The Network Garden - Mark Sigal's Blog

Reading the Tea Leaves of Apple's Q2, 2013 Earnings Call -- Four Takeaways

"It's not real, you know, the fame thing."- Anna Scott (Notting Hill)

The hardest thing for the beleaguered Apple investor to wrap their head around is the fact that Apple exists on a schizophrenic plane like no other.

On the one hand, there is 'THE STOCK' -- i.e., the broken stock price.

It rests in the same Bargain Bin as Dell Computer, a company selling undifferentiated offerings in a commoditized segment that quite literally shrinks by the day.

On the other, there is 'THE REAL COMPANY,' an innovating, selling, marketing, leverage and cash-generating machine that has now dropped almost $100 billion dollars in revenues and $22 billion dollars of profits in just the first two quarters of Apple's fiscal year.

That this engine has fattened the company's coffers to the tune of $145 billion dollars (another $12.5 billion added this quarter) does not satisfy.

That this harvest comes from six different multi-billion dollar product lines (iPhone, iPad, Mac, iPad, iTunes & Services, Accessories) manages little more than an acknowledging shrug.

That the company has repeatedly proven its ability to create massive new markets in a quasi-predictable, highly-levered fashion (now known simply as the iOS platform), yields but a yawn.

"Where's my divvy," bitch the disappointed investors, seemingly ignorant to the fact that not only have spirtual peers, Google and Amazon, never offered up a dividend, but they've never even let the topic so much as brush the top of the table. 

"Apple has an identity crisis," utter the dumbest of the dumb media, blind to the power of Apple's unique position in the market as an integrated hardware, software, services, media, tools and marketplace solution provider.

Ever clear on their North Star - i.e., delivering great consumer experiences that change people's lives - Apple has neither changed their identity, nor lost their focus, as evidenced by the best customer satisfaction and customer loyalty ratings, and consistently, the industry's highest profit margins.

Know this. If it was even remotely easy to approximate the 'Apple Way,' we'd be talking about the multiple multi-billion dollar product lines that Apple's competitors have created; we'd be talking about the breakout success of the Apple Retail Store copycats; and we'd be talking about the multitudes of developer success stories that have dropped out of the Google, RIM or Microsoft mobile ecosystems.

We aren't, and it's not (easy).

It's with this fundamental schism between THE REAL COMPANY and The STOCK that I attempted to make sense of the takeaways from Apple's earnings call.

There are four conclusions that stood out to me:

1. Tim Cook wants Apple to be Liked by Investors in a way that Steve Jobs never did: In the call, Cook had an almost apologetic tone with respect to how Apple has failed to beat the guidance, growth and margins expected by analysts and media. In increasing the dividend and upping buybacks, the tone was more akin to "we're trying harder" than "get on the bus or get left in the dust." By contrast, even when Apple's stock was cratering into the $80's following the crush of the 2008 financial crisis, Jobs embodied a healthy irritation for the capriciousness of investors, and the ignorance of many analysts and the media. The truth here is that no good deed goes unpunished, and far from appreciating Apple's olive branch to investors, the narrative is likely to be spun as Cook's Apple is trying to buy time, and is in defensive mode. Me personally, I wanted a bit more "F-U," and a bit less, "we're sorry."
2. Margins will Remain Contracted for the Foreseeable Future: If there are two product-related narratives that stood out for me, they are: 1) iPad mini unleashed an absolute torrent of first-time tablet device buyers (personally, it's their best tablet device), and if the sacrifice is lower margins (relative to the larger iPad), it's worth the trade-off. If the tablet is the replacement device for many a 'job' that users previously hired PCs for -- as I believe it is -- then any way that Apple can capture this market share is a zero-sum type of win that they must secure. Here, Cook and Apple CFO Peter Oppenheimer were quite clear that Apple executed a similar strategy in winning the media player market with iPod, so what's past is prologue; and 2) iPhone 4/4S is the smartphone device that Apple is counting on to capture market share outside of the US with first-time smartphone buyers. Unsurprisingly, these devices may be where the highest volume comes from on iPhone (especially, until the next iPhone comes out), eroding margins in the process. The alternative is to give that ground to Android based devices, a calculus between market share, revenue, user experience and the bottom line that the company has repeatedly shown the acumen to manage through. Honestly, I am not even remotely concerned that they will find the right balance here.
3. The New Product Pipeline will Likely Remain Dry until Fall at the earliest: Given the extreme secrecy by which the company launches new products, and manages expectations around same, Cook spoke with a metaphorical bull-horn in flatly stating that new product **categories** and new services are not expected until this Fall and throughout 2014. Needless to say, the absence of new products combined with the absence of seasonal catalysts, explains why Apple's outlook for Q3 was a flat quarter, and why the quarter behind that may not be much better.
4. iOS Usage Rates are Staggering in their Differential relative to Competing Platforms: If the downside of the current Apple story is absence of true catalysts to carry it aloft to new heights, the upside is that iOS stands alone in generating 75 cents of every dollar of ecosystem commerce in the mobile universe. Simply put, Apple is paying developers $1 billion dollars in revenue share every quarter, iTunes is on a $16 billion dollar run rate, and the actual usage of these devices in terms of web traffic is of a different degree than the competition. Keep that in mind next time Google touts generic Android unit count numbers. Again, that's not to say that there aren't clear scenarios where Apple gets attacked on the margins, but their core differentators, and the depth of engagement and loyalty with users is unlikely to be threatened any time soon. That's the bottom line.

