iPhone Money Trail

Peter Oppenheimer, Apple’s Chief Financial Officer, said that the Average Selling Price of iPhones in the quarter “was just over $600. This reflects both high mix of 3GS sellthrough and benefits of rebalancing the ending channel inventory toward the 3GS.”

An astonishing admission from Apple who has never revealed their iPhone ASP. Previous analyst estimates had the iPhone ASP at $550. If this is true, then Apple has violated one of the cardinal mobile industry rules: “Thy ASP shall always erode”. Given what is known about the components, iPhone gross margin is likely to be above 50%. The gross margin, or what you are able to capture in value above the bill of materials, isthe primary indicator of value creation in the device business. Apple’s number is astronomical vis-a-vis the competition. Stay tuned as this gets scrutiny.

On Units and Platforms

When thinking about the number of devices shipping out of Apple, and the relative value of those units compared to the competition you have to always think of the platform.

The market leader Nokia claimed to have sold 16+ million smartphones in the quarter. When comparing platforms, to whatever Apple ships in iPhones you have to add the iPod touch units. I see that number being about half of the iPhone numbers or about 4 million. Let’s say 10 to 12 million as a range for the platform. Already this is within striking range of Nokia.

It may sound that Apple has some catching up to do, however the important thing is that most of the Nokia devices are not uniformly addressable by developers because they are different platforms and the Symbian platform itself will be broken next year as it has been broken many times before. This is also true for Blackberry and Windows Mobile and will become true for Android as vendors fork and splinter the code to differentiate.

This already puts Apple in the pole position today in terms of contiguous addressable units volumes.

I cannot over-emphasize the importance of this platform effect. It’s what made Windows dominant and it should be the most important issue in the planning of new mobile products, but it clearly isn’t for Apple’s competitors. Either product planners are ignorant of history or completely hamstrung by other constraints on their businesses (I expect the latter).

As a result it’s inevitable that Apple will have a dominant platform. The numbers in apps and consumption of apps already are telling this story, and devs are voting with their code in a landslide. But going into 2010, this will become evident in the units and Apple share numbers will accelerate toward lead position.

The bogie therefore is to look for contiguously addressable installed base. On this basis of competition, I expect at least 100 million for Apple at the end of next year and less than 10 million for any competitor. At that point the game will be officially over.

On App Store as a Content Store

The implications of the new app transaction model are profound. To begin with, consider the following:

  • 10 MB limit – Devs can now get their apps under 10MB much more easily. This allows them to take advantage of users downloading over the carrier networks and not wi-fi. They can offer more content via in app purchase and make up the difference.
  • Rankings – It will be curious to see how Apple changes the rankings over time. “Top Paid” and “Top Free” just don’t really don’t make sense anymore with this model. Will they make “Top Freemium” or something equivalent?
  • Infrastructure – Developers have to deal with content delivery and updates to that content. Apple handles the transaction in the normal fashion and takes their 30% but then they leave it up to the developers to actually get the content to the iPhone. What if there is a bug in the content? The developer has to deal with making sure the user is notified of the update and then initiate the update.
  • Piracy – There has been a lot of talk about how this may help fight piracy but I think the numbers will tell a different story.
  • Apps as content – The deeper story relates to the transformation of the app store into a content store. I made that prediction a year ago but had no idea how it would happen. In the long term I expect Apple to merge the iTunes music/video content management system with the app store content management. This way you could buy music/video/books/games from within an app and have it available through your iTunes UI.
  • Addiction – “Apping” as the activity of using iPhone apps has come to be known, is already something that did not exist a year ago but has proven to be wildly useful/common/profitable. Only a year has passed and we are already in the realm of uncharted waters.

Comes With Trouble

I can’t believe this.

