In the past two years, Japan has emerged as Apple’s fastest-growing region, far outpacing its home market and the booming economies of Greater China and the rest of Asia. Japan is also home to Apple’s biggest profit margins, and the only one of Apple’s five regions where operating profit grew in the past fiscal year.
That is surprising because Japan isn’t most companies’ idea of a growth market. It has labored through two decades of economic malaise, and is saddled with a shrinking, aging population. Moreover, domestic firms that pride themselves on consumer electronics have kept foreign competitors at bay for decades.
This is one of the key errors most observers – including, in the past, myself – make when considering Apple’s growth prospects. It’s assumed without question that growth is only available in developing nations, or among those without smartphones.
Conventional iPhone wisdom is that the iPhone has tapped out developed markets and must go low cost
This is the completely wrong frame for understanding the iPhone. It’s not that the iPhone has fully penetrated developed countries, leaving the rest – we’re not talking about a Pampers or Pepsi here, or some other consumer packaged good. Rather, the iPhone is an affordable luxury item; the percentage of the population to which it is affordable just happens to differ market-by-market.
The iPhone targets the high-end in all markets, not just developed markets.
With this framing, it’s obvious that the iPhone would be successful in Japan. Japan remains one of the richest countries in the world, which means a whole bunch of the population falls above the “affordable luxury line.”
It’s not so much that the iPhone has saturated the American-style [which includes Japan] and European-style markets, and ought to focus on the Asian-style one; rather, the iPhone has saturated the high end in all three markets – the high end just varies in accessibility ($200 for American-style, $650 for Asian-style). And, if you accept that the iPhone is in roughly the same competitive position in all three markets – that the difference in market share is due to inherent structure of the market – then it’s not at all obvious Apple should focus on the SE Asia-style market. In fact, it’s obvious they shouldn’t.
While any discussion about the iPhone touches on subsidies, the subsidies themselves – and the degree to which the iPhone is accessible – are much more a function of the underlying economy. Countries to the left are more service-oriented, and have higher purchasing power. There is much higher credit-card penetration, and, generally speaking, greater respect for copyright. All of these factors make the left side of that chart much more attractive to Apple. Apple’s ecosystem and overall value prop is certainly the highest in the United States for all of the factors just listed, and the value-add of their ecosystem roughly tracks the same left-to-right listing of countries in the chart above.
Substitute “Japan” for “United States,” and everything in that sentence holds (except for some limitations on media services, such as iTunes Radio).
The current state of the Japan market also demonstrates the power of the iPhone vis a vis the carriers. While I understand and respect the argument that the iPhone is a boon to carriers in that it drives ARPU, an even greater factor is carrier fear of losing customers. From the WSJ:
As the last major Japanese operator to offer the iPhone, DoCoMo is aggressively discounting new models to lure users from competitors, while offering incentives to entice existing subscribers to switch from other phones.
DoCoMo’s entry into the market has prompted KDDI Corp. and SoftBank Corp., Japan’s second- and third-largest carriers respectively, to counter with iPhone discounts of their own. All three companies now offer the standard iPhone 5S at no upfront cost to consumers.
The carriers see the iPhone as a strategic threat because Apple owns the customer relationship; the carrier is reduced to a utility. Therefore the leading carriers do not carry the iPhone
Customers strongly prefer the iPhone; in fact, they prefer it so much that they switch carriers to get the iPhone (something that is very difficult and rare). Second-and-third place carriers add the iPhone in order to steal customers from the leader
The leading carrier is forced to choose between losing the customer relationship to Apple or losing the customer completely
The fact that iPhone users are fabulously profitable makes this situation (and the associated subsidies) tolerable.
To put it in theoretical terms, the Bargaining Power of Buyers (i.e. wireless consumers) drives iPhone carrier adoption:
The power of buyers in the US market. This applies equally well to NTT DoCoMo. Click the image for the original article.
In this view, instead of carriers hiring the iPhone to attract high use/high revenue wireless buyers, the lack of iPhone repels wireless buyers and drives them to rival carriers, forcing the holdouts to give in to Apple’s demands.
Finally, and most tellingly, Apple is doing with the iPhone in Japan exactly what they said they would do when they introduced the 5S and 5C. After the iPhone presentation I wrote::
This attitude and emphasis on higher-order differentiation – the experience of using an iPhone – dominated the entire keynote and the presentation of features, with particularly emphasis throughout on the interplay between software and hardware…
That assuredness and self-confidence was on full display in this presentation. This was Apple, confidently, and without a glimmer of doubt, declaring that the iPhone is special, that it’s worth paying for, and that people all over the world will do just that.
And so it is in Japan:
“Apple’s brand is just overwhelming here,” said Eiji Mori, a Tokyo-based analyst at BCN Inc. “It’s not about specifications. It’s not about rationale. It’s about owning an iPhone.”
So to recount: understanding the iPhone market, consumer preference, and Apple’s explicit iPhone strategy all suggest that the iPhone would be a huge hit in Japan. I guess the only surprise is that the WSJ is, well, surprised.
In June, in response to claims that nine Internet companies were willingly passing information to the NSA, Apple released Apple’s Commitment to Customer Privacy:
Apple has always placed a priority on protecting our customers’ personal data, and we don’t collect or maintain a mountain of personal details about our customers in the first place. There are certain categories of information which we do not provide to law enforcement or any other group because we choose not to retain it.
For example, conversations which take place over iMessage and FaceTime are protected by end-to-end encryption so no one but the sender and receiver can see or read them. Apple cannot decrypt that data. Similarly, we do not store data related to customers’ location, Map searches or Siri requests in any identifiable form.
We will continue to work hard to strike the right balance between fulfilling our legal responsibilities and protecting our customers’ privacy as they expect and deserve.
A Strategy Credit is an uncomplicated decision that makes a company look good relative to other companies who face much more significant trade-offs.
User information of this type isn’t important to Apple’s business model, so they “choose not to retain it.” There’s nothing worth praising here – or denigrating – but it’s worth acknowledging.
