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It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Thoughts on Apple’s Q1 Earnings Call

"We thought we were betting bold. We didn't bet high enough." - Apple CEO, Tim Cook

Unless you are living under a rock, by now you’ve heard all of the platitudes about Apple’s jaw-dropping earnings that are so big, they make my head hurt. 

$46.33 billion in quarterly revenue, $13 billion in quarterly profit, and $17.5 billion in cash flow from the quarter. This on unit sales of 37M iPhones, 15.43M iPads, 15M iPods and 5.2M Macs.

In fact, in the annals of largest quarterly profits of ALL-TIME, this is #4, and Apple is the only example in the Top 20 that is NOT an oil and gas concern.

In other words, conventional wisdom that Apple can’t win is dead, and thus, it’s high time that we start to ‘think different’ about what makes for great user experiences, great products and great companies.

But first, let me shine a light on the fundamental biases that have colored Apple’s skeptics over the years:

1. Apple can’t Win: The basic premise here is that by dint of a magical asteroid hitting planet earth, Apple first stumbled upon an iPod, then an iPhone, and then an iPad. But now that the competition has figured out what they’re up to, Apple’s can’t possibly win. The conventional wisdom here is that every product is destined to become a commodity, and when it does, a company like Apple, which has built its business on creating proprietary differentiation, must lose. Honestly, this one should have been laid to rest with the other bit of conventional wisdom about consumers not buying ‘premium’ products in bad economies. If the recession taught us anything it is that consumers won’t be frivolous, which simply means that they won't buy cheap crap that doesn’t last, OR over-priced goods that don’t deliver true value. Few consider Apple products to be in the low-value category, and increasingly, Apple has learned how to deliver that value without leaving pricing overhang for the competition to outflank them, a lethal combination. Ironically, in the area where Apple most clearly lost, the PC wars, the price of winning has been death or outright market abandonment for Dell, HP, IBM and Toshiba! Meanwhile, Apple hums along with the Mac breaking all-time unit sales records and outpacing the growth of the PC industry as a whole (+26% year-over-year for the Mac vs. 0% growth).
2. Android is Inevitable: This bit of conventional wisdom is the kin of the 'Apple can’t win' mantra, and it’s driven by two fundamental bits of misunderstanding. One, Android vs. iOS is not Mac vs. Windows all over again, as so many non-thinking analysts and media types regurgitate mindlessly. Case in point, Android’s success in smartphones has hurt Apple’s iPhone business not one iota. If anything, by Android accelerating the demise of the feature phone, that catalytic event has driven more consumers, more rapidly into Apple’s arms. Further, owing to the fractured nature of Android, whatever benefits users have seen with their Android phones is NOT translating into any 'halo effect' or loyalty for that same buyer as they start contemplating tablets (where the lure of carrier subsidies do not exist). Contrast that with iOS, where entire families standardize on iPod touch, iPhone and iPad because it is a no-brainer owing to the curation of the platform, the range of both media and apps, the tight integration of services (iTunes, App Store, iBooks, iCloud) and the friction-free nature of its logistics from developer tools and distribution, to discovery, monetization and cross-pollination between devices. Put another way, if Android is winning, then Apple must feel terrific about 'losing' to the tune of 315M cumulative iOS devices, with 62M devices added during the holiday quarter.
3. Horizontal is Best: As alluded to above, it is held as gospel that the path to market success is to build just a piece of the solution, be the best at just that piece, and then look to third-parties for the rest. The sad irony is that this thinking has pushed solution providers farther and farther away from their customers, led to product experiences that are confusingly-complex at best, babble-speak at worst, and manifested in sales and support channels that are blind, deaf, dumb and stupid. Very clearly, the Apple model of innovating the big idea, building the entire solution, and then tying the entire value chain together, down to the level of retail presence, is so at odds with conventional wisdom that it simply demands that conventional wisdom change.
4. Open will Always Prevail: This little bit of double-speak has been proffered in recent years by Google who, let the record show, is open-ish in areas that they seek to commoditize, but quite happy to remain closed in the areas that they monetize (e.g., AdWords, AdSense, Search algorithms). In fact, smart folks should bucket this one with the false bit of conventional wisdom that you can’t beat free. As privacy advocates are quick to note, free is often too high a price to pay when the true price of free is someone selling YOU (and your data) as the customer to advertisers, direct marketers and the like. Hence, in the post-PC universe one envisions a world bifurcating between well-rendered, well-supported products where the customer pays for the product, but knows exactly what they’re getting; and free products, where you get what you pay for; buyer beware. In truth, customers buy outcomes: they don’t buy attributes; and open, which has many conflicting interpretations, is an attribute. Buy the full dining experience, not the raw ingredient.
5. Without Steve Jobs, Apple is toast: Like Walt Disney and Henry Ford before him, Steve Jobs is a once in a 100 years type of leader. Hence, it must also follow that once he is no longer in the picture, Apple will return to its mediocre ways. While it’s way too early to gauge the efficacy of this one, what conventional wisdom does not account for is the fact that: A) Apple (under Jobs) built a very strong, and deep management team, virtually all of whom have been indoctrinated into the Apple Way for a decade or longer; and B) With Jobs battling cancer for the last eight years of his life, the transition plan was implemented in practice on a regular basis, what with three different health-related breaks forcing the issue.

Netting it out: My hope is that in all industries, not just tech, business leaders will take the time and have the intellectual courage to reboot their sensibilities about conventional wisdom, and what they have been taught to think is the 'one right way.'

It’s time to Think Different, inasmuch as Apple has proven yet again that there is another way, and it delights customers, creates serious halo effects, leads to game-changing new products, creates institutional leverage, and makes the creator a shit-load of money.

