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Fluid Coupling

When exactly did enterprises become late adopters of technology? We know that they were some of the first buyers of computers. IBM sold tabulating and later computing machines to businesses starting in the 1910s. During the 1980s it was businesses which bought PCs in significant numbers to augment, and later replace, their centralized computing resources. Networking was in use in government and in business long before consumers saw any value in it.

In my talks I often point out that if you wanted to create a near-monopoly in computing in the 1990s all you needed was to convince 500 people to adopt your technology: the IT managers of the Fortune 500. If the largest companies used your product then they would impose the standard on all their suppliers and distributors and pretty soon there would be no alternatives.

So what happened during the last decade or so?

Today IT departments are known as the Information Denial department.  I recall that when the DVD first became an option on desktop or laptop computers, IT departments were first to decline the option (presumably because it would be used for entertainment rather than work.) When instant messaging first became available, it was IT departments who blocked the ports. When mobile devices with cameras became available signs went up that no cameras would be allowed on company premises. When USB sticks became available, USB ports started getting glued shut. When iOS became available, no devices running it were allowed on the network. Then came Facebook, Instagram and dozens of social media.

This pattern of not only a refusal to adopt but an outright ban on new technologies by enterprises made them fall off the radar of technology developers. Quite simply everyone outside the supply chain into enterprises stopped developing new markets around them. From venture funds to developers, enterprises fell out of the business plans.

The enterprise stood as a place of “legacy” and “security” which prevented mobile or other forms of computing. Paradoxes emerged wherein an administrative assistant had more computing power in his pocket than the CEO had in her data center; where the same assistant would know what was happening faster than any of the bosses. Homes had better connectivity than offices and productivity at small firms increased faster than at big firms. Incidentally, even the slowest enterprises were faster then the government. The bigger the firm, the slower and stupider it seemed. Were large firms employing dumb managers or did being a manager in a large firm make you dumb?

One resolution to this paradox might be that mobility and the movement of processing onto consumer devices increased the cadence of product development to such a degree that the purchase cycle and dollar amounts involved ran out of the range which companies could absorb.

A simple way to explain it is this: A company takes longer to decide to purchase a device than the device’s shelf life. In other words, by the time all the salespeople and committees and standards setting and golf playing and dining and site visits would be completed, the object whose purchase was being discussed would be discontinued.

A more onerous issue is that companies have procedures for accepting technologies (capital expenditures) which require high degrees of interaction and decision making. In order to step though these procedures, the vendors need to have sales people who need to invest lots of their time and therefore need to be compensated with large commissions. If those commissions are a percent of sale then the total sales price needs to be large enough “to make it worth while to all parties”. As a result, paradoxically, an enterprise technology must be sufficiently slow and expensive to be adopted.

Mobility was disruptive to enterprise because the new computing paradigm was both too fast and too cheap to be implementable.

This implies that the problem with enterprises is not the stupidity of its buyers. They are no less smart than the average person–in fact, they are as smart with their personal choices for computing as anybody.  The problem is that enterprises have a capital use and allocation model which is obsolete. This capital decision process assumes that capital goods are expensive, needing depreciation, and therefore should be regulated, governed and carefully chosen. The processes built for capital goods are extended to ephemera like devices, software and networking.

It does not help that these new capital goods are used to manage what became the most important asset of the company: information. We thus have a perfect storm of increasingly inappropriate allocation of resources to resolving firms’ increasingly important processes. The result is loss of productivity, increasingly bizarre regulation and prohibition of the most desirable tools.

Which brings us to the latest announcement of collaboration between the new disruptor of computing Apple and the vendors supplying Enterprises like IBM and Cisco.

Apple was the loser in the standardization of computing during the 1990s but is the winner in the mobilization of computing during the 2010s. The company positioned itself in both cases on consumer computing but it never gave up on enterprises.

