The Network Garden - Mark Sigal's Blog

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

Pattern Recognition: Google growth drivers; BigCo Innovation; Atwitter about Twitter

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. Why can't big companies innovate? Ryan McCarthy at Reuters looks at the woes of Nokia, Yahoo and others, and theorizes why big companies can't seem to build new products and services that create new revenue growth. I have blogged on this topic in the past HERE, and would add that one key variable for big companies is that they are aligned in silo'd business units, whereas most game-changing innovations come from holistically, deeply integrated approaches. In fact, if you look at the past 30 years of innovation, you see products that BEGAN life as one concerted effort, but over time were broken into piece part efforts, overseen by different teams in different divisions. Hence, the effort becomes more about coordination and avoidance of internal co-option than break the bank re-think. As to R&D, the seminal truth there is that specifically because most research efforts are unencumbered by the forced disciple of shipping and monetizing, you end up with lots of "concept cars" and no Mustangs. Case in point, look at Microsoft's myriad of 'test the water' endeavors with tablet and phone prototypes, and contrast that with Apple's approach that it 'doesn't exist until it ships.' Both companies are exercising lots of research, and building lots of prototypes in the effort, but only one has a binary, all-or-none measurable. Is it any surprise that only one of those companies generates a material portion of its revenues from products that didn't exist 3 years prior?
2. Three takeaways from Google's earnings: Robert Hof of Forbes live-blogged Google's earnings call this week, and captured the following focal points for assessing Google. One, Google has serious religion about becoming an integrated advertising machine. By that, they want to connnect the dots between ad types (e.g., branding campaigns vs. direct response) and target environments (e.g., desktop vs. mobile). Part of this is that the desktop is relatively weak, with shrinking CPCs and less effective ad units, whereas mobile CPCs are like 1999 in terms of search. Two is that the company is making a push to improve the quality of ads served, noting  72 quality improvements in ads this quarter, including, better geographical targeting, better phrase matching, etc. Finally, the comapny is focused on chasing the enterprise, seeing it as a future growth engine. Underlying many of these efforts is Google’s new Knowledge Graph, which has 500 million things, people, and places, including 3.5 billion facts about them, which is consistent with making Google contextually aware of what you are looking for, and serving it up before you've even completed the thought. While none of these things make you jump up and say, "YES," they are the right types of problems for the company to be focusing on, especially given how dominant they are in the PC universe, and how rich mobile is becoming. 
3. What Twitter could have been: In lamenting Twitter's de-evolution from its tremendous promise as a real-time cloud API company to instead, being a tightly managed proprietary service (something I wrote about HERE), Dalton Caldwell grabbed the lectern, and proposed morphing his App.net service into a fee-based competitor to the Twitter APIs. This prompted noted VC Fred Wilson, an early Twitter backer, to write a piece defending free/ad-support models like Twitter. Of course, Caldwell promptly rebutted. As my experience is that very few in the tech business understand just how hard it is to execute a platform strategy, especially one that developers can build a business around, this is one thread worth wrapping your head around. 

Pattern Recognition: Caught Red-Handed; Re-thinking the 'I' in IT; Twitter-nomics

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. Caught Red-Handed in the LIBOR Cookie Jar: If you wonder why Americans are losing faith in their institutions, look no further than our Banking System, where Matt Taibbi of Rolling Stone has done exceptional reporting on the systematic manipulation by Big Banks of LIBOR, the London Interbank Offered Rate. If you are not familiar with LIBOR, it is 'only' one of the most common metrics that lenders use to set lending, credit card and bond rates for consumers, businesses and municipalities. In other words, the fact that major banks could manipulate the rate to grab additional profits, speaks to the endemic corruption across the banking industry. In this particular case, several of the major banks (Barclays, GE Capital and Royal Bank of Scotland are the known names so far) were caught red-handed in bid rigging scandals constructed to skim billions of dollars from the already thinning coffers of cities and small towns across America. This particular industry, whereby the banks help municipalities by issuing municipal bonds on their behalf, is a $3.7 trillion dollar market. If you read HERE, HERE and HERE, you get a sense of the persistent, ubiquitous nature of this type of thievery, where good old-fashioned graft expedites the process. If anything, the challenge for folks like Taibbi is to reduce the mind-numbing numbers and complexities of the transactions themselves into memetic pictures, graphs and narrative that forevermore changes public sentiment about 'too big to fail.' Or, as Stalin once said, "The death of one man is a tragedy; the death of millions is a statistic." Money shot from the Taibbi piece: "You find yourself thinking, America's biggest banks ripped off the entire country...every day, for over a decade!"
2. Does IT Still Matter? Ashlee Vance writes in today's Businessweek, 'It Took Less than Ten Years for IT Not to Matter.' In the article, he essentially argues that most companies have no business trying to tackle IT in-house and that they should rent such services, which generally speaking, translates to "trust the cloud."  Talk about confusing attributes with outcomes. As I wrote for GigaOM in a recent analysis of the travails of 'bricks and mortar' retailers (' Retail needs a reboot to survive'), businesses need to differentiate, which fundamentally is about integration. Sure enough, the most successful companies on the planet hugely use IT to differentiate. Thus, if there is any moral of the story from enterprise struggles with IT over the past decade, it's that too few of them had a clear, reasoned understanding of: A) The role that technology could play in their business; B) The cultural barriers to overcome; and C) The specific outcomes needing to be realized to make it worth the effort. Netting it out, a big part of the problem is that the 'I' in IT stands for information, when it needs to stand for integrated, coupled with the fact that most companies tend to be silo'd into business units, which is the antithesis of integration, something that I wrote about in 'DIS-Integrated Systems: A Parable.'
3. Twittter-nomics: Twitter continues its path to maturity. On the positive side, they are building serious conviction about delivering a great and consistent user experience via Twitter Cards, a structured tweet model that I suggested should their path to monetization way back in 2008 (see 'Twitter-nomics: Envisioning Structured Tweets.'). One the other hand, under the double-speak of delivering a consistent user experience, they are starting to clamp down on third-party clients. You know, the same third-party clients that made the Twitter experience so great before Twitter decided to co-opt them. It sucks, but then again, it amazes me how few grok that APIs (and platforms in general) are like toll bridges. They can lift up and disappear, or change their fare structure at any time. Forewarned is forearmed, and free is often too high of a price to pay. 

