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?
The following graph shows the history of smartphone volume shipments from Nokia.
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.
The Windows PC market is contracting. The market data has been showing unit shipment declining for some time with the latest quarter having perhaps the steepest decline for two decades.
What remains undocumented however is how the market looks when considering economic value. A more complete picture would be to show revenues, average selling price (or revenue/unit), operating margins/unit and percent of profit capture.
The data is not beyond reach however. It involves combining the shipment estimates from e.g. Gartner with financial reports from the companies themselves. Some analysis is required to estimate margins but they are also not hard to obtain (e.g. from third parties.)
So here is a view of the market for the fourth quarter 2012:
The latest data on PC shipments from Gartner showed a decline of 11.1% from the first quarter of 2012. As we don’t yet have the final data on Apple’s Mac shipments, I used my estimate of 4.38 million units (14% growth as per NPD estimate for the US) to obtain an estimate of Windows PC shipments.
That number is 74.8 million units. In the first quarter of 2012 the corresponding calculation yields 85.1 million units. That makes Windows PC rate of decline -12%.
The historic shipment data and growth rates are shown below:
Note that tablet data is not yet included in the shipments summary. Windows shipments are shown in shades of Brown and tablets in shades of Blue/Green.
The decline in PC shipments is persisting and even accelerating.
Coming only a week after the iPad’s launch birthday, it’s perhaps a fitting testament to its impact.
The following is a slightly edited transcript of a portion of the Critical Path podcast #79. I am reproducing it here for the sake of brevity and focus of discussion.
I’m going to try to put together an analogy together here that maybe will help us think through the Facebook Home and the Google Fiber issue.
I’ve been thinking a lot about how to illustrate Google’s business model. The problem is that discussion has been polarized: Two camps have formed. One camp suggests that Google is a benevolent entity that does great things and only asks that we indulge their hobby of a business model called advertising. Fundamentally they are about pushing the envelope on technology, making wonderful things happen.
That is one camp. I call them the utopians. It may not be a nice thing to call them but I frame it as being exceedingly idealistic.
The anti-utopian camp is one that suggests that Google is an advertising company primarily, and fundamentally and overwhelmingly. And anything they do technologically is in support of that. The implication is that Google is sinister and manipulative, bent on getting away with as much privacy extraction as possible.
I believe that the anti-utopians dismissing Google as an advertising company sounds a bit incomplete. It’s not incorrect. It’s not erroneous. It’s just not a complete story.
On Mar 18, 2013, Rafael Barbosa Barifouse – Redacao Epoca – Editora Globo asked (and I answered):
Q: Why is Samsung creating Tizen?
A: I believe they are collaborating on Tizen development because they want an alternative to Android and because Bada was not good enough to meet that goal. Tizen’s roots include contributions from Intel, Nokia and several Japanese companies so it’s not Samsung’s OS per se. Historically it was the “open” alternative operating system for embedded and mobile systems. See https://github.com/kumadasu/tizen-history/blob/master/tizen-history.pdf for a historic perspective.
In some ways Tizen seems to be a blend of several pieces of code including proprietary Samsung user interfaces. Samsung is presumably interested in having a unique, differentiated experience. This is something every device maker seeks. Put another way, if they did not seek this then it’s unlikely that they would be profitable which would also imply that they would not invest in marketing and development of products. As Samsung invests both in marketing and development it can be concluded that they seek to offer a unique value proposition and, in today’s market, that means a unique experience.
Does it make sense to create a new mobile OS when it has had so much success with Android?
Although Samsung and Apple are acclaimed as the leaders in profit capture for smart (and otherwise) phones, what is not lauded is how much they spend on capital equipment used in the making of these phones.
In 2012 Samsung spent around $20 billion while Apple spent about $10 billion (excluding leasehold improvements or Apple stores but including real estate).
Compare these figures with Intel at $11 billion, Google at $3.2 billion, Microsoft about $2.8 billion and Amazon $3.8 billion (including presumably new distribution centers.)
What each company spends on differs depending on its business model, but as the graph above shows it’s easy to see that there is a class of “big spenders” who spend so much that it makes it hard to imagine just what $10 billion/yr could actually buy.
To get an idea of just how big that figure is consider that
As part of a continuing series on the iTunes economy I described how iTunes fits within Apple’s overall revenue and cost structure. The operation is a modest contributor accounting for single-digits percent of revenue and operating margins.
One additional question is how does iTunes compare with other non-Apple retail businesses. The obvious comparable businesses are Google Play and Amazon’s digital content businesses. Unfortunately we can’t compare iTunes with Google Play because Google does not reveal any details about Play revenues (or units sold/downloaded or payments to developers or any other data.)
Also unfortunately, we can’t compare iTunes with Amazon digital sales because Amazon does not provide that detail either.
What we do have is Amazon’s overall revenues (and operating margin.) So that’s what I have compared:
Since we have Amazon’s overall retail revenues it seemed fitting to also add Apple’s physical store retail data on top of iTunes for additional perspective.
Here are some observations:
This interview took place on the eve of the launch of the Galaxy S4. Anouch Seydtaghia is Deputy Head of the Economic & Finance Section chez Le Temps Geneva, Switzerland.
Q: How can you explain that Samsung organizes such a huge event in NY for the S4?
A: The S4 is a very important product as it’s probably the second most profitable mobile phone in the world. Samsung is trying to position it as a premium product and is using every means available to do so.
What are your thoughts about the huge marketing budget of Samsung?
Samsung’s marketing budget has been a constant percent of their sales (approximately). As sales have risen, the budget has risen. This is not considered a normal situation if sales grow very rapidly but Samsung seems to consider x% of sales to be appropriate spending level. Note that Apple’s marketing has fallen as a percent of sales while its sales have grown dramatically.
If we read the media, we see a lot of speculation about the features of the future S4. Can we now compare that to the expectations before a new iPhone?
There are speculations about all phones, from Nokia to HTC and BlackBerry. I don’t see the speculation to be different between all the major companies.
Can Apple regain the lead in the smartphone market? If yes, how?
LG Electronics has acquired HP’s WebOS for an undisclosed amount. When last it changed hands WebOS was part of Palm which was purchased for $1.2 billion in 2010.
Palm has thus been effectively divided into several smaller pieces distributed as follows:
HP will own:
- Support of existing Palm users
- Palm back-end assets including source code, infrastructure and talent
- webOS patents
LG will own:
- Stewardship of the Open WebOS and Enyo open-source projects where the source code resides
- Associated talent
- WebOS websites
- License for IP related to webOS
LG announced that it plans to offer an “intuitive user experience an Internet services across a range of consumer electronics devices.” In an interview, the CTO of LG said that given the current situation with Android, LG does not plan on making smartphones running webOS but will use it in televisions and other devices such as cars, signage and appliances where there are no embedded OS’s. “We’d like to secure a software platform across all devices.”