The approach of Apple seems to be to enable the larger suppliers of technology to enterprises to bundle iOS as part of the acceptable set of services and products. In essence, Apple is complying with the requirement to be slow and expensive in order to be adopted. It can maintain the cadence of product development while attaching itself to the purchase cycle of the enterprise.

In a way it’s like an automatic transmission in a car. Operating through gears, the engine can rev at a different rate than the wheels turn. Occasionally, shifting happens but the fluid coupling keeps both the engine and the wheels from absorbing any damaging shocks.

(Much) Bigger than Hollywood

Eddy Cue seems like a nice guy. I can’t say that for sure as I’ve never met him, but he seems to be amiable enough. Maybe it’s because he has a seat on Ferrari’s board of directors. Maybe it’s because he enjoys dancing.

Or maybe it’s because he’s in charge of the only real “division” at Apple. All the other senior managers have functional roles. Eddy has a bona-fide business unit called Services.

Services is Apple’s division of many things. It has the iTunes stores (Music, Video, Apps and iBooks). It has Software with consumer bundles like iWork and iLife and Pro tools like Aperture, Final Cut Pro and Logic Pro. It still has OS X as a product, though revenues are pretty low as updates are now free. It also includes Services with iCloud, Apple Music and Applecare.

These things are not iPhones or iPads but they are many and all together they form a modest little unit. I say modest because not much is said about it. When seen in contrast to the other Apple product lines, it’s hard to be impressed. In the graph below it’s the purple area.

Screen Shot 2015-08-25 at 5.56.19 PM

Apple does not help much. Occasionally  Apple offers updates on iTunes/Services using various (rarely the same) metrics. For example, in early August, Eddy Cue offered an update during an interview with USA Today on Apple Music relating how many users there were one month after the service started (11 million).  It was worth a few headlines.

However he also noted in passing that the App store did $1.7 billion in transactions during July. If you convert that to a yearly run-rate it comes out to about $20 billion/yr. Digging through previous announcements, the equivalent figure for 2014 was about $13.7 billion. Nice growth.

But is $20 billion of “transactions” of any significance?

The Alphabet of Google A and Google B

For the last few years, I’ve been proposing that the way to conceptualize Google is as two separate entities: Google A and Google B.

Roughly speaking Google A was the R&D[1] organization and Google B was SG&A[2]. You can find the operating expenses of running each of these organizations in the company’s income statement.  In the last quarter R&D was about $2.8 billion and SG&A was about $3.5 billion[3]. The two entities are further distinguished as follows:

  • Google A was led by Eric Schmidt and Larry Page and Google B was led by persons unknown, but mostly represented by the “Chief Business Officer” Omid Kordestani.
  • Google A spends money. Google B collects money.
  • Google B sends a check to Google A while Google A sends data to Google B (which then sells it on to advertisers and collects money).
  • Google A communicates frequently with optimism and enthusiasm about the future. Google B remains quiet.
  • Google A solves problems of humanity, Google B solves problems for advertisers.
  • Google A has users, Google B has customers (to whom it sells users.)

In summary, Google A is altruistic, Google B is pragmatic. Google A engages in research, Google B engages in commerce. Google A operates in a structure similar to a Bell Labs for the good of humanity[4],  Google B operates in a structure similar to AT&T and collects monopoly rents but without any government oversight.

This was an effective construct for analysis which explained to me much of how Google operated and how it made decisions. So what do we make of Google’s new Alphabet? Is this a dissolution of the Google B/Google A dichotomy?

My initial answer is no. We don’t have a change in this core structure. What we have instead is a split of Google A into Google A and Google A+.

A+ is the crème de la crème of the altruistic Google A. It’s the stuff that really does not make money. It’s the laboratory of Bell laboratories. It’s the moonshot manufacturer. It’s the incubator where hobbies are hatched. It’s the funder of ventures.

After A+ is carved out, Google A and Google B remain exactly as they were, now under a new CEO. The previous CEO no longer has any day-to-day input in the running of Google A and is no longer soiled by association with Google B.

