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Tim Cook's answer to my first question

Tim Cook was asked the first question (on the iPhone portfolio). His answer is paraphrased here:

We haven’t so far. That doesn’t shut off the future. Why? It takes a lot of really hard work to do a phone right when you manage the hardware and software and services in it. We’ve chosen to put our energy on doing that right. We haven’t been focused on working multiple lines.

Think about the evolution of the iPod over time. The shuffle didn’t have the same functionality as other products. It was a really good product, but it played a different role — it was great for some customers it was strikingly different than other iPods. The mini played a different role than the classic did. If you remember when we brought out the mini people said we’d never sell any. It was too expensive and had too little storage. The mini proved that people want something lighter, thinner, smaller. My only point is that these products all served a different person, a different type, a different need. For the phone that is the question. Are we now at a point that we need to do that?

At a macro level, a large screen today comes with a lot of tradeoffs. When you look at the size, but they also look at things like do the photos show the proper color? The white balance, the reflectivity, battery life. The longevity of the display. There are a bunch of things that are very important. What our customers want is for us to weigh those and come out with a decision. At this point we think the Retina display is the best. In a hypothetical world where those tradeoffs didn’t exist, you could see a bigger screen as a differentiator.

Full interview here, answer begins around minute 37.

Here is how I interpret the answer:

My questions for Tim Cook

Next week at AllThingsD’s D11 conference in LA, Apple CEO Tim Cook will be interviewed by Kara Swisher and Walt Mossberg.

Here are some questions I’m hoping they will ask:

  1. Why is the iPhone not sold as a portfolio product? Meaning, why, after six years, is there no iPhone product range being updated on a regular basis. Having a portfolio strategy is not only followed by every phone vendor but also by Apple for all its other product lines, including the iPad, which came after the iPhone. In other words, please explain why the iPhone is anomalous from a product portfolio point of view.
  2. There are more than 800 operators world-wide so why are there only about 250 of them carrying your phone? Competitors large and small (from BlackBerry to Nokia to Samsung) have cited relationships with more than 500 operators so Apple is being uniquely selective. My question does not stem from a lack of patience: this total number of iPhone distributors has not increased markedly for over a year. Are you limiting distribution through conditions placed on operators (like the availability of sufficient quality data services) or are operators finding the distribution agreement too onerous (e.g. too high a minimum order quota)?
  3. In 2012 Apple’s capital spending has reached the extraordinary level of $10 billion/yr, higher than all but the most capital-intensive semiconductor manufacturers. This is unusual for Apple as it was less than $1 billion in the year before the iPhone launched. It’s also unusual for Apple’s competitors in phones, PCs or tablets. It’s on a level matched only by semiconductor heavyweights. What is the purpose of this spending and what should we read into it leveling off at $10 billion for 2013?
  4. Depending on one supplier is an operational faux pas, and yet Apple has found itself in that situation with Samsung for mobile microprocessors. It may be excusable in PCs with Intel having an architectural monopoly but it’s not excusable for a chip that you designed yourself and purchase in massive quantities. Why did you give Samsung such a concession, especially knowing their potential as a competitor vis-à-vis alternative suppliers who had no such potential? Does the answer have something to do with the previous question?

The allure of iTunes

My estimate of last quarter’s iTunes gross revenues suggested a spending rate of $40 per iTunes account. It would make sense to consider how that figure changed over time. The following graph shows the pattern:

Screen Shot 2013-05-14 at 5-14-9.49.40 AM

You can read each bar in the graph as the total “ARPU” or average revenue per iTunes user[1].

I overlaid a graph showing the total number of accounts as reported by Apple to the (retroactively) estimated revenue structure. Account totals are measured with the right axis and ARPU with the left.  Note that I also broke down each component of iTunes as currently defined (Music, Video, Apps, Books, Software and Services.)[2]

The time frame covered is from Q2 2007, or the quarter prior to the iPhone launch. A few patterns emerge:

Making rain

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.

Reasons for iOS outperformance in the US

The comScore mobiLens survey for the US ending February 2013 shows continuing rapid expansion of smartphone usage in the US. Even though the 50% penetration threshold was passed seven months earlier, the rate of new smartphone users was second highest ever recorded with over 1 million new-to-smartphones users every week during February.