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: Passbook is Apple's eWallet; Fragility; TV Business Collapse

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. Passbook is Apple's eWallet: In my analysis of Apple's forthcoming iOS 6 (part of my WWDC Keynote article), I saved my biggest WOW! for Passbook, noting that while Apple presented it as a consolidated place to organize things like gift cards, flight itineraries, movie tickets and the like, I believe that it's the true beginning of Apple’s foray into being the defacto eWallet. Happily, I stumbled upon this exceptional Quora thread about Passbook. Definitely worth a read, as I believe Passbook is a game changer. Excerpt: "Apple has entered into the mobile wallet marketplace by sticking just a toe in the ocean of mobile payments. In the process, Apple will change just about all aspects of discounts, ticketing and payments."
2. Fragility - How to Detect Who Will Go Bust: Nassim Nicholas Taleb is unquestionably one of my favorite writers/thinkers. Fooled by Randomness provided intellectual framing for comprehending how biases cloud our judgement, and how we frequently misfactor the role of chance. It also introduced the concept of Black Swan events into our lexicon (although Fooled by Randomness is a better read than Black Swan). His newest book is called Antifragile, and in it he espouses a methodology for figuring out if our miscalculations or misforecasts are more harmful one way or the other (than they are beneficial), and how accelerating the damage is. This article provides a nice overview. Anything pertaining to risk mitigation is a worthy ounce of prevention in these turbulent times.
3. Is the TV Business Starting to Collapse? I've read many arguments that TV programming is destined to go ala carte and unbundled, breaking the stranglehold that the cable, satellite and broadcast providers hold on consumers. This piece by Henry Blodget does an excellent job of detailing the many reasons this could happen, but I just don't see it happening any time SOON. Someday, sure, but not in the next 5-10 years, I believe. Why do I say this? One, is that the affilate fees that the cable companies pay to the content providers (e.g., ESPN, Bravo, TNT) are the consummate golden handcuffs. The day that ESPN wants to go ala carte is the day that Comcast can stop paying ESPN $4.69 per household per month. Plus, there is the factor of the selfish gene at work; namely, even if the content creators and network operators saw the wisdom of embracing new models, the individuals in power seats have a vested interest in protecting their fiefdoms, something that I blogged about HERE. "Not on my watch," is the unspoken operating logic here. How about Apple? Won't their rumored TV disrupt the business? First off, I believe that they are a more likely set-top box play than a TV maker, but more to the point, when Apple built the iPod, they worked through the record labels, didn't replace them. When they launched iPhone, they worked through the carriers, didn't replace them. I think the same equation will play here. Two related takes on this story. One is that our thirst for live sports (and perhaps, live content in general) is insatiable. It's why ESPN is ESPN, and why ESPN is the true profit center for Disney. Two is that original programming becomes the differentiator for long-term success. It's the reason that HBO can command the fees it does, and maintain high subscriber retention. It's why people care about AMC (Mad Men, Breaking Bad), and it's why TBS/TNT is no longer the place that syndicated shows go to die (although they do plenty of that, too).One other moral of the story is that creating this TV programming that viewers are loyal to is A LOT harder to produce, distribute and market than news content, which is why blogs could kills newspapers, but YouTube hasn't killed the networks. When someone figures out a different format or production methodology that changes the equation, look out.

Apple WWDC Keynote: On Capitulations, Steak, Sizzle and WOW!

