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Author Horace Dediu

The new iPad. Is it better?

The problem with getting better is that if you’re more than good enough you’re actually getting worse. Improving beyond the point where your improvements can be absorbed is not only wasteful but it’s also dangerous. It opens the door to competitors who compete asymmetrically.

This is the perverse and pervasive threat hanging over all system vendors. The temptation to “get better” is not coming from incentives and human nature. It’s  always there as Moore’s Law offers an exponential increase in power. People don’t naturally have exponentially increasing needs. For them to absorb this new power, it has to be couched in new uses.

What has permitted the absorption of improvements in semiconductor performance (and production) have been other aspects of the system: the software, communications and services innovations have been positioned on more demanding jobs to be done which, once hired for those jobs, saturate the available processing and storage.

This is most easily evident in how digital photography has advanced. The constraints on sensors meant that quality was initially poor and as cameras were unconnected, they were relatively under-utilized. But once software and communications were added (by inclusion in smartphones) digital photo creation exploded. This, in turn, led to more storage needs both on the device and the servers. In a virtuous cycle, more processing power meant video was possible, then high definition video, then slow motion high definition video. The previous storage limits on mobile devices were quickly overwhelmed. Megabytes of storage became gigabytes and then hundreds of gigabytes. Video editing meant processing power was suddenly in demand again. Cores multiplied.

Third party media (music and videos) storage and playback used to be the main job that storage was hired to do[1] but as cameras got better, user-generated content suddenly bellied up to the bar.

That is now the story for phones, which are gobbling up all the storage and bandwidth we can throw at them. But what about the larger form factors? Are iPads (and laptops) growing in their demands? Paradoxically, it would seem that the smaller devices are hungrier than their larger cousins.

The answer lies with the jobs to be done. If highly portable devices are more usable, they will be used more. Large devices are left behind, literally, because their jobs are not as pervasive in place and time. For a large screen like the iPad to increase its attractiveness, it has to be the stage for a set of jobs that only it can perform.

The new iPad has the horsepower. It has more portability (thinner, lighter) and it has the touch ID convenience. It even has a better camera. But for it to succeed it needs to be hired for a set of jobs as expansive in usage as the user-generated photo/video jobs that the iPhone has been called to do.

I hire my iPad for one such job: to persuade audiences small and large. I use it across a dining table and across an auditorium to appeal with a visual language. I use Perspective to create stories that have to be seen to be believed and once seen, create belief.

The tool is demanding however. As the stories are fed by data and the visualizations are rendered algorithmically and not as stored images it is hungry for processing power. I also need it to record performances which taxes storage. I need to transmit those performances both in real-time and as recordings, tasking the WiFi and cellular bandwidth. I need as much screen as I can get to be able to interact with the elements on screen, of which there may be hundreds. I need to export video versions of performances and thus I need a video studio with all its extravagance. I need it to run for all-day workshops connected to a projector, sometimes through AirPlay, under stage lights, which pushes the battery.

Consider my last padcast. It was recorded in one take lasting 18 minutes. I then exported the results to a video that was uploaded to Vimeo and viewed by thousands. However it took over one hour to render it and due to that constraint I did not have the luxury of editing it. I could not easily add, subtract or annotate the video production. This was done on an iPad Air and I was happy to get it done at all.

But if I had an iPad Air 2, not only would production time be shrunk[2] the things I could attempt to do with a presentation suddenly expand. It’s not just about more efficiency but an expansion of scope. More power means more work I choose to do.

So is the new iPad better? As far as the jobs I hire it do do, the new iPad is better. It is in fact not good enough. Which is the best thing to be.

Notes:
  1. Which was far more demanding than office-like documents []
  2. To about half the time []

Apparel is next

If software can be injected into an industry’s product it will bend to the will of the software writers.

This theory expands on Marc Andreessen’s observation that “software is eating the world”. The evidence is that software, coupled with microprocessors, sensors, batteries and networking becomes applicable to an increasingly larger set of problems to be solved[1]. Software has “eaten” large portions of entertainment (e.g. Pixar, iTunes, video games), telecommunications (iPhone, Android, Messaging), various professions including journalism, management and law, and is entering transportation, energy and health care and poised over banking, finance and government.

As entry happens, asymmetries are enabled and disruption follows. This is the bending to the will of the writers–who tend not to be incumbents. The incumbents can’t embrace the changes in business models enabled by software without destroying their core businesses and thus, invariably, they disappear.

The pattern is easily observed but the speed and timing of it is difficult to predict and hence investment success is not certain.[2] There are many entrants who try and few succeed and there are many incumbents who will survive longer than a prophet can stay hungry.

