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I know this has been a somewhat persistent subject, but the implications, from a broader antitrust standpoint, are important to keep a pulse on. Below are a few takeaways from the ruling.
- Apple is not a Monopolist: This may be the most important statement to come from the ruling. Keep in mind many governments, including the US gov, are posturing themselves to start cracking down on “monopolies” via several bills and perhaps more DOJ/FTC lawsuits. Judge Gonzalez’s ruling in several areas will make future lawsuits against Apple much more challenging.
- Judge Gonzalez was convinced that Apple provides significant value and competitive advantage with IAP. This means IAP is not going anywhere. Despite some of the headlines, Apple’s in-app-purchase will remain the default transaction mechanism consumers are presented with for App Store transactions.
- Judge Gonzalez’s ruling affirms that Apple provides clear and distinct value from the App Store ecosystem and underlying mechanics, which include app review and IAP
- The one area Apple will now be required to modify their App Store rules is around developers being able to “steer” their customers to other payment methods and options. It is unclear how this will be implemented, but from the initial wording, it seems unlikely app developers can attempt to cut Apple out entirely. Judge Gonzalez agreed all of Apple’s innovation and IP related to the App Store warranted a commission of some kind. She did not necessarily feel the 30% was justified, which I took as a hint for Apple to strongly consider lowering that rate as a whole. How developers will offer an alternate payment method or process via this steering provision and still give Apple some cut is unknown, but Apple has options in front of them to concede this point and still get a commission given the way this point was worded
One of the biggest things that stands out to me in this case, as well as the FTC vs. Qualcomm case, is how hard the burden of proof actually is in an antitrust case. Two of the largest antitrust cases of the last decade both largely went the way of the defendants in Apple and Qualcomm, respectively. Which, in my opinion, does not bode well for all the posturing of the US Gov to try and bring more monopoly suits against tech giants.
And, ultimately, governments tend to do more damage and enable a variety of unintended consequences when they try to forcibly legislate change rather than pressure the companions to self-regulate. This is where I think we would all prefer, for the most part, tech companies take responsibility to run their platforms in a competitive manner.
While I do believe Apple sensed the allowing of developers to steer customers to alternative means of transactions that IAP was the one they felt they would lose, Apple can still be rigorous in their approach here.
As details emerge on how this will be implemented, it will be interesting to see how Apple approaches this and how tightly they try to hang onto their 30%. As I have repeatedly said, the cleanest solution is for Apple to simply lower their rate. Alternately, after some other broad conversations, another potential angle is for Apple to split out the games portion of the App Store and have a dedicated game store where they are more strict in enforcing IAP and more closely manage the implementation of outside linking and alternate payment methods. Games account for ~70% of Apple’s App Store commission, so if there are going to be aggressive protecting IAP commissions, this is the area it makes the most sense to apply more stringent rules to.
The other angle that does not get talked about is Apple’s advertising strategy within App Store. There is a belief that I think is logical, that once Apple starts getting enough revenue from ads that they are then incentivized or more willing to lower their rate and allow the ads revenue to offset any losses. This theory has legs, but it is a big assumption that Apple’s ads business is lucrative in this regard.
Things are already changing around Apple’s App store, and more will change with app stores broadly in the next few years. For Apple, their changes as of late are what many have referred to as “self-regulation.” Nevertheless, even if minor, Apple has made some concessions to start addressing some of the antitrust concerns surrounding the app store.
I firmly believe Apple has several more changes ahead for App Store that they will initiate whether legal regulation forces them to or not. But as I have mentioned before, none of these changes, even in a worst-case scenario, will impact Apple in any significant way. This is why I have consistently argued that making these changes for the better of the ecosystem, both now and in the future, is worth more than the small amounts of money they get or will lose from making changes to the App Store.
To summarize the economics again, Apple makes roughly ~$15-17b from their commission on App Store a year. That is roughly two weeks of iPhone sales in an average quarter. Apple makes two times as much total App Store revenue as Google, which likely means Apple’s commission is 2x that of Google.
Apple makes most, the vast majority, of their App Store commission from games. Several detailed financial analyst models approximate the percentage of commission Apple gets from games is ~60%. This suggests the only major threat to Apple’s commission revenue is if most game developers successfully bypass Apple’s IAP. At best, this is a long shot, given that IAP is a key reason for the lack of friction inside games that makes most microtransactions happen. And, even if an alternate in-app payment option was allowed to be offered, most normal consumers are unlikely to trust random game developers more than Apple. There are certainly a few game developers who could pull it off but certainly not most of them.
The foremost challenge I see is that as developers begin to exercise some freedoms to attempt to get users outside of Apple’s ecosystem to make a purchase, or try and onboard them in the app with a user account, enter credit card data, etc., all it will do is dramatically hurt the user experience for Apple customers. This is certainly true with purchasing a Kindle book via the Kindle app on iOS or signing up with Spotify, Netflix, etc., where you have to leave the app, sign up and transact, then go back to the app. All of these experiences are loaded with friction, and can you imagine a scenario where every app is free, but then the developer makes you jump through all these hoops to use it after you download it? The app experience would be miserable, but that is a likely road we could head down.
So what is the solution? Honestly, Apple needs to lower their commission to 10% for small developer businesses and 15% for everyone else. Apple needs to make it a no-brainer to use its IAP to collect transactions. The ONLY negative to lowering the rate is they would half their revenue on commissions. But, via regulation or self-regulation, they will lose money anyway at the potential cost of vastly injuring the customer experience with apps.
The positives dramatically outweigh the negatives here to just lower the commission to a rate that makes it a no-brainer for nearly everyone, including even someone like Netflix or Spotify, to embrace if they feel they can make more money by lowering friction to conversions.
But there is another angle I’m interested in. If Apple does, that is a huge positive if it plays out. If Apple dropped their rate down from 30% to 15%, it is reasonable that Google would have to as well. And what if not just Google felt pressured, but all the video game app stores got pressured? That may be a harder point to argue. Still, if Apple’s devices became more attractive as a platform for AAA game developers to embrace then, it would pressure console and PC distribution platforms to lower their rates as well. And if console makers really do operate at a loss, then a drop from 30% to 15% in-game commission could be quite devastating to their businesses. I am well aware this point on the AAA games is more broadly a less likely scenario, but I make it because Apple’s 30% commission was reasonable. After all, it was the standard for all game stores. If Apple lowers its rate, you could argue competitive and/or regulatory pressure could force all app/game marketplaces to do the same. At large, this would have some dramatic impacts competitively.
