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The iPhone company

The analyses of adoption of smartphones in the US and EU5 are remarkably consistent with each other. They also turn out to be consistent with the valuation of Apple.

Screen Shot 2013-10-17 at 10-17-4.01.35 PM

I show the stages of adoption overlaid with the derivative of the Logistic Function and Apple’s enterprise value. The derivative of the Logistic Function shows the speed of adoption, peaking at the inflection point when adoption ceases to accelerate and begins to decelerate.

The figurative sales of iPhones and BlackBerries

The most interesting juxtaposition in market data happened this week.

Apple announced 9 million units of the iPhone 5s/c sold in their opening weekend while BlackBerry recognized 3.7 million smartphones sold in the three months ended August 31.

I will state these data points with a different emphasis:  while Apple explicitly reported, both in a press release and in an SEC filing, Sales of 9 million units, BlackBerry reported recognition of revenues on 3.7 million units.  At the same time BlackBerry also reported sales to end users of 5.9 million units.

So, did Apple sell 9 million iPhones in three days? What about units ordered and not delivered? Which of these units will show up in the company’s income statement? Conversely, did BlackBerry sell 3.7 million or did it sell 5.9 million smartphones in three months?

The answer is dependent on what constitutes a sale. I suggest re-reading the Sold and Shipped: A Brief Introduction post from last year. Understanding is complicated by many factors, not least of which could be intentional signaling by management. We may never come to a perfectly matched comparison of the two companies’ situations but our job as analysts is to see through the signals and obfuscating language and interpret a pattern. A pattern that extends over a time and helps us learn.

My observation is one of contrast. The juxtaposition this time is that Apple emphasized sold and not shipped while BlackBerry sold more units to end users than it recognized revenue. These signals reflect precisely the inverted fortunes of the two companies.

For BlackBerry the higher sold than shipped recognition was due to a product launch failure. Units which were shipped (and recognized as revenue) last quarter did not sell and the company is not only writing off the inventory but has drastically reduced its deliveries of new units in order to drain inventory. The company explains:

During the second quarter the company recognized hardware revenue on approximately 3.7 million BlackBerry smartphones. Most of the units recognized are BlackBerry 7 devices, in part because certain BlackBerry 10 devices that were shipped in the second quarter of fiscal 2014 will not be recognized until those devices are sold through to end customers. During the quarter, approximately 5.9 million BlackBerry smartphones were sold through to end customers, which included shipments made prior to the second quarter and which reduced the Company’s inventory in the channel.

The company is essentially saying that due to the unusual circumstances of a product launch failure, they will change how they account for their business. They don’t have the confidence that units shipped will actually sell and will not recognize them since they fear they will have to write some off. They are signaling: They are being far more conservative, not reporting shipments alone because those shipments could essentially be value free.

When seen as a pattern, the new figure on recognized revenue units needs to be shown relative to the history of recognized revenue units.  

Apple retail vs. Amazon retail

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:

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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:

Why doesn't anybody copy Apple?

Apple’s products are the envy of the world. They have been spectacularly successful and are widely imitated, if not copied. The expectation that precedes a new Apple product launch is only matched by the expectation of the replication of those products by competitors.

This cycle of product mimicry was succinctly summarized by Marc Andreessen regarding a rumored Apple TV product:

And once the television launches, everyone will scramble to copy it. “There’s a pattern in our industry, Apple crystallizes the product, and the minute Apple crystallizes it, then everyone knows how to compete.”

This idea that the basis of competition is set by Apple and then the race is on to climb the trajectory of improvement is so well understood that it’s axiomatic: “It’s just the way things are.” Apple releases a product that defines a category or disrupts an industry and it becomes obvious what needs to be built.

But what I wonder is why there isn’t a desire to copy Apple’s product creation process. Why isn’t the catalyst for a new category or disruption put forward by another company? More precisely, why isn’t there another company which consistently re-defines categories and repeatedly, predictably even, re-defines how technology is used.

Put another way: Why is it that everyone wants to copy Apple’s products but nobody wants to copy being Apple?

Note that I don’t suggest that there isn’t a capability to copy. It may or may not be possible, but capability comes after desire and without desire there can be no capability. What I’m suggesting is that there isn’t a desire to “be like Apple”. If there were a desire, we would be seeing a massive search and debate into what makes Apple successful. Management consultants would be pounding the pavement pitching the “Apple way”. Wall Street would be sizing up companies to a standard of “Apple-ness” and rewarding those who conform and punishing those who don’t.