Alphabet is therefore the “holding company” of Google A+, Google A and Google B. I can only suppose that the separation of A+ from A (and the previous A from B) allows the founders to distance themselves even further from the purchase decisions which, through pricing signals, determine where value lies and how resources should be allocated. That must be a great relief.

Notes:
  1. Research and Development []
  2. Sales, General and Administrative []
  3. Sales and marketing was $2.1 billion and General and Administrative was $1.5 billion []
  4. Using a definition of Good as established by the founder []

Samsung’s profit center

Will there come a time when Samsung will earn more profits from the iPhone franchise than from its own Galaxy product line?

The problem for Samsung is that although it still sells the most phones[1], and the most smartphones, the price and margins for these products are collapsing. The pattern is shown in the graphs below:

Screen Shot 2015-07-30 at 7-30-8.20.29 PM

Screen Shot 2015-07-30 at 7-30-8.20.22 PM

Notes:
  1. over 80 million but we don’t have a precise figure []

How iPad Educates

The fact that the iPhone is contributing over 90% of the operating profits in mobile phone sales has penetrated even as far as the Wall Street Journal. However, it’s not yet commonly known that the Mac captures a majority of personal computer operating profits, at least when considering the sale of hardware.

My calculations suggest at least 60% of operating margin in personal computing hardware is captured by Apple. This is mainly due to the fact that the average Mac sells for more than $1200 while the average PC sells for less than $450.That is equivalent to $1.5 billion per quarter for Apple vs. $930 million for all the other PC makers combined.

Screen Shot 2015-07-17 at 12.16.27 PM

If we are to consider the iPad as a “PC equivalent” computer[1] then another $billion/quarter is contributed to the profit pool. It increases Apple’s share of profits to 73%. As a result, Apple absolutely dominates computing profits.

Notes:
  1. for a substantial minority of tasks []

Apple management answers questions on the market performance of Apple Watch

Katy Huberty (Analyst – Morgan Stanley): You’ve said in the past that the watch may take longer to ramp given the new category and new interface to customers. Is that, in fact, playing out? Is the watch ramping slower than past product categories?

Tim Cook (CEO): Katy, when you use the word ramp, do you mean from a — I assume you’re talking about supply?

Katy Huberty (Analyst – Morgan Stanley): Yes. Pre-orders and first week in sales and any other data points that you track in terms of interest versus, say, when the iPad launched in 2010?

Tim Cook (CEO): Let me talk about supply and demand and sort of separate those two. Right now demand is greater than supply. And so we are working hard to remedy that.[1]

We’ve made progress over the last week or so and we’re able to deliver more customers an Apple Watch over the weekend than we had initially anticipated. We’re going to keep doing that. […] So I’m generally happy that the — that we’re moving on with the ramp.

It is a new product for us, and with any kind of new product, you wind up taking some time to fully ramp.

Having said that, I think we’re in a good position. And by some time in late June, we currently anticipate being in a position that we could begin to sell the Apple Watch in additional countries. And so that’s our current plan.[2]

From a demand point of view, it’s hard to gauge when you don’t have product in stores and so forth. And so we’re filling orders completely online at the moment.

The customer response from people that have gotten theirs over the weekend have been overwhelmingly positive. And we’re far ahead of where we expected to be from an application point of view.

To give you a comparison, when we launched the iPhone we had about 500 apps that were ready. When we launched iPad, we had about 1,000. And so our internal goal was to be able to beat the 1,000 level and we felt — we thought it would be great if we were able to do that by a little bit.

And as I’ve mentioned before, we now have over 3,500 apps in the App Store for the Watch. And so we couldn’t be happier about how things are going from that point of view.

We are learning quickly about customer preferences between the different configurations. There’s a much larger breadth of possibilities here for customers than in our other products. And in some cases, we called that well and some cases we’re making adjustments to get in line with demand.