So, netting it out, should you Buy, Sell, or Do Nothing? And what will Apple stock do in the intervening months ahead?

This, unfortunately is a riddle without a clear answer, a stark reminder of the famous quote that the market can stay irrational far longer than most investors can remain solvent.

Related Posts:

1. Cry Babies: The Strange, Confusing Path of the Apple 
2. Apple's North Star: Four Takeaways from Apple's Q4 Earnings Call
3. OMG, WTF is going on with Apple Stock
4. What is Apple Worth: The 'Gold Standard' Thesis
5. Get ready for the Apple + iPhone backlash

Introducing Play and Learn with Wallace

This short video is a superb encapsulation of what I have been working on for the past year with the good folks at Macmillan Children's Publishing, and their much beloved imprint, Priddy Books.

If you don't know them by name, Priddy is the maker of over 500 books, including First Words, ranked by Scholastic as one of the 100 Greatest Books for Kids. They have sold over 100M titles over the past decade so they really understand the early learning segment.

Working around a model known as co-creation, we called upon our own learnings from building dozens of ebooks, apps and games at Unicorn Labs, combined those learnings with the ethos and IP of Priddy, and a built that into a series of early learning apps.

These apps are delightfully fun for kids, to be sure, but in the process of play, kids develop cognitive, creative, spelling, math and drawing skills.

What's unique about the approach is that while each app can be used separately, the apps can also be "super-shuffled," or mixed together dynamically, to provide what is known as blended learning, a proven methodology that helps children learn more rapidly and more deeply.

I will write more about the system that underlies 'Play and Learn,' but in the interim, I would encourage you to watch the video, and download the app, which is free.

New titles in the series will be rolling out monthly. In fact, here's a teaser about our next title, Picture Puzzles, which launches at the end of the month.

Related:

1. Rebooting the Book (One iPad at a Time)
2. Kirkus Reviews gives Spot the Dot a Kirkus Star as a Book of Remarkable Merit

Why the mobile web vs. mobile apps debate is a false dichotomy (GigaOM)

The mobile web versus mobile native “grudge match” rages on, with over 300 comments to Super VC Fred Wilson’s post on whether now is the time to invest in mobile web apps (and services) over mobile native ones.

But the arguments presented in favor of the mobile web over mobile native represent a false dichotomy. Simply put, there is no universal truth in the mobile web vs. mobile native debate, and no “one right way,” despite what the pontificators would have you believe.

The argument in favor of mobile web goes like this: The web is open, ubiquitous, requires no special software, is globally searchable and algorithmically discoverable. As such, it is agile, extensible and readily manageable. Plus, there are lots of proven models for development, discovery, distribution and monetization. And, of course, mobile web development offers a higher degree of symmetry to PC browser-based web development than mobile native app development does.

The argument is favor of mobile native goes like this: There are over 400 million iOS devices and over 500 million Android devices, representing almost 1 billion devices worldwide. In the case of iOS, Apple has built a well-managed development, distribution and monetization platform that has yielded tremendous innovation and user engagement in areas ranging from photography to gaming, social networking, entertainment, education, music and other rich media.

On some level, the argument comes down to “good enough” and “universal” vs. the “richest possible experience” on the device type that is subsuming the PC.

Read the full article at GigaOM.

Related:

1. The iPhone, the Angry Bird and the Pink Elephant (O'Reilly)
2. The short 'half-life' of apps and the App Store 
3. OMG, WTF is going on with Apple Stock?

