly helps to have $250 million as platform support payments from Microsoft.

As a platform it’s still a very long haul for Windows Phone. Even if we assume a nominal $15 revenue/ Windows Phone license and ignore the kickback, at this level of sales the platform generates less income than what Microsoft gets from licensing IP to Android vendors.