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The iPhone company

The analyses of adoption of smartphones in the US and EU5 are remarkably consistent with each other. They also turn out to be consistent with the valuation of Apple.

Screen Shot 2013-10-17 at 10-17-4.01.35 PM

I show the stages of adoption overlaid with the derivative of the Logistic Function and Apple’s enterprise value. The derivative of the Logistic Function shows the speed of adoption, peaking at the inflection point when adoption ceases to accelerate and begins to decelerate.

When will the European Union Five reach smartphone saturation?

Thanks to Symbian, the EU5 countries (France, Germany, Italy, Spain and the UK) had an earlier start in the conversion of phone usage from non-smart to smart devices. According to published comScore data, in July 2010 the EU5 were at 26.6% penetration of smartphones and the US was at 22.8%[1].

However, with the aid of mobile operator subsidies, by the beginning of this year, the US caught up. According to comScore EU5 reached 57% penetration in March 2013 while the equivalent figure for the US was 58%.

Using the logistic curve model introduced last week, it’s possible to get an approximate categorization of the adopters of the technology:

Screen Shot 2013-10-16 at 10-16-2.02.44 PM

As with the previous analysis, the graph identifies the following dates:

Notes:
  1. The population is defined as adults using phones for themselves. Meaning it excludes children and phones purchased by companies. []

The Five Year Plan

Gartner reported that PC shipments totaled 80.3 million units in Q3. Subtracting an estimated 4.4 million Macs yields an estimated 75.9 million Windows PCs.[1]

This total is lower than the total shipped in the same period of 2008.

 

Screen Shot 2013-10-10 at 10-10-11.12.11 AM

 

The graphs above show the

Notes:
  1. The total will be less than this as some PCs will not ship with Windows []

Estimating HTC's post-traumatic life expectancy

In May 2012 I wrote:

The pattern may be that companies either have short post-trauma lives of about two to three years or relatively long post-trauma lives lasting 4 to 5 years. What determines this life expectancy and how long do RIM, Nokia and LG have?

via Post-traumatic life expectancy of phone vendors | asymco.

These comments came right after BlackBerry (then RIM) announced a loss and thus entered what I called the “post-traumatic” phase of its existence.[1] The observation I have been making is that once a company begins to generate negative operating margins from phone sales, that phone business never recovers.

The question then becomes one of gauging how long they have before the business is sold, dissolved or merged. Since that update, both Nokia and RIM have tentatively agreed to be sold. If the sales go through then we can update the graphs as follows:

Screen Shot 2013-10-04 at 10-4-11.01.11 AM

[Graph note: solid bars in the second graph indicate companies which exited and thus the duration of life post-trauma.

Notes:
  1. The analysis began earlier, in June 2011 []

Competing with a Mac

Publicly, Mr. Lazaridis and Mr. Balsillie belittled the iPhone and its shortcomings, including its short battery life, weaker security and initial lack of e-mail. […]

Internally, he had a very different message. “If that thing catches on, we’re competing with a Mac, not a Nokia,” he recalled telling his staff.

From How BlackBerry blew it: The inside story – The Globe and Mail

The whole article is worth reading, detailing as it does the decision process inside BlackBerry during the painful disruption of its core business.

What struck me most however was how similar their decisions were to those of Nokia at about the same time. Consider:

  • The engineering priorities placed on optimization around constrained hardware. Although engineers knew how to build the right products, the business priorities caused them to be deployed in the wrong direction.
  • The delays these misdirected efforts caused. Mobile phones have narrow windows of opportunity but long lead times. A strategic mistake is very costly and most probably impossible to remedy. In the case of BlackBerry, buying QNX came too late while for Nokia the deprecation of Symbian was catastrophically managed.
  • The feedback loop from network operators which shut down any initiatives for improved user experiences. Your best customers provide all the wrong information when the market is being disrupted. Ignoring them is impossible while complying is a strategic mistake.
  • The demand from network operators to develop “killers” to competing platform-based products[1] and the subsequent “jumping at the opportunity”.
  • Listening to large buyers at the expense of users. While BlackBerry was guided to omit consumer features from its enterprise buyers, Nokia never secured enterprise buyers of any significance[2]. Nevertheless it created the “E series” business-friendly phones which suppressed features like cameras and music.
  • The celebrity sponsorships and wasted promotional efforts in the face of structural failures.  This is manifested today by HTC as well.

The parallelism of this synchronized failure can be seen in the following graph showing smartphone volumes.