 

“A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” – Wayne Gretzky

Here’s hoping that after today's WWDC Keynote, the Google troika of Page, Brin and Schmidt have finally capitulated (at least internally) AWAY from their 'loosely-coupled' mantra and TOWARDS the more craftsman-like goodness of Apple-style integration.

After all, while Android is absolutely ‘killing it’ in terms of 900K daily activations, at what point can we acknowledge that this is a pyrrhic victory, and that Android is a paper tiger?

I mean, who exactly is winning? Consumers? Uh, actually Android consumers tend to utilize the mobile web less than iOS users, and swear that they don’t need apps, which might have something to do with the fact that most Android devices are running the Windows 3.1 equivalent of Android.

Are developers winning? Hardly (see recent Flurry report). They have to support dozens of form-factors, not to mention, a wavy-gravy medley of Android OS variants, and all this for the prize of making less money on Android than on iOS. Is it any wonder that none of us can name a single game-changing app that originated on Android that wasn't specifically built by Google?

But surely, the hardware OEMs are loving it, cuz…Uh, the vibrant ecosystem where a thousand flowers bloom actually killed Motorola, then HTC, and left only Apple-impersonator, Samsung, standing. How is that a win?

Even for Google, I don’t believe that they still see this so blithely as a redux of Windows vs. Mac in terms of monetization, mindshare or momentum. Increasingly, they just look defensive, reactive...and conflicted.

Google, you are better than this. You are! And don’t start pulling out more empty numbers about Google Plus. No one cares. Aggregated is not integrated. Fragmented, me-too, and bolted together is not innovating. It just isn’t.

Okay, that point made, let me tell you why I believe that Apple’s WWDC Keynote today was stunning in its effectiveness, substance, shock and awe. 

The “We bring good things to life” Company

When I was a kid, GE built an enviable brand position around the core message that GE brings good things to life.

Well, is there any question that Apple is the post pc era torch-bearer of bringing good things to life?

I mean these guys have reinvented music, freed the mobile phone from the hegemony of carriers, brought innovation back to the PC, increasingly freed us from the PC, made design matter again, re-thought software, marketplaces and the cloud, embraced accessibility for the handicapped, brought an ethos to building products at scale in an environmental-friendly fashion, and shown a willingness to boldly lead in segment after segment.

A bit off topic, but isn’t the problem in America right now (and much of the world, for that matter) a lack of bold willingness, a lack of vision, an intellectual dishonesty about taking shortcuts and a tolerance for poor execution?

Ya know, we could do worse than emulating Apple.

Keynote Highlights: Steak, Sizzle and WOW!

Let’s get the Steak out of the way, as it provides context for the Sizzle and the WOW.

By steak, I mean those items that show that Apple knows what they are building, who their customer is and what their business is. Specifically:

• iOS Ecosystem: There are now 400M accounts in the app store (365M of which are iOS devices), all backed by credit cards, and a one-touch workflow for buying, installing and enjoying. No less, the model has proven to work grandly across both media (songs, movies, tv shows, books) and apps (30 billion downloads). Further, the platform has yielded 650K apps (225K for iPad), several of which are considered standard-bearers for the power of post-pc, in the process generating over $5B for developers. Oh, and it’s a global success, operating in 120 countries, with 32 more on the way.
• The Un-Fragmented Platform: iOS vs. Android is a study in wince-inducing contrasts. Consider this excerpt from the keynote: "Almost all of our users are running iOS 5. Now if you compare that to the competition, they released a dairy product, 4.0, about the same time as we released iOS 5. Yet, only about 7% of their users are running it." 
• The Integrated Platform: iCloud is currently on 125M devices, and with iCloud integration deeply within Macs when Mountain Lion ships next month that means a unified + synchronized flow across Macs, iPads, iPhones and iPod touches in the following services (to name a few): Mail, Browsing, Note Taking, Messages, Reminders, Notifications and even Documents. In restaurant terms, this is the distinction between delivering ingredients, and crafting recipes that are fully conceived with a tightly orchestrated ‘dining’ experience in mind. Even sharing has been thought through across both Macs and iOS devices, so you can take advantage of multiple services, including Twitter and Facebook, without having to jump between apps or through hoops to make these workflows happen.
• Cross-Pollination: To Apple’s credit, they have continually shown a willingness to leverage best practices from Macs and feed them into iOS devices, and more commonly, feed iOS innovations back into the Mac. Case in point, Tabs in Mobile Safari has fed a new Tabview in Safari for Mac. AirPlay Mirroring from iOS is now part of OSX, and Game Center  (used by over 130M users) is now part of OSX, opening up cool scenarios like Mac vs. iPad gameplay. Cross-pollination is something that I have blogged about extensively (See Holy Sh-t! Apple's Halo Effect: HERE).
• New MacBooks: The main takeaways here are that Apple pushed down the cost of MacBook Air about $100, and introduced a new MacBook Pro that brings their vaunted Retina display to notebook computers. Hence, unless you are specifically a Windows devotee; or have a business or application-specific reason for not going with a Mac, just know that you are sacrificing R&D, integration with your mobile/tablet devices and of course, well-trained human support for when questions pop up Apple has retail, after all). 

