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Category Nostalgia

Take the money and run

In August 2007, during the HD format wars between HD-DVD and Blu-ray format, Toshiba offered Paramount and Dreamworks $150 million to produce HD versions of their movies exclusively as HD-DVD.[1]

This type of deal is equivalent to an “advance” offered to a book author. The DVD manufacturer pays studios up-front cash for the right to make its DVDs. From an accounting point of view this is treated as an advance that the manufacturer recovers by selling the DVDs back to the studio’s video division in the same way a publisher earns back the advance it gives an author.

In this case, the payment was so large and the sales of HD-DVDs so small that Toshiba was unlikely to earn back the entire advance. The way the deal made any sense for Toshiba was that it was exclusive: the studios could not continue to release their movies in Blu-ray. The deal was done explicitly to hobble a competitor and create “critical mass” of content for its own format.

But then in March 2008, Toshiba threw in the towel and abandoned the HD-DVD format. The way the deal worked, the studios got to keep almost all of the $150 million. They then re-released all their movies in the Blu-ray format. The only “cost” to the $150 million windfall was that there was a nine month delay in the eventual release to Blu-ray–a small price to pay for an emergent format without a large install base.[2]

Platform owners go to great lengths to ensure “content” for their platform. They will, essentially, finance an ecosystem when there are barriers to entry or when competing ecosystems are far more lucrative.

This scenario for movies is being played again with Netflix, Hulu and other distributors who need to fill their pipelines. Netflix’s content acquisition costs are exploding and putting the whole company’s future in doubt.

But this scenario is also being played out with app developers. Most recently, news broke that developers are receiving payments from Microsoft for Windows Phone ports of popular apps. In mobile platforms, apps are the new content and developers are the new studios.  It’s also a practice that is not without precedent[3].

This is as it should be. The value of the platform lies mainly in what is built on top of it just like a foundation is not much use without a house on it. However, the practice of “priming the pump” with cash payments for porting is not ideal. Like spiffs, those who receive payments may become used to it and withhold development if there is no payment. Also, those who did not get payment offers may feel shunned and retaliate in kind. Those who receive payment may become cynical about it and may not put in the extra effort (or, more probably, outsource) to make the work spectacular.

Or, like Paramount, they may just take the money and run if/when the platform fails.

Notes:

  1. Source: The Hollywood Economist 2.0: The Hidden Financial Reality Behind the Movies by Edward Jay Epstein.
  2. Paramount made $250 million more from three “replication output” deals: $50 million from Toshiba for agreeing to release Titanic on DVD in time for Christmas sales, $150 million from Panasonic for agreeing to allow them to take over video replication from Thompson, and $50 million from the law firm Ziffrin, Brittenham and Circuit City stores for agreeing to support the DIVX format. Paramount got to keep the money even though DIVX never launched.
  3. Although it’s never been reported that Apple pays developers for building iOS apps, some developers do benefit from promotional placement and visibility during launch events and from early access to devices or SDKs under development.

The new feeds and speeds: iPad vs. MacBook Air and iMac

At last year’s iPad 2 launch, I compared the specs of the newly announced iPad with those of a laptop and desktop from five years earlier. This year I am comparing the new iPad with Apple’s computers from four years earlier:

The new iPad now exceeds the total display resolution, has similar speed and storage capacity while having twice the battery life of the thinnest laptop of four years ago. It also has very high quality cameras and GPS and cellular network connectivity which have yet to appear on mainstream PCs. It’s still a lot smaller and half the price and has a larger selection of available software titles at prices a fraction of its elder cousin.

My thoughts on iBook Author

My thoughts were expressed 20 months ago in a private email.

I did not get a response.

[Sponsor] Carnegie Mellon University (with a history lesson)

It gives me great pleasure to have Carnegie Mellon University as a sponsor this week. This is because CMU holds a special, historic role in the development of the platform at the center of the disruption of mobile telecommunications.

I am referring to the kernel behind OS X and iOS: Mach.[1]

When I was a researcher at GTE Laboratories, I remember following the progress of this alternative kernel. As a research project it was one of the earliest microkernels and, along with virtual memory management, inter-process communication and control innovations, pioneered what became the basis of highly modular operating systems. Those innovations enabled an architecture which allowed complex systems to scale down to micro computers and eventually to devices.

