The Network Garden - Mark Sigal's Blog

Old Media, New Media and Where the Rubber Meets the Road (Guest Post @ O'Reilly Radar)

Analog (old) media is all about managing scarcity by controlling distribution, the net effect of which is to enable publishers to price access to their “toll roads” as they see fit. 

Digital media, by contrast, is premised on the assumption that the tools for content creation, selling, distributing and marketing said media content enable meta-professionals and prosumers to create a surplus of “good enough” content.

This content, in tandem with un-tethered distribution and pretty good information search/retrieval functions, operates in complete disregard for the old media-based pricing models that preceded it.

As such, when the forces of analog media collide with digital media, as they have in music, newspapers, yellow pages, books and magazines (and are beginning to collide in television and movies), a brutally efficient “creative destruction” process occurs.

Simply put, when the digital forces can assemble a “good enough” version of the un-tethered content, then in most cases, the analog media provider is in deep trouble (read: devastating business model disruption).

In this guest post for O'Reilly Radar, I take a look at Media Disruption in the real world; examine Differentiated v. Undifferentiated Media strategies; and analyze the implications for Re-thinking Your Product and Your Audience.

You can read the full post HERE.

UPDATE 1: Great article by Dan Lyons, writing under 'The Secret Diary of Steve Jobs' about "Why Mainstream Media is Dying."  Excerpt: Every once in a while you get to see a mainstream outlet cover a story right alongside a blog, so you can put them up against each other and see why one was so much better than the other. This week TechCrunch and the New York Times (photo) provided just such a lesson.  The issue was a company called Zynga, which makes online games, like FarmVille, that have become incredibly popular on Facebook among people who are missing parts of their brains. On Oct. 31 TechCrunch broke a big story called “Scamville: The Social Gaming Ecosystem of Hell” about how Zynga was making money by selling scam ads — the kind that trick kids and other frigtards into signing up for useless subscriptions to stuff they don’t want. After all this, we woke up Saturday to find a story in the New York Times, also about Zynga (and other Facebook game companies) with the headline, “Virtual Goods Start Bringing Real Paydays.” The Times put two reporters on the knob-polisher, and somehow they managed to interview Pincus, and to quote him — and yet they included not a single word about the scammy ads. Not. A. Fucking. Word. 

Related Posts:

1. Digital Media Rules: The Open Sourcing of Information
   
2. Apple, the ‘Boomer’ Tablet and the Matrix 
3. How Social Media Works: It's About Breadcrumbs and Conversations
4. The Programmable Fan Site: A New Media/Ad Unit Model
   
5. Flip Video News Network: Crowd-Sourcing meets CNN

Analysis: Apple June Quarter Earnings Call - Keeping it Real

APPLE (AAPL) STOCK PRICE: 
Jan. 20 = $78.20 
July 20  = $152.91

Remember all of the platitudes about Apple being doomed since they are a consumer-centric company selling high end products in the worst economic cycle in decades?

Well, it was the mighty consumer that enabled the company to (once again) report its highest non-holiday quarter (in terms of revenue and earnings) in Apple’s history. 

More on that in a minute. But first, some numbers.

In terms of GAAP, Apple generated $8.34B in sales in the June quarter, a 12% increase over last year’s June quarter, which is incredible considering the economic shift between last June and now.  

No less, this growth did not come at a cost of margins and profitability.  Instead, the company generated net income of $1.23B, or $1.35/share, on gross margins of 36.3%, which was 300 basis points better than they guided; so much for sacrificing margin to entice customers to buy. 

More impressive is when you add in the full impact of iPhone revenue via the non-GAAP model that Apple now provides transparency on (it backs out the impact of subscription model accounting - i.e., two-year ratable revenue recognition). 

Here, the sales mushroom to $9.7B and net income to $1.9B, a bump of $1.4B and $700M, respectively. 

Oh, and cash, Apple has LOTS of it.  They are now sitting on a “sick” $31.1B pile of it, an increase of $2.3B from the prior quarter.

