Sunday, February 22, 2009

Who is Ralph de la Vega?

And why does he want to destroy his own company's competitive advantage? (See pullquote in red on left.)

Wednesday, February 18, 2009

What is Apple?

Some facts:
Last quarter:
Apple Retail same-store sales were down 17% year-over-year, with foot traffic overall down 1.8%
Apple sold 71% of Macs as laptops, the highest ratio ever.
Mac sales were the second-highest ever, and only barely not tops. The Mac traditionally isn't strongest in this quarter, so it is a definite net positive.

In general:
Apple controls the world's largest music store, bigger than Wal-Mart, and can ensure the digital music market operates as-needed by the iPod.  It is top-three in the mutating "video market", though that is harder to quantify. The DVD sales/rental market is huge, but Apple has purchasable and rentable movies and TV for television, computer or mobile consumption selling in significant quantity. The Apple [on] TV is a "hobby", but also a statement of interest, alongside Mac and iPod/iPhone media distribution.

Apple has a larger Leopard Mac installed base than any console manufacturer, outside of perhaps the Nintendo DS. Apple's consumer home installed base is smaller than the total Leopard number, but surely rivals any console manufacturer. Apple's Mac "consoles" are far higher-margin, and are likely to be internet-connected, buying, creating, and running media and applications. 

Much as iPhone application and internet use dwarfs other smartphones, making each iPhone a more valuable target for developers, Mac connectivity, power, and interoperability gives Apple home productivity and entertainment footholds as yet undetected by competitors. The PlayStation 3 is a comical island, the XBox 360 the proprietary G5 Apple used to ship running a tragicomic OS, and the Wii a clever use of limited resources meeting genuine success, but not a competitor to a netbook, let alone a Mac, as a personal computer.

Apple has the largest "Application store", again a huge platform for developers, and all other smartphone platforms are rushing to catch up. Apple's advantage here may be more reminiscent of Microsoft's early moves in the personal computing industry to own the platform with the broadest hardware and software compatibility. Market forces crushed anyone else, including the Apple of the era. Owning that layer, here the function of OS X iPhone  combined with the App Store, may mean no other platform gains developer momentum. Hardware, like a keyboard or a given niche feature, will differentiate marginal competitors, but the main personal mobile device and platform could become Apple's.

So Apple is what sort of company? They own and operate methods of distributing paid and free content to every consumer entertainment venue besides movie theaters. They are therefore like a multinational radio station, music store, television channel, and 2nd run movie studio, agnostic about (and uninvested in creating) what it is playing. Apple is also a high technology company building electronics and operating systems that serve as the venues for consumer consumption of distributed digital content. (When the content includes signed code, like the App Store, Apple plays the same roles but constrains the types of content to protect its control.)

So Apple is a multinational media conglomerate without a creative or production department, a major mobile consumer electronics and telecommunications player, and the owner of the world's most sophisticated, best selling, industry-defining "convergence platform." 

The Mac playing iTunes from the Music Store is performing a computation and presentation of digital media, in this case for entertainment, for one or many, but that same Mac allowing for the creation of a Pages document is doing the same fundamental operation. The iPhone Apps are games, notepads, or even a musical instrument. The iPhone "Contents" are videos and music licensed from someone. Play the Ocarina or an Ocarina.mp3 out of the speakers and the rigid conceptual barrier between "living room" and "office" on the Mac dissolves into "iPhone."

Thursday, February 12, 2009

Apple Store Decor: Revelator and Reifier of Unarticulated Corporate Strategy

The Apple Store is about to get a major redesign. Already, iPhone and iPod Touch sales real estate has shifted.  The takeaway is that the emphasis has become software. This on the heels of reported Apple Store anti-loitering efforts.

The net effect of the conjecture about pushing higher throughput, and the merchandise redesign, point to Apple's next annus mirabilis. 

The iPod was a music player that became an ecosystem. Hardware was what could be sold around Apple's brilliant, focused design. The dock connector, and Pixo's OS, gave peripheral makers a broad canvas to work from, and sales volume took care of the rest. The limitations of the software meant iPod Games were a hobby.