For kicks, I looked up what I wrote about Comes With Music (CWM) a year ago:

Trouble Comes With Music By Horace Dediu on October 3, 2008 12:18 PM
The troubles that CWM will face:
The model is complex and the value prop is convoluted with users discouraged from making informed purchase decisions.
CWM is firmly embedded in a value network that is in the final stages of disruption. Profits have evaporated and participants are in a state of defensive rigidity that prevents investment in innovative business models.
To some buyers (esp. parents who will pay), the concept may sound more like “music sold as hardware” than “hardware loaded with music”. Music sold as hardware is what the CD is/was but this new hardware is bound to wither away and become disposable in a year, PC copies notwithstanding (as transfers between PCs are limited). Therefore, the limitations of perishable music persist and comparisons to durable media are unfavorable.
Competitiveness with pirated music is often cited as the goal. The means to that goal is the advantage of having “unlimited” content available vs. “60,000 songs on your hard drive”. The unstated assumption is that new music is always more desirable over a rich, but dated back catalog. Long tail theory says that’s not true for an increasingly larger group of consumers.
Finally, the bet is that users will upgrade devices as if they were a subscription. This becomes “music sold as hardware subscriptions”. As “music as a subscription” has not taken off, it does not bode well. One reason is that subscribed music is hired for a different job than owned music–one of discovery and casual listening–a job we used to hire Radio for. A job that is now obsolete in the era of social networking.

Nokia’s official comments one year hence:

the official blog on which Nokia is celebrating CWM’s first birthday acknowledges: “Sure, it didn’t start out that rosy, with lots of folk not really certain about what Comes With Music offered … we never shied away from the important education process that is needed in order to fathom that you can download and forever-keep as many tracks as you like – but the past 365 days have seen a much greater understanding and appreciation for the service emerge.”

Subs numbers:

  • UK – 32,728 (launch date: Oct 08)
  • Singapore – 19,318 (Feb 09)
  • Australia – 23,003 (Mar 09)
  • Brazil – 10,809 (Apr 09)
  • Sweden – 1,101 (Apr 09)
  • Italy – 691 (Apr 09)
  • Mexico – 16,344 (May 09)
  • Germany – 2,673 (May 09)
  • Switzerland – 560 (Jun 09)

For comparison: Spotify has 6 million users and iTunes has 120 million registrations.

Pink Cheeks

The decision process regarding mobility at Microsoft from 2005 has been a classic example of paralysis by analysis. Trapped by their processes and resources into doing horizontal solutions for a world that buys vertical integration, Microsoft was bound to fall into a trap. Like a wounded beast, it is not dying predictably but with spasms. Rather than concluding that Pink and Zune are part of a fucked up process or evolution, they should be seen as terminal convulsions of WinMo.

Credit to Dilger for going further than anyone in tying Pink, WinMo and Zune.

If I may summarize, the problems Microsoft faces are:

  • A reliance on a horizontal business model at a time when modular product “turns” are not fast enough vs. integrated/vertical models. Just look at Dilger’s mobile OS history graph and measure the “cycle time” of each product rev for the competitors.
  • An economic model that implies there is value in a mobile OS (something PalmSource and Symbian figured out to be dead ends long ago, not to mention OpenWave, SavaJe and a few others long forgotten.) Microsoft, a company that grew by disruption at the low end (vis. Lotus, Novell, IBM, etc.,) is unable or uncaring enough to sense when it’s being disrupted the same way.
  • Competitors that combine into a pincer movement from above (Apple) and below (Google) with a fortified alternative incumbent (Nokia, Microsoft’s original target) still standing. Unlike previous single competitors in each category Microsoft conquered, the mobile world presented a more diverse (and perhaps wiser) front.

I won’t get into Microsoft’s dysfunctional culture as that’s been covered brilliantly by others.

Windows Immobile

John Herrman reviews the new Windows Mobile 6.5 for Gizmodo:

To put it another way, handset manufacturers have done more in the last two years to improve Windows Mobile than Microsoft has, which borders on pathetic. In the time since Windows Mobile 6.0 came out in February of 2007, Apple has released the iPhone — three times. Palm has created the Pre, with its totally new webOS. Android has come into being, and grown into something wonderful. RIM has created a touch phone and a revamped BlackBerry OS. For these companies, the world has changed.