Apple admitted as such in their recent report on government information requests:
Unlike many other companies dealing with requests for customer data from government agencies, Apple’s main business is not about collecting information. As a result, the vast majority of the requests we receive from law enforcement seek information about lost or stolen devices, and are logged as device requests.
We have no interest in amassing personal information about our customers. We protect personal conversations by providing end-to-end encryption over iMessage and FaceTime. We do not store location data, Maps searches, or Siri requests in any identifiable form.
Many were quick to praise Apple for this very fact, but let’s be clear: there is nothing here worth praising. It’s an artifact of their business model.
The slogan that good business is profitable business is superficial – an attempt to make moral dilemmas dissolve in a warm bath of goodwill. When the right thing to do is also in your own self interest, you do not need advice from philosophers and theologians. Ethics are about what to do when good behaviour and profitable business are not necessarily the same thing.
Bishop Whately noted the difference between the honest man and the man for whom honesty is the best policy. When you deal with the man for whom honesty is the best policy, you never know when it might be the occasion on which honesty is no longer the best policy. Bankers, not bishops, deliver lectures extolling their own personal integrity; the man who repeatedly reminds us how honest he is rarely acquires, or deserves, our trust. The integrity we value is a personal or organisational characteristic, not a business strategy.
Apple, unlike Google, or Facebook, or even Microsoft, is not a services company (as long-suffering iCloud/MobileMe/.Mac/iTools customs can attest), and so, to prescribe any sort of goodness to their decision to not retain user data is much less useful than an examination of what actually matters to their bottom line. And, as a hardware company, that means the supply chain. And that means people like Bibek Dhong. From Bloomberg Businessweek:
Staffing production lines in Malaysia, where 28 plants run by 24 companies worked on Apple contracts last year, usually goes this way: Companies tap an informal, largely unregulated, and transnational network of thousands of recruiters. They fan out, often hiring subrecruiters, into the farm fields and impoverished cities of Indonesia, Cambodia, Myanmar, Vietnam, and even into the Himalayas in Nepal. The positions they’re trying to fill are so coveted that they’re not merely offered, they’re sold. The brokers take fees from families, representing as much as a year or more of wages; frequently the fees are paid with loans that can take years to pay off… The hunt reached then-27-year-old Bibek Dhong on his mobile phone, while he was packing milk crates at a Kathmandu dairy to support his wife, a newborn daughter, and his extended family. The call would change his life.
The entire article is worth a read, and, as you might suspect, it doesn’t end well.
I don’t come to sit in judgment on Apple. How can I? After all, the very next article I read was this piece by Rick Reilly on the carnage that is American Football:
I see too much sorrow and ugliness to love football like I used to.
I watch Indianapolis quarterback Andrew Luck take a brutal lick now and I think of former Packers quarterback Brett Favre, who told a Washington radio show the other day he can’t remember most of his daughter’s soccer games. “That’s a little bit scary to me,” Favre said. “… That put a little fear in me.” He’s 44 years old.
I watch New England tight end Rob Gronkowski get up from wreck after wreck, and I think of former Colts tight end Ben Utecht, who said the other day he couldn’t remember being at a friend’s wedding until the friend showed him the photo album. See, you were a groomsmen. And you sang, remember? He’s 32 years old.
I watch Minnesota running back Adrian Peterson fling himself into crashing whirlpools of men and I think of former Cowboys running back Tony Dorsett, who said he sometimes finds himself driving on a highway and can’t remember where he’s going. “I’m just hoping and praying I can find a way to cut it off at the pass,” Dorsett said recently. He’s 59 years old.
I immediately set out to write a self-righteous tweet on how I’ve given up football, conveniently ignoring the fact I’m in Taiwan (football is only good live – which is 2 in the morning), and the fact I watched when I was in America. And then, the iOS 7 task switcher really brought my hypocrisy home:
Setting my fantasy football lineup one moment, feeling smug about not watching football the next
Apparently the last thing I did before penning said self-righteous tweet was set my lineup for fantasy football, an activity that reduces flesh-and-blood humans risking their futures to the equivalent of Magic cards.
So much for a self-righteous screed.
I don’t know where morals and ethics sit in business, especially in technology, where we celebrate the idea of disruption and failure, giving no heed to the real world implications of what we are building, or how we are building it. Moreover, it’s not as if I’m going to give up my iPhone, or Google’s search, or any of the stuff I’d prefer to feel smug about. Heck, I can’t even give up fantasy football.
And yet, how will things change? How will they get better? How will technology be a force for good, instead of a tool for evil? I remain a technological optimist, but just. The power of software and the Internet is truly awesome, and we best start taking it – and our personal roles in that – seriously.
First things first: I do not subscribe to the idea that a Bill Gates return would be a good outcome for Microsoft. Indeed, much of what troubles Microsoft today is directly attributable to Gates, particularly the Vista disaster/distraction and the Windows obsession.
Still, though, there is something to be said for the power and inspiration that can only be provided by a founder, and two fascinating pieces about Gates really give a great perspective on the challenges today’s Microsoft faces.
The first article is from Harvard Magazine, called Bill Gates, Inside the Gates, and is an excerpt from a book Walter Isaacson is writing. It concerns the creation of the Altair BASIC interpreter, Microsoft’s first product:
It may have been the most momentous purchase of a magazine in the history of the Out of Town Newsstand in Harvard Square. Paul Allen, a college dropout from Seattle, wandered into the cluttered kiosk one snowy day in December 1974 and saw that the new issue of Popular Electronics featured a home computer for hobbyists, called the Altair, that was just coming on the market. He was both exhilarated and dismayed. Although thrilled that the era of the “personal” computer seemed to have arrived, he was afraid that he was going to miss the party.
Slapping down 75 cents, he grabbed the issue and trotted through the slush to the Currier House room of Bill Gates, a Harvard sophomore and fellow computer fanatic from Lakeside High School in Seattle, who had convinced Allen to drop out of college and move to Cambridge. “Hey, this thing is happening without us,” Allen declared. Gates began to rock back and forth, as he often did during moments of intensity. When he finished the article, he realized that Allen was right. For the next eight weeks, the two of them embarked on a frenzy of code writing that would change the nature of the computer business.