The iPhone began life as smartphone but will become a platform. Hardware ecosystem compatibility largely intact, as it shares (all but the FireWire charging pin of) the iPod line, it is software that will drive the iPhone (and iPod Touch) to palm-space dominance. Become the Windows, the lingua franca, of the new personal computing device space, and hardware becomes less deterministic of purchase choice. 

People fell for the Mac-only iPod 1.0 because Mac users had few options, and are self-nominating aesthetes of personal technology. FireWire, compact design, and a cutting-edge hard disk gave that market what it wanted. Once the 3G iPod with Dock Connector arrived for all computing platforms, Apple was picked as a dying breed, the "vertical integrator" in an infant market about to be stampeded by a rush of horizontal device makers coalescing around a platform. As with the Macintosh and the WinTel PC, hardware would necessarily emerge that met any and every market demand, and do so most efficiently.

But music players are not PCs. They are very simple devices, and early volume sales drove Apple into the catbird seat when purchasing components. Apple also had hardware design prowess among the best (Sony?) in the category. The market demands everyone was trying to meet were better matched by the iPod maker at lower cost. A software platform cannot dissolve the hold of a vertical integrator in even commodity technology segments without price or feature superiority. 

(Aside: The content of the personal music/media player industry simultaneously collapsed in price and mushroomed in availability, guaranteeing that all platforms, inferior or superior, could not leverage themselves with exclusive "walled garden" material. The role of the iTunes Music Store in cementing iPod dominance is overstated. While a non-iPod-compatible dominant form of content in tandem with the end of "piracy" could drive Apple out, the iTMS did not keep Apple dominant.)

The iPhone is Apple's combination of the Mac, WinTel and iPod strategies. Apple offered the iPhone 1.0  as a "new paradigm" cellular/smartphone. iPhone OS X was a leap beyond Symbian and other "environments" as large as the Mac was from DOS. The hardware was also a generational advance, featuring few buttons, minimal branding, and matte tones where the opposite had been the norm. Like the early iPod, the Lisa, the Mac 128k, and many other Apple first stabs, the iPhone sold moderately, and was a useful educational experience for Apple. 

The iPhone 3G/OS 2.0 marked a strategy shift. To expand the iPhone beyond the Mac-alike initial market of Apple and smartphone early-adopters, Apple repeated the maneuvers of the once-triumphant PC cloners, as well as its own past work with the iPod. 

To match the inevitable cloners, Apple dropped iPhone pricing to commodity levels by sharing components with the iPod line, and negotiating a carrier subsidy from AT&T. "Smartphone" segment profit margins thus came under pressure, where they had been relatively fat before. High-end vertical phone/software integrations like the Treo and BlackBerry no longer merited high-end prices. Cloning an iPhone would not yield a lower price, if it were possible. Horizontal integrators, with hardware designed to run Microsoft or "Symbian" software, also faced price pressure, and the difficulty of matching the polish of an integrated solution from any of the vertical players.

The iPhone market position at this juncture is "the best smartphone in the largest selling price category for such phones, with the most capable and varied software." The redesign of Apple's retail stores represent a move to shift the iPhone/iPod Touch from a best in class device into a definitional consumer electronics reference platform, something far more valuable. This is the Wintel portion of Apple's hybrid strategy.
The Apple Stores mean first-party product offerings can be sold at retail in lockstep with corporate strategy, surrounded by unilaterally controlled third party offerings. Contrast this with a typical retail/manufacturer arrangement, in which one works to produce its best attempt at what will sell, and the other tries to create a venue that sells most efficiently.

The first iteration pushed Apple's hardware/software integration panache, with iMovie or Final Cut on kitted-out demo Pro machines, or colorful iHardware for kids and adults alike to experience in the flesh. Unremarked, but an obvious goal was to offer a haven for the "round pegs in the square holes." Long-time Mac users otherwise unable to browse software and hardware peripherals (i.e. POS material pushing 5 PDAs, 5 digital cameras, shelves of software and books, etc.) with any consistency in a Windows-dominated consumer electronics world had their new home. These customers happened to be wealthier than average, most in professions, where an expensive computer, either emphasizing digital media or print document workflow, was advantageous.