Who wouldn't want to emulate that? Our differentiated economy depends upon it.

Closing Notes:

1. Independent Analyst Andy Zaky of Bullish Cross deserves serious props for calling this earnings blowout back in December. What I love about Andy is his analysis is crisp and clear, and unlike the folks that write 27 different position pieces, and then spotlight the two that are right, conveniently ignoring the 25 that are wrong, he writes 1-3 pieces per month. The full piece is worth a read.
2. Tim Cook has consistently asserted that the iPad and tablet market is destined to be a bigger market than the PC, noting that iPad outsold the US PC market in the recent quarter. Along those lines, he had a great comment where he noted that you can SEE how the iPad is winning in market-by-market in segments like consumer, retail, pharma, education, and financial services, and cited lots of specific use case examples to prove the point. I'm certainly seeing this playing out in my daily travels, aren't you?
3. For all of the banter about Apple’s legendary secrecy, it’s ironic that their earnings calls are so transparent relative to earnings calls at Amazon, Google and Netflix. Whereas prying metrics from the other companies is like pulling teeth, Apple seems more than happy to breakout product lines, geographies, channels, market segments and the like. You know the axiom that you can’t improve what you don’t measure. Perhaps another appropriate axiom should be that you can’t really trust what you can’t measure, and Apple is very trustworthy in this regard. No fuzzy metrics.
4. One clear change in todays call was that for the first time, Apple acknowledged that they are now in ACTIVE mode in figuring what to do with their massive pile of cash, which is approaching $100B. Nothing specific was cited, but it’s perhaps a tacit acknowledgement that they either have more cash than they know what to do with, or that they are contemplating something game-changing that will take a lot of cash (buying Comcast, DISH or DirecTV?).
5. I was heartened to hear that per store sales are rocking at Apple Retail, hitting $17.1M in the last quarter versus $12M in the year-ago quarter (up 43%), which to me suggests that the impact of halo effects are tipping into another gear, as people default to the stores and buy for their entire family, as opposed to piece meal buys just for themselves. The company tracked 110M visitors to the stores vs. 76M the year before, which translates t 22K visitors per store per week. Cited was the role of Easy Pay in enhancing the ability to handle sales of in-stock items on busy periods, and the ability to order online and pick up at retail, all of which are subtle indicators of how even in a seemingly played category like retail, Apple continues to tweak and evolve. Mind you, the holiday period is an outlier relative to the other three quarters, but Retail is a game-changer when it works, and it is working big-time for Apple. 

Related:

1. Apple's Segmentation Strategy (and the Folly of Conventional Wisdom) 
2. Five reasons iOS vs Android isn't Mac vs Windows
3. Holy Shit! Apple's Halo Effect
4. Open "ish": The meaning of open, according to Google
5. Apple just became IBM of the Post-PC Era: Thoughts on Apple’s 'Q3 Earnings Call
   
   

The Hypocrisy of Open: Google's silent treatment of Amazon Kindle Fire

For a company that touts every milestone associated with the ascent of its Android platform (as they should);

That defends its refusal to ban 'craplets,' or apps dictated by the carrier, and often unremovable;

That notes that the presence of such craplets is a plus...

“That’s the nature of open..That’s actually a feature of Android.” (Andy Rubin said it.)

That acquires one of the three leading Android hardware handset makers (Motorola), despite the obvious disadvantage that it puts the other makers who bet on its commitment to openness.

Whereas Google has in essence stated a commitment to the good, bad and ugly that its open manifesto bears, they have been deathly silent about Amazon's successful launch of the Kindle Fire Tablet, the first REAL success of an Android-derived tablet.

Now, why could that be?

Because Amazon is using Google's open medicine to create a forked, proprietary village where Google is not invited?

Where Google Search is nowhere to be found;

Where Android Market is mostly unwelcome;

Where Android's look and feel is buried;

Where Google Maps won't open;

Where the 'spirit' of Google's version of open is closed for business.

Yes, for all of the platitudes that Google has uttered about 'open this,' 'open that,' they have said zero about what Amazon is doing.

When you boil it down, either:

A) This is the nature of open - a feature of it - and they should verbally acknowledge it as such. OR

B) They should raise their hand, and say that it's not cool, and embrace their 'open-ish'-ness. 

To sit silently as they are, in the face of a successful instance of their platform, is at best ironic, and more probably, hypocritical.

But, I am 'open' to other interpretations.

Related:

1. Amazon's "Prime" Challenger to iPad
2. Open "ish": The meaning of open, according to Google
3. You say you want a revolution? It's called post-PC computing
4. Existential Threats: Google v. Apple v. Amazon - who fares best?
5. Built-to-Thrive - The Standard Bearers: Apple, Google, Amazon

Existential Threats: Google v. Apple v. Amazon - who fares best?

If Apple, Amazon and Google ⎯ my tech industry standard-bearers ⎯ were each confronted with an existential threat, who would fare best, and why?

What is an existential threat? In short, it's a doomsday scenario that threatens one's very existence, changing the rules of the game for survival going-forward.

I came to ponder this topic after I read Andy Zaky's excellent analysis of Apple's stock price performance, where he convincingly argues that Apple is the single most undervalued large-cap stock in America.

Reading it, I struggled how to wrap my head around why a dollar of Apple earnings were worth only 68 cents relative to the Google earnings dollar, and a truly feeble 14 cents relative to the Amazon earnings dollar (based upon each company's price-to-earnings ratio).

Don't get me wrong, intellectually I get it, having written on investor dead zones many times over the years.

That stated, it simply begged the question of whether Apple's investors are so skittish on the company's future prospects that they are blithely willing to dismiss its current performance, especially in light of Apple's tremendous acccelerated earnings growth.