Pattern Recognition: Maps Mea Culpa; Marketplaces; Lesser Evils; Particularity

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Maps Mea Culpa: Unless you were trapped in a bomb shelter all day, you probably read Apple CEO Tim Cook's 'owning' of the fact that the new Maps in iOS 6 is a poor replacement to the old Maps in iOS 5 (and before). First off, that's the textbook right way you do it. Accept full responsibility, without caveat, something that I blogged about regarding brands and trust. For good measure, Apple even created an App Store section for Maps Alternatives (meh). Second, as I blogged about a couple of weeks back, almost regardless of what Apple did in launching iOS 6 and iPhone 5, a backlash was inevitable. This just provided the match. Third, know this; while Apple was not perfect in the time of Steve (see Me.com, Ping, AirDrop, AntennaGate), this time is different. Those instances were new products, new features or instances that touched a tiny subset of users. Maps is a CORE feature, and this is the first time that Apple has taken users BACKWARDS based upon business goals conflicting with consumers' best interest. Consumers trust Apple because they have repeatedly protected consumers interests and by ensuring that the solution would always get better. In this context, sideways or backwards is not acceptable. COOK SPEAKS: "At Apple, we strive to make world-class products that deliver the best experience possible to our customers. With the launch of our new Maps last week, we fell short on this commitment. We are extremely sorry for the frustration this has caused our customers and we are doing everything we can to make Maps better."
2. Mobile’s Hidden Opportunity - Marketplaces: I love the evolution taken place in marketplace models (see: Kickstarter, 99Designs, Etsy). In fact, I blogged about the topic recently for O'Reilly with respect to my own experiences using 99Designs for design of a new logo; it's an article that pissed off a bunch of designers (see the comments section). This piece by Matt Cohler frames the role of mobile, and codifies what models are most interesting. MONEY SHOT: "The best opportunities for creating new marketplaces (or reshaping old ones) via mobile will be in markets where supply is inherently constrained and there are no viable (similarly priced) substitutes for that supply. Aggregate that scarce supply and the demand will follow. This playbook isn’t new to mobile. Mobile just makes it a whole lot easier."
3. The Lesser of Two Evils: A friend of mine noted that in recent times, elections seem to come down to a choice between the lesser of two evils. He notes, "If you play that one out, at the end, all that you are left with is evil." I thought about this in reading Matt Taibbi's excellent article, 'This Presidential Race Should Never Have Been This Close,' which forked me to a great article by Frank Bruni of the New York Times. Bruni suggests that the electoral process systematically generates (increasingly) shitty candidates. Regardless, of which candidate you are rooting for, the current scenario is pretty sad. I will, however, express a bit of schadenfreude for Mitt Romney, who if he had even one iota of intellectual honesty or personal humanity, and simply ran on his record and history, probably would have been electible by people like me. Instead, the '47 Percent' ads simply kill for the simple reason that it's a case of a man in his own words confirming how most people believe he thinks. JUST TRY SHRUGGING THIS OFF: "If this race had even one guy running in it who didn't take money from all the usual quarters and actually represented the economic interests of ordinary people, it wouldn't be close. It shouldn't be close. If one percent of the country controls forty percent of the country's wealth – and that trend is moving rapidly in the direction of more inequality with each successive year – what kind of split should we have, given that at least one of the candidates enthusiastically and unapologetically represents the interests of that one percent?"
4. Spray vs. Solve; AKA The Power of the Particular: In the movie 'My Big Fat Greek Wedding' there is a joke about Nia Vardalos' dad. He seems to think that Windex is a magic tonic for which the answer to every challenge is to spray some Windex on it; "it" being EVERYTHING. This is emblematic of what ails so much of tech where the ethos is to "spray," be it 'speeds and feeds,' lines of business, social, mobile, media, real-time, analytics, etc. when the answer instead is to "SOLVE." This is why I am such an acolyte of the Apple model (see 'HP, Dell and the Paradox of the Disrupted'). David Brooks ruminates on the outcomes that such particularity yields (''The Power of the Particular)'. EXCERPT: "It makes you appreciate the tremendous power of particularity. If your identity is formed by hard boundaries, if you come from a specific place, if you embody a distinct musical tradition, if your concerns are expressed through a specific paracosm, you are going to have more depth and definition than you are if you grew up in the far-flung networks of pluralism and eclecticism, surfing from one spot to the next, sampling one style then the next, your identity formed by soft boundaries, or none at all."

Get ready for the Apple + iPhone backlash post iPhone 5 announcement

Tomorrow, Apple is poised to announce its newest iPhone, the iPhone 5 (or whatever they call it). And while there has been no mobile device more successful, more inspired and more game-changing than the iPhone, I can't help but feel that the sentiment post announcement by the media and bloggers will range from, "That's it?" to "Apple blew it."

Mind you, I say this NOT because of anything that the product will or will not do, but more because, if you think about it, it's the Perfect Storm in terms of media sentiment.

One, the "WOW" bar is pretty high with Apple to begin with, so anything that's not absolutely game-changing is destined to register with story writers as a disappointment.

Two, the big new feature of iPhone 4S, Siri, is widely perceived to be a bit of a disappointment, so there is already the easy narrative that Apple's lost its iPhone mojo.

Three, the media loves hero takedown stories, and has been waiting for the right moment to write the "He's not Steve Jobs" story about Tim Cook. I'm guessing this is that moment.

Don't get me wrong, I am not saying this is a conspiratorial effort or even that it's fair, just that the narrative machine works this way.

Four, Apple is coming off a "disapppointing" quarter in terms of its earnings (relative to its ridculously lofty standards), so the pieces fit if you want to construct dark, but ultimately meaningless, narrative.

As such, I will be shocked if the sentiment is not dour post announcement, and if there aren't at least a handful of "Apple's in trouble" stories tomorrow.

Put on your raincoat. A storm's afoot!

Then again, the last disappointing iPhone blew the door off the barns in the one place it matters - the market - so I expect a similar outcome when the faux clouds disperse. 

Govern yourself accordingly.

UPDATE 1: Watching today's stock ticker during the Apple event and leading up to the close of the market, you could see a debate going on with dollars, as the stock teetered between being down $4 and up, before rocketing to a close up $9.  In the end the stories were actually pretty measured like these two:

• The iPhone 5 Is Completely Amazing and Utterly Boring (Wired)
• Apple's iPhone 5 bigger, faster but lacks "wow" (Yahoo Finance)

UPDATE 2: MG Siegler at TechCrunch has written an entertaining read, 'Apple’s Magic Is In The Turn, Not The Prestige,' that takes an apt metaphor from the movie 'The Prestige' to explain the magic of what Apple has done with iPhone, and specifically disappointing to some of the Apple faithful at this point.