And Microsoft? They eked out some performance enhancements and a new homescreen in 6.1, and executed a gaudy facelift for 6.5. This is what they’ve done to Windows Mobile.

The review from Gizmodo concludes:

I’d like to think that 6.5’s stunning failure to innovate is a symptom of a neglected project—maybe Microsoft just needed something, anything to hold people over until the mythical Windows Mobile 7 comes out, whatever it is. But as Steve Ballmer himself has plainly admitted, it’s worse: Microsoft has simply lumbered in the wrong direction for two years, letting everyone, save maybe Nokia, fly right past them.

John Gruber adds:

Microsoft’s irrelevance in today’s mobile space is nothing short of a spectacular failure. Worse than the mere fact that Windows Mobile 6.5 is a total turd is that no one is surprised, and no one cares.

I’ve said it before and I’ll say it again: Microsoft will take 4 to 6 years to respond to the iPhone. Nearly 3 years have already passed and indications are that Windows 7 will ship in devices by end of 2010. I expect another 2 years hence will be needed to polish it.

Nokia will take at least as long, though probably longer.

Neither response will be sufficient or effective. Curiously perhaps, throughout this time both Nokia and Microsoft will use each other as benchmarks of competitiveness.

Android Fantasies


“Three Reasons Android Could Terminate Apple Despite the Hype, iPhone Isn’t the Only Mobile Platform in Town”

All three reasons he cites apply to the incumbents Windows Mobile, Symbian and Palm OS of old PalmSource. Android therefore is a symmetric response to the incumbents whereas iPhone is an asymmetric response. To suggest that Android has a chance to defeat iPhone implies that the incumbents do as well. If the incumbents do have a chance, why would they not destroy Android as they have vastly greater resources in a symmetric match-up? (Incumbents always win sustaining battles).

His argument depends on Google “being better”. History suggests that resource-based matches always benefit the incumbent.

Blurry Moto

Earlier today, Motorola unveiled MOTOBLUR, a mobile social media OS of sorts that runs on top of Google Android. The company plans to introduce its first MOTOBLUR handset – CLIQ (and an international version called DEXT) – before the holidays

The assumption underlying this product is that “social networking” as it exists today is a job that people are specifically hiring devices to help them do. There are several problems with this assumption:

  • SN is rapidly evolving. As any new medium, it takes several iterations before it’s “good enough” to solve the underlying problems. Whatever emerges (twittering, fb, or as yet unknown) will be a moving target. Users are moving quickly between these services. Assumptions about value of “stickiness” based on the social graph are proving to be flawed.
  • SN is not a “job” per se. SN is a means by which people communicate and try to get something done in their lives (i.e. getting a job, getting laid, suppressing loneliness, etc.) SN will compete with various other emergent technologies that solve these underlying jobs. These disruptors could be gaming metaphors, media-centric packages, virtual spaces, etc.

Therefore building a hardware product that is positioned and intertwined with SN is highly risky.

By the way, about 1.5 years ago Nokia considered doing the same thing. SN was on everyone’s mind as the next big thing, just like email was 2 years before that. These service fads come and go. It’s no surprise that one product development cycle later the devices are emerging even though the value of the service has rapidly evolved in new directions. This points out the fact that you can’t make hardware dev cycles match service/software dev cycles. The only way to play this from a hardware perspective is with a platform approach e.g. iPhone. Let the ecosystem solve the job to be done and collect rents. I’m always surprised that this lesson from the 90s is still being forgotten by the device guys. BTW, I understand the NOK Solutions logic a bit better. It is not a major departure from the track NOK is on now. The power base remains with devices, as it has for 15 years or more.

On another level, MOT is a going concern issue right now. The approach with CLIQ is, by definition, niche. I don’t see the product as broadly attractive solving MOT cash flow issues. If they sell more than 2 million units, I’d be surprised. (note: N97 got to 2 million on the back of massive distribution power but SE Xperia did not cross 1 million and Pre will struggle to get to 2 million.) The “bet” on Android is weak and not a bet really on anything correlated to earnings growth.