Yowza!  So, how did they do it?  Well, that’s a story worth analyzing a bit, as it provides a framework for making sense of the durability of the company's performance over the next handful of quarters.

The Mac Business

Incredibly, the company has outgrown the market now for a staggering 18 of the last 19 quarters, and in the June quarter, they were up 4% versus 3-5% contraction for the industry (a 7-9 point outpacing of the market). 

They did this by selling 2.6 million Macs, setting a new June quarter record.  Clearly, this was aided by accelerated sales after the launch of new MacBooks in the June quarter, but interestingly, whereas institutional business, education and pro segments were down, the consumer segment was up. 

Credit Apple’s execution here in taking down the average sales price of their products to remain compelling to cash strapped consumers – without sacrificing margins.

By contrast, the competition continues its assault on high volume, low margin, undifferentiated offerings, which predictably, has played into Apple’s hands.

The upside scenario in the Mac segment is that as K-12, higher ed and pro segments rebound, the company could see significant upside to this part of their business, further aided by federal stimulus inflows into the education segments, which in this quarter, had no impact (good or bad) for the company.

The counter is that now that the company has refreshed both its desktop and notebook lines, some of the call to action is muted in the coming quarter. 

iPod, iPod touch and iPhone

First off, this was the first time that I heard the company refer to the iPod, iPod touch and iPhone product lines as “Pocket" products. 

My gut is that this is a precursor to the segmentation (and hardware/software matrix) that they will announce when they come out with the larger form-factor tablet device that is (expected) in the October time-frame (see my post on the iTablet here).

The bottom line is that the descent of the iPod is in full force (10.2M units sold, down 4%) versus the ascent of both the iPod touch (numbers not presented, but up 130%) and the iPhone, but this is more a product of the maturation of the market than Apple losing any market share (they have 70%+ of the MP3 player market).

By contrast, the iPhone sold 5.2M handsets in the quarter, nominally aided by the presence of a $99 3G after the June 19 launch of the 3GS (which sold 1M  units in the first three days following its release). 

I have written too much on the phenomenal success of the iPhone platform so the only things of note here are that the company:

1. Has a dearth of 3GS supply, which suggests that they have achieved the right balance between low-end 3G buyers and high-end 3GS buyers.  And unlike the Apple of years past, one gets the sense that the company has a good handle on its supply chain/demand planning.
2. Is seeing growing interest from the enterprise in terms of iPhone 3.0 OS and iPhone 3GS due in part to hardware encryption and improved security. They are doing particularly good with small businesses and large orgs that allow people to purchase phones for personal use. In fact, 20% of the Fortune 100 have purchased 10,000 units each, with some orgs having purchased more than 25,000 units. This data, coupled with a highest overall satisfaction rating among business customers (according to JD Power), and being approved for purchase by over 300 higher ed institutions, leaves them confident that they are still at the tip of the iceberg of this market.

Apple Retail Stores

I would, however, flag Apple retail as the “potential fly in the ointment” bucket, inasmuch as while the company still shows that over 50% of the Mac buyers in Apple stores are first time Mac buyers, and they saw an uptick of store visitors to 38.6M from 31.7M last year (up 22%), same store sales (versus the prior year) were down $5.9M (versus $6.8M), a drop of 13.2%.  

This is the one clear asymmetry in their numbers, and in retail land (my first career was in retail real estate asset management), when same store sales drop, it is often an early warning sign that new stores are cannibalizing old ones, and the macro business is approaching a ceiling. 

Plus, the shrinkage is a deviation from all of the aforementioned growth numbers in the macro business. 

Finally, and purely anecdotal, is the fact that Apple’s former head of retail now works for Microsoft spearheading their (likely disastrous) foray into retail.  

Know this.  Retail real estate guys rarely jump off of gravy trains. They are either pushed or see the opportunity for real growth as behind them.

In any event, this is one to watch.

Other notes of interest:

1.    There was no cameo appearance by Steve Jobs in the call, and no one asked where he was, which is both a credit to Apple's performance and perception management (i.e., perception is that the company is in good hands in terms of operational performance).