Then, I read a Wall Street Journal piece on how Google is planning to compete with Amazon Prime via a one-day shipping program to be orchestrated in tandem with third party retailers.

This brought me back to the myriad of Google initiatives over the years that while seeming to have a larger purpose in the company's core business, lack the rigor of experiential focus and more pointedly, the 'show me' factor of direct pressure to produce real oxygen in the form of sales and profits.

The juxtaposition of these two stories transported me back to a conversation I'd had years back with one of my co-founders in a company that we'd recently sold to the '800 pound gorilla' of the segment.

Ruminating on whether we should hold onto our stock from the sale or cash out, my partner raised a question that I'll never forget.

"Do you think that if XYZ (name witheld) faced a major disruptive threat, that they have the DNA, secret sauce and intestinal fortitude to re-group and rebound?"

I didn't believe that they did, and that was that.

Rise to the Challenge, or Wither Away?

The lessons of the past is that there is no 'one right way' when faced with overcoming existential threats, as evidenced by how differently Intel, Microsoft and Apple responded when faced with potential doomsday scenarios.

In the case of Intel, the strategy when confronted by the commoditization of their original DRAM business was to re-invent themselves as a Microprocessor company.

In the case of Microsoft, threats such as the emergence of network operating systems, the rise of TCP/IP as a global communications protocol and the ascendance of the Web-browser and web-based apps were reconciled via an "embrace and extend" platform-centric strategy.

In the case of Apple, the strategy was highly pragmatic. First, they shored up the 'mother ship' Macintosh business by embracing their tight integration of hardware and software, and then they leveraged this position to invent the future via a 'halo effect' approach of self-cannibalization, new product creation and derivation, coupled with managed distribution channels (e.g., Apple Store, iTunes, App Store).

Most companies, however, lack the necessary combination of acumen and ego attenuation to make such reboots, and as such, the tech industry is littered with the remains of once-great companies that are either dead or strategically irrelevant, such as WordPerfect, Novell, Borland, Nortel, Motorola, Netscape, AOL, Sony and Yahoo, to name a few.

Where do Apple, Amazon and Google Fit in this Mix?

To the extent that Apple has faced multiple existential threats in its history, and A) has emerged bigger and stronger than ever from its experience; and B) has multiple members of its management team who remember the dark days, common logic says that the company has both the DNA and culture to overcome such threats.

Similarly, the company's strong track record of R&D is anchored by a rigorous focus on only pursuing new product initiatives that have a long-term path to economic durability, which bodes well for them relative to their peers, Steve Jobs or no.

What about Amazon? Interestingly, the company has been repeatedly battle-tested in segment after segment as a e-commerce provider, each time emerging stronger than ever.

Moreover, the company has been pronounced dead by investors more than once in its history, toughening its skin, and equally important, fomenting a culture of continuously improving the core business, while expanding into new domains. 

And while the company's R&D acumen is not quite to the level of Apple, Amazon has been able to accomplish its moves in a segment where wafer-thin operating margins are the norm, shielding it somewhat from the 'fat and lazy' mindset that has undermined many a company.

Where does that leave Google? The short answer is that we don't know. The company has never faced material risk to its primary revenue-generating ad business, and even though many (most?) would agree that the core Google search service is less magical and a bit long in the tooth, there are, for the moment, no direct threats to that business either.

Simply put, the company has never been battle-tested for operating in adverse environments, and frankly lacks both the R&D proof points that they can create new product lines which generate material sources of revenue and/or a cohesive sense of how the various piece parts fit together holistically. I would, however, give them credit for getting better on that latter point under Larry Page, as I wrote about here.

Netting it out: If a company's stock is a reflection of its current performance relative to its past, measured against its prospects and risks for managing for a better tomorrow, it seems clear that Apple is the gold standard in managing through existential threats, Amazon is the silver, and Google is the great unknown.

Related:

1. Built-to-Thrive - The Standard Bearers: Apple, Google, Amazon
2. Amazon's "Prime" Challenger to iPad
3. You say you want a revolution? It's called post-PC computing

Inconvenient Truths: How Adobe lost the Mobile Wars

In 2005, I launched a startup in the online video space by the name of vSocial. Powered by Adobe Flash's 'embed and spread' capabilities, our service grew virally, piggybacking on the growth of the emerging social networks, most fundamentally, MySpace.

In about 120 days from launch, it would grow from 0 to 71M+ monthly page views, and 45M+ monthly videos served.

Moreover, there is little question that the rise of YouTube (and countless other video service providers) was directly tied to the power of Flash to facilitate viral distribution.

In fact, numerous video clip sharing networks existed before Flash took hold, but for this lack of virality, never reached a tipping point.

I was sufficiently blown away by the potency of Flash that I wrote in mid-2006 that Flash was delivering on the promise of 'write-once, run-anywhere' in a way that Java never would, and had the potential to be the fuel that drove the engine of social computing.

Meanwhile, Adobe was spreading the message how by the end of 2006, tens of millions of mobile devices would be running Flash lite, giving developers the dream scenario of being able to develop on one platform that would run on PCs, Macs, the Web and Mobile devices.

There are no Shortcuts to Greatness

I set the above backdrop, as in 2006, iPhone had not yet been announced, Adobe had incredible market momentum with Flash, legions of dedicated developers, and as a developer, the ideal of NOT having to create different code bases for different platforms, while maintaining rich application and media functionality, was a no-brainer. 

Thus, IF Adobe had delivered in mobile, I and most of the developers in my circle would have enthusiastically ridden that bandwagon.

There is not a SINGLE mobile Flash Success Story

Flash-forward to the present, and the inconvenient truth is NOT that Apple blocked Adobe, but rather, that there is not a single mobile success story that Adobe can hang its hat on showing why mobile Flash is more asset than liability, let alone a viral propagating game-changer.