UPDATE 3: I may have been a bit ahead of the curve, but since the launch, Apple is getting dinged left and right for dissatistfaction with Maps, "disappointing" iPhone 5 sales, an un-Apple like launch of Passbook, and an unheard of drop in device satisfaction, to name a few. Some even wonder if the company has peaked.

UPDATE 4: In the four weeks since I wrote this post, Apple is down $22, or 3.39%. By contrast, Google is up a shade under 10%, and the Dow is up 2%. Of, Andy Zaky (my favorite analyst of Apple), thinks the rank and file are clueless and will miss Apple's run up to $1,000.

Related:

1. What is Apple worth? The Gold Standard Thesis
2. The Paradox of the Disrupted
3. Apple’s North Star vs. Earth’s Gravity: Four Takeaways from Apple’s Earnings Call

Amazon 'kindles' the competitive fire: “We’re the elephant in the room” (GigaOM)

“Here endeth the lesson.” —Jim Malone, “The Untouchables”

There is a great moment in the movie “The Untouchables,” when street-smart cop Jim Malone (played by Sean Connery) explains to federal agent Elliot Ness (played by Kevin Costner) the laws of the urban jungle that was 1920s Chicago, culminating his sermon by saying, “Here endeth the lesson.”

In his own way, Amazon CEO Jeff Bezos delivered a similar message today about the laws of the post-PC jungle when he unveiled the next generation of all things Kindle. In doing so, he accomplished two things.

One, he firmly anchored the precept that other than Apple, Amazon is the elephant in the room when it comes to tablet and media devices, aka the post-PC universe.

After all, there is no company out there (other than Apple) that can so seamlessly combine ecommerce, digital media, publishing, cloud computing and hardware know-how — and do so at wafer-thin margins.

Read the full post at GigaOM by clicking HERE.

Related:

1. Amazon's "Prime" challenger to the iPad (O'Reilly)
2. You say you want a revolution? It's called post-PC computing
3. Built-to-Thrive: The Standard Bearers: Apple, Google, Amazon
4. Existential Threats: Google v. Apple v. Amazon - who fares best?

Pattern Recognition: Microsoft's Lost Decade; Differentiate or Die; Building the Whole Enchilada

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Microsoft's Lost Decade: Once upon a time, Microsoft dominated the computing industry like no other. They were absolutely terrifying if they viewed you as the competition, as Borland, WordPerfect, Netscape, Lotus, Apple and many others can attest. Yet, Microsoft under Steve Ballmer has become a decidedly different company; one that has repeatedly gotten outflanked by Apple and Google. In fact, just ONE Apple product, the iPhone, now generates more revenue than the entirety of Microsoft's offerings. How did this happen, and why did I suggest back in 2007 that a decay was coming. Read this engaging Vanity Fair article to find out.
2. Differentiate or Die: We see it in the PC space, a market so commoditized that the only hardware OEM that is making any money is Apple. And of course, we are seeing how totally Apple is killing it in the post-PC market with a completely integrated and differentiated set of offerings that the competition can't touch. As John Gruber of Daring Fireball notes, "It’s a testimony to just how remarkable Apple’s last few years have been that 23 percent year-over-year growth (this past quarter) looks so bad on a chart." Meanwhile, this week we saw it in the grocery space, where Whole Foods (aka 'Whole Paycheck'), who StockTwits founder Howard Lindzon calls a 'platform business for new unique food brands,' is crushing it. Meanwhile, it's undifferentiated competitor, Safeway, is majorly struggling. I have a general thesis on this one. The conventional wisdom the past 20 years has been dominated by the loosely-coupled, 'horizontal' model that made Microsoft a lethal killer (upon the release of Windows 3.1 in 1992). That model was so effective that it made Bill Gates the richest man in the world, and industry after industry embraced horizontal as the 'one right way.' With the advent of the Internet, however, the downside of horizontal - a vicious cycle of commoditization - played out. Now, we are at the end-game, a point where few companies can make money under this model, unless they are the core supplier of the secret sauce. Thus, I believe that the next 20 years will look less like Microsoft and more like Apple; namely, tightly integrated, and vertically focused businesses where bricks to clicks are logistically worked out in a more than the sum of the parts fashion. Bet on the companies that figure this one out.
3. Building the Whole Enchilada: Speaking of the vertically integrated trend, BuzzFeed is a social news organization founded by Jonah Peretti, co-founder of Huffington Post, and they are killing it. This letter from Peretti to his BuzzFeed cohorts provides a great window into how a startup (in publishing, no less) is embracing a vertically integrated product strategy to breakout success. Here is an excerpt: "Most publishers build their site by stapling together products made by other companies. They get their CMS from one company, their analytics package from another, their ad tech from another, their related content widgets are powered by another, sometimes even their writers are contractors who don’t work for the company. This is why so many publisher sites look the same and also why they can be so amazingly complex and hard to navigate.  They are Frankenstein products bolted together by a tech team that integrates other people’s products instead of building their own. At BuzzFeed we take the exact opposite approach." Read the whole piece HERE.