There is a huge amount of lore around Unix and CMU’s efforts are deeply interweaved into it (as are Berkeley and AT&T). I strongly recommend a stroll down that memory lane. But I’ll keep it short here and say that original developers of Mach at CMU went on to be key executives at both Apple and Microsoft. It was really a spectacular success as far as academic research projects in computer science. A real inspiration.

So with that history, I want to thank Carnegie Mellon University for their sponsorship and I’m glad to see continuing innovation in their degree programs.

Today they are offering a Master of Information Systems Management  degree with a Business Intelligence and Data Analytics concentration (MISM-BIDA). This particular degree program is essentially cross-training in business process analysis and predictive modeling, two methodologies which deeply benefit from one another. Much of what I do for this blog is exactly this:  mapping, analytical reporting, segmentation analysis, and data visualization. I’m glad to see that his has been codified into a degree program.

Students in the MISM-BIDA program learn to integrate information filters and mining tools with applied business methods yielding insights that you see celebrated in the media every day. They do this with world-renowned faculty teaching a cohesive blend of data analytics, management, strategy, and IT courses.

I can only assume that this unique mix makes graduates highly valued by  financial service firms, consulting companies, technology agencies and start-ups.

If you like the results of this web site and would like to learn how it’s done “by the book”, consider the degree programs at Carnegie Mellon Heinz College.

Highly recommended.

—-

Notes:

  1. Carnegie Mellon also had a role in the development of Siri.

Who is being reasonable now?

Last week Horace wrote about the apparent “reasonableness” of analyst Apple estimates. He explained how the consensus for Apple’s growth was always deeply pessimistic because its performance could be argued to be anomalous. It was just too good to be true. We reproduce the chart here:

The estimates look like characteristic “tell-tales” of a company running strong into the wind.

This conservatism in the face of rapid growth sounds “reasonable” but is it always practiced? And what about the ability of this conservative strategy to predict dramatic changes in growth? To test, we started to look at the predictions for RIM. RIM has also enjoyed strong growth over a similar time frame as Apple. How did analysts predict its performance? The following chart was prepared using the same technique as the one for Apple[1].

Why Apple is cheap

Imagine it’s late 2005. Apple’s fiscal year just ended and they reported their performance. You’re an analyst whose job includes forecasting the company’s performance for next year. This is a weighty responsibility.  Your forecast will be blended with those of your peers and used as a “consensus” average. That consensus for the next year will be used to measure the current value of the shares in a ratio called the forward PEG or Price/Earnings/annual earnings Growth. You are supplying the earnings and hence growth forecast while the market offers a price.  As a stock is meant to measure future earnings, your forecast is a crucial and frequently cited figure about whether a stock is priced fairly.

There is some comfort in knowing that there will be many others who will offer such a forecast and your contribution is thus not the only way investors can calibrate the price. However, you should think hard about what you are predicting as it also will reflect your skill in predicting such a visible company.

Apple just had a tremendous two years. 2004 and 2005 saw EPS grow at 274% and 337%. This is largely due to the runaway hit iPod. Given all that is known about the company, what will you put forward? While you’re at it can you also forecast two years forward, namely provide a growth forecast for 2006, 2007 and 2008?

Here is what you and your cohorts publish as a consensus:

You go with a 13% growth for 2006,  15% for 2007 and 5% for 2008. The chances are, you reason, that the iPod will not carry the company’s growth much longer. The competition is sprouting all over and Microsoft is rumored to be launching its own music player.

It makes sense to be conservative and offer a modest growth of 13%. At the same time you can rate the stock a buy as it is still growing. The stock just doubled in the last 12 months and the law of large numbers says that growth cannot last at the same rate as we’ve just seen.

 

 


It’s now late 2006. Apple just closed out another big year. Contrary to your forecast last year, the company grew at a rate of 46%, more than three times faster than you expected.

It turns out the iPod still has some legs and the company’s Mac business seems to be growing. Looking forward you take your 15% growth for 2007 and increase it to 20% and suggest 16% for 2008 and 32% for 2009.

There are rumors of Apple getting into the phone business.