Nevertheless, this process of software-induced turnover in wealth–and, incidentally, vast, additional wealth creation–is inevitable.

But can we predict anything other than timing? For example, can we predict the next industry to succumb to this force?

Notes:
  1. Or, put another way, is eligible to be hired to perform an increasingly large set of jobs []
  2. Which, ironically, means that the jobs of venture capitalists are still safe. At least until the theory develops to the point where it can predict with more accuracy winners and losers. []

Interview With Horace Dediu: What To Expect When Apple’s Expecting

My thanks to Eric Jackson for his thought-out questions on Apple. As published in Forbes, here is his Interview With Horace Dediu: What To Expect When Apples Expecting.

A few excerpts:

Q: Do you expect to see a sapphire cover on the new iPhone(s)? Is that material significant?

I expect Sapphire will become a signature feature across many products. I don’t know if they will have capacity to deploy on iPhone this year but on a watch it’s essential. Here’s a clue: if the screen has any curvature, especially around edges, it needs to be sapphire as glass can’t take strain in that shape. The scope of the plant they are building with GT implies that they will have massive volume potential with at least one major iPhone model using the material. It’s a significant material because it allows design freedom in new directions, especially curved (concave) touch surfaces that retain a jewel-like feel. This has Jony Ive all over it.

Q: Is it fair to conclude now based on the 5C and 5S that Apple will never launch a “cheap iPhone”?

Oscar Wilde said a cynic is someone who knows the price of everything and the value of nothing. When I see the word “cheap” I never know if it refers to price or value. And even when we talk about price, an iPhone is cheaper than buying all the things it replaces so it’s always been a low end disruptor in my mind. (I saw a tweet with an image of a Radio Shack ad from the 1980s and every single item available on that page is now a part of the iPhone. It would have cost thousands to buy all those things back then–and dollars were worth a lot more.) Furthermore, I think Apple holds a black belt in pricing. They seem to define their position in the market by anchoring certain prices and “owning” them. Given all that I would say that Apple is not going to move their price points much. They will expand the portfolio and offer some iPhones at $300 but they will be older models. The average selling price (ASP) I expect to remain constant on a year-long average.

Q: In the past, Apple critics were quick to dismiss the new iPad and 5C iPhone as failures upon their introduction.  You never judge. You just report the facts and data.  That said, is there anything about past new Apple products launches that we should look at as a predictor of how a new iWatch might be received by customers?

When the iPad was imminent the great debate was over whether it would run iOS or OS X. Many imagined a touch-based Mac rather than the “big screen iPod touch”. It was a tough call and one which Microsoft could not and still does not make. Therefore, the interesting question for me with respect to iWatch is: What OS it will run? I will be shocked to the core if it does not run iOS. It is my opinion that making iOS work on it is the entire reason Apple is sweating this segment. They are in it because they are trying to make a platform product with a novel user experience and all the power of an ecosystem run on a wrist. It’s as big a problem as getting a phone-sized device to run a touch UI was in 2007. That is the crucial contribution that Apple is making to this next generation of computing. Now you might ask what users are asking for in this segment. The answer is nothing. Nobody is asking for this. As nobody asked for the iPhone (or the Mac or the iPad). It’s a new computer form factor and how it will be used will be determined by the apps written for it. But it will work and be magical out of the box in version 1. This is in contrast to the single purpose or accessory model of wearables we see to date.

Q: As a student of disruption, where is Apple most vulnerable to being disrupted?

Apple is a new market disruptor but much of what is put forward as a threat to it is low-end disruption. I think Apple knows enough about how that happens that it can manage its way around it. The strategy they employ is one of attrition. If you wait long enough a low-end threat tends to wear itself out as it starves of profit and is constantly gnawed-at by alternatives. (You see, if the disruptor cannot manage a profit then they cannot climb up the trajectory to get on top of the incumbent. Being profitable is a key requirement for successful disruption in the long term.) The attrition strategy works as long as you have the fortitude to hold out and the deep pockets to keep improving your product as alternatives flame out. It is my belief that Jobs made sure that thinking is inculcated in the company. So if not low-end is the company vulnerable to new-market disruptors? This is more subtle and the threat here is what Google/FaceBook/Amazon and the other ecosystems are all about. It’s creating new usage models and shifting where consumers place brand value. I think this is more what keeps Apple’s management awake at night. They are not standing still however. iTunes and Software and Services (now with Beats on board) is the way they are staying on top of that threat.

Lots more here.