It takes more than money to rid the world of a scourge such as polio – though having buckets of cash certainly helps. Also needed are ambitious thinking, organisational knowhow and the ability to bring new ideas to bear on old problems…
When the Gates Foundation made polio eradication a priority five years ago, the global anti-polio effort was running into the sand. More than 10 years of progress had given way, at around the turn of the millennium, to a stalemate as vaccination efforts in the countries still harbouring the disease failed to reach the coverage levels needed to push it into extinction. The organisations behind the existing drive – such as Rotary International, the business group that had long led the effort – “had sort of naively assumed it was on track, but it wasn’t”, Gates says. “The idea that business as usual was going to get us there – it had to be broken out of that, because it wasn’t going to succeed. It probably would have been better to just give up than do business as usual. But that would have been horrific.”
Gates seems to relish nothing more than challenging business as usual, often by applying a dose of more ambitious thinking. It was the same impetus that led him to rethink familiar approaches to philanthropy, throwing his money into the urgent pursuit of solutions to big problems rather than attempting a drip-feed of donations that would amount to little more than a Band-Aid.
What is so striking about these two totally different excerpts is how they bely the exact same approach: the identification of a goal, and the application of total effort to achieve it, no matter the obstacles.
It’s the exact same sort of feeling evoked by one of the greatest corporate mission statements of all time: A computer on every desk and in every home, running Microsoft software.
This is Gates’ – and by extension, Microsoft’s – modus operandi. Massive ambition, identified opportunity, clear goals, and the relentless determination to achieve them.
I’ve written previously, in the context of Apple, that “while a company can reinvent itself around new products and new categories, and continue to thrive, I believe culture is the sort of pie that can only be baked once.” And there’s no reason to think Microsoft should be any different.
And that, right there, is what is wrong with Microsoft. It’s not they don’t have talent – they do. It’s not that they don’t have great technology – they do. In fact, it’s not even that they lack a CEO. Rather, it’s that they achieved their goal. There IS a computer on every desk and in very home, and nearly all of them run Microsoft software. So now what?
Steve Jobs famously used the Wayne Gretzky quote: “I skate to where the puck is going to be, not where it has been” to wrap up the iPhone introduction.
Steve Jobs introducing the iPhone at MacWorld in 2007
Since then, a popular criticism of Microsoft is directly ripped off from this: that they are continually skating to where the puck has been. And while that’s arguably true in a narrow sense, it misses the bigger picture: Apple may very well be Wayne Gretzky, performing ballet on skates and seeing what others don’t see. But the second greatest goal scorer in NHL history is Gordie Howe, known not for his grace but for his strength, durability, and willingness to mix it up.2 There is virtue in the single-minded pursuit of a goal, and the absolute refusal to be deterred.
But again, what is the new goal? What is Microsoft’s reason for being? What ends are achieved by a massive conglomerate spanning CRM systems to database software to gaming consoles? Microsoft, perhaps more than any other company, needs focus,3 vision, and a problem worth solving. To be sure, that falls on the next CEO, but the bigger question that must be asked is if such a problem – one suitable for the unwieldy behemoth that is Microsoft – even exists.
Microsoft’s next chief executive should consider spinning off consumer businesses including search advertising and the Xbox games console, according to the private investment vehicle of Microsoft co-founder Paul Allen.
Mr Allen, who started the company with Bill Gates in 1975 and still holds a $2bn stake, is “intrigued and interested” by forthcoming changes, said Paul Ghaffari, who manages the tech investor’s $15bn fortune.
Mr Ghaffari, chief investment officer of Mr Allen’s family investment office Vulcan Capital, said the successor to Steve Ballmer ought to perform radical surgery on Microsoft.
The goal of a breakup is usually to “unlock value.” In the case of Microsoft, though, what needs to be unlocked is that old Gates culture of massive ambition, identified opportunity, clear goals, and the relentless determination to achieve them by focused, distinct product groups companies no longer burdened by the need of Microsoft to simply exist.
Yes, you have to register. I think this article is worth it ↩
You may have heard of the “Gordie Howe Hat Trick” – a game with a goal, an assist, and a fight ↩
The current mission statement is the opposite of focus: “At Microsoft, our mission and values are to help people and businesses throughout the world realize their full potential.” I could write an entire article on what’s wrong with this ↩
The “maybe” is deliberate. I can see both sides of this argument and look forward to people’s responses ↩
At the ARM developers’ conference today, Intel partner Altera announced that the world’s largest semiconductor company will fabricate its ARM’s 64-bit chips starting next year. An announcement that sent shockwaves throughout the technology industry as Intel is desperately trying to break ARM’s supremacy in the mobile market…
But this is just the beginning of a much larger endeavor for the chip giant as Intel is even willing to compete with semiconductor foundry leader TSMC for the business of its fiercest rivals, like Nvidia NVDA or Qualcomm QCOM.
“Intel will build Apple’s A7, Qualcomm’s Snapdragon or the Nvidia Tegra for the right price. Now, the question is, are they ready to pay that premium and feed their direct competitor, except for Apple. But that would actually make business sense for everyone,” adds Brookwood.
I’m sure Intel is just dipping their toes in the water, and using an older process that was likely to be retired otherwise. Still, the significance of this move can’t be overstated, despite its obviousness.
Update: I shouldn’t have been so flip. EETimes reports this is on Intel’s 14nm process, befitting Altera’s high-performance, high-margin niche FPGA business. Along those lines, it’s very possible this is a one-off and not a harbinger of change. I still like – and stand by – the below article though.
In fact, I’m rather chuffed at the news, just so I can link one of my favorite articles written before most of you, dear readers, were following this blog. It’s called The Intel Opportunity, and I wrote it upon the promotion of Brian Krzanich to CEO:
Today Intel has once again promoted a COO to CEO. And today, once again, Intel is increasingly under duress. And, once again, the only way out may require a remaking of their identity.