Think about that for a moment. There is not a SINGLE mobile Flash success story that one can point to either at the killer app level, the handset level or the carrier level. And it's not for lack of interest on the part of any of these constituencies.

You don't think that RIM desperately wants to be able to piggyback on the installed base of Flash on the desktop?

Or, that Google didn't want Flash's presence on Android to make Apple's iOS look closed and hobbled?

Or, that the legions of Flash developers didn't want to see their existing Flash apps running on mobile devices?

Or, that AT&T and Verizon didn't want a device-agnostic software play that would strengthen their hand relative to end-to-end providers like RIM and Apple?

How the fuck did this NOT happen for Adobe?

If they had even remotely executed on the mobile side in terms of portability, performance and battery life, they would likely still be in the driver's seat, and Apple would have had no choice but to capitulate and put Flash on iOS (something that every Mac owner knows would have sucked the performance 'juice' out of iOS).

Adobe didn't Bow to Apple; they FELL on their face

The narrative that Adobe management would desperately love to propagate is that, in the end, pushing Flash on mobile was blocked by Apple, and the success of iOS forced the company to shift to open standards like HTML5 (which notably, has been long-pushed by 'closed,' proprietary Apple).

The hard truth is that almost eight years after Flash variants were introduced to run on mobile devices, and five years after Adobe began pushing mobile as core to its Flash everywhere strategy, mobile Flash is a dog without any serious defenders outside of Adobe.

In other words, in the so-called war for mobile video and mobile app run-time supremacy, Adobe simply never showed up, something to keep in mind when you see ludicrous headlines, such as WSJ's 'Adobe Bows in Apple Feud.'

If anything, the company that was once known for creating brilliant tools and core technologies for creative professionals and web developers, fell prey to its own internal entropy.

In this context, shooting mobile Flash in the head hopefully frees the company both psychically and from a resource perspective to focus on building great products that enable HTML and other open web technologies to realize their potential in mobile, the desktop and beyond.

But, as others have noted, the sheer PR-speak, gobbledy-gook nature of their announcement that they are killing mobile Flash is indicative of a company that continues to confuse assembling a bunch of fatty chicken parts with the magic and alchemy of creating a living, breathing, organic free-range chicken.

That, in tandem with their failure with Mobile Flash, is the inconvenient truth the company needs to get clarity on IF they are going to turn the tide of irrelevancy in mobile.

UPDATE: Mike Chambers, Adobe’s Principal Product Manager for developer relations for the Flash Platform, has written a 'clarifications' post that in blaming Apple, seems to be confusing correlation with causality so as to ignore an inconvenient truth. After all, Adobe was like the 'Boy who Cried Wolf' for so long that when Apple came along and solved many of the problems that Flash had been known for and then Adobe STILL failed to make them pay for it on Android, RIM, etc., it was more a case of death by irrelevance than by attack. 

Related:

1. Adobe Crumbling: Is Winning Mobile Flash Fight Critical to Company’s Success?
2. RIM: Confusing a Bag of Chicken Parts with a Living, Breathing Chicken

You Say You Want a Revolution? It's Called Post-PC Computing (O'Reilly Radar)

"You say you want a revolution,
Well, you know,
We all want to change the world." — The Beatles

I loved Google engineer Steve Yegge's rant about: A) Google not grokking how to build and execute platforms; and B) How his ex-employer, Amazon, does.

First off, it bucks conventional wisdom. How could Google, the high priest of the cloud and the parent of Android, analytics and AdWords/AdSense, not be a standard-setter for platform creation?

Second, as Amazon's strategy seems to be to embrace "open" Android and use it to make a platform that's proprietary to Amazon, that's a heck of a story to watch unfold in the months ahead. Even more so, knowing that Amazon has serious platform mojo.

But mostly, I loved the piece because it underscores the granular truth about just how hard it is to execute a coherent platform strategy in the real world.

Put another way, Yegge's rant, and what it suggests about Google's and Amazon's platform readiness, provides the best insider's point of reference for appreciating how Apple has played chess to everyone's checkers in the post-PC platform wars.

Case in point, what company other than Apple could have executed something even remotely as rich and well-integrated as the simultaneous release of iOS 5, iCloud and iPhone 4S, the latter of which sold four million units in its first weekend of availability?

Let me answer that for you: No one.

Post-PC: Putting humans into the center of the computing equation

There is a truism that each wave of computing not only disrupts, but dwarfs its predecessor.

The mainframe was dwarfed by the PC, which in turn has been subordinated by the web. But now, a new kind of device is taking over. It's mobile, lightweight, simple to use, connected, has a long battery life and is a digital machine for running native apps, web browsing, playing all kinds of media, enabling game playing, taking photos and communicating.

Given its multiplicity of capabilities, it's not hard to imagine a future where post-PC devices dot every nook and cranny of the planet (an estimated 10 billion devices by 2020, according to Morgan Stanley).

Read the full piece HERE.

Related:

• 5 takeaways from Apple's iPhone 4S event
• Ruminations on the legacy of Steve Jobs
• Amazon's "Prime" Challenger to iPad
• Apple's Segmentation Strategy (and the Folly of Conventional Wisdom)

 

(CHART) Head-to-Head for Ten Years: Wal-Mart, Amazon, Google and Apple

This chart is illuminating, I think. Wal-Mart is so completely instutionalized that the present, past and future seem "priced in." It's obviously a great company, but how can you argue any differently?

Meanwhile, Google is making a ton of money, is completely dominant in search advertising, and has executed their moat strategy very effectively.

Yet, when positioned side-by-side against Amazon and Apple, it too, is far removed from tremendous "upside surprises."