Lastly, while I advocate dropping the rate, which has both pro-ecosystem and pro-competition benefits, I still maintain Apple has App review processes that need to be refined. However, it does seem there are positive moves in this direction. Still, Apple’s success in some future platforms like AR/VR is dependent on the third-party developer goodwill they have had that is certainly being impacted at this moment. In my opinion, Apple can easily get this back and continue to modify and refine the App Review process in a way that gives developers confidence. Apple views them as partners may be the most important thing related to App Store Apple can do for its future.
It has been several months since the Epic v. Apple court case and just over one year since Epic’s battle with Apple began. Since a ruling is expected any day now, I thought making a few additional points would be good timing.
There is a range of implications to consider regarding certain outcomes, but the angle I will take is to assume the worst-case outcome in a few of the trial’s most critical points. I’ll then look at some of the implications assuming the harshest verdict/opinion. The bullets below will be the basis of ruling a worst-case scenario for Apple.
- Apple must allow third party app stores
- Apple must allow third party payments in its app store
- Apple must allow developers to steer customer from the app store to an outside source for transactions
Economics. I’ll start with the economic impact. Assuming the following ruling and Apple losing any appeal, a big question will be what is the financial impact to Apple. The answer to this is tricky, but I think the key metric to understand is that currently, Apple pays around $15 billion a year to developers who make up about 6% of their revenue. Yes, $15 billion is a lot of money, but it is a drop in the bucket in the grand scheme of things for Apple and how they make their money.
The key to that $15 billion number is to know it mostly comes from games and probably less than 100 games driving the vast majority of revenue. The only way I see Apple taking a financial hit here is if all the games driving most of the revenue rally around a third-party store and ONLY distribute their games there instead of Apple’s App Store. On this point, it is not outside the scope of reality that if Judge Rogers rules Apple needs to allow for third-party app stores, she could also rule that all apps must ALSO be submitted to Apple’s app store. I make this point because Judge Rodgers went out of her way to mention that she recognizes the platform provider should get an incentive to keep the platform vibrant. So I find it hard to believe she would provide an opportunity for third parties to completely bypass the store or any avenue that allows for no compensation to Apple.
With all the variables that can factor into how Judge Rodgers may arrive at the listed bullets above and the ways that Apple will still be able to receive compensation, it is unlikely their $15b and growing cut of App store revenues takes too large of a hit. Plus, as I mentioned, even if it does, it is not that big of a deal. So in my mind, the economic impact is less of a concern.
Consumer Behavior. Tangled into the economic point is a broader point about consumer behavior should all the above changes be forced on Apple. To this point, I want to reference an excellent article by Benedict Evans where he makes the below point I wholeheartedly agree with.
There are lots of privacy and security arguments about side-loading, and to some extent also third-party app stores, but I would argue pretty strongly that this is mostly a waste of effort – that these are not a mainstream consumer behavior and the dominant route-to-market for most developers will be the default, preloaded app store.
This is essentially my conviction as well. Even in a worst-case scenario ruling, where all my above bullets exist as options for consumers, the vast majority of them will still use Apple’s default store and Apple’s default payment system. My confidence in this viewpoint stems from my many years researching consumer behavior and consistently quantifying how hard changing consumer behavior is once established habits have set it. I outlined this in my theory of behavioral debt piece many years ago.
Benedict also points out that only a few brands have the power to execute either a third-party app store or an alternate payment option to Apple. A good example of this is Netflix and Amazon for e-books who successfully, yet highly inconveniently, get customers to transact on their website and then consume on their Apple device. If I had to stake a bet, I’d say this and not a third-party app store would have more success but still be limited to only a handful of brands.
The important factor here is to recognize that the only reason a Netflix, or Amazon, can do this is that they are a large brand, trusted, and already managing customer relationships at scale. This applies to the argument for Spotify because I can guarantee that when Spotify started, if they asked customers to leave Apple’s store and go directly to their website to transact, they would never have grown to the size they did. It was primarily because of the lack of friction Apple provided an upstart company like Spotify that allowed them to acquire customers as easily as they did.
This provides the challenge to ultimately deal with the charge Epic has brought against Apple. The argument is that these rules are limiting innovation. And limiting innovation is something Apple itself would agree is not what they want. So, assuming it is true innovation is being limited, what is the solution? That is a harder question to answer, and I think it comes in two parts which I could probably write an entire analysis on individually. But, as much as I am sure Apple would disagree, I think dropping the App Store commission to 15% for developers that don’t fit into their small business program (those that make less than $1 million a year) would be a huge start. And then dropping the commission for small business program participants from 15% to 10% as well. But, again, neither of these changes would impact Apple financially in any significant way. On the other hand, in some cases, if Apple made it attractive enough that Netflix, Amazon, etc., would embrace IAP because of the dramatic decrease in friction, there is a chance Apple can win back transactions they have lost, which would be a net positive financially.
And lastly, as I outlined in the analysis of our developer research study, I do think some app store rules need to be changed/modified as well as the App Store review process, and those things would do wonders for Apple’s developer community and perhaps help eliminate some of the barriers the small developers face when trying to innovate on their app and service. Apple should be doing everything in its power to continue to incentivize the kinds of innovations that help developers make money because ultimately, by doing so, Apple will make more money as well.
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One of the first articles/analyses I ever published on Tech.pinions was aptly titled Why Apple Has a Strong Competitive Advantage. I’m linking to this article, but I encourage you not to read it as my writing skills have greatly improved, and when I go back and read it..it is a little painful. Nevertheless, that article remains the most read article on Tech.pinions to this day and still generates significant monthly views because of people searching the term “Apple’s competitive advantage” via search engines. Meaning, this is clearly still a topic many are interested in.
I’m not going to go back through my points, but I will list the core pillars because I still believe they apply to Apple’s competitive advantage today. The core pillars of Apple’s advantage I outlined in my essay were:
- Apple’s Hardware + Software
- iTunes & Digital Asset Management (what turned into the services businesses)
- Apple’s Retail Strategy
This piece was written in 2011, and Apple as a company has matured greatly. What I outlined for iTunes/digital was the early seeds planted for Apple’s services business, which is absolutely a key part of their differentiation and advantage. Other things I would include today are things like Apple being a functional organization (one PNL instead of competing business units) and their hyper-focus on customer experience as a culture and philosophy. One could argue these are ingredients of their advantage more than pillars, like their integration of hardware and software is or retail, and I could agree with that. But if I were writing that article today, I would add two new areas that I feel are undoubtedly pillars of Apple’s competitive advantage.
