Steve Jobs didn't

  • Steve Jobs did not create products. He created an organization that predictably and reliably created emotionally resonant products.
  • Steve Jobs did not make movies. He made a company that predictably and reliably made blockbusters.
  • Steve Jobs did not wrest market share from competitors. He created new markets that attracted and sustained competitors.
  • Steve Jobs did not design anything. He gave others the freedom to think about what jobs products are hired to do.
  • Steve Jobs did not re-engineer processes. He brought engineering processes to works of creativity and the creative process to engineering.
  • Steve Jobs did not develop new management theories. He showed by example that innovation can be managed.
  • Steve Jobs was not a visionary. He put the dots together and saw where they led.
  • Steve Jobs was not a futurist. He just built the future one piece at a time.
  • Steve Jobs did not distort reality. He spoke what he believed would become reality at a time when those beliefs seemed far fetched.
  • Steve Jobs was not charismatic. He spoke from the heart compelling others to follow him.
  • Steve Jobs was not a gifted orator. He spoke plainly.
  • Steve Jobs was not a magician. He practiced, a lot.

He had taste.
He was curious.
He was patient.
He was foolish.
He was hungry.

These things many others can do. Maybe you can.

At $2.9bn/yr apps are challenging songs as the most valuable online medium

During the October iPhone event Apple gave an update on the app and song download totals. This is a reliable gauge of the iTunes ecosystem performance and Apple has been supplying these numbers for several years.  Plotting these numbers gives us a good idea of the trend in mobile content consumption. Here is the data to date:

The total number of apps downloaded (excluding updates) overtook songs in June/July and continues on its trajectory. In fact, the rate of downloads for Apps is now over 1 billion / month. Given the data points above, I calculate it to be about 34 million per day. The corresponding rate for songs is 8.3 million per day.

You can see the rate of downloads as it’s changed over time here:

I used trailing four periods’ moving average for the lines to show the trend more clearly. The gap in download rates is large and increasing.

Now most observers would note that songs are much more expensive than apps, especially since there are no free songs and many apps are free. This would imply that the music business is probably more valuable than the app business.

That’s true, but not by much. To determine how much, I used the other data point offered: $3 billion in payments to developers. Since that represents 70% of gross revenues to Apple, we can determine that the average price per app is now 23.8c (down from 28.5c in April 2009)[1]. Knowing the app price we can plot both revenues and the margin that Apple keeps.

We can compare that with the margin that Apple keeps from songs (assuming a price point of $1.2 per song and a 73% pay-out to labels.)

The data jumps around quite a bit but the trend is pretty clear. After paying the content owners, iTunes is left with about $75 million per month from apps and $85 million per month from songs.

Apple then needs to pay other direct costs like credit card processing, bandwidth, storage, curation and testing. Then there are other operating expenses like R&D and marketing. These costs add up such that, according to Apple, they cover revenues, yielding a break-even operation.

Break-even or not, the way the data is trending it’s pretty clear that Apps will be responsible for a the majority of content cash flow at Apple.

At a billion downloads a month (and rising) the value in terms of revenues is already a run rate of $2.9 billion per year. This has been enough to overtake a business that has been running for more than seven years.

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Notes:

  1. The payments to developers probably includes in-app purchases.

Why is there no iPhone 5?

I’ve been asked what will be the effect on the market of the iPhone 4S. Actually the question was what would be the effect on the market of there being no iPhone 5.

I’d answer that the iPhone 4S is a product designed to compete for two markets: (1) half the current iPhone users who bought a phone prior to the iPhone 4 and (2) non-iPhone users, typically non-smartphone users.

I’ll describe each market briefly.

The current iPhone users

Tim Cook said that half of all iPhones sold to date have been iPhone 4’s. That means that about 70 million iPhone 4’s have been sold. Those are not a target market because of three reasons:

  1. The vast majority of those users are still paying for their iPhone 4 through the subsidy model used to sell them and to change phones today would incur a cash penalty.
  2. Customer satisfaction surveys show that they have 90%+ satisfaction rating for their iPhone 4 and we can therefore assume that they are not looking for something better
  3. Their iPhones are practically new and they still work and are upgradeable.

The other 70 million or so iPhone users have either a 3GS or a 3G iPhone. These are a very different market for three reasons: Continue reading “Why is there no iPhone 5?”

5by5 | The Critical Path #9: Getting To Know You

Dan and Horace talk about some of the more profound implications of “intelligent assistance” in personal devices both in terms of business models and in terms of industry dynamics. Getting assistance is an implied bargain we all make as internet citizens but what do we pay for that assistance?

via 5by5 | The Critical Path #9: Getting To Know You.

This got a bit deep.

Let's talk 'Let's talk iPhone' on 5by5.tv

Thirty minutes after the end of the ‘Let’s talk iPhone’ event, 5by5.tv will be hosting a set of commentators[1] giving initial impressions of announcements.

“Tune-in” at http://5by5.tv/live

I’ll update this post with a link for the download once available.

[UPDATE]

Dan Benjamin talks about Apple’s “Let’s Talk iPhone” event with Dan Moren, Marco Arment, John Siracusa, John Gruber, Horace Dediu, Arnold Kim, and Christina Warren. Topics include the iPhone 4S hardware and form factor, the iOS update, the “geek letdown”, Siri, iPods, pricing, release dates, AppleCare, carriers, serious stats, iCloud and iTunes Match, the non-geek response, and more.

Download the episode here.

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  1.  @marcoarment @asymco @arnoldkim @dmoren (@gruber & @jsnell if avail)

Sprint's gamble

The Wall Street Journal reported that Sprint Nextel made a “multibillion-dollar” gamble on the iPhone. This is based on information that Sprint committed to buy 30.5 million iPhones over the next four years.