Apple’s North Star vs. Earth’s Gravity: Four Takeaways from Apple’s Earnings Call

The broad narrative on Apple earnings for the quarter is that the company: A) Missed on most of Wall Street’s projections for them (except iPad and iPod sales); B) Barely beat their own comically conservative guidance; C) Provided guidance numbers for the quarter ahead that are especially conservative; and D) Acknowledged that the slowing global economy is a challenge on multiple fronts.

Unsurprisingly, the stock is down 5% after-hours. But the real question is, 'Buy,' 'Sell' or 'Hold,' right?

To answer this one, let me put forth two salient questions on the topic.

One, is Apple still selling something that the market wants, that customers are willing to pay for when times are tough, and is sufficiently differentiated to maintain high margins?

Two, as a stock, is Apple richly priced, fairly priced or under priced?

Related to this, any analysis of the quarter needs to take note of the fact that the company is in a clear ‘down period’ before the release of the next iPhone.

Simple logic dictates that those who know Apple's product release patterns would default to waiting for the next iPhone, knowing that it’s a quarter away.

Similarly, the same analysis needs to factor that Apple’s newest MacBooks contributed just a few weeks of revenue to the quarter given their date of release.

So, let me attempt to answer Question 1 (Demand + Differentation) and Question 2 (Stock Value) with my four main takeaways from the earnings call:

1. Performance is Relative: Apple revenue was still up over 22% year over year to $35B, so the law of big numbers is not catching up to them yet. Moreover, the company shows no signs of margin erosion. Quite the opposite. Margins this quarter were 42.8% vs. 41.7% a year ago, and 39.1% in the year ago quarter before that. Further, iPad is disrupting more segments within the PC market than ever before, as evidenced by Apple’s own accelerating separation in sales of iPads vs. Macs. A year ago at this time, Apple was selling 2.5 times as many iPads as Macs. Yet, in this quarter, that number mushroomed to 4.25 times as many iPads. And we already know that the Mac is outpacing the general PC market, growing 2% year-over-year, vs. the PC, which is shrinking 1% year-over-year. A big part of this is the educational sector, especially K-12, where Apple has intelligently segmented pricing with the $399 iPad 2. Apple CEO TIm Cook was quite pointed in asserting that when people talk about the 'tablet market' they generally mean iPad, notwithstanding the buzz and promise of Nexus 7, Kindle Fire and the Nook. Similarly, iPhone was up 28% year-over-year, and shows no signs of losing its magic with either consumers, the enterprise, or even carriers, especially with the promise of a new iPhone and iOS 6 in the fall. In other words, we can debate if Apple should have WON more, but we can’t and shouldn’t posit that they are LOSING anything anywhere. The iOS platform, now 410M devices strong (45M devices added in the quarter), coupled with iTunes and surrounded by iCloud (150M users), stands alone. (Some great charts on Apple numbers are HERE.)
2. The Economy Sucks: One of my favorite moments of the call was when Bernstein analyst Toni Sacconaghi challenged Apple CFO Peter Oppenheimer’s comments about being “pleased” with the quarter, by noting Apple’s various weak spots, and asking Oppenheimer what he wasn’t pleased about. This led to a bit of a 'tell' by Oppenheimer, who stated that, “Given what’s happening around us...” Oppenheimer went on to talk about a weak Europe, struggling economies that are based on natural resources, foreign currency weakness against the dollar, and delays in getting both the new iPad and the new portables into China. In other words, while Apple is quite strong in the US (no slowdown yet), and asserts great strength in China (they have not seen the rumored China slowdown in their business), there was ample acknowledgement that the economic picture is cloudy and getting dark, so much so that Apple’s going forward numbers assume a weak Europe, Australia, Canada, Brazil, France, Greece, Italy and even Germany. That, by friends, is macro risk, something that Sacconaghi, who is bullish on Apple, nonetheless suggests HERE.
3. Apple Retail is Flat, but No Alarm Bells: I watch this one like a hawk, inasmuch as retail presence is such a game-changer when it works (product discovery, social confirmation, sales, upsell, and support channel) and an albatross when it doesn’t. As such, I am perennially looking for canaries in the coal mine. Well, here the news is muddy.  Same store sales were up a measly 2.8% year-over-year (from $10.8M per store to $11.1M per store). But at the same time, overall sales numbers were up 17.1% year-over-year to $4.1B, and logic suggests that the company still has room for further geographic expansion. For some contrast, in the obviously seasonal holiday quarter, same store numbers were $17.1M (up 43% over the prior year's quarter), but in the more representative October quarter, they were $10.7M, a number that was actually 9.3% worse than the prior year. Do with this data what you will, but it suggests that Apple Retail continues to work.
4. Apple Stock Remains Cheap, Getting Cheaper: I have blogged on my 'gold standard' thesis with respect to Apple, so read that post, if interested. The upshot is that there are a small handful of companies that are such bellwethers that their value is almost segment independent. Their only peers are the other bellwethers. Who are the bellwethers? Think: Google, Disney, Nike, Coca Cola, Berkshire Hathaway, Amazon, Southwest Airlines, Procter & Gamble, McDonald’s. Well, after-hours Apple is now trading at 12.6 times trailing twelve-month earnings (per Horace Dediu of Asymco). By contrast, its gold standard peers are trading at 18.54 times trailing earnings, and that’s factoring OUT Amazon’s crazy multiple. Put another way, does anyone think that Apple is even remotely worth only 68 cents on the dollar of its peers? I sure don’t.