Asymcar 17: 27 Quadrillion BTUs

Part I is a review of the “automotive stack” and note how there is no singular event that seems to affect disruptive change. From changing jobs to be done, modular design and manufacturing processes, powertrain evolution, urbanization, environmental interests, regulation and taxation.

Part II is a review of a framework of analysis based on sources and uses of energy.  Inputs, efficiency/losses, network effects and inertia, what can change and what can’t change.

For a shot of theory, Horace reflects on the dichotomy of efficiency vs. efficacy when it comes to predicting change in the sector.

via Asymcar 17: 27 Quadrillion BTUs | Asymcar.

The Critical Path #119: Creativity and Engineering

Predictions of the iPhone Portfolio, big screen phones and what they are good for, and a tentative review of Ed Catmull’s “Creativity, Inc”

5by5 | The Critical Path #119: Creativity and Engineering.

Cash exceptionalism

Prior to implementing a dividend and share buyback plan, Apple had accumulated about $120 billion in cash and marketable securities. In the eight quarters since implementing the cash return plan, Apple has paid about $21.5 billion in dividends and spent another $53 billion of its shareholder’s money buying its own shares and retiring them. That’s $74.5 billion in cash that’s been removed from its balance sheet.

To avoid some repatriation taxes it also borrowed about $29 billion.

Of course, in the meantime, it also generated cash from operations.

Before the plan’s implementation, eyeing the cash allowed for easy tracking of the accumulation of retained earnings. After the plan it’s become a bit more complicated. The following graph shows all the quantities involved:

Screen Shot 2014-08-18 at 8-18-2.09.00 PM

The graph lets us answer the question “What would have happened if Apple had not paid any dividends, bought back shares and taken on debt?”[1]

The answer is in the blue line. It would be about $210 billion today. There are about a dozen companies other than Apple worth more than that amount.

As the company is not growing as quickly as it used to, the slope of the blue line is constant (i.e. it’s nearly linear.) Though that might be seen as evidence of failure, it’s more useful to treat this vast quantity as a recognition of past successes. The company’s beleaguered status needs to be carefully preserved.

Notes:
  1. The grey and black area of the last column is the total “cash returned to shareholders” and sums up to the $74.5 billion mentioned earlier. The grey area is only theoretically valuable as it depends on the outstanding (i.e. not retired) shares retaining their value. In this case, the value of the shares grew, making this an actual gain for shareholders []

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Beleaguered

Amazon’s recent disputes with publishers (Hachette and Disney) shows a degree of market power that is closer to monopsony than to monopoly but this power is nevertheless real. It may not not be something that requires intervention, regulation or even scrutiny but market power is evident in both how companies operate and in how they are valued.

If you look at the following graph, it’s easy to spot those with “monopoly” power. The graph shows a short history of revenues/operating income and P/E ratios. Modest or no growth in earnings coupled with extraordinary high P/E ratios indicate that the market understands the business is not threatened by competition.

Screen Shot 2014-08-14 at 8-14-1.40.47 PM

A Dollar a Day

There are 80 million Mac users. The last 12 months saw sales of 18 million Macs.

As of the end of June there were 886,580,000 iOS devices sold. As of today the total is well over 900 million. One billion sold will happen well before this year is out. Estimates of current iOS users vary but they are probably at least 500 million and could be 600 million.

Screen Shot 2014-07-25 at 7-25-2.44.06 PM

Apple claims 800 million iTunes accounts.

Therefore, in terms of revenues:

  • Mac User = $289/yr
  • iOS User = $262/yr
  • iTunes User = $25/yr[1]

Adding iTunes usage to either Mac or iOS yields

Notes:
  1. Measured from billings []

Is the PC back?

Gartner’s own press release has an interesting spin:

“After Two Years of Decline, Worldwide PC Shipments Experienced Flat Growth in Second Quarter of 2014, According to Gartner”

Gartner’s actual figure is 0.1% growth. Gartner and IDC measure slightly different quantities as “PC” but they don’t disagree much. IDC still shows declining PC sales at about -1.7%. However both also include the Mac in their accounting of PC. If we were to remove the Mac and measure “Windows PC”[1] Gartner’s figures would show -0.8% drop in PC ex-Mac shipments.

The difference in growth between the Mac and non-Mac PCs is shown in the following graph.

Screen Shot 2014-07-23 at 7-23-5.23.08 PM

As Apple puts it, the Mac grew faster (and hence gained share) for 31 out of the last 32 quarters.  It missed on this perfect record during the fourth quarter of 2012 when the then fresh new iMac was impossible to buy due to production issues.

So as far as the Mac is concerned the slowing of the decline in PC unit shipments isn’t at its expense.

Notes:
  1. In quotes because this total includes Linux and Chromebook []