Screen Shot 2013-04-05 at 4-5-4.15.52 PM

Overall penetration increased to 57% with nearly 2% of the population switching in one month. Using the average growth rate for the last six periods, the US could see 80% penetration in another 19 months or by Q3/Q4 2014.

The cost of selling Galaxies, updated

Thanks to @jtk0621 via twitter I was able to obtain a quarterly view into Samsung’s SG&A expenditures by cost category.

The value of this data is in being able to understand why Samsung SG&A as a percent of sales remains fairly constant. To recap, the discrepancy with Samsung’s SG&A is that it has grown in proportion to rapidly rising sales. Normally, when sales grow, SG&A grows but when sales grow very rapidly, SG&A grows a bit more slowly since it’s primarily a function of headcount and hiring is necessarily organic and hence slower as a process.

The contrast is shown in the following comparison between Apple’s SG&A and Samsung’s SG&A as a percent of sales. [For more detail on Samsung revenue composition see: The Cost of Selling Galaxies].

Screen Shot 2013-04-02 at 4-2-3.09.39 PM

Apple’s SG&A has declined as a percent of sales, as one would expect, but Samsung’s hasn’t.

I have hypothesized that the reason for this might be in the practice of “outsourcing” many marketing functions. As Samsung expands promotional efforts, it does so partially by hiring people but even more so by farming out a lot more work. In this way, if and when sales subside, it can pare costs. This practice ensures that it’s not exposed to a huge cost structure that is hard to control. The downside to this approach might be obtaining “quality” marketing as oversight is still depending on inside teams who still have limited resources.

To test this hypothesis, I looked at the types of costs it reports and divided them into two categories:

Category 1 are what might be considered “internal” costs which are in function of employees or operations. These costs are:

  • Salaries
  • Retirement Benefits
  • Commissions
  • Depreciation
  • Amortization
  • Freight

I graphed these costs over time below:

Screen Shot 2013-04-02 at 4-2-3.12.09 PM

Category 2 costs are those which can be “outsourced” and are in function of budget items. These are:

How many iPhones will T-Mobile USA sell?

From the initial product launch until the end of 2012, AT&T has activated 72 million iPhones. Verizon began selling iPhones four years after AT&T and managed to activate 26 million since. Sprint began nine months after Verizon and has activated 8.5 million.

In proportion of their subscriber bases, the activations are shown in the following graph.

Screen Shot 2013-03-28 at 3-28-12.50.06 PM

 

I identified the reported iPhone activations with blue areas while the sum of green and blue areas represent total subs at the end a the given year.

I also took the liberty of forecasting 2013 data in order to try to estimate T-Mobile’s contribution.

Interview with Anouch Seydtaghia of Le Temps regarding the Galaxy S4

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?

An update on Android activations

Two days after I posted a reminder that Google had not updated their Android activations for five months, Google updated their Android activations.

The new total is 750 million. My expectation (based on a rate of activation acceleration of 30,000 activations/day/week) was 800 million. Google did not update their download rate but it can be derived. Between September and March the average has been about 1.4 million/day. I had previously estimated that the rate of activation was 2 million/day.

This is a modest increase from the 1.3 million/day that was reported in September implying that activation acceleration has slowed.

After resetting the acceleration to 5,000 activations/day/week my new forecast for 1 billion activations moves to the end of August.

Coincident with this update on activations, Google reported that Andy Rubin has stepped aside as the head of Android and that Android and Chrome would be under the same management.

Putting aside the exit of the founder, the implications of the merger with Chrome will need significant contemplation.

Where are the Android users?

Google occasionally reports data regarding Android. Very occasionally. The last time we had some data was in September 2012 when we learned that activations were running at 1.3 million per day and that a total of 500 million total activations had taken place.

As of today, being March 2013, the time between updates has reached five months. It’s the longest gap so far. Benedict Evans also notes that it’s been five months since the data regarding screen size stats has been updated on the Android developer site.

But we have to live with what we get and, in the absence of an update, the pattern of growth in Android, if sustained, looks like this:

Screen Shot 2013-03-10 at 3-10-11.05.14 PM