Notes:
  1. Ironically, Nokia was asked to do a BlackBerry killer []
  2. though they tried very hard to get them []

An interview with Niaz Uddin at eTalks

My thanks to Niaz Uddin for asking some good questions and posting my replies:

Horace Dediu on Asymco, Apple and Future of Computing | eTalks.

Full interview is here, excerpts below:

Niaz: Why do you study Apple?

Horace: Apple is an interesting company to study because its success comes from being a serial disruptor. This is a very rare type of success formula. I am trying to “reverse engineer” its operating model and I hope that such a model is one which others might learn from if they were to emulate it. The trouble is that very few others seem to want to emulate Apple. Why that is is also an interesting question.

Niaz: […] Do you think apple has lost its image that it has created over the years as a center of innovation and building excellent products?

Horace: I cannot comment on how Apple’s image is measured by people in the industry. I have been listening to commentary on Apple for about a decade and I have never seen any change in pattern. The company has always been perceived as a failure by a majority of observers. With respect to its products, I also do not see a change in the pattern established over the last decade.

Niaz: Are you optimist about the future success of Apple? Like after 10 years and then 20 years?

Horace: Let me put it this way: if there were no Apple then somebody will have to invent an Apple to do the same thing Apple does. In that sense I’m optimistic that there will be an Apple in some way in perpetuity.

Niaz: What will be the next big innovation from Apple?

Horace: I have no idea but it’s likely to involve refining new user interaction methods. Similar to the breakthroughs that came from the use of a mouse, a scroll wheel and a touch screen. It means making computers better at gleaning our intentions without our getting involved in explaining them.

Niaz: Will Apple, Google and Samsung be the major player for the future of computing? Or we can hope to see some new faces?

Horace: I am fairly sure Samsung will not be because they have not yet grafted software and services to their operating structure. I would give Amazon a higher probability in being a successful platform alternative.

Niaz: In 2011 you’ve written a blog post ‘Steve Jobs’ Ultimate Lesson for Companies’ on Harvard Business Review Blog and you have cited ‘A leader should aspire to do more. A leader should claim to have left a legacy not just on their company but on all companies.’ As you know Google, Amazon, Samsung, Facebook … all have learnt lifetime lessons from Steve Jobs. What do you think about the impact that Steve Jobs have created?

Horace: He led by example and like all great leaders sacrificed much as a way to inspire others to follow him. He also spent time in the wilderness and chose asceticism. This gave him authority. Many historical figures had the same quality. The problem is that few business leaders have it but I don’t see why they shouldn’t.

Much more on evaluating Tim Cook’s performance, the iPhone portfolio, the rise of Android, Microsoft/Nokia, wearable technology and disrupting Google. Check it out on eTalks.

 

S is for Service

One of the enduring mysteries of the iPhone has been its lack of a portfolio. After six years it seems that Apple has finally acquiesced that there should be one, albeit currently limited to two items. The second enigma is related to the price, namely why does Apple ask so much for its phones? At an average sales price of $600 it’s a shocking premium to the average phone, and with a six year run, a shocking resistance to the corrosive effects of competition.

The obvious answer to why Apple asks so much is because it can. Anybody would if they could. That’s a poor question. So the right question should be: why does anybody pay this much? One could answer that few do and it’s not a mystery that some feel better paying more simply because they can. But those who pay Apple’s prices are, mainly, not consumers. They are operators. Exactly 270 of them.

So then let’s re-ask the question: Why do so many operators pay so much for Apple’s phones? We can’t answer that with the psychological slurs usually directed at the brand. Surely Operators aren’t competing in beauty contests or need to soothe their collective egos. The decisions operators make on whether to range a phone are driven by hard economic realities: ARPU, churn, network costs, depreciation, ROI, etc. Some clearly can’t make the iPhone fit their economic models and indeed about two thirds of them don’t. But the most prominent[1] do. DoCoMo, the largest in Japan just did after holding out for five years. Verizon held out for years, as did T-Mobile. China Mobile’s acceptance also seems imminent.

But that still leaves the question of why are those operators who do carry the iPhone willing to pay so much for it? I only assume that their decision process is likely to be rational. Mainly because we have a large enough sample but also because there is a lot of money at stake requiring quite a bit of internal consensus and vetting before committment. We have to conclude that operators place the orders because they obtain value from the iPhone even when it’s priced at a premium to the average alternative.

The question which follows then is how do they obtain value?