My belief that Apple’s investment in custom silicon is a pillar of differentiation won’t shock many of you since I cover this subject extensively. However, in today’s computing economy, I would argue that Apple’s efforts in Silicon are the underlying foundation on which ALL of Apple’s differentiation is built. Meaning, every other pillar of differentiation and competitive advantage is made possible because of Apple Silicon.
I’m not saying Apple would not be as successful if they never started making their own silicon, although I am quite confident the lead they have over multiple competitors would not be nearly as significant if Apple shipped the same silicon components their competition does. In essence, their differentiation and advantage would likely still exist, and it would just not be as strong.
Apple’s investment in silicon brings them many advantages but first and foremost is the custom tuning of components to hardware, software, and services vision. Apple has the luxury of roadmap planning in lockstep with hardware, software, and silicon engineering, and this is a luxury they have that none of their competitors do.
It could be easy to say their efforts in silicon are just part of their integration strategy. And that is true, however, I contend it is the core of their integration strategy. I’ve long said the famous quote from Alan Kay that “people who are really serious about software should make their own hardware” should be revised to say “people who are really serious about software, and hardware, should make their own silicon.” I think if Steve Jobs were around today, he would be ok with that revision as an orientating way that Apple thinks about integration.
In looking at structural competitive advantages, we look for things that the company we are analyzing is uniquely equipped to do that competitors are not, or at least not in the same way. This is why I would add Apple’s efforts in privacy as a pillar of their competitive advantage.
Apple’s business model is a key reason they aren’t able to harvest user data for economic gain. I know this has become a topic of debate lately since Apple has been clear they do collect some data to improve their products and services for their users. However, there is a difference between observing some of your habits for other people vs. observing some of your habits to make your experience better, and Apple falls more into the latter than the prior. I’m still on the fence on a few areas with Apple’s advertising pushes, but that’s for a different analysis.
Ultimately, the point I want to make here is people trust Apple, and it is becoming clear their trust Apple with their data and their sensitive data. I’m not saying people don’t trust other companies, but I am saying that if you asked a random person on the street what technology companies they trust their most sensitive and private information to, it would be an extremely short list.
People have proven to trust Apple with their credit cards, location data, family location data and information, medical records, health information, and more. Of course, Apple didn’t get there overnight, and its efforts to protect consumer privacy have been around for a while. But making this a point of marketing and doubling down on privacy will award them some advantages that other companies will not have.
The main one that comes to my mind is around Apple Watch. Apple is by far the leader in wearable consumer devices, and the advancements made to Apple Watch every year only go deeper into a consumer’s health and well-being. However, they could not do this if they didn’t have a base of trust, and in some cases, are still working to earn the trust of their customer base.
Leveraging the Advantage
With those two additions to the pillars of Apple’s competitive advantage, I want to look forward to future products and industries Apple can move into. When we think about going deeper into health/healthcare, more personal and intimate wearables, computers like glasses and beyond, and even automotive where our lives are at stake, Apple Silicon and Apple’s privacy stance become fundamental advantages that will allow them to go into markets competitors can’t.
It is easy to see the whole picture now, but seeing how far back Apple has clearly been planning and deepening their advantage with the pillars of silicon and privacy as competitive advantages, shows us just how far down the road Apple thinks strategically.
One of the more interesting conversations to be happening around the tech industry currently is what kind of a cycle we are in? In the last few years, I’ve noticed an interesting tension that emerged because, as a whole, the tech industry has just come off a period of significant rapid invention and innovation. From the mid-2000s until the mid-2010s, we saw an incredible innovation cycle around computing where over half the planet became connected to the internet via a primary computing device. Unfortunately, humanity has no real historical precedence for the rapid innovation and adoption of computing devices into the hands of more than 3 billion people in a span of fewer than 10 years. And this tension that is emerging is more of one of the expectations than anything else.
When your most present memory is a decade of innovation around PCs, smartphones, tablets, and wearable technology, once that innovation slows down, it can create the perception that tech is no longer innovative, or it is mature, or as I’ve heard it often said the tech industry is “boring.” I made several points years ago discussing this that the pace of innovation of the last decade simply was not sustainable, and we can’t expect that to the norm.
What is happening is actually what many predicted would happen when the first tech boom hit in the late ’90s. I wrote about this, what many call the boom, bust, buildout theory. Nearly every mega-industry since the industrial age saw this pattern where there is a boom equaling a flood of capital to a market, followed by a bust due to overflooding of capital to a market, and that is followed by a long sustained period of building out the industry via innovation and adoption.
Having studied consumer adoption of technology for over 20 years now, the way I think about this cycle is the boom, and bust part of the market helps to enable product creation due to its flood of capital followed by falling prices due to the bust. This enables new entrants to innovate and also provide solutions at costs that the mainstream can then afford. Sometimes this happens quickly, and sometimes it takes a while, but the buildout part of this phase is the mass adoption of the solution into the general public.
While it may seem boring, we are still in the buildout phase as a tech industry. What makes this cycle different than others is the role the Internet plays. The Internet is the backbone that makes computing relevant. If all our hardware was not connected to the Internet, it would be largely useless. And unlike things like boats, railways, engines, and other technologies where this pattern has emerged, the Internet is dynamic, not static. The dynamic nature of the Internet is what will enable the continued innovation of our digital devices. What this does, is causes the build-out cycle to be longer and larger than any other previous mega-industry.
The Next Big Thing
In the framing I just provided, my thinking has clarified this question around what is the next big thing. Of course, we can say something easy like augmented reality, virtual reality, robotics, or automation, but the reality is the next big thing is the evolution of the Internet. Because the truth is, all this interesting hardware we like to envision is simply just a new way to interact with the Internet. We interact with the internet today on 2D flat screens, but in the future, we will Interact with it via 3D displays, and with robotics and AI, the internet will start to interact with us.