Netting it out: Apple and Amazon still seem to know how to pull rabbits out of their hats, and their stocks reflect it.

It's something to think about in handicapping the next stage of the media tablet market, and the respective ecosystems that will emerge, sustain or get marginalized around same.

UPDATE:Steven Cains (@cains) notes via twitter that it's not really fair to compare $WMT due to dividends (Wal-Mart pays em; Apple, Amazon and Google don't). It's an obviously fair point, but if anything, it seems to affirm the macro narrative that Wal-Mart's got predictability (in all forms) priced in.

On BATNAs and the Law of Unintended Consequences: Thoughts on Google’s Acquisition of Motorola Mobility

 

As I stated in my post last month on Google’s earnings call, I am a big-time fan Larry Page, and the way that he is running Google as CEO. The guy is simultaneously a chess player and a coherent communicator about WHAT Google is doing and WHY.

Towards that end, today’s move to acquire Motorola Mobility is fundamentally a recognition that if Google doesn’t establish a serious defensive position with respect to its patent portfolio 'surround' on Android, it risks the proverbial 'death by a thousand cuts.'

In other words, the writing is already on the wall (and in lots of court documents) that between Oracle, Microsoft and Apple, the 'fig leaf' of plausible hope that Android's handset OEMs can embrace the mobile/post-pc software ecosystem funded by Google, and freely reap the rewards, must now be seen as nakedly untrue.

Henry Blodget of Business Insider puts it best when he says about the deal that, “It seems safe to say that, six months ago, investors and partners did not realize that Google was going to have to shell out $13 billion to ‘defend’ Android, let alone start competing with its hardware partners.”

Simply put, the best lipstick that you can put on this pig of a deal (more on that in a bit), and the reason that HTC, Samsung, LG, et al are giving their boilerplate support is that it answers a core question of any ecosystem play; namely, how clean is the intellectual property provided by the ecosystem operator, and how committed is that operator to protecting its licensees.

Is HTC happy about today’s deal, knowing that Google now has 'first cousins' whose sole reason for being is to sell hardware devices that directly compete with them?

Hell no, but they are immediately less happy about having their nuts squeezed by Microsoft, the specter of Apple stepping on their wind pipes, and Oracle pouring hot oil on them.

Compromised survival is better than risk of death almost any day, and that risk was long past the point of being merely 'theoretical.'

The Best Alternative to No Agreement (BATNA)

Thus, Google’s acquisition of Motorola should be seen as the best alternative to no agreements (BATNA) being made by Google to strengthen its IP portfolio.

It should also being seen as a formal acknowledgement that the question of IP purity is no longer a mere border conflict in the pursuit of Android-everywhere, but rather, a prolonged war out in the open.

Plus, to be clear, in the chess scheme game of things, it’s not like HTC, Samsung or LG have anywhere else to go. They have played that card by addicting themselves to Android, and as such, are effectively part of Google’s concubine.

Moreover, let’s be brutally honest. If Google really wanted to get into the hardware business, does anyone consider Motorola state-of-the-art? On any level? No.

Sure, in the abstract, you can connect the dots to mobile phones, tablet devices and set-top boxes, and conclude that there are other synergies in this deal, but to get them, you need to assume a second-order of corporate integration that Google is wise (and likely) to avoid.

After all, merging Motorola’s 19K employees with Google’s 29K employees is a soupy broth that, for cultural reasons, I am highly doubtful that Google wants to make.

The Law of Unintended Consequences

Netting all of this out, I can take Google at their word that this acquisition was a defensive move – although a note aside, that obviously doesn’t say a whole heck of a lot about the tenure of Sanjay Jha (Google Mobility's CEO) in terms of creating great products and sustainable value at Motorola. Would-be hardware OEMS counting on Android to save your hide, you might take note of that fact.

Moreover, I can see why HTC, Samsung and LG will hold their noses and support this deal, as this is the price you pay when you give up software-differentiation. The 'high' is great, but the hangover kinda sucks.

Similarly, today’s deal signals yet another reality check in the sanctimonious positioning of Google as operating according to some higher moral code. They are as ruthless as any profit-bound company, and all such commentaries about open-ness should be seen as marketing spin going forward. 

I will grant you that Google is better than most, but never forget that Google only seeks to fully open what they desire to commoditize, NOT what they aspire to monetize. Pontifications on open-ness are like those on beauty. It is in the eye of the beholder.

Similarly, this is one of those moves that feels like a big-company action, which is as it should be. Google is a big company.

But then again, in positioning itself with the best and brightest as the place to work, this move again signals an end of innocence, something that both recruits AND growth investors will take note of moving forward.

Now, while you might counter that peers like Apple or Facebook are hardly innocents in terms of their own ethos, note that this has never the positioning of these companies.

You go to Apple to build the insanely great, not to be warm and fuzzy, and sanctimonious. You go to Facebook to build the ubiquitous social utility, and join an hyper-aggressive culture.

For Apple, this deal opens the door for them to further assert that they were 'right' about the endemic goodness of deeply integrating hardware, software, service, marketplace and tools into a complete solution, and that Google 'blinked.'

Don't get me wrong. I don't believe that Google blinked (except on patents), but truth is the first victim of wars, and this will offer yet another salvo in the mobile/post-pc wars.

Today also opens the door to Microsoft potentially coming up with a new calculus (economics, positioning) to establishing a foothold with Windows Mobile 7, not to mention HP with WebOS. Will they? I am dubious, but they should (try).

Finally, it’s easy to see how this deal distracts Google ever so slightly in finding some mojo and momentum on the tablet front.

In a segment where there is no obvious catalyst to buy an Android-based tablet (e.g., the carrier push factor in mobile), and where Apple is running away from the competition, the time that Andy Rubin and team will be spending assuaging partners in the coming months, is time lost co-creating with them.