It is into a climate of doom and gloom that Krzanich is taking over as CEO. And, in what will be a highly emotional yet increasingly obvious decision, he ought to commit Intel to the chip manufacturing business, i.e. manufacturing chips according to other companies’ designs.
If you at all enjoyed those pieces or found them compelling, then I would highly encourage you to give this a listen. I both touched on these articles, and also expanded on several points, and, I must admit, I was pretty worked up while doing so. Moreover, there is a lot of my personal philosophy when it comes to computing and technology wrapped up in what I have to say, so please, check it out.
One thing in particular I want to call out is apps: I feel like I could totally write yet another article about apps and the iPad, but I think I’ve beaten the topic to death at this point. It’s worth noting though that my vision of the iPad is by definition a huge opportunity for app developers. The opportunity for iPad apps is limited only by a developers ability to perceive new opportunities unlocked by an entirely new device.
Anyhow, I cover this and more in the podcast, so download it now.
Yesterday’s presentation covered the “What” and “How” of the iPad, but it had nothing about “Why.” Why does the iPad exist? Why should consumers buy it? Why does it matter? These are answers that cannot be found in a spreadsheet or focus group, but only in experience, empathy, and philosophy – i.e. in the liberal arts.
To be clear, not knowing the “why” is a rather common affliction. Microsoft, for one, has been rather explicit in characterising the iPad as just a (poor) PC. In response to last week’s iPad event, Frank Shaw, Microsoft’s Corporate VP of Communications wrote:
Since we launched the Surface line of tablets last year, one of the themes we’ve consistently used to talk about them is that they are a terrific blend of productivity and entertainment in one lightweight, affordable package. In fact, we’re confident that they offer the best combination of those capabilities available on the market today.
That’s not an accident, it’s exactly what we set out to design. We saw too many people carrying two devices around (one for work and one for play) and dealing with the excess cost, weight and complexity that “dual carrying” entails. We believed that there was another, better way: A tablet built to offer great touch-based entertainment activities combined with a productivity powerhouse that helps people crank through the stuff they have to get done before they watch zombies or flick birds.
That’s what Surface is. A single, simple, affordable device that helps you both lean in and kick back. Let’s be clear – helping folks kill time on a tablet is relatively easy. Give them books, music, videos and games, and they’ll figure out the rest. Pretty much all tablets do that.
But helping people be productive on a tablet is a little trickier. It takes an understanding of how people actually work, how they get things done, and how to best support the way they do things already.
The good news is that Microsoft understands how people work better than anyone else on the planet.
This statement is true in a way that I very highly doubt Shaw – or just about anyone at Microsoft – truly understand or appreciates. It’s not so much that Microsoft knows how people work; rather, their thinking about everything pertaining to tablets – their imagination about what is possible – is limited by what can be done on a PC.
And so, the Surface is first marketed based on an accessory – a keyboard – that makes it more like a PC. The second wave of ads are spec comparisons focused on the PC-lite features like multi-tasking and multiple-accounts. And the presence of Windows is a feature, not a bug.
@parislemon@markgurman On tablets, Windows is a barrier for entry. Microsoft will probably never realize that.
In short, Microsoft may know how people work now, but cannot imagine the type of work that people want to do, but cannot or will not do on a PC.
Mickey is a musician. He falls asleep with his guitar in hand, and has done so since he was a teenager, finding refuge from an uncertain adolescence in rock-and-roll. He experiences life through music, and when a line or a riff enters his head, he has learned to lay it down sooner rather than later. He uses an iPad to do just that; after all, an iPad is not a PC, but rather the most portable recording setup ever.
Jane is an artist, at least at heart. She showed remarkable ability as a child, but her parents ultimately passed up the opportunity to send her to art school in favor a more practical education. She always wondered what might-have-been, but now art seems more like a dream, one she doesn’t even know how to begin to pursue. Now in her 30’s, Jane discovered Paper on her iPad, and started sketching. There was no investment needed to get started, simply touch the screen. Her iPad is not a PC, but rather the most accessible art studio ever.
Richard is a student. As is the norm in his education-obsessed country, he commutes nearly two hours a day on the bus and subway to his elite high school. Formerly he lugged along backpack so full of books it had wheels; now he has a simple messenger bag with a notebook and a textbook with the brandname iPad. And, when his brain is fried, it magically turns into a television.
Selina is a child. She and her family live abroad, and she attends the local school taught in a different language than her own. It’s ok though; Selina’s father buys her English books to read on her English reader (also known as an iPad), at a price far cheaper than the local foreign-language bookstore. And sometimes, when she’s finished reading, she simply plays; last week she created a photo collage of herself and her brother, without any training.
Monica is retired, free to finally devote her time to her children and grandchildren. Fortunately – or unfortunately, depending on your perspective – Monica’s children have done well for themselves and are scattered all over the country, even world. Monica, though, who has never used a computer, keeps close tabs on all of them through Facebook and Facetime, on an iPad she bought on her own, a fact that Monica is all too happy to share with anyone who asks.
Each of these individuals is using an iPad, but none of them are using an iPad. Rather:
Mickey is using a portable recording studio
Jane is using an accessible art studio
Richard is using a one-pound library
Selina is using a foreign-language reader
Monica is using a family-connector
Moreover, they are all doing work. They are all being productive. And what they are doing would be prohibitively more difficult on a PC.
If your worldview of productivity is limited to what can be done on a PC – documents, spreadsheets, presentations, coding – then of course you will produce a product that is like a PC, but worse for having tablet features. Of course you’ll produce a Surface.
If, though, your worldview of productivity is defined not by the PC, but rather by people – by the liberal arts – then you will produce a product that is nothing like a PC, but rather an intimate, responsive object that invites people in, and transforms itself into whatever you need it to be.
You’ll produce an iPad.
Watching Steve Jobs at D8 in 2010, it’s clear he came up with the now famous “iPads are cars, PCs are trucks” analogy on the spur of the moment.1 The entire exchange, though, is worth a rewatch:
The transcript:
Walt Mossberg: Is the tablet going to eventually replace the laptop do you think? There are a lot of people who say “Well you’ll never do content creation on it” for instance.” Talk about what you think where it’s going, not just the iPad, but the tablet itself as a form factor.