Notes:
  1. Arguably the most important []

C is for Cognitive Illusion

My assumption going into this, sixth iteration, of the iPhone was that we would see the expansion of the iPhone into two distinctly positioned products: a low-end C and a high-end S. The assumption was based on what what we saw with the iPad: the regular iPad and the mini iPad.

By using the iPad as a template, my exercise in August was to forecast what the pricing[1] might turn out to be for such a split-personality product.

I expected the 5C would replace the “low end” n-2 variant[2] and the 5S would continue as the core product. This is reflected in the original graph as devised in mid-August:

Screen Shot 2013-08-12 at 8-12-11.44.05 AM

The surprise was that the 5C was not “low end” in any way other than having a plastic case. It has a minor spec increase over the 5 but is otherwise a 5 feature set in a plastic skin. It also is priced as if it was the continuation of the 5, with a modest reduction in ASP.

In addition, the continuation of the 4S and 4 (in China at least) means that the old strategy continues more-or-less unchanged.

Knowing the line-up and pricing all that remains to understand is the positioning, or how the products are defined relative to each other.

This is where there might be a shift happening. Under the old model the n-1 variant was meant to be a modest volume contributor to the portfolio, being essentially a cognitive illusion which encouraged buyers to stick with iPhone n at the expense of competitors. However, the new n-1 product (the 5C) has a distinct positioning that makes it seem fresh and not a lesser, stale version of the flagship. It is designed to appeal as a legitimate upgrade for iPhone 4/4S users.  It is, in other words, not meant as an illusion, and not focusing attention on the flagship[3]. Rather, it is meant to be a genuine, core product.

As a result, I expect the mix of iPhones to be more evenly split between the C and S variants. I expect the C to even become the most popular version in the mid-term. My expectations are shown in the following graphs.

Notes:
  1. Revenue/unit to be more precise []
  2. Older by two generations as the iPad mini replaced the iPad 3 []
  3. It might still be an illusion for many but I’m suggesting that it won’t be for most. []

Game over

In the “Race to a Billion” there is a graph showing Android reported activations and iOS cumulative unit sales alongside cumulative console sales. The contrast between mobile phone platforms and game consoles is striking, with an order of magnitude difference in consumption. The best performing console to date is the Wii with about 100 million units sold so far.

[UPDATE: Thanks to Danny Nemer cumulative sales of Sony's PlayStation 2 (using production shipments from FY 2000-05 and recorded sales for FY 06-12) is 155.81 million units]

However, that is an incomplete picture of the game platform business primarily because consoles are not the entirety of the business. Mobile (but dedicated) gaming platforms have been sold for some time.

To give a better picture of the game business we prepared the following graphs. The first shows Nintendo’s product lines with actual unit shipments (shown as colored dots in millions of units per quarter) and the trend (shown as trailing twelve months’ average trend lines).

Screen Shot 2013-09-09 at 9-9-4.45.30 PM

Note that fixed and mobile products are both shown on the same graph. The picture that emerges is that for Nintendo, its mobile platforms combined are more popular than its fixed consoles with a total of 186 million mobile devices sold since 2003.

There is also a pattern of generational change. The GBA, DS and GameCube era was superseded by the DS Lite, DSi, Wii era. The Wii era (or generation) was significantly more popular than the GameCube generation. If there is a problem however, it seems to be that the new generation devices or consoles are not forming a new era. The Wii U and 3DS are not growing nearly to the level of the previous generations and have faded quickly.

To summarize, the unit volume graph for Nintendo is below.[1]

Notes:
  1. This is a smoothed graph showing what sales would have been if they had been evenly spread out over a 12 month period. The actual sales would total to the same area but would be much more seasonal and thus noisy. []

Who's next?

In February I asked Why doesn’t anybody copy Apple?

Put another way: Why is it that everyone wants to copy Apple’s products but nobody wants to copy being Apple?

Being Apple means, at least:

  • Insourcing all aspects of operations which affect the customer experience. Increasingly that has meant insourcing everything, a toxic idea to every MBA-trained professional since forever.
  • Organizing functionally and having no product level P/L responsibility. That also means removing almost all incentives for employees to climb ladders and thus prove their worth.
  • Developing products using integrated “heroic” efforts which shun  every best (or even adequate) process for product development.

I asked somewhat rhetorically because it’s an open question. Apple’s operating model and devotion to integration have been asymmetric to technology dogma for decades. To the casual (read: naïve) observer, pursuing the Apple way seemed also to be tied to one individual. You could not “be Apple” unless you were also Steve Jobs and there was only one of him.

But it seems I did not give enough credit to other observers.