The rapid period of innovation of the last decade was the creation of hardware to interact with the Internet version 1.0 or 2.0, according to some people. That manifests itself with web browsing and apps. Internet 3.0 will consist of more AI, augmentation, and automation, and the devices we experience the Internet with will look and feel much different than today. But, I find thinking about the future helpful if we start with the evolution of the Internet around cloud, AI/ML, automation, etc. First, think about devices vs. think about devices and then the Internet’s evolution. Simply because the Internet’s evolution (what is capable on the backend) will dictate what is capable within the hardware we create to experience it.
But, all of this means we are still a long way off from mass adoption of topics that get people excited today. Augmented reality is a 10+ year journey to mass adoption. Automation, specifically self-driving cars, is a 10+ year journey to mass adoption. We haven’t even scratched the surface of AI and robotics yet, which is more like a 20+ year journey.
This buildout phase is important, and it doesn’t mean there isn’t still innovation ahead. But, it won’t be as exciting as the last 10 years in terms of hardware invention.
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In the last few months, I have had some very interesting conversations with executives knee-deep dealing with the supply chain shortages for their company’s procurement. The narrative about the shortage of chips has concentrated on the leading edge manufacturing node, meaning 7nm, 5nm, etc. But from the conversations I have had, this is not the biggest issue impacting our industry shortage, nor is it their worry about where semiconductor manufacturers are investing their money. It turns out, the semiconductor’s biggest issue is at the trailing edge.
The Trailing Edge and Legacy Nodes
The leading edge gets all the attention because it is the most exciting. The leading edge powers the supercomputers in the cloud, our desks and laps, and our pockets. But computing devices are not just made up of leading-edge microprocessors. The vast majority of other components are made up of legacy nodes and quite often many chips on the trailing edge.
What became clear in these conversations is most of the fabs in the media like TSMC, Samsung, Intel, and even Global Foundries, to a degree, are not relevant in the trailing edge semiconductor manufacturing process. Most of the companies making these chips largely on 90nm process and larger are located in China. Generally, these chips are a commodity, which is why most big fabs do not invest much in the trailing edge. Yet, most modern digital devices run at least a handful of chips built on the trailing edge. So while not nearly as sexy as the leading edge, chips made on the legacy processes are still as important to the manufacture of computing devices.
No End in Sight
Sadly, this likely means there is no end in sight for the capacity shortage. The fear alone of semiconductor drought has caused most of the big technology firms to stockpile both chips and POs with suppliers. Unfortunately, this only exacerbates the demand and delay for the foreseeable future.
In discussions on the matter, even an easing of demand is not necessarily light at the end of the tunnel. This situation has highlighted the steep challenge of predicting demand and the fine line companies procurement divisions have to walk to manage such a diverse supply chain of components. However, there are worries that companies are now hyper-aware of the delicate supply chain balance and may move forward with a new strategy and philosophy of procurement that includes more advance purchasing and volume guarantees.
If, in the end, supply chain management and procurement logistics go through a strategy and philosophy change, it could mean a prolonged challenge to get core components in a timely fashion. The discussions of strategy happening in the supply chain are uncharted waters, which is fascinating in its own right.
A Point on Semiconductor Supply Chain Nationalization
I have written in the past the role the semiconductor supply chain plays in a national security discussion for a nation-state. This was the basis of my thesis around the US needing to invest more in semiconductor manufacturing for both the competitive need of its companies and its own national security. And while that is true and needed, it is likely entirely impossible.
Even if there was a leading node manufacturer owned by the US company and operated on US soil, said the company would still be subject to a global supply chain of parts required to make silicon. For example, things like wafers, lithography machines, etc., are generally purchased from companies outside of the US.
I make this point simply to say that for all the points we make about the need for local manufacturing of Silicon, the reality is we can’t escape the global supply chain of semiconductor manufacturing that make it near impossible for a nation like the US to have every aspect of that supply chain operations within its borders.
Our takeaway, then, is first and foremost that this semiconductor supply chain shortage has no end in sight. Second, manufacturers of mass-scale technology are securing their orders in bulk and creating a wait-in-line scenario for everyone else, exasperating the shortage. And lastly, even an emphasis on domestic manufacturing of silicon can’t alone solve this problem for companies that operate on its soil.
The only thing that keeps surprising me about Apple is that people keep being surprised by their ability to keep delivering great quarterly revenues. But, of course, I know the point I’m making is more of an industry and investor one since most of Apple’s customers pay no attention to their earnings.
I have participated in countless investor debates on the sustainability of Apple’s business. While most investors have come around to the resiliency of Apple’s business and adjusted their models accordingly, there is still a general sustainable growth concern.
I find most fascinating, and perhaps the biggest reason I’m confident in Apple’s sustained growth is how the growth contributions can come from unexpected areas. One quarter maybe iPhone, one quarter it may be Mac and iPad, one quarter it may be services, one quarter it may be wearables, etc. While multiple of these lines of business can contribute to varying degrees, what has to be appreciated is all the revenue levers Apple has, which continually contribute to top-line growth.
While I appreciate the debate around how much more the iPhone can grow, being stuck on that point misses the fact that the rest of the Apple product and service ecosystem is underpenetrated compared to the iPhone. Meaning that not every iPhone owner has a Mac, iPad, Apple Watch, AirPods, or HomePod. Not every iPhone owner subscribes to Apple’s digital services. In that light, the growth story looks a lot more interesting and sustainable.
While the iPhone will continue to see a cadence of upgrades, generally over a four-year time frame, and be stable on an annual basis of shipments, Apple keeps sharing their active iPhone installed base keeps growing. This means they are continually adding new customers, even if relatively slowly compared to other products.
To give out some numbers for context, the iPhone global installed base is ~1 billion. Mac is ~110m. iPad is ~250m. Apple Watch is ~100m, and Airpods likely in that range as well. So compared to the iPhone installed base, every other hardware category from Apple is owned by less than 30% of their global customer base.
I’ve seen several global surveys on iPhone customers, which indicate that no single service has more than 30% penetration into the global iPhone customer base. iCloud appears to be the most subscribed to service at around 30% of iPhone customers subscribing to the storage service.
Now to the important takeaway in the Apple growth narrative. ~70% of Apple customers don’t own an additional piece of Apple hardware or subscribe to Apple’s digital services. While I do not expect 100% of all iPhone owners to own multiple pieces of Apple hardware or subscribe to all of Apple’s services, there is still a great deal of growth headroom for every offering from Apple beyond iPhone.