Steve Jobs: You know, uhm, [long pause], uh, I’m trying to think of a good analogy.
When we were an agrarian nation all cars were trucks because that’s what you needed on the farm. But as vehicles started to be used in the urban centers, and America started to move into those urban and then suburban centers, cars got more popular and innovations like automatic transmissions and power steering and things you didn’t care about in a truck as much started to become paramount in cars. And now, probably, I don’t know what the statistics, maybe 1 out of every 25 vehicles, 30 vehicles is a truck, where it used to be 100%.
PCs are going to be like trucks. They’re still going to be around. They’re still going to have a lot of value. But they’re going to be used like 1 out of X people.
WM: And when you say PC, just so I’m clear, it’s not PC versus Mac, you mean…
SJ: Personal computers
WM: Personal computers and you’re including laptops and desktops.
SJ: Yeah! And this transformation is going to make some people uneasy. People from the PC world, like you and me. It’s going to make us uneasy, because the PC has taken us a long ways. It’s brilliant. But, and we like to talk about the post-PC era, but when it really starts to happen I think it’s uncomfortable for a lot of people, because it’s change, and a lot of vested interests are going to change, and it’s going to be different. So, I think that we’re embarked on that. Is it the iPad? Who knows. Will it happen next year or five years from now or seven years from now, who knows? But I think we’re headed in that direction.
Here then, is my concern for Apple: it’s the PC guys – or Mac guys, if you prefer – who have taken over iOS, and last week’s presentation was a little too truck-heavy. It’s not so much that Frank Shaw was mistaken; rather, it’s that Apple even gave him the opening to attack. It was Apple that decided to spend more time on the Mac than on the iPad. It was Apple that saved the most-extensive software demo for iWork, and even then, only on a Mac and browser (and just as well: PC software works best on a PC. It’s not really the best selling point for the iPad). It was Apple that was unable to focus on the product and experience that is far more magical and transformative than the PC/Mac will ever be, and instead deliver a smorgasbord of product announcements, most of which are (relatively) unimportant.
I’ve written previously that the iPad is a truly disruptive product. It is inferior to a PC on the attributes that matter to PC-users, even as it excels on orthogonal attributes that appeal to a new type of customer. Those orthogonal attributes certainly include things like portability and battery life, features highlighted in last week’s event. But the more essential attributes are those that make the iPad very much not a PC. The immersiveness of apps, and responsiveness of touch. The safety of iOS, and the discoverability of the app store. None of these attributes were highlighted; indeed, the iPad was not even demoed. It’s as if Apple is doing its darndest to undisrupt itself.
Again, from D8:
SJ: You know, people laugh at me because I have used the phrase “magical” to describe the iPad.
KS: Yes, they do.
SJ: But that’s what I really think. There is something magical about it. It’s like you have a much more direct and intimate relationship with the Internet and media, your apps, your content. It’s like something’s, some intermediate things has been removed and stripped away.
KS: Like the keyboard.
SJ: You know, like that Claritin commercial where they strip away the film, it’s like that. And, is it the direct action? Is it the fact you can move it all around? Is it the fact that you have no cables and 10 hour battery life? I don’t know. It’s all these things plus other things which I don’t understand yet. But there’s something about it that’s magical. And, I think we have, we are just scratching the surface on the kinds of apps we can build with it. I think one can create a lot of content on a tablet.
“Magical” as an adjective is deeply uncomfortable for us geeks especially. The very idea of believing in something that can’t be explained, much less quantified, is so foreign that it is almost immediately rejected. And yet, cultures the world over believe in the supernatural. Humans believe in that which they cannot explain, or fully understand. And they respond to that, and it’s the liberal arts that helps us comprehend their response.
The “why” of the iPad, then, lies in its magic. It’s in the experience, and, crucially, it’s in the apps.2 The iPad is not an iPad, yet-another-Apple device to weigh down your bag and your wallet. Rather, it is whatever, and exactly, you need it to be.
If you are a musician, the iPad is your instrument, your studio.
If you are an artist, the iPad is your paint brush, your easel.
If you are a student, the iPad is your textbook.
If you are a child, the iPad is your storybook, or your entertainment.
If you are a grandma, the iPad is your connection to your family.
If you are human, the iPad is your magic wand. And, honestly, who does not want a magic wand? And why isn’t Apple selling it as such?
One wonders if Jobs, had he had more time to think, wouldn’t have gone with bicycle instead↩
Apple’s reluctance to help build a sustainable model for apps is particularly problematic for the iPad ↩
To this I have just one response. It’s the best Apple commercial in years – maybe of the decade:
And it debuted in April 2013. This advertisement – which is virtually perfect in every single way, is all about story. It is the absolute personification of story and emotion…
So are we really going to say that liberal arts are gone from Apple because of an ad designed to show off the amazing industrial design of the iPad Air? Let’s be serious.
This, unfortunately, completely misses the point (and misrepresents my argument to boot):
My disconcernment was not only with the iPad Air ad, but with the entire keynote. Everything was about Apple, from the opening repeat video to the self-praise for free to the ridiculous demo about the Eddy Cue poster. What was absent was any demo or discussion about the way humans might actually use Apple’s products for real (the Life on iPad spot being the clear exception).
My argument was about the iPad, not the iPhone. I have written that Apple’s strategy and storytelling around the iPhone are spot-on and a good idea. Moreover, I think Apple is doing great things with the Mac, upping the software value prop and lowering the price at a time when Windows has never been more vulnerable in the consumer space.
It’s the iPad, though, that is devoid of a story (in fact, as Pavan Rajam points out, Apple has not done a single on-stage demo for the iPad this year). The difference in clarity and specificity between Apple’s iPhone strategy – increase value, both in features and in higher order benefits – and whatever it is they’re doing with the iPad is reflected in the marked contrast between the humanity of the spot Warren references and the abstract iPad Air ad.
The larger problem, though, is a misunderstanding of what the liberal arts reference is all about. It’s not about the story, or lack thereof, although that is a symptom. It’s not about the ad, and it’s not about emotion. Rather, the question that the liberal arts answer is “Why.”