But I’m really confident that this is something we really understand how to do and will do. And so I’m really happy where we are currently and happy enough that we’re looking forward to expanding into more countries in late June.

[…]

Gene Munster (Analyst – Piper Jaffray and Co.):  …question for Luca, in terms of any thoughts on what the margin impact from the Watch as that ramps over the next couple of years?

Luca Maestri (CFO): Apple Watch is, not only a new product, but it’s a brand new category with a lot of new features, a lot of new innovative technologies. And Apple Watch margins will be lower than the Company average.

[…]

Toni Sacconaghi (Analyst – Bernstein): I just wanted to revisit the watch.

Tim, I think you said when you were talking about your new products, you said we’re, quote, very happy with the reception. And in response to a previous answer you said, relative to demand, it’s hard to gauge with no product in the stores.

I would say relative to other product launches where your commentary around demand was characterized by superlative after superlative, that assessment feels very modest. And part of the reason that I ask is, A, are we reading you right in terms of that? But if we look at consensus, consensus is expecting that Apple will ship more watches in its first two quarters than it did iPads, despite, as you said, very limited distribution in terms of only selling through your stores.

So I’m wondering if you can talk a little bit about putting those demand comments in context, given that they do seem different from how you’ve characterized product demand for other products. And how, if at all, we should think about the modeling demand in the context perhaps of the iPad, which was your most recent significant new category? And then I have a follow-up, please.

Tim Cook (CEO): I’m thrilled with it, Toni. So I don’t want you to read anything I’m saying any way other than that. So I’m not sure how to say that any clearer than that.

And in any situation, whether it’s the watch or in the past on iPad or on iPhone, when demand is much greater than supply, it’s difficult to gauge exactly what it is. And so, as you know, we don’t make long term forecasts on here. We maybe forecasts for the current quarter. And so I don’t want to make any comment about the consensus numbers.

Honestly, I haven’t even studied those. We’ve got enough to think about here.

I feel really great about it. The customer response, literally from what I’ve seen, is close to 100% positive. And so it’s hard to imagine it being better.

——-

Excerpts from Apple Earnings Report: Q2 2015 Conference Call Transcript, April 27, 2015.

Notes:
  1. This is still true today, three months later []
  2. This has been achieved according to plan. []

Selling Watch Sales Data

There is no reliable information on Apple Watch sales. None of the analysts which follow Apple or the phone, computer or watch markets have any insight into this. The only source of information is Apple itself and they have made it clear that they don’t intend to provide watch sales data for competitive reasons. I did not and do not expect any information from Apple on watch sales. They have placed the product within the “Other” category specifically to make unit data hard to discern and have explained why they do so.

The only estimate we have heard of is from a company that has no track record in market research and relies entirely on sampling of email receipts. I urge extreme caution when dealing with this type of data. We don’t know how representative these receipts are and how they are sourced or sampled. The methodology is not only unclear but it’s one not practiced by any other analyst. You would think that receipt sampling would be a phenomenal source of information about a lot of other products and yet we hear nothing about how predictive it is for anything except this particular new product as claimed by a company which never made any such prior claims.

It’s also a sampling of (presumably) US-only customers at a time when the product is undergoing a gradual roll-out through multiple countries and multiple channels. Consider that if sales were constrained internationally then buyers would be trying to arbitrage through the US market, meaning there would be many e.g. Chinese buyers/brokers booking sales through US online stores inflating that channel’s initial volumes. Furthermore as physical retail stores begin to receive stock, online sales (which are what is sampled) should decline as buyers opt for the instant gratification (and the option to see the product in real life.) To see US-only online purchases drop after a period of pent-up demand and as store inventory becomes available is not interesting and says almost nothing about the product’s performance.

The only way to be thoughtful about this new category is to understand the broad transitions underway in mobile computing. We are witnessing a pivot in human-computer interaction as significant as the initial iPhone launch.