Apple even streamed Jobs' keynotes into "theaters" at the back of many stores. Cambridgeside Apple Store did not advertise, but provided seating for thirty or so people each time I went. I arrived an hour early and had a chair, but the store was eventually standing-room only and packed with cheering Mac zealots. (These broadcasts were predated by the satellite downlinks and pizza parties offered with even less promotion by Apple corporate offices.) The move of the event from an obscure corporate setting to mall retail mirrors Apple's corporate strategic shift in that time.

Store 2.0 heralded the addition of the iPod as a major product category. The "rollout night" for the 4-button 3G iPod, featuring then-unusual entryway placard announcements, is a useful milestone. The shift of Apple Retail from Mac torchbearer to consumer electronics platform showroom was partway finished.

Post-1.0 stores have iMacs, PowerBooks, and iBooks running on capacious tables. Each is a vertical solution to the question of how best to accommodate consumer usage of computers. The past division of retail by machine function (music, movies, games) was almost entirely replaced. 

OS X, now the default operating system on all Macs, was sold unobtrusively. Marketing highlighted "UNIX foundations", with plenty of plumbing for complex functions, regular updates, and good security, all made "lickable" and easy to use by Apple's inherent design savvy. 

Depending on the user's needs, the PowerBook, iMac, or iBook might be appropriate, but all were Macs. The PowerMac became a halo product of sorts, demonstrating the high-end media software and peripherals a Mac could theoretically handle, but in a fairly small section. Costly, then unusual and impressive 23in, then 30in, then two of the latter flat panels, sold in tiny numbers, cemented PowerMac cachet and Mac functional credibility. 

Hardware and design differentiated Apple products in all classes of product, but none more so than the iMac, MacBook and MBPro, and iPod, and those products dominated the floor.

Mac computer accessories and software, already made easier to shop for by a burgeoning internet, were minimized to allow the iPod ecosystem habitat in its optimal environment. The iPod was positioned as a music player with a minimalist feature set. Color, photo browsing, contacts, on-the-go playlists, and other requested features were added, but Apple carefully kept Mac functions (i.e. word processing, even of a short note) out. Notably, even the music sold by Apple required computer-based iTunes software as an intermediary between content and iPod.

Accessories like boomboxes, Mac input devices, printers and scanners, software, and laptop cases were all given less prominent space than primary Mac or iPod hardware, and iTunes promotional material. Thus, Apple Store 2.0 made the Mac and iPod a platform for digital media sales and the personal application of consumer-patterned computing features. The iPhone, introduced midway into the era of Store 2.0, was positioned as a media consumption device tied to the Mac for such operations, like an iPod, but also a participant in the most common communications functions, like email, web browsing, telephony, and SMS messaging.

The rumored Apple Store 3 is Apple's move to make the iPod/Mac divide inconsequential, replaced by a focus on OS X (as application vector) as the Apple differentiator. The iPhone tables that focus on applications are meant to do what the 2.0 "Mac table" did. Push technical details and rigid usage to the background, and present the product as a platform supporting user whims and desires. The iPod Touch and Mac will be presented as a unified environment divided by form factor. Where iPod hardware was a category-defending ecosystem, software will be the flora and fauna that lures new phone and palm-space hardware buyers as well as converts to the Mac. Apple wants "OS X users" computing on all its form factors so as to cement OS X as the de facto standard, the Windows, of today. The network is not the computer, as Sun wished, but rather the "back office" server and managed computers. The userland operating system "is the computer" for most, and Apple's stores are moving to reflect the strategic aim of seamless OS X across end user devices.

Wednesday, February 11, 2009

My life in the bush of ghosts

Discordant, unpredictable, arrhythmic. The market is all of these and more. Fits of lunacy, groupthink, input from reality-divorced quantitative analyses, the whims of the rich and powerful, the competing interests of hundreds of banks and institutions, thousands of brokers, and thousands upon thousands of retail bankers, stock analysts, and automatic trading, all add up to the morass known as the public stock market.