Final Notes:

1. Reality Distortion, My Ass: I have stated this previously, but it bears repeating given Apple’s reputation for secrecy and reality distortion. If you want to find out which company is more open about their strategy, tactics and results, all that you have to do is sit in on an Apple earnings call. Then compare it to a Google, Amazon and/or Netflix earnings call. For example, while Google may fancy itself as the more 'open' company, with its investors at least it generally provides 50,000 foot fly-over views of the business (and Amazon and Netflix are even worse). By contrast, Apple gets surgical, breaking out metrics, segments, margins, channels, etc. Where I come from, WYSIWYG is a good thing, especially where my pocket book is concerned.
2. Apple TV is a Nice $400M Hobby: Apple has now sold 4M Apple TV units this year, including 1.3M units in the quarter. That’s up 170% year-over-year, and Tim Cook was candid that Apple doesn’t pursue hobbies where they don’t think there is a 'there' there. Still, nothing in the call suggests that a full-blown TV is on the horizon, and I remain extremely dubious that that’s a business that they should get into, as I have previously written about. 

In closing, I'd like to note that I loved Tim Cook’s comment that, “Our (Apple’s) 'North Star' is to maniacally focus on making the world’s best products, and economy aside, we won’t deviate from that...that’s why we breathe, that’s why we live.”

I don't know about you, but I root for companies that aspire for greatness, as I know how few truly do set such lofty goals.

And as an Apple acolyte and frequent investor in the company, I know this isn't Tim Cook puffery. It is Apple gospel, something Cook put a bow around by noting that the company has seen time and again that when companies opt to belt-tighten vs. innovate in tough economic times, the end-result is that Apple puts more distance between itself and the competition.

When you get down to it, that's the Apple story over the next few quarters. To win convincingly by following their North Star, or succumb to Earth's Gravity, and be like everyone else.

Related Posts:

1. What's Apple Worth? The 'Gold Standard' Thesis
2. Understanding Apple's Q2 Earnings: It’s about Value & Integration, and it’s Global
3. It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Thoughts on Apple’s Q1 Earnings Call
4. Four things I heard at the Apple Q4 Earnings Call (2011) that caught my attention

Nice! Unicorn Labs is Profiled: Building an Award-Winning App Portfolio with Corona

A successful San Francisco-based studio, Unicorn Labs has used Corona SDK to develop a number of popular apps, including an App of the Week winner – Rabbit and Turtle’s Amazing Race.

This impressive app even cracked the Top 10 list for free eBooks, and went on to become one of the top grossing eBooks for iPad in late 2010.

What’s the company’s secret sauce and how has Corona contributed to Unicorn Labs’ success?

Mark Sigal, Chief Product Officer of Unicorn Labs, is a longtime Corona user and shares his thoughts on why Corona is the standout choice for mobile development.

Read the full piece HERE.

Pattern Recognition: Mobile Web v. Mobile Native; TV's Blind Spot; 'Invisible' Designs