Yesterday’s presentation covered the “What” and “How” of the iPad, but it had nothing about “Why.” Why does the iPad exist? Why should consumers buy it? Why does it matter? These are answers that cannot be found in a spreadsheet or focus group, but only in experience, empathy, and philosophy – i.e. in the liberal arts.
Moreover, these are not idle questions. Tim Cook himself showed why they are so pressing:
Plateauing iPad Growth
That line is flattening much too soon for a product as truly revolutionary as the iPad.1 It is not obvious to customers what the iPad is and why it matters.
This, then, is what makes the iPad different – and yesterday’s event more alarming – from a story-telling perspective: a phone and a computer are known quantities. There is no need to answer why. And so Apple’s continued excellence on the “What” and “How” truly shine. The iPad, though, has always been different by virtue of being not only a new product, but a new category. It needs not only the design of “What” and the technique of “How,” but the meaning of “Why.”
There is no one in the world better at “What” than Jony Ive, and no one better at “How” than Tim Cook. But who at Apple knows “Why”?
Steve Jobs closed the January, 2010 introduction of the iPad with this now famous slide:
Steve Jobs and the intersection of technology and the liberal arts
His remarks:
The reason that Apple is able to create products like the iPad is because we’ve always tried to be at the intersection of technology and the liberal arts. To be able to get the best of both. To make extremely advanced products from a technology point of view, but also have them be intuitive easy-to-use, fun-to-use, so that they really fit the users. The users don’t have to come to them, they come to the user. And it’s the combination of these two things that I think has let us make the kind of creative products like the iPad.
He repeated the slide the following year, at the iPad 2 launch:
So, I’ve said this before, but I thought it was worth repeating. It’s in Apple’s DNA that technology alone is not enough. That it’s technology married with liberal arts, married with the humanities that yields us the result that makes our hearts sing. And, no where is that more true than in these post-PC devices. And a lot of folks in this tablet market are rushing in and they’re looking at this as the next PC. The hardware and the software are done by different companies, and they’re talking about speeds and feeds just like they did with PCs. And our experience and every bone in our body says that that is not the right approach to this. That these are post PC devices that need to be even easier to use than a PC. They need to be even more intuitive than a PC. And where the software and hardware and the applications need to intertwine in an even more seamless way than they do on a PC. And we think we’re 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. And so I think we stand a pretty good chance at being pretty competitive in this market, and I hope that what you’ve seen today gives you a pretty good feel for that.
This year’s iPad launch also featured a repeat performance, this time of the abstract “values” video that opened WWDC:
The effect could not have been more different.
Jobs second speech – like the second iPad, and like the entire presentation that preceded it – was fuller, more filled out. Apple had launched the iPad in 2010 not quite sure of its place in the universe, but a year later, the vision was clear: it was not that the iPad needed to be better at jobs done by a laptop or smartphone, as Jobs promised in 2010; rather, the iPad was capable of previously unimagined applications that were truly life-changing. To put it another way, the iPad 1 launch featured Pages, a pale imitation of a PC word processor; the iPad 2 launch featured GarageBand, an application that was immensely better on the iPad by virtue of it not being a PC.
Yesterday’s opening, however, gave the opposite impression: of staleness, and ossification.1 Words and illustrations on a canvas, literally replayed, without life, without originality. Perhaps it’s because it was a video instead of the spoken word, but the rest of the presentation was in the same vein. In Jobs’ words, Cook and company were “talking about speeds and feeds just like they did with PCs,” with hardly even a mention of real people, and the very real impact the iPad had already had on so many, and could have on so many more.
After that WWDC keynote, I wrote a glowing endorsement of Tim Cook, titled, aptly enough, Tim Cook is a Great CEO. I spent an extended amount of time on Scott Forstall:
Forstall is, more than anyone on the planet – including Jobs – responsible for the iPhone (for this reason alone I found the potshots taken at Forstall, particularly by Craig Federighi, to be in poor taste). He is an incredible engineer – legend has it he could write, or rewrite, nearly any part of the iOS source code on command, and would routinely do so to win disputes in managerial meetings – and a NEXT man, and the closest thing to a Steve Jobs 2.0.
Yet Cook fired him anyway.
Apple didn’t need another Steve Jobs. The price of individual brilliance is collective friction, and only a founder has the cultural capital to make the elevation of the individual possible. After all, he/she created the culture to begin with!
It’s not unlike a revolutionary movement: typically there is the transcendent leader, surrounded by the true believers. Eventually the leader departs, but the revolutions that endure have an ideology that continues to unite. To be sure, over time said ideology ossifies into rules enforced by a bureaucracy, until a new revolution uproots the old one, but this can take many years, even decades.
Most revolutions, though, don’t make it that far. Usually, when the leader departs, his closest lieutenants scheme and fight for the throne, and the entire movement implodes. This was always my fear for Apple: Steve Jobs was the glue that united a strong, stubborn, and talented company that continually operated under high pressure. What would happen when the glue was gone?
Tim Cook has answered that question: the glue is Apple, and the ideology is design. It is a shared belief system that “No” is more important than “Yes,” that focus is essential to making great products, and that no one individual is essential. Not Steve Jobs, and certainly not Scott Forstall.
Today, my certainty in this declaration is wavering. What is design? How fast does ossification arrive? Why is it that Jony Ive is the sole arbiter? And what about Forstall?
I went back and watched the iPad 1 introductory video, and the relative roles of Ive and Forstall were jarring:
Ive opened and closed the 7 minute and 48 second video, but his total time on screen was only 70 seconds – 15%.
Forstall, on the other hand, featured for a straight 3 minutes and 45 seconds – just about half.
Ive himself all but explained why:
The face of the product is pretty much defined by a single piece of multi-touch glass. And that’s it. There’s no pointing device. There’s isn’t even a single orientation. There’s no up, there’s no down. There’s no right way of holding it. I don’t have to change myself to change the product. It fits me.