2.    Over 8 billion songs have now been downloaded from iTunes store. By contrast, 1.5 billion apps have been downloaded from App Store in about a year. Not a one-to-one comparison, since many of the app downloads are free, but gives some relativistic view into the potency of Apple’s media and platform strategy.

3.    Snow Leopard is coming sometime in the next quarter, and as noted in past posts, it is being priced as a $29 upgrade from Leopard, which I believe is tied somehow to unannounced functionality in the tablet and/or new ways that Apple will better bridge the distinctions between MacOS and iPhoneOS computing models; the implication being that we (Apple) want/hope/need everyone to upgrade to take advantage of something unannounced, and are pricing the upgrade accordingly.

4.    Tim Cook sidestepped questions about an Apple tablet/netbook device.  One of the questions asked by analysts was whether Apple had plans or saw a market for netbooks. Cook's answer was a tell; namely, that the company saw no viable $399-499 type of offering that would meet its goals, reminding the audience that Apple isn’t about maximizing units (whither Nokia, Dell, etc.) but rather, on delivering ease of use, value and innovation, suggesting that the netbook buyer was replacing a full featured notebook with something underpowered, cramped, small display, etc.  When asked by a different analyst if Apple saw a market for such devices at ANY price, Cook punted.  Translation: a $700-900 device solving a different problem than a shrunken down notebook, and presumably offering more than a bigger screen version of an iPod touch is coming soon. I can hardly wait.

5.    App Store differentiation. The question came up whether Apple could keep ahead of the competition, which is now building its own app store concepts and platform plays, and Cook basically noted Apple App Store's 65K apps versus 1-5K for Android, RIM, Palm and Nokia, respectively.  All true, and the company has knocked the ball out of the park, and back again, which I blogged about here, but there has been serious developer backlash about a race to the bottom and Apple’s capricious, non-transparent approach to its developer constituency, so I would flag the health/happiness of the developer ecosystem as a category to watch over the coming quarter. The key challenge for the competition is to come up with the "desktop publishing differentiator" that changes the equation from a simple law of numbers to a metrics of success discussion (i.e., we are solving a different problem, and supporting the ecosystem accordingly). Yeah, I know.  That as easy as "just add water," but the game is no longer about trying to meet Apple punch for punch. It's about changing the rules (again).

6.    iPhone in China. The word I have heard is that a deal is finally done, and we will see a stripped down iPhone in China later this year.  Cook went so far as to say that it is Apple’s goal to have the iPhone in China within a year.  I will leave the analysis on units and dollars to others.

Netting it out: Apple continues to be the sexiest company in tech by balancing a brilliant, gusty vision with a boring focus on the basics: strategic planning, execution, innovation, value, ease of use, diversity and leverage.  And it has its (traditionally) two best quarters of the year upcoming.  Wishing you owned this puppy at $78.20 when the sky looked like it was falling?  

UPDATE 1: Chris Albrecht of NewTeeVee asks What the Heck is Going on with Apple TV, noting that Apple didn't evening mention the "hobby" in the earnings call, and analysts didn't ask.  I know that I forgot, even though there is no way that I believe that Apple is doing little/nothing with the product.

UPDATE 2: China Unicom in 3-Year iPhone Sales Deal, Reuters reports.  China Unicom Ltd. (CHU) has reached an agreement with Apple Inc. (AAPL) to be the sole supplier of the iPhone in China for three years, the Shanghai Securities News reported Tuesday, citing unnamed sources. The mainland's second-largest mobile operator by users after China Mobile Ltd. (CHL) will guarantee total iPhone sales of at least CNY5 billion by buying 1 million to 2 million phones from Apple annually, the report said. China Unicom could begin selling the iPhone in China around late September, the paper said.

Related Posts:

1. Apple, the 'Boomer' Tablet and the Matrix (O'Reilly Radar guest post)
2. Is the iPhone Platform Destined to Disrupt the Packaged Software Industry? (GigaOM guest post)
3. iPhones, App Stores and Ecosystems 
4. Analysis: Apple WWDC Keynote - Punishing the Wizard, Part Two 
5. Built-to-Thrive - The Standard Bearers: Apple, Google, Amazon 

The Mobile Broadband Era: It's About Messages, Mobility and The Cloud

 

PC-centric computing is giving way to the age of Mobile Broadband, best exemplified by iPhone, the first caveat-free mobile platform.  