Netting it out: the above simply underscores the deft skill by which Apple navigates the PC legacy market (Mac sales will do even better now that they better fit under the iOS Halo), tightens its domination of post PC, and bottom line, delights customers (over 75% of iOS users called themselves very satisfied vs. <50% for Android).

Heck, they even added Chinese specific features in recognition of China's position as the largest ‘green field’ market opportunity on the planet, one where they are, unsurprisingly, already incredibly well-positioned.

Put another way, if I am an Apple shareholder, I am very bullish that the company has kept its eye not only on the ball, but the whole field of play.

So Hot, It Sizzles

Put me in the camp of those who have looked at Siri, Apple’s voice-activated assistant, as a great foundation that is still more gimmicky than game-changer.

Putting aside the fact that Siri is hard to demo in noisy Apple stores, the larger truth is that the system is imprecise; a solution to a problem that may or may not exist.

Recognizing this, Apple focused in iOS 6 on giving Siri more contextually specific tasks that generate richer outcomes for users.

The demo showcased things like Sports related questions, yielding baseball card style media units to questions like, “What was the score of the last Giants game?” Or, “What is Buster Posey's batting average?”

There were similar examples of movie reviews, restaurant recommendations and dinner reservations vis-à-vis partner integrations with Yelp, OpenTable and Rotten Tomatoes (you can ask about directors and their movies, for example).

Further, Apple is working with auto manufacturers to integrate Siri into new cars and trucks via a service they call Eyes Free. Inasmuch as Apple has already built a wedge into such vehicles with the music and phone side of iPhone, the efficacy of burrowing deeper into automobiles via Siri makes a lot of sense.

In fact, seeing how Apple is cultivating Siri, it is not too far of a leap to imagine them creating a paid search product where questions and answers are bid up by vendors that want to be part of the Siri directory.

In this regard, Siri just **feels** like a domain destined to make Google less relevant in the mobile universe. A sidebar is that such a bid placement model would be a retro return to the old model that dominated during the age of the portals and AOL. 

Mind you, this is in addition to Siri’s growing support for international languages, including Chinese, integration with Facebook, Twitter, voice-based launching of apps, notifications, and its new Map service (see below).

Speaking of Facebook, while some might see this as more steak than sizzle, I can tell you how wonderful having twitter integrated at the system level is in turning inspiration into tweets.

With Facebook, it has the potential to go deeper since this is really where my true social relationships live. Ironically, this linkage to may photos, music, apps, maps and notifications is the exact opposite of the walled garden experience that Apple naysayers wrongly ding the company for. Plus, all of this is baked into the Mac as well.

Two other iOS feature adds that stood out for me are:

1. Smart app banners, a feature in Mobile Safari that makes it easy for Safari users to jump into an app (or download it) directly from the mobile web, further blurring the line between mobile web and mobile native.
2. Shared Photo Streams:  This is a feature that evolves the current “one silo” approach with Photo Streams into multiple shareable Photo Streams, where a user can choose the photos they want to share and the friends they want to share it with. 

WOW! A Map and a Passbook

It was the worst kept secret that Apple was going to abandon Google Maps in lieu of a solution that they could fully control, but WOW, Apple’s forthcoming Maps look terrific.

It works with Siri, it features turn-by-turn navigation, incorporates over 100M business listings (via Yelp integration) and has a nice “info card” style listing interface.

Moreover, the system supports anonymous real-time incident reports, just-in-time re-routing options and even a flyover feature that is derived from rich 3D models of the major cities around the world. 

Now, I LOVE Google Maps so while this is a definite WOW, in truth, Maps is all about utility so the real story on this one won’t be clear until we see what we’ve lost for all of these bells and whistles.

In closing, I save my biggest WOW for a new feature that Apple presented called Passbook.

While Apple presented it as a consolidated place to organize things like gift cards, flight itineraries, movie tickets and the like, I believe that Passbook is the true beginning of Apple’s foray into being the defacto eWallet.

Think of it this way, Passbook will materialize just in time for the holiday season, a time when loads of (historically) boring gift cards are handed out.

Via Passbook, these cards and tickets become something cool, dynamic and even geo aware (Starbucks is nearby, you have $18.25 on your eCard).

Plus, these cards are alive, so if your gate changes at the airport, your boarding pass will be updated and you will be notified.

Given that type of service-aware handle, how far of a leap is it for vendors to be able to present cardholders a flash sale or other special offer based on time of day or locality?

My point is that Apple can segment their approach here to be to be anything from the organizer (think: iBooks, Newstand) to the facilitator (i.e., the platform building blocks) to the curator to the market maker.

And that’s the point, as Tim Cook flagged is closing his keynote.