Once Apple acquires customers, they generally do not leave. Apple has loyalty, engagement, and brand equity on its side, and all those things factor into the continued reliance and strength in its business. Apple has a history of putting out great products, and as long as they continue to put out great products, there is no reason to be surprised by their performance in the marketplace.
An article posted by Nilay Patel on the Verge over the weekend seemed to get a fair bit of attention. I found it fascinating the industry buzz generated over Netbooks and why so many in the media seemed to be so excited about and fawned over these devices. Perhaps it was simply because they represented a shift away from the normal, boring, clamshell designs of notebooks relatively unchanged for years. But the reality was no one making these devices or participating in the ecosystem wanted this category to happen.
I mention this brief anecdote on Netbooks because there has been an ongoing debate about what Netbooks meant leading up to the iPad launch. If you recall, Steve Jobs mentioned Netbooks during the iPad launch and famously remarked that their problem was “they aren’t good at anything.” Jobs was spot on, but the Netbook brought broad enlightenment to the tech industry that traditional PCs were too complicated, but most consumers did not do much with their laptops and desktops. I was always personally hesitant to side with the debate that consumers didn’t care to do more interesting and computationally complex tasks. This is why I always found the iPad so interesting as a computing device.
iPad vs. Mac
As I watched yesterday’s event from Apple and looked at post-event commentary, it seems a popular angle was noting the line between the iPad and Mac was becoming more blurry now that iPad uses an M1. Adding an M1 to iPad was a big question mark for me, and one I was not convinced Apple would do to be honest. My gut wanted to keep some cleaner lines between Mac and iPad, and the processor was a good way to do that. It is not like the iPad running an Ax processor was underpowered. But upon further reflection, the addition of the M1 in iPad Pro makes me even more bullish on iPad.
When I think about drawing the lines between iPad and Mac, I come back to something I’ve said about the iPad for quite some time. The strength of the iPad is its versatility. A popular framing inside Apple for iPad is that it is a magic piece of glass. That magic allows it to be just about anything. If we refine the way to think about iPad, it is the most versatile portable computer Apple makes. This is the message I think Apple needs to lean into so consumers who value both versatility and portability can clearly gravitate toward iPad if they happen to be on the fence between a Mac and an iPad.
Another interesting element of iPad running an M1 is how it can leverage the growing Mac base of software optimize and created for M1 Macs. I agree with some of the commentaries I saw yesterday where people thought the M1 was overkill for the iPad unless the software ecosystem built up to take advantage of all the performance offered in the M1. But I think that software is filled by the many developers optimizing and creating new software for M1 Macs, which should translate nicely to iPad. If anything, this helps create a much cleaner line of separation between iPad Pro and iPad Air and iPad. At the top of end, Apple’s Pro computing lineup is Macs and iPad Pro.
I led off this note by talking about the Netbook and how some people draw comparisons the Netbook to the iPad and like to argue the iPad can’t replace your PC. That debate has been dead for a long-time, but some still like to remain stubborn. Adding the M1 to iPad should end the debate permanently and is absolutely a viable option if someone is looking to replace a laptop.
The Merging of iOS and macOS?
Another question that keeps coming up is if/when Apple will merge iOS and macOS. Something that each year feels like it’s taking baby steps in that direction. It does seem like this will happen someday as it has a lot of benefits for developers. What may end up happening is Apple develops an entirely new framework around app development that can more adequately adapt to the range of the devices they will make. iOS was built for a mobile world, and macOS was built for a stationary world of computing. Apple has not yet built a unified operating system from the ground up for all the categories they are in, including wearables, and at some point, AR/VR. What Apple seems to be building at the moment with their operating systems feels more like bridges than brand new continents. Perhaps an entirely new, more encompassing operating system is coming.
The more I think about this point, which I will leave for food for thought, is if the future of Apple’s computing devices is the M1, and eventually, they bring that architecture to iPhone and beyond? The M1 has a fundamentally different architecture than their A-series chips and one that is a bit more capable of scaling the clock frequency up or down depending on the device. If a more grand unification of platforms is on the horizon, I think it is logical not to have M and A chips but a highly flexible and scalable architecture capable of incredible computing power. Right now, that seems to be the design of the M1, so M1 iPhones may not be too far off?
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Yesterday, Intel announced a series of efforts that may one day be looked back at as foundational for their turnaround. Despite Intel being in a strong market position in many of the areas they compete in, the leadership zeal Intel once brought to the technology industry had been waning, and when it came to looking for points of innovation in computing, Intel is not the first company to come to mind.
In many ways, Intel is in a position very similar to Microsoft before Satya Nadella took over. Microsoft, like Intel, remained dominant in many markets. But the issue was a staleness surrounding the company that was leading to fading relevance as an industry and category leader and technology innovator. Nearly overnight, Satya Nadella brought renewed vigor to Microsoft, and Pat Gelsinger appears to be having the same impact on Intel. With the right leader, no company can ever be ruled out. Microsoft proved this, and Intel may very well prove this with Pat Gelsinger at the helm.
Intel’s Renewed Foundry Efforts
One of the main announcements is Intel’s renewed efforts at being a competitive foundry making semiconductors for companies other than Intel. Some may remember, Intel has tried this before, but those efforts failed for a variety of reasons. The main one being the priority for Intel was always their own products and not others. So what has changed this time around?
The first is a very different market than when Intel first attempted being a foundry. There has never been more demand for semiconductors than right now, and that demand will remain and grow stronger for years to come. Amidst significant semiconductor demand, leading to chip shortages for every segment, Intel remains one of the only semiconductor manufacturers with the capacity to offer immediately.
Another significant difference is Pat Gelsinger is a different leader, with different ambitions and goals than those who led Intel’s previous foundry efforts. Intel Foundry Services is a stand-alone business unit, which reports directly to Pat Gelsinger. Intel Foundry Services will have its own PNL, revenue goals, and growth targets. This is a much different model than what Intel had set up in their prior foundry efforts.
Lastly, Intel Foundry Services will have one of the more robust I.P. portfolios for foundry customers. This statement from the press release is succinct “IFS will be differentiated from other foundry offerings with a combination of leading-edge process technology and packaging, committed capacity in the U.S. and Europe, and a world-class I.P. portfolio for customers, including x86 cores as well as ARM and RISC-V ecosystem I.P.s.” Two things about this are unique to Intel foundry customers.
