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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.

Unforgiven, Continued

In June of 2011 I asked “Does the phone market forgive failure?” Not much time has passed since but the answer still seems to be no. The trigger I was using for this point of no return when the vendor began making losses.

The list at the time consisted of 13 phone vendors who either merged, were liquidated or acquired after this trigger point was reached. There were no examples of vendors who recovered. Since then two more vendors reached the threshold (Nokia and RIM) and a third will do so this quarter (HTC). One vendor (LG) may be recovering but Nokia has just been acquired and RIM has put itself up for sale. Some Japanese vendors like Panasonic have also called it quits since then. So the score so far is about 18 triggers, 15 exits and three pending.

Some of this data is summarized in the following graph:

AMP Index update

The following graphs show the most visible global phone brands and the approximate percent of value they captured since 2007.

Screen Shot 2013-08-21 at 8-21-6.17.19 PM

The graphs each show trailing four quarter average of shares of units shipped, revenues, operating profits and smartphones shipped. I also averaged the four shares into a single share number called the AMP index (Asymco Mobile Performance).

That Competition Thing

Bill, I think the smartphone market has always been competitive. [Only] the names have been changed.

Tim Cook responding to Bill Shope’s question on the competitive landscape, April, 2013.

Indeed, over the years, the companies considered Apple’s primary competitor have been many.

In years gone by in the phone market there were RIM and Nokia and Palm and HTC. In the iPod era there was Creative and Sony and innumerable others long forgotten (not to mention the tyranny of DRM).

Even today we struggle to decide whether Apple competes with Google first or Samsung. Or perhaps with the iPad it’s with Amazon or  Microsoft. Or maybe iTunes is threatened by Netflix or Spotify. The Mac surely competes with HP and Dell and Toshiba. What about iCloud? Clearly it’s Dropbox or Google Drive. iWork? Both Office and Google Docs.

Doing a competitive analysis for Apple is then mostly a struggle of whom to compare it to. So forgive me that I only track the few challengers shown below.

Screen Shot 2013-08-13 at 8-13-2.14.59 PM

Apple's biggest acquisition

At the end of the first quarter 2013 there were 946,035,000 fully diluted shares of Apple stock outstanding. At the end of the second quarter there were 924,265,000. The 21,770,000 shares that disappeared were purchased by Apple and retired. Apple shares traded between $390 and $463 during the quarter so it’s hard to know exactly how much Apple paid for them, but at an average of $426.5 per share Apple would have spent $9.3 billion

Management explains:

In late April we executed a very successful debt offering issuing 17 billion of debt across 3, 5, 10 and 30 year maturities. We paid $2.8 billion in dividends in the quarter and we also utilized a total of $16 billion in cash on share repurchase activity through a combination of a new accelerated share repurchase program and open market purchases. $12 billion of the $16 billion was utilized under a new ASR program initiated with two financial institutions in April.

An initial delivery of 23.5 million shares was made under this program with the final number of shares delivered in average price per share to be determined at the conclusion of the program, based on the volume weighted average purchase price of Apple’s stock over the program period, which will conclude in fiscal ‘14. In addition to the new ASR, we executed $4 billion of open market share repurchases, resulting in the retirement of 9 million additional shares.

Later, during Q&A:

Switcher

Nokia’s Windows (Smart)Phone performance was drowned out last week by Microsoft’s big announcement of the Surface inventory write-off. They are pieces of the same puzzle however.

First, a look at Nokia.

There were 7.4 million Lumia phones sold in Q2 with 0.5 million sold in the US. Although Windows Phones grew sequentially from 5.6 million the previous quarter, and up from 4.0 million in the same quarter last year, total smartphones are down y/y and nearly flat over the last four quarters. This is of course because Symbian phones have finally disappeared from volume shipments. The following graph shows the history of Nokia’s smartphone shipments.

Although it’s tempting to compare Lumia to iPhone (given the premium positioning in the US) the average price of €157 or $206 shows that Lumia is more adequately compared to Android. This is about a third of what Apple gets for its iPhones.

That’s not necessarily a bad thing. Nokia’s always had a knack for mass-market phones and certainly that was one reason Microsoft was attracted to them. Presumably, the promise of the relationship was to insert Windows Phone into the Nokia development and distribution pipeline, squeezing out costs and filling up channels.

Screen Shot 2013-07-22 at 7-22-3.24.21 PMThe problem for the brand has been that although priced at Android levels, volumes are nowhere near and the gap is widening. At current activation rates, Android is selling 16.5x faster than Windows Phone (assuming 90% of Windows Phones are Lumia).