"Only Apple could make such amazing hardware, software, and services…They are perfect examples of what Apple does best. Ultimately, it's why people come to work at Apple, and with Apple. To create products that empower people. To make a difference. The products we make, combined with the apps that you create, can fundamentally change the world."

Not only does Apple have the skill and the footing, but equally, they have the will; and that leaves them incredibly well positioned.

Related Posts:

1. Understanding Apple's Earnings: It’s about Value & Integration, and it’s Global
2. DIS-Integrated Systems: A Parable
3. It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Apple’s Q1 Earnings Call
4. Five reasons iPhone vs Android isn't Mac vs Windows

Pattern Recognition: The JCP Story; App-Enabled Hardware; Thesis-Driven Investing

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. To make sense of J.C. Penney, look to Apple: What's the moral of the story at JCP, where same store sales are down 18.9%, the stock is off 26.5% year-to-date, and CEO Ron Johnson, who built Apple's massively successful retail stores, is suddenly no longer looking like a savior? I think that the moral is less mysterious than it may seem. It's that change is hard, mega-transformations take time and only those with the intestinal fortitude (and board support) to focus and see it through to the end, succeed. After all, JCP is trying to fix a broken brand that's been poorly packaged in a tired segment where a shocking 99.8% of all sales occur at below regular price. Moving to "Fair and Square" pricing may be the right approach, and it's certainly sensible enough to succeed (think: "Low Prices Everyday"), but success won't happen overnight. After all, it took Apple six years to reach the tipping point from which they'd never look back. Macs were dead. Apple's brand was tarnished. The iPod was hardly an overnight success and Apple stores to a while to find their footing. In fact, few remember that while Apple was a ~$5.50 stock when Steve Jobs became interim CEO in September, 1997, it nonetheless hit $6.56 in April, 2003. Now, don't get me wrong. I am not saying that Ron Johnson is Steve Jobs. Just that he's no shlub that has no idea what he's gotten himself into, nor a simpleton who doesn't understand the requisite details needed to come together for his company to succeed. Know this, though. Mega transformations take time, and he'll need it to reinvent JCP. I thought about this reading Herb Greenberg's quasi-defensive position on twitter. Two related takes: HERE and HERE.
2. iOS Inside - App-Enabled Hardware Accessories: As a long time network hardware guy (I've built it, sold it, and created platforms to extend it), and one of the earliest 'bandwagon jumpers' on iOS as a platform play, I have been more than a little disappointed in the lack of hardware accessory businesses to grow out of the enormous success of iOS. After all, from 1994 to the crash of the dotcom bubble, there was a tremendous amount of network device innovation, the so-called Internet of things. Money flowed in, and cool products came out. But as the past 30 years teaches us, the marriage of software and hardware is a coupling that is incredibly hard to pull off. Software guys hate hardware guys, and vice-versa, and that's when they even talk the same language. That's one fundamental reason that there's Apple, and everyone else. Making software, simple web services and apps is a whole lot easier, and takes a lot less capital, so that's where the dollars and decisions flow. But, the ability to create entirely new categories of devices that are "app aware" and can take advantage of an iPhone or iPad as a proxy is a BIG idea - think watches, scales, fitness devices, home monitoring systems, thermostats, etc. That's why I was particularly excited to see Incident's gTar, a new fangled electric guitar that uses an iPhone as its brain, get honorable mention at the latest TechCrunch Disrupt. Subsequent to this, I was thrilled to see that Apple has created a category in their online store for such devices called App-Enabled Accessories. Between this, Apple's decision to resell the Nest Learning Thermostat, and the tremendous story of the Pebble smart watch project at Kickstarter, which raised over $10M and generated tens of thousands of orders, I am optimistic that a boom in hardware accessories that are "native to the post-pc era" are just around the corner.
3. Thesis-Driven Investing ("Large Networks of engaged users.."): I will never forget the conversation that I had with a VC a few years back. In response to my assertions about the value of thesis-driven investing, the VC retorted, "Well, we pride ourselves in NOT being thesis-driven." That the fund is defunct, and the particular VC was never heard from again, is unsurprising, something that I thought about in reading Union Square Ventures' investment thesis in a post this week. USV is the fund led by Fred Wilson, who in addition to being in most of the smartest deals, is transparent about his approach (via his blog), engages his faithful community (myself included) in a conversation on same, and has enough battle scars from the dot-com bust to not take himself too seriously. No hubris here. Hence, I was more than a little piqued to read and digest their investment thesis, which is focused on: "Large networks of engaged users, differentiated through user experience, and defensible through network effects." Read the whole piece, as it's well articulated, but even better, think about codifying your own thesis. 

 

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.