The first one being x86 cores, which assume some x86 I.P. At the moment, AMD is the only other company offering a cooperative effort to build custom x86 products for customers in their semi-custom business. While it is unclear how deep down the customization efforts would extent for Intel x86 I.P., but it will be extremely interesting to see how foundry customers take advantage of x86 I.P.
The other element of interest to me is Intel’s packaging technology, particularly their 3D packaging technology, which is quite innovative and unique. Foundry customers can take advantage of this unique technology which could turn out to be a significant differentiator for Intel Foundries, as well as Intel’s own products going forward.
While there is no slam dunk for Intel Foundry Services, I remain conservatively optimistic about their efforts. As I’ve outlined before, Intel being competitive as a foundry is extremely important for U.S. technology companies, so I personally believe it is in the best interests of many that Intel succeeds in this area.
Catching up in Process Technology
A fundamental part of Intel’s turnaround efforts is to close the gap between their foundries and TSMC and Samsung in process nodes. Intel will roll quickly past 10nm, something they should have done years ago, and look on track to deliver 7nm in a timely fashion and then quickly move to 5nm on a regular cadence going forward. Part of the reason I have more confidence Intel can do make these process node advancements going forward is due to their embracing of EUV and their less aggressive density targets. Both of these recipes are what TSMC has used to remain a steady cadence, and there is no reason to believe Intel can’t do the same.
Assuming Intel can close the gap, even if not catch up, there is reason to believe they will remain extremely competitive even if they are not making products on the same nodes as TSMC and Samsung. A lot of that has to do with Intel’s packaging technology which Gelsinger argues is the best packaging technology in the world, and there is some truth to this claim.
Intel is not actually as far off as its competition when it comes to performance. They are a bit farther when it comes to performance-per-watt but not in sheer performance. This is a testament to their architecture, and as we will see with future competitive products is a testament to their packaging and transistor design.
Getting to the point of at least some parity on process technology is essential for both Intel’s own products manufactured by Intel and customers of Intel Foundry Services. The next few years will be critical at an execution level for Intel to deliver on this front and for us to gauge their success at meeting regular cadence schedules.
I’ve always been curious to see what it would look like for other companies to collaborate with Intel to have their architecture designs run on Intel’s advanced packaging technologies. Hopefully, soon we may finally see if Intel process and package technology is truly that differentiated. I’d also love to see what Intel packaging technology looks like designed on Arm (hint Apple).
Outsourcing Intel Chips
As interested as I’ve been to see what other semiconductor companies can do with Intel’s packaging technology, I’m also quite interested to see what Intel architecture looks like running on other company’s process technology. We have been watching to see if Intel would outsource its CPU designs on a different process, and it looks like we may see that reality.
As a part of Intel’s announcements, it became clear that they would now start outsourcing some CPU designs to TSMC and possibly Samsung in the future. While this may be a trial run at first, I’m extremely interested to see how Intel CPU designs perform on a leading-edge TSMC process. Again, this will bring quite a bit of clarity to the quality of Intel’s architecture and potentially their process as well.
The other area of intrigue this creates is the competitive dynamic between Intel Foundry Services and other foundries. If Intel (who is Intel Foundry Services’ largest customer) sees significant benefits from their products made at TSMC, then it creates a competitive dynamic that did not exist before. Intel should be building its products on the best technologies, and if that becomes clear it is not Intel Foundry Services, then IFS will be truly competing for Intel’s business. A fascinating storyline to watch develop.
What is also new to this equation, and one that will be interesting to watch is the dynamic of Intel now competing with any outside foundry they make their products with. Intel may be partnering with TSMC, but they will also be trying to compete with them, directly, with Intel Foundry Services. This, in my opinion, is the most awkward part of the overall new structure and announcement. We will watch this new dynamic closely.
Overall: I am significantly more bullish on Intel now than I was a year ago. Pat Gelsinger is the right guy at the right time, and as I mentioned with the observation on Microsoft, sometimes all it takes is the right leader. These announcements are a huge step in the right direction, but as Gelsinger continued to emphasize during his presentation, it will all boil down to execution. That being said, now more than any time in the last decade, I’m more optimistic Intel can execute going forward.
This article is exclusively for subscribers to the Think.Tank.
I want to add a perspective to the idea of augmented reality (AR) that I don’t hear discussed much. When most people, who are familiar with augmented reality, talk about AR, the concept is rooted in overlaying the digital world with the physical. Common use cases surrounding the AR vision include things like getting directions and having more details revealed to you on your route. Shopping and having lists, product information, and more revealed to help you shop more efficiently. Communications where your emails, or texts, or contact information can show up right before your eyes. I could go on, but there is a fundamental point lost in these use cases that I feel will shape the category.
What is Augmentation?
First, we need to understand what the foundation will be for augmented reality. We can start with recognizing the definition of augmenting. Augment, in its verb form, means “to make (something) greater by adding to it.” If we start with this simple understanding of what augment means, we can then have a more productive conversation about the future of augmented reality. Just looking at the word, augmented reality, in definition, would mean to make reality greater by adding to it. The challenge I’ve run across with several vision pieces for augmented reality is how the use cases discussed make reality worse, not better.
I think this conversation about the future of computing and augmented computing needs to center on at this moment in time is what exactly we are trying to augment. More specifically, are we trying to augment (make it better by adding to it) the computer or the human? I would argue that if we flip our thinking from augmenting the computer, which is what most people think, to augmenting the human, we will get closer to a reality where computers make our lives better and not worse. And in that viewpoint, I’d argue that people will have far less tolerance for the inefficiencies most of our smartphones and PC experiences encompass.
Augmenting the Human
In case it isn’t clear, I have personally landed on the side of augmenting the human and not the computer. I mean that whatever form a computing device focused on augmentation takes, its sole purpose should be to make the human’s capabilities better. For example, I believe health and fitness wearables are a form of augmented computing. If you use one of these devices and use the Apple Watch, you realize it increases my health potential in various ways. For me, Apple Watch increases my fitness and overall health by monitoring many vitals (with more to come in future versions) and bringing a computational element to health that is not achievable without it. By definition, Apple Watch is augmenting my health.