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Mobile Web > Mobile Native > Bifurcated Native: In the continuing 'banjo duel' between Mobile Native and Mobile Web, three threads got into my bones. One, is the idea that whereas Apple has the best combined story in terms of providing BOTH a superior mobile web environment and the best mobile native platform, the reality is that their unfair, defensible advantage lies in iOS. Hence, it makes sense that Apple would boot Google from Maps, a native app, but keep them in Search, a mobile web environment, a decision that Danny Sullivan of Search Engine Land called 'Containment' (in lieu of Thermonuclear). After all, Apple is not at war with mobile web, but definitely wants to WIN mobile native. Two is the fact that whereas all of the banter is that HTML5 is the great disrupter to be of all things Native, the hard truth is that those who forget the past are doomed to repeat it. In abandoning their HTML5 gaming ambitions, featured Facebook Platform developer Wooga cited insurmountable challenges with discovery, performance and connectivity. I guess the contender is still a pretender, but then again, I have been waiting since 1994 for Web apps to offer a caveat free application model, as opposed to merely a (quasi) universal one. Finally, the meme of what it means to be mobile NATIVE, has been buzzing in my brain since reading Fred Wilson's excellent post on the topic. I think that I have a thesis around the evolution of native apps. If the first generation of native apps were knocked as being little more than native wrapers on web functionality, and the second gen were mostly parallel to the web, what we are going to increasingly see are what I call 'Bifurcated' Native Apps. These are apps, like Instagram and Path, where the optimal creation, consumption and service-ready environment (e.g., social share + discovery) is within the native app itself, BUT one of the output methods is in a web-friendly format suitable for blogs, tweets, Facebook, G+, LinkedIn pages and the like. In other words Native first, with a 'best-practical' gateway to the web. I can see a great many application scenarios for such apps.
2. TV's Blind Spot: Peter Kakfka of AllThingsD argues that the TV business is vulnerable, but it's not with highly pirated premium shows like 'Game of Thrones,' but rather, cheap to produce, cookie-cutter reality shows. I have two takes on this one. One, "must-see" programming and live sports are the straws that stir the drink, and everything else is bundles and fillers. That's why ESPN drives Disney profits, and HBO cares not one whit that GOT is most pirated. It's the same reason that Bravo, the den of reality programming, has cultivated the hell out of their few franchises, including continuous advertising, which cost serious coin.In other words, cost reduction is not the silver bullet in itself, even if it has real prospects as a low-end disrupter. What will be a silver bullet is when the next wave of web "tv" programmers start creating media units that are native to the web/app medium, and deeply integrated from the first storyboard. Whether that means integrating community into the programming, designing in locality handles, reinvigoration of live to create a new shared experience, game-ification, or something else, that's the bucket, and it's a different animal, in the same way that TV was not simply radio with pictures. So far, what we've seen are loosely-coupled approaches that I view similarly to the dog that walks on its hind legs. Interesting, but nothing that anyone would conclude was designed from the ground up to be that way. As an analog, think of the distinction between our concept of the smart phone pre-iPhone (see Blackberry) and post (see iPhone, iPad and beyond). TV has a long way to go in that regards.
3. Integrated to the Point of Invisibility: One of the books that has deeply influenced my thinking about industry, economy and technology models is the book 'Waves of Power' by David Moschella. In WOP, the author shows how technology evolves in waves, such that in the initial wave, the technology is so new, complex and brittle that the only way to deliver a real solution is to be verticalized. As the technology matures and becomes understood, the trend is towards commoditization. Here, the best model is to be horizontal, so as the leverage the broadest swath of innovation, and to be able to focus on the narrowest slice of differentiation, where your margins will come from. One can see how the mainframe and mini was the first wave of computing, and the PC era was the second wave. What's interesting is that Moschella, who wrote the book way back in 1997, goes on to show how the wave after horizontal is the embedded wave where the technology becomes so pervasive and the best practices are so well-formed that computing becomes both ubiquitous and invisible. Apple's dominance is best understood in this light. In an industry organized around 'speeds and feeds' and loose-coupling, they correctly realized that once everyone understood what technology could do, they would want it to work well. To do so, it would need to be an extension of their aspirations, their vanity and their daily outcomes, not the other way around. I thought about this in comparing my iPad 1 to my new iPad; namely, marveling at the many elements where the 'magic' lies not in some cool new feature, but rather in the tiny bits of integration 'finesse' that turned functionality that I formally noted, 'Wow, I can do that,' to instead, 'Wow, I no longer even think about the steps to doing it.' The source of delight is in the fact that it's simply invisible, an extension to what I am doing in the moment. I thought this an interesting contrast to Microsoft's announcement of Surface earlier in the week (which I like, even though it's vapor at this point), where they were touting the hinges on the kickstand of the device's case as being 'designed to feel and sound like a high end car door.' It's the opposite of designing invisbility, IMHO.

Pattern Recognition: That Was Then; Losing My (Institutional) Religion; Mobile Native

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. That Was Then, This is Now: Reading about Morgan Stanley's role in screwing retail investors in the Facebook IPO, and JP Morgan's hedge fund safely nestled in a too big too fail mega-bank (with an implicit US government guarantee), I am reminded that Wall Street wasn't always an amoral, scumbucket octopus. Back in the mid-70's, New York City was teetering on the edge of bankruptcy. Dark days, to be sure. Then, Walt Wriston, the visionary CEO of Citibank (now Citigroup), stepped in, and quite literally, helped save the city. Talk about a juxtaposition. Today's Citigroup not only had to be rescued by TARP, but its CEO was recently rebuffed by angry investors over his excessive pay package. All of which leads me to conclude that if the circumstances of a major municipality going bust were to repeat itself in America today, couldn't Wall Street be "trusted" to find a way to profit from the bust vs. acting socially responsible? How times have changed.
2. Losing My (Institutional) Religion: A few weeks back, I saw an intuitive, yet troubling, chart on how Americans are losing faith in our greatest instituitions (e.g., Congress, Banks, Schools, the Presidency, the Supreme Court). Then, I read Apple's legal response today to the Department of Justice's E-Book Case. The specific way that Apple frames it (it's worth a read), put a bow around how fucked up so many of our intitutional processes are. This point was lain especially clear in a conversation I had with a friend of mine in the real estate industry. Regardless of whether you consider yourself pro-businesss, anti-business, liberal or conservative, his point was illuminating. He told the story of how everyone in his industry is worried about the capricious way that the government has gone about changing the rules for banks about lending, from reserve requirements to constraints on where they can make loans. His point was less that the government shouldn't be coming up with policies for these things, and more that the government bodies typically step in with broadstroke policies that are completey disconnected from the outcomes they want to encourage or discourage. As a result, we end up with policies that by virtue of their superficiality, just institute random risk, which is obviously not a good thing if you want business investing in growth. To me, this speaks to a false dichotomy that we find ourselves in with respect to the role of government. Today, it feels like a choice between: A) laissez faire policy/enforcement (which led to an SEC completely asleep at the wheel, culminating in the 2008 economic crisis); and B) broadstroke governance, which results in policy that's akin to the "successful" surgery where the patient dies. It's why the health care reform sucked so bad for the very people it was supposed to help most, at a time when they needed it most. The net effect of this false dichotomy is that it only serves to perpetuate the gridlock in Washington. 
3. Go Native (Mobile): It's the nature of technological waves, that the first stage of a new wave always looks derivative of the old wave. But, the new wave doesn't lead to lasting, transformational change until 'native' applications are born that could only exist within the new medium. The silent film gave rise to the talkie, and while it took a while for the new medium took find its footing, our concept of what a motion picture could be was never the same again. The first TV shows were basically redux versions of their radio show parentage, but ultimately the medium became something entirely unique. So, too, the PC and then, the Web, completely transformed what came before it. Now, we are sitting at the precipice of 1 billion post-pc devices, on our way to 10 billion devices globally. Respected VC and Blogger Fred Wilson suggests that this confluence is due to give rise to legions of Mobile Native Services. In other words, apps and services that are not simply 'children of the Web,' but rather, new DNA entirely, powered my untethered mobility, GPS-locative attributes, perpetual connectivity, unparalleled scale, social fabrics, big data graphs and application platforms that are part hardware, software, service and tool. Metaphorically speaking, we are at the moment in the 1950's when everyone thought that TV was simply 'radio with pictures.' But very soon, that will change, and what rises on the other side is destined to be the Golden Age.