 

Pattern Recognition: The Integrator's Dilemma; iTV Disconnects; Buy a House

I read a ton, and while much of what I read captivates me in the moment, very little gets under my skin, and into my bone's by week's end. These three narratives are the ones that kept percolating to the top:

1. The Integrator's Dilemma: There was an interesting article written by Horace Dediu on the topic of 'What retail is hired to do: Apple vs. IKEA.' It basically looks at IKEA's global success, its dearth of competitors, durability, and relativity to the Apple Store model. As a devotee of Strategyn's 'Jobs, Outcomes and Constraints' model, which is one of the primary inspirations for Clayton Christensen's excellent book, 'The Innovator's Solution,' I am a firm believer in the precept of hiring products and services for specific jobs. In parallel, I have have been ruminating alot on how the Internet is changing the job that retail can viably perform from an economic perspective (see 'Retail Needs a Reboot to Survive' at GigaOM), so the topic is near and dear to me. When I net it all out, I am left with a narrative that goes like this. Once upon a time, the premise was that businesses should be horizontal and focused on solving just one piece of the product or service equation, and outsource the rest. The rise of the PC and the growth of Big Box category killers (Comp USA, Best Buy, Barnes and Noble) all seemed to affirm this approach. As the Internet took hold, the idea that this model was universal became conventional wisdom, as Google was all about being open and loosely coupled; and Amazon become the biggest online retailer by (seemingly) building very little, but selling everything. But now, this wisdom is getting turned on its head, as undifferentiated retail is dying, commodity PC makers are dying, commodity mobile and tablet device makers are dying, and the winners are folks like Apple and Amazon and Nike that are the antithesis of loosely coupled. In other words, conventional wisdom is dead. Not only are these companies integrated across their value chains, but they have built into their DNA truly differentiated positions. To me, this is The Integrator's Dilemma. It's not enough to assemble a bag of components. You have to do it in a way that is truly differentiated, which often means, a hybrid of hardware, software and service, which is hard to execute. In retail, I look at someone like Gap as an example of a company that confused brand and hit-making with clear vision, agility and differentiation, and once they stumbled, they never came back. The irony here is that most individuals would get fired for not taking a holistic (integrated) approach to getting their jobs done, yet paradoxically, few companies embrace this ethos, preferring the path of comfort, entropy and obsolescence to the path of discomfort and reinvention. And we wonder why there are so few catalysts for job creation in our economy.
2. iTV Disconnects: Ever since Apple analyst Gene Munster starting asserting that Apple was going to build a full-fledged TV set, I have struggled to get my head around the concept (see my analysis HERE). TVs, after all, are low margin, bulky to deal with from an inventory perspective, and infrequent buys. Plus, the actual TV viewing experience is essentially "good enough." By contrast, Apple's last three game changing devices -- iPod, iPhone and iPad -- are the kind of devices that several members of the family might buy, and those same members would likely replace and upgrade every 2-3 years. Moreover, those devices created entirely new experiences to fix fundamentally broken models or to define new ones. In the big picture, the TV set is closest to, but doesn't even look as good as, the Mac model, where you buy 1-2 Macs for the household every 4-5 years. It just doesn't fit that Apple would build a device that looks more like the relatively low unit Mac model when their universe is all about high unit sales and high device refresh frequency. And the only scenario where content is a compelling, high margin business for them as rationale for such a device, is where Apple is partnering with the cable and satellite providers for a slice of the monthly subscribers' bill. But, that's a set-top box play, more so than a TV play, in my opinion. The only other scenario I can theoretically see is where the so-called iTV is really an iWall; a widget device that is flat like an iPad, but made to perform the task of the smartest, most interactive wall frame ever. Yet, the rumors persist. (See also: 'Your iPad Could be Your TV' in MIT Technology Review.) 
3. Let's Go Buy a House: Felix Salmon did some interesting analysis looking at the correlation between rental rates and mortgages in America, on the premise that when you can get a mortgage (if you can qualify) for equal or less to what it would cost you to rent in the same market, housing values are, or should be, compelling. This truth is even more so when you weigh the fact that the historical market data shows that rents go up pretty predictability over time. In other words, the value of your house today, if nothing changes, should only get relatively less expensive than renting over time. You can even rent it out. So, let's go buy a house! 

 

 

Understanding Apple's Earnings: It’s about Value & Integration, and it’s Global

We live in a world of extreme noise. So many stories, and so many competing narratives vie for our attention that what rises above the noise is perhaps the closest proxy to actual truth.

With that backdrop, and without restating ad nauseam the numbers behind another blowout Apple quarter, let me state the truth about Apple’s March Quarter Earnings as I see it:

1. It’s About Value: Every quarter, the prognosticators wait for the mythical other shoe to drop, be it the ‘inevitable,’ ‘unstoppable’ onslaught of Android, the depletion of fanbois, the resolve of carriers or the exhaustion of those who’ve yet to purchase an iPhone or iPad. But, on this topic, I would turn to the one quote that has swirled in my head continuously since I first heard it, and it’s from Ron Johnson, JC Penney’s new CEO, and Apple’s former head of Apple Retail, who says quite cogently that, “Customers will not pay literally a penny more than the true value of the product.” You can parse this any number of ways, but what it means to me is that when a consumer looks at an iPhone vs. an Android Phone, they see something real, that is supported, that is readily understandable and for which their investment will be rewarded. By contrast, with Android increasingly they grok that they are buying ‘Not Exactly.’ The efficacy of this truth is never more evident in the Tablet segment where, despite Android’s success in smartphones, and in spite of Apple’s clear proof that there is indeed a massive tablet market, Android Tablets are utterly stillborn. It’s about value, which simply can’t be smoke-screened. This truth is especially clear in the case of Carriers, who would no doubt love to reduce subsidies on iPhones (and other smartphones for that matter). But as Apple CEO Tim Cook sagely noted: A) The Subsidy is 'not that large' relative to the 24 months of revenue that the carrier is securing via subsidy; B) The Delta of the iPhone subsidy relative to other smartphones’ subsidy is not material; C) The Churn of iPhone buyers to other carriers is the lowest of any phone that the carriers sell; D) iPhone is the number one trigger for carriers upselling feature phone customers into smartphones – i.e., their largest untapped market; and E) Carriers want to sell what customers want to buy, and that’s iPhone. In other words for all of the puffery and noise about competition, commoditization, pricing pressure, etc., it’s fairly simple. Apple wins because its value is tangibly real, and for no other reason.
2. It’s About Integration: I blogged on this point yesterday, so read that post, but suffice it to say Apple’s success is best understood by looking at how an iPhone or iPad integrates beautifully designed hardware with iOS, iTunes, App Store, iCloud, Apple Retail and App Developers into one unified set of outcomes and experiences. Then, contrast that with how Android doesn’t (or even the sluggish rate of innovation on the slightly more integrated Amazon Kindle Fire). Integration vs. DIS-Integration. It’s the distinction between the restaurant where the food, service and dining experience is orchestrated into a synchronous whole vs. the Mongolian barbecue, where the whole never quite adds up to the sum of the individual parts. I'll leave the digestive visuals to you.
3. It’s Global: I think that the most YOWZA takeaway from the call was when Tim Cook talked about how Greater China has grown 3X year-over-year to $7.9 Billion on the most recent quarter (i.e., 20% of Apple’s total sales). Here Cook noted that there’s a massive, emerging middle class in China that (un) surprisingly aspires to the same products and experiences that consumers do in the US. For all of the easy quips about China being the land of knockoff imitation products, they want the same real products, and are willing to pay the real value for it. Apple has only brushed the tiny surface of this market, not just in China, and not just across the globe, but across industry segments (enterprise, education) and product categories as well (i.e., iOS is a scale-able platform for other types of devices, accessories and price points). In other words, the Apple 'halo' is global, and just getting started.

Mind you, that for all of the Apple accolades, the same company that grew earnings by 94%, that generated 77% of its revenue from iOS devices, which generated gross margins of 47.1% and which dropped another $14 billion into its coffers still trades at a mighty 20% discount to its gold-standard peers. Govern yourself accordingly.

Related Posts:

1. DIS-Integrated Systems: A parable for acolytes of Apple, Google and Amazon
2. It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Apple’s Q1 Earnings Call
3. What is Apple Worth? The Gold Standard Thesis
4. Is Google doubling-down on a losing hand with Android in Tablets?

 

Dis-Integrated Systems: A Parable

Once upon a time, there was a market segment called Embedded Systems, which was all about creating real-time operating systems for the 'headless,' often invisible, computers resident in networking equipment, industrial controls, set-top boxes, printers, automobiles, rocket ships and medical devices.

It was a fiercely competitive market with two aspiring market leaders, Integrated Systems (ISI), and Wind River (now part of Intel). 

For a time, ISI was the market leader, until Wind River started touting their more deeply integrated, solutions-oriented approach -- relative to ISI.

So focused was Wind River's positioning and messaging, that Wind River employees would pointedly and repeatedly call their competition ‘DIS-Integrated Systems,’ any time ISI's name came up in customer meetings, media events, analyst calls and industry tradeshows. Wind River even created 'DIS-Integrated Systems' t-shirts to belittle their competitor.

Long story, short, the message stuck, and from this point forward, Wind River began to whip ISI in the market.

Just a few years later, it was game-over for ISI when they were swallowed up by...wait for it...Wind River!

The moral of the story is that customers don't want to buy a bag of components (if they know better). They want real, integrated solutions where the piece parts work together in a mostly caveat free fashion.

Next time you wonder why Apple is winning, and why Google's Android, despire impressive unit counts, feels wobbly (platform fragmentation, no success in tablets, no real economic model, few developer success stories, Android OEM financial struggles), think about the story of DIS-Integrated Systems.

Related Posts:

1. Apple vs. Google: Lessons from Bill Gates' Playbook
2. Holy Shit! Apple's Halo Effect
3. Google Android: Inevitability, the Rise of Mobile, and the Missing Leg

 

Apple vs. Google: Lessons from Bill Gates’ playbook (GigaOM)

“There are three sides to every story: Your side, my side, and the truth.” —Robert Evans, 'The Kid Stays in the Picture'

I’ve been ruminating on how Apple and Google could have come up with such divergent takeaways from studying the incredible, terrifyingly dominant run of Microsoft under Bill Gates.