Indeed, the first iPad – and all of the iPads that followed – are marvelously designed and manufactured, but the magic is absolutely in the glass, in the software. And that was all Forstall. His opening lines:
We looked at the device and we decided, “Let’s redesign it all. Let’s redesign, reimagine, and rebuild every single app from the ground up specifically for the iPad.” And with this large a display we built apps that aren’t just a little bit better than their smaller counterparts. You get apps that are an order of magnitude more powerful.
Forstall’s enthusiasm and excitement are absolutely tangible, and, quite frankly, in marked contrast to Ive. And so it goes. Meaning and value always rise up through the stack, and as hardware increasingly melts away, it’s software that differentiates, that requires the utmost in care, and the ethos of the liberal arts.
And yet, today it’s Ive who manages that, and iOS 7 is certainly Iveian: it looks beautiful, it demos well, and it absolutely compromises a certain level of intuitiveness and consideration in the pursuit of beauty.
I like iOS 7, particularly its palette, but it is less usable. Almost daily I find myself momentarily stumped about how to proceed or backtrack, and the sparseness of many layouts makes options less obvious. The motion is a neat effect, until the 100th time you see it, or unless it makes you sick. It is more beautiful, but it is less intuitive. In short, it bears the mark of not just the maker of the iMac, but also the maker of the iMac’s mouse.
Beautiful, but usable?
It’s telling that Jobs did not say that Apple was at the intersection of technology and design. While any designer will tell you that design is about how it works, not looks, to pretend there isn’t a tension is naive. The liberal arts, though, and the humanities, are literally about people. They are about how they learn and experience the world, and each other. The magic of the first iPad – as noted by Ive in that video – was that people already knew how to use it. And the magic of the iPad today is that people are using it in ways no one could have imagined.
The absolute highlight of the presentation was this video that captured exactly that:
Yet note Cook’s comments at the end:
It’s really an amazing video and each of those scenes has an amazing story behind it. We want to help out customers create even more amazing stories because we know that this is just the beginning for iPad. And so we’ve been busy working on the next generation of iPad.
And thus proceeded the speeds and feeds, and none of the actual stories. How has the iPad changed lives? Why does it exist? Where are the apps that makes these applications possible?
This, then, is my concern: Apple is in great shape, and executing wonderfully. Both new iPads look fantastic, and I want both of them. But I’m already a convert! There are many more customers who don’t yet know that the “computer for the rest of us” exists, and Apple itself doesn’t seem to know how to tell that story.2 Look at the ad previewed in the keynote:
There are no stories, and there are no humans. It’s clever yet abstract, remarking upon what has happened, without a vision for what is now possible. That’s the thing about stories: the best storytellers – like Jobs – are so compelling because they have vision. They see what we don’t see, and they can’t be more excited to tell us about just that.
Does Apple still have vision? Yesterday’s presentation did not, and I wonder just how costly last year’s departure might have been.
To be clear, I loved the video the first time! But that was enough ↩
This is direct contrast to the iPhone event. I was incredibly impressed by the story Apple told about increasing value, not lowering price ↩
Most folks seem to instinctively compare the iPad and the tablet market to the iPhone and smartphone market, and it’s easy to see why. They share the same OS, the same competitor, many of the same apps, and, of course, the same time period – the present.
But in reality – and this touches on many of the themes of this blog – an overt focus on product similarities misses many crucial factors that, in my opinion, make iPhones and iPads very different. In fact, I believe the business we should be looking at to understand where Apple might take the iPad is the iPod, not the iPhone.
And the conclusion:
I believe the iPad is much more like the iPod than the iPhone, and I expect Apple to treat it as such. For structural reasons, Apple can’t and won’t match Google and Amazon pricing, but I believe they will be more aggressive than most people expect with this year’s upgrade cycle.
My prediction was a new A6 non-retina mini for $249, a retina mini for $399, and the end of the old big iPad for $399 strategy.
I’m wavering on a few of these.
New big iPad for $499 – this is the easy one. No changes.
End of the old big iPad for $399 strategy. I still think this is the case; it’s likely Apple will make better margins on a $399 mini than they would last year’s big iPad at the same price. However, I got a lot of pushback that the big iPad at a more aggressive price point is a big deal for education. Perhaps the iPad 2 stays available eMac style?
Retina mini for $399. I still think this is the case. Moving to retina in the big iPad increased the BOM by $30, and while the price didn’t increase, the iPad 2 had a lot more margin to play with. Not so on the iPad mini.
A6 non-retina mini for $249. First off, I expect Apple to continue selling the current mini with the A5, not an A6 (see the iPhone 4S rocking its 30-pin, A5, 3.5 inch screen in the current iPhone lineup).
I’m also conflicted on the price. For much of the month of August I was on this weird fantasy that Apple would price this fall’s products much lower than expected. I eventually came around on the iPhone, all but predicting $550, but I still wonder about the iPad.
There is one final point that deserves discussion, and that is price. One of the most interesting things about the iPod is that it was always price-competitive [lots of data about prices]…In thinking about where Apple will take the iPad, I’m reminded of two quotes in particular.
At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.
One thing we’ll make sure is that we don’t leave a price umbrella for people
A price umbrella is when an incumbent maintains high prices, allowing low-cost competitors into the argument. Apple ruthlessly eliminated the price umbrella in music players, but while they closed the umbrella somewhat with the iPad mini, the competition isn’t exactly getting wet.
If Apple can wrangle a 10% decrease in the iPad Mini’s BOM, that would be good for a $30 decrease in the final price at the same margin, i.e. $299. And, given the 5C, the argument can and should be made that Apple will always preserve its margins.
More importantly, it is increasingly clear that Apple’s iPhone strategy is to increase value, not lower price, in part by setting up Apple as an aspirational lifestyle brand. Presuming this is a company strategy and not just an iPhone one, then perhaps $299 as a floor makes sense.
And yet, this in some ways invalidates a major point of my thesis that the iPad is more like the iPod, and it absolutely invalidates Tim Cook’s claim of not leaving a price umbrella.