This article, a Guest Post that I wrote for O'Reilly Radar, looks at the elements that will define mobile computing.

Here's an excerpt:

Forty years ago, media theorist Marshall McLuhan asserted that the “medium is the message,” as a way of underscoring how different forms of media are imbued with their own contextual forms of meaning.

Yet, as we sit at the waking hours of the Mobile Broadband Era, it is hard not to conclude that it is The Message that is to be the defining characteristic of this era.

Why, The Message?  Simply put, messages have compelling attributes.  One, they can be date stamped and packaged up to elegantly deal with both real-time and asynchronous communication scenarios.

Read the full article HERE.

Related Posts:

1. Envisioning the Social Map-lication
2. The Nine Essential Truths of Entrepreneurial Success
3. Right Here Now Services: Weaving a Real Time Web Around Status
4. Digital Media Rules: The Open Sourcing of Information
5. Surplus, Scarcity and the iPhone App Store

Quantum Leaps and Wave Logic

 

I have been ruminating a bit about the onset of the Mobile Broadband Age and the rise of Cloud Computing models, and will blog about the topic shortly.

This quote by Carver Mead struck me as pretty relevant to thinking about the fulcrum that is forming before us: 

"The quantum world is a world of waves, not particles. So we have to think of electron waves and proton waves and so on. 

Matter is 'incoherent' when all its waves have a different wavelength, implying a different momentum.

On the other hand, if you take a pure quantum system – the electrons in a superconducting magnet, or the atoms in a laser – they are all in phase with one another, and they demonstrate the wave nature of matter on a large scale.

Then you can see quite visibly what matter is down at its heart."

- Carver Mead

Apple has secretly released a Tablet Computer: It's called iPod touch

 

"Well today, we're introducing THREE revolutionary new products. The first one is a widescreen iPod with touch controls. The second is a revolutionary new mobile phone.  And the third is a breakthrough Internet communications device."

"An iPod, a phone, an Internet mobile communicator. An iPod, a phone, an Internet mobile communicator.... these are NOT three separate devices! Today Apple is going to reinvent the phone. And here it is...we are calling it iPhone!"

So echoed Apple CEO Steve Jobs in his Macworld 2007 keynote that publicly kicked off what (arguably) became the most successful consumer product launch of all time.

Now it seems that Apple is poised to launch its Tablet Computing entry later this year for a (rumored) price ranging between $500-800; wedging it, from a pricing relativity perspective, at about a grand less than a MacBook Air with solid state memory.

What computing model it pays homage to (i.e., the Mac or the iPhone, or more likely a hybrid of the two), and what it means for Apple's hardware-software strategy moving forward, is a topic that I recently blogged about in the O'Reilly Radar piece, ‘Apple, the Boomer Tablet and the Matrix.’

But, perhaps the real story with respect to the forthcoming Apple Tablet Device is that Apple has already released a tablet computing device. 

After all, the iPod touch (with Safari, Mail, Contacts, Calendar, Maps, iTunes, iLife, MobileMe and the 65K application strong App Store baked into it) is already more powerful than most of the netbook offerings, which, by contrast, are typically touted as doing one thing well - web browsing - and a bunch of other things in a "good enough" fashion (e.g., email, chat, audio/pics/video).

All of which begs the question; when Apple releases its NEXT tablet computing device, will they reinvent the iPod touch in the same way that the iPhone reinvented the phone?

My guess is, yes they will.

Related Posts:

1. Apple, the 'Boomer' Tablet and the Matrix (O'Reilly Radar guest post)
2. Is the iPhone Platform Destined to Disrupt the Packaged Software Industry? 
3. iPhones, App Stores and Ecosystems 
4. iPod touch: the first mainstream Wi-Fi mobile platform?