Another area of great interest to me is devices we have in our ears. From my perspective, a simple hearing aid gives us a basis for augmented hearing. Hearing aids enhance hearing for those who need them, but there are applications for this for everyone. For the last six months, I’ve been trying the IQBuds Max from Nuheara and it has been truly enlightening for me under the premise of augmented hearing.
These earbuds are not just noise-canceling music devices. Their true value is the sound-enhancing features, particularly around voices. They have an active microphone that listens to outside sounds and can eliminate white noise and isolate sound to hear everything better, even if you have good hearing in general. The software includes different modes that can isolate sounds in certain directions as well as in real-time.
My experience with the Nuheara IQBuds Max has shown me a vision for what an ear-worn computer could do in augmenting my hearing. It is not just helping me hear noises or conversations better, but also digitally managing the sound levels, helping me isolate sounds that are softer by boosting them or softening sounds that are too loud all in real-time. These, not just active noise canceling but active noise listening earbuds, have shaped my perspective on augmented computing more than any other product I’ve tried up to this point. They are the definition of augmenting, to make better, my hearing by using a microcomputer with AI that sits in my ears.
Lastly, let’s talk about augmented vision. If we use my basis that the primary way to think about augmented computing is computers than enhance the human’s capabilities, then vision becomes quite clear, literally. Yes, a computer I wear over my eyes will bring elements of our experiences with computers today. Still, as I said, our tolerance for inefficiencies will go up dramatically when it comes to our eyes. I’ve come up with a saying that I’m fond of is while the wrist and ears are prime real estate for computing devices, the eyes are sacred ground.
In 2019, I did a project for a company working on an augmented reality product. We brought consumers in and tested a wide range of current AR solutions. From this research, it became abundantly clear to me the eyes will be an extremely difficult place to put computers. Rather, the eyes will be an extremely difficult place to bring the current smartphone or PC-centric thinking of computing. The core challenge is nearly every use case that exists today distracts from our vision instead of enhancing it. Showing me a text message gets in the way of my vision. Even how directions are shown will need to be re-imagined as not to obstruct or getting in the way of what I see in the world. This is why I’m convinced this will be the most difficult place to bring a computer over my eyes and why we are still a long way off from any true mainstream smart glasses solution.
Whatever ends up becoming mainstream, that is, a computer for my eyes will have to, at its basic level, augment my vision in useful ways. Sight is precious, and humans know this, so enhancing our sight will be one of the most useful features of smart glasses. Letting me see farther, closer, in the dark or low-light, are all core augmented vision use cases. How the computational/digital world overlays will need to recognize sight is precious, less is more, and focus on truly adding to the visual experience, not detracting from it.
Ultimately, augmented computing by way of devices we wear, that give us “superhuman” capabilities, could be the purest manifestation of Steve Jobs’s perspective that computers are bicycles for our mind. The observation that Jobs makes is that what humans create is added to our efficiency as a species by way of computers. Augmented computing will enhance our capabilities as a species and take this concept of computers, making us more efficient in all we do to a new level.
It’s a great vision, but also one that is extremely difficult and still very far off.
A lot is going on in the world of advertising at the moment. Actually, I should clarify a difference between advertising (which, when done right, also contains a heavy dose of branding) and simply trying to sell a product. When it comes to the Internet and the many free ad-subsidized services that exist, anyone paying attention would agree the clickbait articles, dozens of trackers, websites filled with malicious code, and more have gotten out of control.
I understand this world all too well. From 2008-2010 I was very close to one of the largest tech blogs on the Internet. I spent a great deal of time working with them on their business model, growth strategy, and revenue growth strategy. The product itself was free but was subsidized with ads. During negotiations with our ad-placement agency, I was under the constant pressure of their demands of how they wanted ads to show up. The disconnect, which I found nearly impossible to educate them with, was that you could place all the ads you want in the world all over an article, but if it hurts the customer experience and lessons engagement, there is no ROI. This was where the internal data we had via reader (I still called them customers) analytics and ad-engagement were clear.
The battle I was up against was the belief that with enough ads thrown at a person, via pop-ups, video, in-line articles, etc., that you could inundate them to the point that they simply could not ignore it. This is where tracking came in, and I saw many internal ad-deck pitches that demonstrated volume across websites and some shady statistics about how that helps consumer awareness. But my gut was always that this would create a more negative sentiment to that product and brand than a positive one. What is happening with ad-tracking and following today is the equivalent of a traveling salesman following you around everywhere you go screaming “buy this product” at the top of his lungs. Such a thing would turn people off to the product, even if it is decent, simply because of the tactics of the salesman.
From years of studying this space and having spent time in it, I’m convinced of several things. The first one is that consumers genuinely enjoy discovering new products and brands that enrich their life. The second is that excess ad-placement, and tracking is a turn-off and creates a look of a desperate product or brand, then one confident to go up against the competition.
Google and Facebook are both central to this debate. Both have proven effective, given current means of ad-targeting. Both have lowered the customer acquisition costs for brands and product companies, but again at the cost of feeling creepy, or at the least overly aggressive. This is why Google’s announcement of phasing out third-party tracking cookies and their privacy sandbox is of interest.
From reading through the blog-post, on the surface, it appears Google is simply distilling the information gathered on a person to the bare minimum to put them into a defined cohort of interests. In some ways, this is how Google functioned in its early days and historically the analog age’s advertising industry. If I’m a reader of a magazine on skateboarding, or tennis, or cars, etc., then it is safe to assume I’m interested in said topic and products within the category.
This is why I’ve always believed niche content is the best bang for the buck for any ad or product spend. I’d bet good money those ads will perform better any day over Facebook and Google if done right and placed relevantly. Niche content breeds more engagement, and more engagement creates higher Ad ROIs.
Google remains in the best position here, with the exception of an audio/podcast platform which I believe are excellent ad mechanisms given the integrated flow of ad read and placement. For Google, YouTube is this mechanism, and I’ve noticed a lot more content creates on YouTube start to integrate ads cleverly into their content. Anecdotally, YouTube is becoming one of the driving forces behind my purchasing behavior as I find authentic product reviews on YouTube the most helpful source to influence my purchases.
While Google remains well-positioned, I still question Facebook here and its ability to adapt. I’m even less optimistic of Facebook proper where I can see Instagram in a better position to adapt. The Facebook app/website itself may very well end up being like Yahoo. Not dying but fading more and more into irrelevance. Facebook’s likely inability to develop new assets or acquire new companies doing something innovative in a social media adjacency is going to hurt the companies overall ability to compete, in my opinion.