[As a rule, be very careful with the premise of data salesmanship. All data is false, some is useful. Data you have to pay for is less useful than data that has been peer reviewed.]

iOS v. Windows and Immunity to Disruption

The pattern of Mac growth exceeding Windows PC growth (and overall PC growth which includes the Mac) is old news. It has been observed for at least 40 of the last 42 quarters.

Screen Shot 2015-07-10 at 12.47.04 PM

It’s a historically interesting contest, but the story of computing has moved on.  Starting with building computing, via floor computing, office computing and then to desktop computing and portable computing we are now in the era of mobile computing.[1]. The problem with observing mobility in general is that there are too many mobile computing options. Phones have a wide range of capabilities, tablets and various other form factors are positioned on differing jobs-to-be-done. Platforms and services are also scattered around jobs which have been carved from fixed computing or have been established with no fixed precedent.

So can we pinpoint with any accuracy the moment when the tipping point has been reached? We could point to all mobile phone shipments, or even the vaguely-defined smartphone shipments compared to all PC shipments. We could look at tablets alone. If we could get accurate measurements.

One measurement could be to look at operating systems alone. When comparing iOS shipments (iPhone, iPad and iPod touch) to Windows we can see that combined iOS shipments exceed all Windows PC shipments for all three previous quarters.

Notes:
  1. And as sure as the sun will rise tomorrow we will move beyond mobile computing []

What next for iPad?

ComScore suggests that there are 100 million tablet owners in the US. On a per capita basis that implies penetration of about 30%. As a percent of mobile phone subscribers (above age of 13) that implies 40%. As a percent of smartphone users that implies 43%. As a percent of iPhone users that represents 47%. As a percent of households assuming one device per household that implies 85% penetration. By another measure (Pew) household penetration is around 50%.

Regardless of the difficulty in defining what is the correct “addressable market”, the more important question is whether tablets will be an ubiquitous object. Perhaps what we are seeing in the US is something similar to the MP3 player market or video game console markets where penetration saturated at around 50%. Perhaps tablets will reach PC levels which are closer to 80% of population or perhaps they will reach phone levels which are above 90%. The reason we can’t answer the question of ubiquity easily is because competing solutions can carve the usage out of a category “disrupting” it with alternatives.

The idea that jobs are the segments into which products fit and not demographics or product attributes is key to understanding this migration. The reason phones have subsumed more jobs onto themselves is because they have a rapid rate of evolution and because they have larger scale of economy and because they are conformable to our life spaces. As phones get better they take on more jobs and some of those jobs are those of tablets. The MP3 did not become ubiquitous because the phone took its job. Same for the video game and same perhaps for the PC and tablet.

Where are Maps going?

At the 2015 WWDC Apple stated that it receives 5 billion requests per week for its maps service. It also said that Apple maps is used 3.5 times more frequently than “the next leading maps app.”

These two data points are the total number of data points we have about the global maps market. Neither Google nor Nokia provide usage or share or performance data. Regardless, commentary on the usage, share and performance of Apple Maps has been abundant for the three years since its inception.

The data presented allows us to make a few estimates for the first time and we can hope that additional data can allow a picture to emerge of where maps are going.

With these first two data points we can finally make some estimates. But some assumptions are still needed: We need to assume that the “next leading maps app” is Google Maps. Although there are other maps apps on the iOS platform they are probably insignificant and it’s a two-horse race between Google and Apple on iOS.

This means that the 3.5:1 split in usage results in a 78% share for Apple Maps and a 22% share for Google. If we assume that there are about 400 million iOS users of maps[1], it leads to about 90 million Google Maps users on iOS and about 310 million Apple Maps users on iOS.  This includes iPad.[2]

Given that Google also reported 1 billion downloads in 2014[3] we can assume between 25% to 33% Apple Maps “market share” of usage.

Notes:
  1. Note that not all iOS users are maps users. Maps are not used by all users []
  2. We are excluding OS X use of Maps. []
  3. though not necessarily all of these downloads lead to active use, obviously []