A banker friend of mine explained that stock markets occupy perhaps 1% of global capital, and the rest is bonds and other market vehicles. The Dow average, not alone among popular indicies but easy to cite here, is the product of thirty companies, each buffeted by millions of forces every day. Some events are cut and dried. Say a meteor hits Wal-Mart headquarters and eliminates the entire executive suite, among hundreds of others of managers. The reaction is simple: sell. This hypothetical is pure bad news for the top-down retailer, given that it just lost the entire top of the company. Wal-Mart plunges accordingly, say, and its market cap dives proportionally.

Rarely, of course, is bad news so obvious or so one-sided. Perhaps Wal-Mart loses a dispute with Colgate, and is forced to split its shelves between Crest and the upstart, instead of retaining monopsonic control over the toothpaste market. Such a development is not so obviously deleterious, and some could argue that abandoning the monopsony-as-price-cudgel strategy might even lead to greater sales. More toothpaste choice, albeit at worse margins, could go against forecasts and lead to a spike in high-end paste choices among otherwise low-margin, once Crest-loyal customers who now enjoy a greater selection at reasonably similar prices. Wal-Mart shares might go down a bit as some sell, seeing the slipping control of sales layout as a profit-destroying anti-Wal-Mart nightmare. When profit numbers come in and toothpaste is a bright spot, the stock might adjust accordingly. Indeed, shares may go up seemingly against type, ahead of earnings, as savvier investors see the silver lining of variety where the pro-Crest faction saw only less control over Crest prices.

But what to think of the current public stock market. That 1% of capital sloshing around seemingly without reason.

Apple computer is massively undervalued by any measure besides the "stockpile your food and guns, the US is going primitive" extreme. Apple trades at a forward P/E closer to commodity producers, and is growing faster than any startup by revenue or year-over-year (besides Google), including a laundry list of tiny companies dwarfed by Apple. Apple is "growing like a startup" with revenue like a major industrial player. While luxury goods are going to drop in sales in a recession, small business, education, and a number of other Apple markets are primed to grow. Add in a mature, 20m+ iPod/quarter sellthrough to guarantee low prices on bulk memory deals, and the iPhone 3G, and the stock seems positively staid. Never mind the rumors of $99 iPhones and an iPod-alike iPhone line that hits every reasonable price point.

I may look stupid in three months, or even one month, but I am iterating/reiterating a strong buy on Apple. 100 is not high from 80, it's low from $225, my price target.

Tuesday, February 10, 2009

Regarding the Kindle and "Did Apple Blow It?"

No. Apple, and even in some headlines, "Steve Jobs", did not "blow it" by failing to enter the hardware eBook space.

The sales fire stoked by the Kindle is a small controlled burn by consumer electronics standards. Sales of 500,000 are excellent, but not for an Apple device. Even 500,000 sales in one weekend would be "disappointing" for "analysts", so Apple probably didn't want to get stung by what would be spun as witheringly weak sales reports no matter how much eBook share they grabbed. Why couldn't Apple sell 1m eBook readers if they did a great job? Sure, they could, eventually. The industry now is too young, younger than the pre-iPod MP3 player market, for sure, and definitely younger than the pre-iPhone smartphone market, to deliver those numbers.

Also, the Kindle comes with 3G service included. Apple's entangling alliances in that field are well known, but I will say it anyway: an Apple eBook content network driven over Sprint's network would not play well with AT&T, on whom Apple relies for its, er, "other" 3G project. Why not bundle 3G with the iPhone or iPod Touch, or even our mythical reader? Even if such a move were obviously rational, Apple hasn't shown any desire to go in that direction, preferring the subsidy/carrier model. They don't seem to want to switch. An iPod Touch or MacBook Air with 3G is the most radical I can see Apple getting. Certainly, a new paradigm of connectivity ("it's included!") is not best rolled out as part of a new paradigm of product, at least, for Apple. Amazon seems OK with offering a doubly unusual package, and seeing how it sells.