Hiding in plain sight

Guessing the next Apple product has become the parlor game of choice for a whole generation of technology journalists and analysts. The premise of the game is that given a track record of breakthrough products, there is always another one just around the corner. Being the one to predict this next breakthrough product creates credibility and demonstrates the domain knowledge of the predictor. If the prediction fails to materialize there is consolation in dismissing the actual announced product as disappointing, unsophisticated or, worst of all, uninteresting.

Most often, these guesses are as much a reflection of the analyst as they are an analysis of the company. Too many predictions are designed to impress or demonstrate the imagination or knowledge of the predictor. They typically anticipate a giant leap of functionality, power or market re-structuring. They envision revolution not evolution; a cutting of the Gordian knot not a polishing of ugly rocks.

Yet nearly all of Apple’s launches have been sustaining improvements in existing products, technologies or platforms. To name just a few:

In memoriam: Dennis Ritchie

Dennis Ritchie created C and co-created Unix. One of the unsung heroes of the modern world. He died yesterday.

His “The C Programming Language” was my bible during a formative period of my life.

In his memory I re-link a post I wrote a little over a year ago.

Unix’s Revenge | asymco

 

Visualizing the Steve Jobs era

On October 4th, Tim Cook will take the stage at Apple’s fall event. With Steve Jobs’ transition to head the Board of Directors of Apple and after serving as CEO for fourteen years, it is time to take a look at his reign.

Looking at his performance vs. peer companies from a capital market performance, I have composed the following two charts:

Market capitalization of selected peer companies by calendar quarter in USD million sorted by most recent market capitalization (1997-2011)

Market capitalization of selected peer companies in USD million sorted by recent market capitalization (1997-2010)

Market capitalization as share of combined market capitalization by calendar quarter sorted by most recent market capitalization (1997-2011)

Polymath

In a rare reflective moment Steve Jobs, after the launch of the iPad, mentioned Apple’s DNA. He said:

“Technology alone is not enough. It’s technology married with the liberal arts, married with the humanities, that yields the results that makes our hearts sing.

Nowhere is that more true than in these post-PC devices…that need to be even easier to use than a PC, that need to be even more intuitive than a PC; and where the software and the hardware and the applications need to intertwine in an even more seamless way than they do on a PC.

We think we are on the right track with this. We think we have the right architecture not just in silicon but in the organization to build these kinds of products.”

Steve Jobs’ legacy in product development has been clearly established and celebrated. What remains now is to determine his legacy in company development. If indeed Apple has the “right architecture in the organization” to serially build disruptive products. The collection of evidence begins today.

If Apple has indeed become Jobsian then it will have been a grand achievement. John Gruber is already convinced. He points out

Jobs’s greatest creation isn’t any Apple product. It is Apple itself.

If indeed he has built Apple sufficiently well to last then he has built an admirable process and not just a product. But this would not be a unique achievement. There have been other companies which preserved their founders’ cultural imprints, at least for significant periods beyond their departure. Consider that Disney, Ford and even HP and IBM remained successful for many years after the departure of their founders operating much the same way. They were infused with an indelible culture and preserved it for some time.

But 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.

Is it not more worthy to have changed civilization than the fortunes of a few?

I believe that Steve Jobs has actually sought just that. He put it as “making a ding in the universe.” This can be interpreted as developing products that “change everything”. But if the thing that Steve Jobs should be most proud of is the creation of Apple Inc. then how exactly could an Apple Inc. benefit the world?

This is where Jobs’ quote above strikes me as valuable. The lesson the world should take from Apple is that a company needs to become multi-dimensional. It needs to mix the core business with the disruptive innovation. It needs to combine the intellectual with the artistic. It needs to maintain within it the rational and the lunatic.

Apple’s violent success should serve as a powerful beacon that others should follow. Rather than copying its products other companies should copy Apple’s processes–its way of thinking. They should copy how Apple harbors the creative process and the technology processes under the same roof.

If they do heed this call then we should look forward to the the post-Jobs era as that time when large companies gained the ability to intertwine multiple core competencies. A time when humanism balanced corporatism. A time when we came to reconcile the rational and spiritual.

This post has be re-published in The Harvard Business Review Blog as: Steve Jobs’s Ultimate Lesson for Companies – Horace Dediu – Harvard Business Review