Bottom Line: Google needed to do this deal, I guess, and good for them for being decisive about it, but this was no rope-a-dope, as Dan Lyons dorkily suggests. It was simply better than doing nothing, and waking up one morning to find Motorola’s patent portfolio in the hands of Microsoft.

UPDATE: John Gruber of Daring Fireball has a delicious rant that is one part call out on Dan Lyons, and one part compilation of the various write-ups from the course of the day. As always, a fun read. 

UPDATE 2: Well that didn't take long. Bloomberg is reporting that Google is replacing Motorola Mobility CEO, Sanjay Jha, with Dennis Woodside, who led Google’s ad sales in the Americas before overseeing the merger from the Google side. As noted in my original piece, Google's dismissal of the strategic value of Motorola's hardware business (at the time of the deal announcement) spoke volumes about Jha's tenure. At the same time, the move to replace him with a Google insider versus an MMI member suggests that the combined companies will hardly be arms-length from one another. More fodder for the wake-up call aspect of this for Google's third-party hardware OEMs, not to mention the increased probability of "unintended consequences" alluded to in the piece.

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1. Quick Take on Google Earnings Call: Put me in the bucket of being a Larry Page 'fan' 
2. Apple's segmentation strategy, and the folly of conventional wisdom
3. Apple just became IBM of the Post-PC Era: Thoughts on Apple’s 'Q3 Earnings Call
   
   

Apple just became IBM of the Post-PC Era: Thoughts on Apple’s 'Q3 Earnings Call

 

 

"What would I do? I'd shut it (Apple) down and give the money back to the shareholders." – Michael Dell

“Amateur hour is over.” – RIM

“No one ever got fired for buying IBM.” – IT Buyer

With Apple’s stock surging towards $400 in after-hours trading, let me just say that I guess all of those 'Apple can't win' naysayers should have a cold, hard one with Michael Dell about now.

"Not open enough." "Too vertical." "It’s Windows versus Mac all over again." "The iPad is just a really big iPod touch." As if that last one is even an insult.

If anything, we are seeing the last vestiges of Apple being undervalued and under-appreciated - both as a stock and as an entrepreneurial institution - and the realization/capitulation that the company is the second coming of IBM, as in "No one ever got fired for buying IBM."

The good news in that is that the company has earned it through laser-like focus, brutally precise execution and a coordinated balance between short-term goals and tactics, and long-term planning.

There just is no other comparable in terms of this level of innovation, diversification, market penetration, corporate culture and eye on the money-making machine.

As such, like IBM in the good old days, companies big and small will want to gain access to some of the Apple magic, investors will pad their portfolios, and who knows, the next great job creation stimulus might come out of the elixir that engaging with Apple brings forth.

All that said, I like my Apple with a bit of a chip on its shoulder, surrounded by legions of skeptics, confidently, but with a bit of a bruised ego, needing to show 'em what they can't see from the highest heights.

I need good, scary competitors keeping the company hungry and lean of mind, and fear that in absence of same, sloth, arrogance and the easy path might water down true greatness.

To be clear, though, I heard zero in today's earnings call that gives me cause for pause, as these blowout numbers and jaw-dropping highlights suggest:

1. The Law of Big Numbers? Yeah right: Apple posted $28.57B in revenues for the quarter, an 82% year-over-year bump. But the company has never been one to confuse market share or even raw sales with profits and cash, and this quarter was no different. In terms of profits, Apple netted $7.31B for the quarter. That means that profit growth (up 125%) outpaced revenue growth. Imagine a quarter that drops $10.4 billion in new cash reserves (up 131% year-over-year), and you have a picture of Apple, which now has a tidy hoard of $76.2 billion. Oh, and they actually grew gross margins in accomplishing this (41.7% vs. 39.1% a year ago), spotlighting the single-mindedness of their assault. Good thing the board didn’t listen to Dell when they had the chance. I jest.
2. Victory over the Tyranny of the "One Right Way": One knock on Apple is that they are trying to do too much, and be too integrated, which is a false dichotomy in the same way that Apple winning doesn’t mean that Google has to lose, or even that the King of Old PC, Microsoft, will die anytime soon. Strategy that is well-planned and even better orchestrated is simply magical, and validates itself through measurable, repeated results. Were Apple to do nothing more than sell 20.34M iPhones in the quarter (representing 142% year-over-year growth, double the 67% growth rate of IDCs smartphone segment) it would warrant Lion-izing Jobs & Co (pun intended - it ships tomorrow). But it’s beyond shocking to see that on top of that performance they took the iPad, a product that did not even exist five quarters ago, a tweener device, and one for which there remains no viable competing solution, and sold 9.25M units in the quarter - a whopping 183% increase year-over year. Apple management was magnanimous in stating plainly that they literally sold every single iPad that they had to sell. Put another way, the iPad is now selling almost 2.5X the number of Macs sold quarterly in just its fifth quarter of life. Imagine the kid in diapers down the block, storming onto the court, and whupping LeBron James without breaking a sweat. It's that astounding. I am sure some analyst will find a dark cloud in Apple's "disappointing" Mac and iPod numbers, since the former is only growing 14% year-over-year and the latter actually contracted 20% year-over-year, but this is akin to a parent with a family full of prodigies lamenting that one of her kids was merely top of class, and not top of the world. Mac, after all, still sold 3.95M units to outpace the growth of the larger PC business by 5X, the 21^st consecutive quarter its growth has outpaced the larger PC market. And the iPod, where Apple still commands a 70% market share, is somewhat of a hodge-podge. After all, almost half of the 7.5M devices sold were the non-iPod touch variety, and thus, a long-term dead end on the street of smart devices. Meanwhile, the other half - iPod touch - is subsuming the legacy iPods on one side, and being subsumed by the god-device iPhone and the big daddy iPad on the other. 
3. When You Look Like the Safe Choice, You’re IBM: One hard takeaway throughout the call is how the one-two punch of iPhone and iPad, when combined with everything else that Apple has done right (Apple Retail, iOS unity, the SDK play, iTunes) has made Apple look like the "safe choice" in Post-PC computing. Consider emerging markets, like Asia-Pac where the iPhone business quadrupled year-over-year. Even the Mac is up 57% year-over-year there. Similarly, China, Mexico, Brazil and the Middle East were cited by Apple management as the mega-drivers of iPhone growth in the quarter.  And if you think that China is a bellwether, consider this. It generated $3.8B for Apple in the quarter, constituting 13% of Apple’s revenue. Moreover, in the K-12 educational segment, typically a laggard in new technology adoption, Apple sold more iPads than Macs in the most recent quarter. You wrap hard numbers like this with 'soft data' of iPhone and iPad pilots in the enterprise (91% and 86% of the Fortune 500, respectively, about half that amount in Global 500 companies), and the picture is clear. Apple looks like the safe choice, which history suggests has a way of becoming a self-fulfilling prophecy, as both IBM and Microsoft proved before them.
4. Masters of their (Channel) Domain: Now what’s scary in all of this is that the company is hardly at their apex from a market penetration standpoint. First and foremost, the almighty Apple Retail halo-effect creation engine, which no other device vendor has, is a business that is humming along with 36% year-over-year revenue growth, but equally important, one where Apple is seeing 20% Y-O-Y growth at the individual store level (now at $10.8M per store). Moreover, I took note of the assertion by Apple COO Tim Cook that the company is ready to move from “pilot stage” to “adoption phase” in the enterprise, something they plan to do vis-à-vis the dual leverage of: A) Piggybacking off of carrier’s sales forces that target enterprises to sell them voice and data solutions (where RIM’s inattention to their core competency, and obsession with chasing consumers will be business school fodder for years to come); and B) Building overlay sales organizations that co-sell with other enterprise solution providers (although details were fuzzy at best, and no mention was made to their recent B2B licensing programs). When you surround this gauntlet with an additional existing 115K outlets for Apple products, another 228 carriers (in 105 countries), and of course, the 225M account strong iTunes ecosystem (all backed by credit cards), and you’ve got something that is, dare I say, borg-like.