Wall Street Journal reporters calculated that the deal is worth around $20 billion on the basis of iPhone ASP during the last quarter (about $650). That Sprint would get that price is possible but not necessarily correct as there is likely to be some discount and the ASP Apple receives includes accessories.

But the “gamble” is more than the deal value. The way it’s being reported is that Sprint bet the company on being able to sell this many iPhones. So naturally we have to ask: how hard can it be to sell 31 million iPhones?

First, note that the order is over a four year period. It’s also not likely to be linear, with volumes accelerating over time. If I estimate a ramp where in year one the commitment is for 4 million, year two 6, year three 9 and year four 12 million we get a total of 31 million. Can Sprint sell this volume?

To get an idea we can look at the sales rates for the other US operators. I built a table of iPhone sales by Operator last July. The data is shown in the following chart:

What is interesting is to see the number of iPhones sold in a given time frame as a percent of subscriber base. Continue reading “Sprint's gamble”

iOS vs. Microsoft: Comparing the bottom lines

I began comparing Microsoft and Apple’s financial performance with a review of “top line” or revenues by product lines over a four year period.

This post is about the “bottom line” for the same companies and products.

Before I jump in I would like to make sure there is no confusion about the terms. I will be comparing “operating income”[1] as a measure of “bottom line”. This is a common way to compare the profitability of companies because it excludes taxes and interest income. These non-operating expenses/income can distort a comparison of performance because they can be the result of investment activity or changes in tax law or where the company is domiciled. One should not make judgements of comparative performance on those non-operational bases.[2]

Another challenge is that some companies report operating income by division while others don’t. We can usually compare overall operating income but usually not on a division or product-level. This is the challenge I will try to overcome in this analysis between two very different operating models.

The first chart shows Microsoft’s Operating Income by Division as reported by the company.

Each area represents a business division. Note some are showing negative income (losses). Continue reading “iOS vs. Microsoft: Comparing the bottom lines”

The case against the Kindle as a low end tablet disruption

In an Harvard Business Review post Rob Wheeler makes the case for the Kindle Fire as a disruptive innovation. I believe that it is but crucially I disagree that the Kindle Fire is a low end disruption.

My assessment of the Kindle Fire is based on the two attributes which Amazon highlights as the key selling points which offer a basis of differentiation and potential for asymmetric competition: a low price and a new browsing model. I believe that these two attributes result in two opportunities: one for low end disruption and another of new market disruption. I reject the first and tentatively support the second.[1]

The price

It’s immediately obvious that the price point of the Kindle Fire is well below alternatives. That forms the basis of disruptive potential, but before we jump to analyzing the disruption hypothesis we should determine whether and to what extent Amazon profits from the device directly. Profitability gives us a clue to where Amazon will apply resources and thus establish its trajectory of improvement.

We know the margin on the Fire is low because we can calculate the bill of materials for 7″ tablets. Gene Munster of Piper Jaffray estimates that Amazon “loses” $50 for each unit sold. We also know that the design Amazon used is essentially very similar to the RIM PlayBook and was sourced from the same ODM. RIM priced the product at $499 but has struggled to find buyers and is reluctantly dropping the price. We also can estimate that Apple with a product having more than twice the screen size is keeping modest (~30%) gross margins for at a price point approximately double that of the Fire. It does seem that Amazon does not have much or any margin to dip into.[2]

So the Fire can be classified as a low price product. Does that make it a low end disruption?

Continue reading “The case against the Kindle as a low end tablet disruption”

Comparing top lines: Apple vs. Microsoft

I’ve been providing analysis of Apple’s operating and financial performance for some time. Recently we’ve begun to look at comparisons of financial performance for comparable companies. Now it’s time to dig deeper and do comparisons of operating performance as well.

To start, Microsoft.

Whereas Apple has product lines (iPhone, iPad, iPod, Mac, iTunes, Peripherals and Software), Microsoft has business divisions (Windows & Windows Live, Server and Tools, Online Services, Business (Office), Entertainment and Devices). The charts show revenues for both Apple and Microsoft according to these defined segments.

 

The second chart should be a familiar one:

Note that the horizontal and vertical axes are the same. The period of coverage is from mid-2007 to the end of June 2011 which corresponds to the life of the iPhone. The vertical axis ranges up to $30 billion/quarter in both charts.

When shown this way, the exceptional growth for Apple becomes easier to understand (and perhaps Apple’s valuation premium of 15.7 P/E vs. Microsoft’s 9.5). Microsoft has been growing these past four years but not nearly at the rate of Apple. Microsoft grew quarterly revenues from the ~$15b range to ~$17b range.

Additional points of interest:

  • The Mac business generates more Revenue than Windows
  • iOS powered devices generate more revenue than all of Microsoft’s products put together
  • Apple’s revenues grew 413% since Q2 2007 while Microsoft’s grew 26%
  • The release of Windows 7 had a marked effect on revenues in the launch quarter but the sales did not seem to grow above the previous version’s run rate ($4.2b/quarter vs. $4.7b/q on average).

But most importantly, whereas Apple’s growth has come from new businesses (iPhone and iPad), Microsoft has organically grown existing businesses. The condemnation of leadership at Microsoft should hinge on the absence of significant top line growth. Note that neither the Online Services nor the Entertainment and Devices divisions had appreciable net growth.

 

5by5 | The Critical Path #8: In Memory of Robert Boyle

Episode #8 • September 28, 2011 at 2:00pm

Horace and Dan talk about why CEOs are paid so much and what analysis has come to mean in equities research and the value of cross-pollination between the camps that form around technology companies.

5by5 | The Critical Path #8: In Memory of Robert Boyle.

Asymco

Asymmetric Competition

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