 

Three simple reasons that the Office for iPad rumors are probably true

The Daily is reporting that Microsoft is putting the finishing touches on an iPad version of its eponymous Office Suite.

Meanwhile, Microsoft has countered with a non-denial denial by saying that the outed images are a fake, but tellingly, not denying that such an app suite is in the works.

All of this begs the more basic question of whether such a rumor makes sense given what we know about Microsoft.

To me, the answer is an an obvious and emphatic yes. There are three reasons:

1. Why do you rob banks? Because that's where the money is: There are now 55M iPads out in the wild, and that number could easily be double by the end of the year. Microsoft isn't stupid. At this point, they make more money from Office than they do from Windows, and iPad is the single largest relevant platform play remaining for Office to tackle. Meanwhile, Apple's not shown the hunger or aptitude to upgrade their productivity products on either the Desktop or iOS, leaving Microsoft a golden opportunity if they can credibly execute. And to be clear, Office is a domain where Microsoft still can execute, and notably, one where they are comfortably cross-platform in terms of their operational DNA. 
2. The enemy of my enemy, is my friend: It's no secret that Microsoft and Apple share a mutual disdain for Google, and equally so, the two companies have a history of amicable reciprocity, while still competing in the wild. Remember, Microsoft's validation of Apple's 'relevance' by continuing to make Office for the Mac helped save Apple back in 1997 (in tandem with a much-needed cash infusion of $150M). In recent times, the companies jointly acquired Nortel patent portfolio last year, ostensibly to attack Google.
3. Office is Microsoft's most durable platform: Beyond dollars and cents, there is common sense, and the common sense is this. Microsoft's dominance with its Windows platform is slowly, but surely, sunsetting as the PC gets relegated to just another device in the Post-PC era. However, looking forward, the greatest and most defensible leverage point that Microsoft has going for it is 'The Document' -- Word Docs, PowerPoint presentations, Excel Spreadsheets. There are billions, and billions and billions of them. And tellingly, there STILL is no single app that has obviated the goodness of Office. If you are Microsoft, getting the next generation of users trained on Office apps, and providing them useful ways to leverage, reuse, extend and distribute these same documents is the best way for Microsoft to get locked into the future. 

Netting it Out: The first question that any user asks when contemplating a move to another word processor, spreadsheet or presentation app is this, "Will it work with my existing Office docs?"

That's the 'defensibility of the document' that Microsoft has to protect, and should look to extend as a core part of their platform play moving forward (e.g., let me create Web and Mobile services using Office as a front-end environment).

Looked at this way, delivering Office for the iPad is a no-brainer.

Related:

1. Microsoft, Metro and the Next Wave in Computing (4 thoughts on Windows 8)
2. You say you want a revolution? It's called Post-PC computing (O'Reilly Radar)
3. Comparing Microsoft to the Collapse of Communism

"You Will" (and I Did)

In 1993, AT&T ran an ad campaign called "You Will" (see below) whose purpose was to provide consumers a clear visual sense of how in the not too distant future, communications, entertainment and commerce would be transformed.

A typical ad asked the viewer, "Have you ever watched the movie you wanted to, the minute you wanted to..or tucked your baby in from a phone both?"

The Tagline - "You Will. And The Company That'll Bring It To You: AT&T"

Well, for the most part AT&T wasn't destined to be 'the company that'll bring it to you,' but the 'hit rate' of the predictions was pretty darn good, inasmuch as they predate the emergence of the web and mobile broadband.

I thought about these ads a bunch this week while having daily video calls with my wife and kids -- while my wife was driving the kids home from school, and despite being away from them out of the country.

Me on my iPhone 4, with only Wifi and Skype, and my wife on her iPhone using Verizon 3G. And for the most part, it worked like a charm.

It is in such moments that the inevitability of such technologies, and the magic of their actual realization, turns cynicism into pixie dust.

 

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

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)