A side observation in trying to digest all of these numbers is that for all of the puffery about Apple being a "closed" company, if you compare their metrics breakouts in earnings calls to a more "open" company like Google, it’s laughable. Google, like a lot of companies, gives the flyover view, whereas Apple allows the interested to get fairly surgical in their understanding of Apple’s business.

I could go on and one, but the key point is..."Holy Crap!" And you can quote me on that. :-)

Related Posts

1. Apple's Segmentation Strategy (and the Folly of Conventional Wisdom)
2. Five reasons iPhone vs Android isn't Mac vs Windows
3. Holy Sh-t! Apple's Halo Effect
4. Is the enterprise dead as a tablet strategy?
5. Apple announces 'Custom B2B Apps for Business' Program...but there's a catch

 

Google+ doesn't hit the bulls-eye, but Google's found a 'wedge'

Sure, we'd all love to be killer apps, to have hit the bulls-eye, to have delivered a solution so compelling that it forces the competition to change, and adapt.

And in tech especially, there is a tendency to create these false dichotomies - fueled by the echo chamber of the blogosphere - such that everything either "sucks" or is a "game-changer."

But sometimes, it's just as important to find a wedge, some wafer-thin morsel of utility or delight that gets you into the game.

For Google, I think that's the best way that I can describe Google+.

Is it going to kill Facebook? Probably not, but then again, it doesn't need to. It just needs to provide another reason for Google's base of users to use a Google product twice a day, "just like your toothbrush," as Google CEO Larry Page suggested in last week's earnings call.

So what is that reason? For now, it's status updating with decent visual display, and at a more basic level it's an opportunity for users to reboot their friending process.

In that regard, Circles is a **potential** middle-ground on the friending front between:

A) Being a prude with your social network, so as to maintain intimacy and trust; AND

B) Being promiscuous, so as to maximize reach and connectivity.

Personally, I think that as Fred Wilson noted, once you get beyond true "Friends" and "Family" buckets, the 'circle' distinctions get to be arbitrary and unwieldy except for the most die hard users.

As such, I believe that for the concept to scale, it will need to be more simple and algorithmic, probably some combination of tracking "like minds" and "like content," coupled with contextual, visual content "traversal" tags, along the lines of what Posterous facilitates on the user-generated side, and Quora enables on the auto-generated side.

Again, these are implementation details, but unlike my past knocks on Google for being unclear about what purpose a new product initiative serves, and what path Google will take that product, with Google+:

• Google is showing clear leadership at the CEO-level (Larry Page categorically frames three product buckets for Google)
• Google-folk appear to be eating their own dog food by using the product
• Google has defined Google+ in meta terms as a project that will permeate all their efforts, while at the same time showing continuous, daily iteration of their offering.  

On that last point, today brings a native iPhone app, and you can see the iteration on the web side daily.

Yes, I could quibble about the UI or the user experience that Google+ currently delivers, or I could lament the fact that Google+ is yet another social service to post to.

But, that would only affirm the point that in the same way that Twitter succeeded -- despite its unreliability -- specifically **because** it was useful, so too will Google+ succeed, despite these annoyances.

Simply put, it's useful and engaging enough, which constitutes a wedge.

Ironically, given how fully Twitter has changed the rules of the game on its developer base (perception is reality here), if Google gets any religion on making G+ into a developer platform, that could be a game-changer, but I'll keep my platitudes to a minimum in this post.