None of this is happening. I can think of two reasons why:

  1. Apple is not to be imitated because it’s not worth copying. I.e. Apple is not a successful company.
  2. Apple is successful but Apple cannot be copied because its success is a magical process involving sorcery.

It's a wrap. Asymconf California

My thanks to all those who made Asymconf California the best Asymconf ever. We had over 200 attendees and, for the first time ever, 50 workshop participants and a panel session. The venue was spectacular: IBM’s historic Almaden Research Center and special thanks to Paul Brody of IBM for making it available.

Engagement was stronger than ever and I believe we moved the ball forward on a range of topics: The workshops helped solve some of the mysteries related to Amazon valuation and the main event looked at the limits of growth. The State of the Union took a look at the post-PC world and Apple’s inflection point. The panel session took on the future of TV and, including the audience, we had input from some of the most influential companies in the space.

We will scramble to make the proceedings (in the form of an iPad download) available as soon as possible.

Normal blogging and tweeting will now be resumed.

The policymaker's dilemma

Here is an exchange with Robert van Apeldoorn, Journalist with Trends Tendances Magazine in Belgium. (www.trends.be/fr). The exchange took place in early September via e-mail.

Robert: -Information and Communications Technology (ICT) is considered in Europe as a way to push growth, and is a target of national and EU policies (digital growth,etc), but the result seems to be a failure: the European computer industry (hardware) is almost dead (ICL, Siemens computers bought by Fujitsu, Olivetti almost out of computer business, Nixdorf dead) since the 90’, and the telco industry seems to be in crisis. All European companies are out of the handset business (big and fading exception is Nokia, but with  American software), and Alcatel is suffering with telco equipement manufacturing. It seems that at best, Europe can be a good niche player, with companies like ARM (chips). Technology seems to be reduced to localized services (computer services), some software businesses. What do you thing about that point of view? Is it correct or exaggerated ?
What will remain to the European companies ?

The main problem is perphaps the creation of European platform/ecosystems. Almost all are American today: Apple IOS-iTunes, Android, Amazon,…

Why Symbian didn’t succeed as a competitive platform ?

Is it possible to create European platforms? After all, IOS succeed after a short period of time.

What are the European tech companies that could play an important role in the near future ?

5by5 | The Critical Path #46: The Next Victim

We cover the valuation question regarding Apple and tech in general as seen through investors’ eyes. This discussion ranges a bit on P/E compression and the psychology of investors–which might change with Apple TV.

We also look at who is most vulnerable in the ongoing mobile computing disruption and who are the up-and-coming challengers. Finally, I introduce the Perspective app which I used for all my live presentations.

I’ll post more about Perspective in the future as it will be my platform for publishing complex or rich data.

via 5by5 | The Critical Path #46: The Next Victim.

What will happen to Nokia?

There is no shortage of information about what happens to companies in distress. The cause of distress varies widely and is often not well understood but the actions and symptoms of distress are very consistent. We can look at examples in each industry, even in each product category for a rich set of distressed company data.

For over a year I’ve been chronicling the decline of incumbents in the mobile phone industry. However, decline cannot continue indefinitely. At some point a company “exits” the industry. Either through a sale or divestiture or, rarely bankruptcy. The list of exits is already long. The length and the correlation between exit and the lack of recovery implies that Nokia will also exit.

But how, exactly?

Will Nokia be acquired? If so, then by whom? What other options exist? How can we analyze this?

Android's contribution to Google

Yesterday I presented the estimated Android income statement vis-à-vis Apple’s income statement. In this post I’ll compare Android as a part of Google’s overall business.

Recall that Google has already been compared in terms of overall revenue, growth and profitability to Apple and Microsoft here.  The argument can be made that mobility has not yet had a measurable impact on Google (certainly not noteworthy enough to be reported by management).

The impact on Google of Android can be shown in the following diagram:

I used color coding to identify non-Android (Green) and Android (Brown) segments of the business. Overall, Android could amount to about 3.5% of total Google revenues and about 5% of operating earnings.

Google and Microsoft speak volumes with silence

The following charts show Google and Microsoft revenues and operating income:

Both companies showed healthy growth. Revenues: Microsoft 6%, Google 24%. Operating Income: Microsoft 12%, Google 48%. Google had a particularly weak margin Q1 2011 so its income growth appears very strong.

The surprise in Microsoft’s performance was