The Kindle also does one thing really well - process and display free and not-free text. It does a good job negotiating DRM issues with the latter, via What the Kindle isn't is a software platform. It doesn't run an OS with anything like the chops of OS X. Who knows what is hacked up to operate it, but it isn't able to go beyond "what it takes to make the Amazon Kindle tick", end of story. Apple has far greater aspirations for its hardware and software. The "Classics" app, which comes with public domain books and allows for dressy reading on the iPhone, encompasses the Kindle's mission and then some, and the device also makes phone calls, plays music, and offers a few hundred thousand other applications or features. Apple's target market is that which is encompassed by a palm-sized OS X machine constrained to signed applications and a branded network. The putative Apple Kindle-sized device with physical keyboard, and iPod shuffle-sized "page" buttons, takes a once-elegant, pocketable iPod/iPhone device, and makes it far less interesting to most of the market. Yes, a small segment of the market may buy the Apple device instead of a Kindle to accompany their smartphone, but Apple's current offering captures most of those customers, and does not sacrifice dozens of other markets.

So, to all of those who wish Apple was out front in eBooks, please turn to the Nomad Jukebox for a good representation of the last pre-iPod stab at mobile music, and then envision the best Kindle 3 you can. Both were or are, respectively, cannon fodder for the palm platform of universals, not vertical niches, that Apple is building. Will we someday see an iPhone with a bigger screen and a narrower market target? Sure. It certainly won't be sold as an eBook reader first, and everything else later, no matter how many Kindles Amazon sells.

Wednesday, February 4, 2009

Does Apple spend too much on ads?

That is the question posed, and affirmed, here. The reasoning is that Vista "dug its own grave", and Apple is piling on advertising OS X on Macs, and doing so for the sake of ego.

Does anyone remember when Windows ME "dug its own grave" crushing dominance, or Windows 3.1 turning people away from the more-advanced Mac OS because "it's what everyone is buying"? There were other reasons for the Mac's slide, but Apple's ads then were not effective in the least. Bewildering Performa variants and a muddled message, and the mainstream consumer forgot the product. PCs were it. The I'm a PC ads, the Seinfeld ads, even the Zune, is convincing when fatted with a marketing department as rich as Microsoft's. A deafening silence in response would be cataclysmic, on the iPod/iPhone front a seeming retreat, and for the Mac a sign of "another luxury good losing momentum", not the platform resurgent it is now.

Jobs wanted 10% of the market when he returned to Apple, and he said so explicitly in the Think Different era ("if we can convince 5 more people out of a hundred", when Mac share was less 5% than 2%.) Apple is there by certain measures, sure, but Jobs wanted to use the perquisites of 10% share, not achieve it and slide back.

Tuesday, February 3, 2009

Still Misunderstanding Apple

A recent hosanna slung Apple's way by the NY Times demonstrates how badly most understand Apple's current relevance.

Apple is a leader and innovator in its various markets, but not because, as the Times says in its final paragraph, "Apple is...willing to draw colorful juxtapositions with its rivals." It got to where it is by being, by living, its strategy devoutly. The Mac was a colorful juxtaposition to the IBM PC when it was released, and though the dominant company has changed, it remains exactly what it was when released. It is an operating environment unique to its hardware with an emphasis on graphics running only on proprietary hardware in an especially thoughtful and elegant physical enclosure. (Please spare me the Hackintosh, it is irrelevant at the very least to Apple's marketing.)

The iPod is not a colorful juxtaposition, and it has never been sold as such. The iPhone is a unique offering, and really a "hardware and software" proposition like the Mac, but it is portrayed as the first incarnation of what will be the dominant offering, like the iPod in the beginning. The Mac, though, was always an "alternative", though I suspect Apple hemmed the message in at first to spare the Apple II, and then stuck with it when the Mac was not "the iPod" of personal computers. Apple has assumed a brash, anti-establishment image with people older than the iPod because it primarily sold the Mac in a period of corporate and market decline, but it is wrong to assume that it wants or still adopts that mantle.


The Mac is more pleasurable to surf with than Linux, as verified by the computer literate community. All of the surveyed must be real computer nerds to run the boxes they do, and the boxes are all generalized PC hardware configurations. Win2k still beating Linux is one thing, but a newer, closed, actively hostile OS? A consumer condemnation, even in the face of the "netbook phenomenon." I use quotes because the disposable, under-capable computer is no place to look for the future, let alone phenomena.