Related:

1. Google+ (Wake me up when I should care)
2. Google Buzz: Is it Project, Product or Platform?
3. Quick Take on Google Earnings Call: Put me in the bucket of being a Larry Page 'fan'

Quick Take on Google Earnings Call: Put me in the bucket of being a Larry Page 'fan'

In today's Google earnings call, Google CEO Larry Page said two things that frame why I believe that the Larry Page era is going to be very different from the Eric Schmidt era.

The first was his commentary on how Google thinks about what it is; namely, that he thinks of Google as three businesses:

1. Search and Ads;
2. Products enjoying high Consumer Success -- YouTube, Android, Chrome;
3. New Products like Google+ and Local, where the bet is long term, and the investment is made with an eye to securing returns on that time horizon.

IMHO, this type of framing is great, inasmuch as it gets the company both internally and externally beyond being perceived as a one-trick pony (search and ads), solely defined by revenues and profits.

In other words, it provides a clear context for gauging how Google is going to invest time and effort, as well as a clear demarcation line (especially, internally) on projects that will lose their oxygen if they don't yield results.

Contrast that with the Schmidt era, where it was never clear how all of the various Google projects fed the larger gestalt of the company (other than being cool).  

"Exhibit A" is the delta between the Schmidt Way and the Page Way is the deeply flawed launch of Buzz at the tail end of Schmidt's run, contrasted by the highly successful launch of Google+ with Page at the helm.

My only comment regarding the Google buckets is that it would be great to see the company articulate metrics that define what it takes to fit into buckets 2 and 3 (a measuring stick, if you will), although I'd caveat that comment by saying:

1. The company is certainly not shy about sharing them post-facto (Google+: 10M users & 1B items shared daily; Android: 550K daily activations; Chrome: 160M users);
2. I am guessing that those metrics are codified internally.

The second thing that Page said, which I found resonant, is that Google wants to create products that people use twice a day, "just like your toothbrush."

I love it, inasmuch as if I am working at Google, I'm thinking that we can crush that number, and that there are more of these types of "jobs" that can grow usage from 2 to 5 to 10 times a day.

In other words, Page's crisp articulation simplifies even for the layman outsider how the company grows from a $40B run rate business (i.e., $9B this quarter) to a $200B business in the not too distant future. 

What does it all mean? If am an employee, I am psyched because my CEO just defined the step-stones from R&D to Core Consumer Engagement to Cash Cow, and if I am an investor, I now have a mental framework for better understanding the relationship between HOW the company is doing and WHAT the company is doing.

Smart guy, great communicator.

Related: 

1. Horizontal, Vertical and the Google Path to Riches: Ruminations on Today's $GOOG Earnings Call
2. Google Buzz: Is it Project, Product or Platform?
3. Built-to-Thrive - The Standard Bearers: Apple, Google, Amazon
4. Apple's segmentation strategy, and the folly of conventional wisdom

Five quickie thoughts on Amazon's tablet computer announcement

The Wall Street Journal is reporting today that Amazon will be releasing a tablet computing device by October.

Some quickie thoughts on this:

1. Amazon is the only company with the media relationships AND comparably-sized billing relationship with consumers to directly challenge Apple. No one else has either of these elements, let alone both of them. Not Google, not HP, RIM, Microsoft, Facebook etc.
2. In the consumer realm, Hollywood-style media (music, movies, TV shows, books) is such a core "job" of a tablet device, that NOT having an iTunes equivalent is analogous to a missing leg on a table. It's pretty integral, unless wobbly is okay with you.
3. Arguably, Amazon understands product discovery and recommendation even better than Apple does, and certainly groks the transaction and distribution logistics of that equation at least comparably well.
4. What's interesting about this one, is that while the spotlight is on Amazon and Apple as competitors, Amazon is also very well-positioned to outflank Google's play with Android. How? By better leveraging their installed base with Kindle; by building both tight integration with the Amazon Android App store and with Amazon Cloud Services; by better harnessing their recommendation services on both digital and physical goods (e.g., "Looking to buy a screwdriver? Constructor App will help you with construction project budgeting."); and of course, the aforementioned billing relationship, which facilitates one click purchases.
5. For developers, the market needs an integrated alternative to iOS, if for no other reason than to keep Apple honest, and also because not enough developers are making serious coin in either the iOS or Android model. Amazon, if they get their act together, can seriously court developers on the premise of their success with their Cloud Services offerings, not to mention the various hybrid programs they have proven out over the years for smaller retailers to plug into the Amazon Marketplace. Heck, there is even a place for an affiliate model in all of this to make app discovery more viral. Put another way, there are legions of Android developers who like the Android model, but don't like having to support the compatibility matrix from hell on the device front, not to mention the fact that the Google model is all about free, which is not exactly music to the ears of the typical developer. 

What gets me most excited about this is the fact that in Amazon and Bezos, you have a company that is clearly focused on execution.

Case in point, on both the product and M&A front, they have had very few crash and burn outcomes. This is a company that is disciplined and durable such that when they launch an effort they keep iterating until they get it right...and then they make it better.

Plus, as a developer, they are focused on making stuff that directly makes money when it sells. Not a trick subsidized offering to sell their real product, be it advertising, customer's data, etc.

Finally, it's hard not to root for a vendor whose approach inspires the kind of loyalty that one associates with...Apple (and Google).

RELATED:

1. The iPhone, the Angry Bird and the Pink Elephant (O'Reilly Radar)
2. Built-to-Thrive: The Standard Bearers: Apple, Google, Amazon
3. Google Android: on Inevitability, the Dawn of Mobile, and the Missing Leg (O'Reilly Radar)