Moreover, the iPad hasn’t been doing as great as you would think for the last few quarters. Some of that may be due to a slower-replacement cycle in the tablet market relative to smartphones, but Android tablets in particular are making a push not just in the uber-low end but in the $200 range as well. If ever Apple is going to be aggressive with pricing and trade margin for market share, this is the time and place to do just that.
Apple has the prototypical good-news, bad-news scenario on its hands, with soaring sales of its flagship iPhone 5S contrasting sharply with souring sales of its “for the colorful” iPhone 5C.
“Our latest channel checks confirm that Apple indeed has cut back 5C production by 35 percent and increased 5S production by 75 percent,” NPD DisplaySearch analysts Tina Teng and Shawn Lee posted today.
First, the necessary caveat: Apple supply chain rumors are notoriously unreliable. But let’s assume this one is true, and see if we can figure out the bad news Koetsier is referring to.
Analysis Overview and Assumptions
The key question is the mix of iPhone sales between the 5S, 5C, and 4S. Many commentators, including myself, assumed that the 5C would be a big seller, and, indeed, it still might be after the initial wave of purchases die down. However, it seems obvious now that the 5S will sell far more overall.
Below I’ve looked at three different scenarios to better understand whether this is in fact bad news as many are assuming.
I’ve based my BOM+manufacturing estimates on iSuppli’s teardowns, and assumed a cost reduction of 10% a year for the iPhone 5 and 4S. I’ve also assumed additional costs of $150 per phone for licensing, software, packaging, shipping, etc. I’ve assumed a 50/40/10 split for the 16/32/64 GB models on the 5S, and a 70/30 split for the 16/32 GB models of the 5C. Finally, I’ve assumed 50 million total iPhones sold; this is NOT a 1Q2014 prediction, rather, just a convenient round number. All of the data is here if you want to change any assumptions.
What if Apple sold an even split of 5S and 5C?
Financials with a 50:50 5S:5C split
If we presume that 45% of iPhones sold are the 5S, and 45% the 5C (I assumed the 4S was 10% of sales in all three scenarios), then, given my assumptions, the iPhone as a family will have a margin of 45.53%, with a contribution per share of $15.91.
What if Apple sold 3x as many 5S as 5C?
If the 5S is outselling the 5C 3 to 1, margins and profits are higher given the same number of phones sold
If we presume that 68% of iPhones sold are the 5S, and 23% the 5C, then, given my assumptions, the iPhone as a family will have a margin of 46.94%, with a contribution per share of $17.17. That’s a huge difference – and is exactly what is rumored to be happening.1
What if Apple had not made the 5C (and sold 3x as many 5S as 5C)?
One more scenario – presuming the rumors are correct, and the 5S is outselling the 5C by a significant margin, was it even worth the effort?
The 5C is certainly cheaper to make than the 5, making it worth the investment
It clearly was, for manufacturing costs if nothing else. Assuming the 5’s costs came down by 10%, the 5C still costs $10/unit less to manufacture, and at Apple’s scale, that’s worth over $100 million per quarter. Not creating the 5C would result in a margin of $46.54, with a contribution per share of $17.04.
Tim Cook has hinted this was a primary reason for creating the 5C. From the BusinessWeek interview with him just after launch:
Q: Why not just sell the old iPhone 5, as you’ve done in the past? Why create a new phone with the 5C?
A: The business became huge. The market became huge. The customers’ desires grew. You know, people want different things. We wanted to make the phone more accessible. For us it’s all about products, and so we don’t look at things and say, “I will never sell a phone below that.” We don’t look at it like that. We say, “Let’s think about a great product that we’re doing.” If that great product can be sold for less, then we sell it for less.
There is one other benefit to having a second new design. From the same interview:
Now the great thing is we’ve grown our capability to do two phones, and when you’ve done one before, that’s a big change.
If, as I suspect, next year’s high-end model comes with a larger screen (with the mid-tier model staying the same size), developing the capability to manufacture different models will be particularly forward-thinking. Apple is teaching itself to manage two relatively similar lines before they branch out into even more significant segmentation.
In the end, this analysis is quite obvious: presuming the number of phones sold is the same, it’s great news to be selling more of the more expensive model. It’s even better news when iPhone sales are still growing, as the opening weekend indicates they clearly are.
The only objection, then, is that Apple is artificially limiting itself to the top end and not growing enough. Koetsier makes this argument in the aforementioned piece:
The bad news, for long-term investors, is that iPhone 5C is not really achieving what some — particularly those outside Apple — saw as its goal: expanding the universe of potential iPhone owners, and thereby expanding Apple’s customer list in developing countries. That said, the 5C is a great iPhone in my testing and experience, and has the potential to do very well for Apple, if the company can just get over its self-imposed need for what some would call unrealistically high margin expectations.
First off, this is a classic market share over profit share argument, and is basically advocating that Apple leave money on the table. As I wrote in The $550 iPhone Makes Perfect Sense:
No one – probably including Apple – is quite sure exactly what the elasticity will be for the iPhone. See, the demand curve is usually, well, curved. It’s not as simple as I’ve presented it. Same with elasticity – it changes depending what price point you are at. While Apple could go lower cost, there is a very high likelihood they would, like the first example above, make less money than they could otherwise. It makes a lot more sense to gradually move down the demand curve and build out your knowledge of the market.
The problems with that paragraph go deeper still, though. To Koetsier’s credit, he includes the line particularly those outside Apple, because this paragraph – and much of the 5C angst – is a statement of miscomprehension about Apple’s strategy.
Apple is focused on increasing the value of the iPhone, not only through specs, but through solving pain points like security. And it goes far beyond the phone itself. It’s increasingly clear Apple is focused on being an aspirational lifestyle brand, where specs are completely immaterial, and paying a bit more is part of the allure.
Still, it’s worth noting that if these rumors are true, even Apple itself didn’t realize how far down this aspirational road they already were. Customers don’t care that the 5C specs are good enough; are aspirations limited by such rational ceilings? To aspire is to dream, to want the best. The iPhone 5S is the best, for just $100 more, and millions of consumers – more than ever, in fact – have already demonstrated their willingness to pay just that.