For those too young to remember, Microsoft had a run like no other. Through a combination of strategic brilliance, relentless focus and sheer determination, Microsoft leveraged its initial DOS beachhead into a PC industry-crushing market share and massive profits vis-a-vis Windows, Office, Internet Explorer and BackOffice, a position cemented by a unified foundation of developer tools and legions of dedicated Microsoft developers.

When Microsoft set its sights on a market, it would squeeze the life out of the market leader like an anconda wrapping itself around its prey. Before it was done, the company struck numerous segments, including personal computing (Apple and IBM), word processing (WordPerfect), spreadsheets (Lotus), databases (Borland and Sybase), networking (Novell) and Internet browsers (Netscape).

It’s not hyperbole to say that Apple’s phoenix-like rise and Google’s ascent are directly and positively correlated with Gates’ decision to step away from running his company as CEO in 2000

Read the full piece HERE.

Related:

1. Retail needs a 'reboot' (to survive)

Four thoughts on Google's Project Glass (Augmented Reality Glasses)

Google has officially taken the wraps off its Augmented Reality Glasses effort, dubbed 'Project Glass.'

If you haven't watched the concept video, you should, as it is well done, and provides a clear set of narratives that are both plausible and value-add to one's daily life. Nick Bilton of New York Times has an excellent write-up on it HERE.

When I think about a Google effort like this, four thoughts come to mind. One is kudos to Google for thinking outside of the box.

Even better, as opposed to (metaphorically speaking) assembling a bunch of disparate 'chicken parts,' and assuming that consumers can crystallize what the living, breathing chicken looks like, how it breathes and and how it manifests as a life form, they are actually SHOWING you. Good job!

I want these guys to succeed, and am in no small part motivated by a personal liking and professional respect for Steve Lee, one of the co-creators of the effort, and a good friend and former business partner.

Two, I can see lots of logical applications for this type of device that are non-obtrusive and value-add (SEE '3D Glasses:Virtual Reality, Meet the iPhone').

For example, imagine socially-powered or professionally curated walking tours? Wouldn't Yelp, Time Out, Foursquare or Fodors want to be all over that?

Heck, it even passes my 'Porn and Parody' litmus test.

What is that? Simply, if a new technology is easily and memorably mocked AND has logical use cases that the adult industry would be interested in, then it has a chance of succeeding in the market.

Well, in about two seconds of watching the video, I could come up with multiple NSFW-related applications. The porn industry, after all, is the cockroach of innovation. Every industry that has succeeded in tech (DVDs, Internet, Mobile, Cable TV) has seen the porn industry finds its niche within it. They are the consummate early adopters.

Similarly, watching the video, I was instantly imagining the parody video where we find out just how disturbed the A/R glass wearer is, as he calls upon deeply disturbing contexts that only he can see, or worse, hackers take over his overlay feed, and disrupt his day with snarky comments or offensive data.

Is a Project, a Product, or a Platform?

Three, though, is that with all things Google, I ask first if this is a Project, a Product, or a Platform (SEE: Lessons learned from Google Buzz). 

Projects are like concept cars. Cool, but the likelihood of yielding real products is unknown, and as a consumer, I am done caring until Google is committed.

After all, we have seen many such projects be launched, then abandoned by Google. Buzz, Wave and App Inventor are a few recent ones that come to mind.

(You can reach your own conclusions from the fact that they are calling this ''Project' Glass, although I am hopeful that this time is different).

Products, by contrast, take precision, execution, distribution channels, sales training, end-to-endness, and generally speaking, are outside the ken of what Google has done well to date.

That stated, I believe that this is exactly the category where Google should take the lead in committing to and delivering a best of breed product. They are the only ones that can cultivate it and sell it successfully, as it is a wholly new concept.

Platforms imply courting and cultivating software developers, and while this project is built on Android, what this means in terms of depth of focused support remains to be seen. As a developer, I would wait and see big-time how the uptick is with this as a product -- before committing to it as a platform.

In the real world, how does it work?

Four is the question of how all of this works in practice, in the real world, given the need of such a device to be lightweight and have reasonable battery power, but not sacrifice on functionality.  

Here, I am guessing that such a device is actually a peripheral that communicates via bluetooth to your Android powered phone; using it as a 'middle-tier' between your eye-line and the cloud, thus elevating the smart phone to personal hub.

That, in itself, would be a very Apple-like embrace of the totality of the solution domain, over the loosely, and often poorly, coupled that one associates with Google offerings.

Related:

1. 3D Glasses: Virtual Reality, Meet the iPhone (O'Reilly)
2. Google Buzz: Project, Product or Platform? (O'Reilly)
3. Don't Confuse a bunch of Chicken Parts for a Chicken