The model Facebook has appealed to is the Web 2.0 way of advertising but not the web/digital world 3.0. Oculus may be the one bright light for the company, and if they can make the Oculus experience mainstream, there is more upside. But this is still a question mark if Facebook is the company that will mainstream VR and AR.
As I mentioned, advertising can not get in the way of the customer experience. This is an evolving landscape that will need to find a sweet spot in helping consumers discover new brands and products that enrich their lives without stalking them, harassing them, and protecting their privacy. That will be a cornerstone for success for any company looking to subsidize their service with ads, and that is still a very different world than we live in now.
One of the biggest issues facing the tech industry right now is significant delays and a backlog of semiconductor foundries. Almost every tech category has seen a boost to demand, and that led to a dynamic of significant demand and not enough supply of semiconductors.
While an unanticipated surge of demand is a chief cause of the chip shortage, China’s initial shutdown this time last year due to the pandemic was going to cause delays for the entire year regardless of an uptick of demand. The surge in demand exaggerated this problem even more, which now brings an important observation to bear.
When I wrote last week about Apple perhaps partnering with Intel, I was only scratching the surface of what should be on every tech companies mind if their products rely on semiconductors in some way. This shortage is brought about because of the lack of foundry options for semiconductor companies. TSMC has had the clear lead for several years, and if you want a product on leading-edge process, your only option was TSMC. Samsung kept pace, but they hit some snags with their 10 and 8nm product which led some of their customers to go to TSMC.
While TSMC is not a semiconductor foundry monopoly yet, we are seeing a glimpse of what the world may look like if TSMC either is the last foundry standing or, at the very least, having a multi-year advantage on leading-edge process technology.
In either scenario, competition is painfully impacted. If only a few of the biggest tech companies, with scale and money, have access to leading-edge process technology and transistor designs, then those companies will maintain an edge on everyone else because they will be the few who can actually secure inventory. Everyone else will have to wait to get their chips to market. This is not a good scenario.
While TSMC is investing in foundries in the US, right now in Arizona, it will take several years to build out and be ready to start producing wafers. But the dynamic of TSMC having a monopoly on the leading-edge process, at a minimum, is concerning since they control who can get supply AND they could control pricing. This is why it is of the utmost importance that foundry competition is established and remain.
Yesterday Joe Biden signed an executive order to investigate the issues surrounding the chip shortage and look to strengthen the supply chain. Many hope for a renewed focus and more investment around the Chips Act and actively look to make US-based foundries more competitive.
Semiconductor foundries are not startup opportunities. Therefore, the US government’s options are Intel and Global Foundries to support US-based semiconductor manufacturing. While I do hope there is more around the Chips Act that can be established, I do not have the most faith in the government to help solve this. Which is a key reason I mentioned Apple, as I feel it makes more sense for private enterprise to help Intel via joint ventures or supply commitments.
The Art of Dual Sourcing Foundries
Given the reality, both short and long-term is the industry will only have a few viable foundries supporting the growing demand and need for semiconductors, companies who can strategically execute a dual-source strategy will be well-positioned.
This was always something Broadcom did well. I recall many conversations with their executives who were proud of the fact their chip design libraries were portable, and they could make them at whatever foundry they saw fit. Qualcomm is similarly executing a dual-source foundry strategy as they have versions of the same chipsets made at both TSMC and Samsung.
Companies that dual-source will be extremely well-positioned to weather a number of different storms that could come their way. From the geopolitical that I have outlined before, national economic issues, global catastrophes, etc. While this isn’t discussed as much publicly for obvious reasons, it is top of mind for many executives in the supply chain and those whose companies make products via semiconductor foundries.
While I keep circling the wagon on this, the fundamental point that needs to be addressed in the long-term is how to keep foundry competition alive. I believe Intel is critical to that future, which is why the industry needs to be concerned with Intel’s future whether they buy chips from Intel or not.
This article is exclusively for subscribers to the Think.Tank.
Clubhouse has gained quite a bit of attention lately. Before I share how I’m viewing the audio platform that is Clubhouse, I think it is helpful to give a little context around the audio opportunity.
For a while, I have known that something was going to happen around a pure-play audio platform for 3 years or so now. The reason I knew was because of my work with the VC community. Several years ago, I did the rounds with most of the top-tier VC firms, and they ran me through their central investment thesis for the next several years. The audio was the most consistent thesis I saw that showed up in nearly all VCs investment thesis.
Essentially the thesis for audio was this. The visual opportunity is gone. YouTube, Snapchat, Instagram, Facebook, Netflix, etc., has sucked up all the available time to view something visually with our eyes. Basically, the battle for the eyes is gone, but the battle for the ears is a different story. We commute, we exercise, we walk, and in general, we do things where we can’t always stare at screens. This is where the opportunity for the ears comes into play. Pure play audio is an area most investors believed there was room to compete for consumers’ time. And thus, something in audio was going to come out of this.
Many investors believed Podcasts were the audio opportunity evidence but knew Podcasting platforms were mostly settled and would not be an investment opportunity. Then came Clubhouse, and now we have a highly evolved take on many previous audio platforms.
If you aren’t familiar with Clubhouse, it is basically an app where anyone can host a room, start talking, and people can show up to listen. Hosts of the room can invite listeners up to the stage to participate or call on listeners to ask a question to those on the “stage.” You can liken it to talk radio with listener participation, a panel at a conference where people with subject expertise have a moderated discussion, or even as one of my followers on Twitter pointed out like the days of Ham radio where people could connect and talk to each other even if they didn’t know each other.
The clubhouse is the evolution of many former audio meetings but not a 1:1 comparison to any of them. It is like many things but not exactly like any of them. This perplexed a lot of investors, but given their thesis, it was only a matter of time before Clubhouse raised funds.
What I find curious is the black and white nature of Clubhouse. The public commentary I’ve seen, at least, in general, paints it as the next big thing or a total failure waiting to happen, which will get crushed by other players. Its future is not so black and white, but when something new shows up, we don’t totally understand. This dynamic seems to be common, and quite curious.
The reality is Clubhouse could be big, or it could fail. Both possibilities exist. I agree with the investment thesis I explained, and pure-play audio is certainly an area of opportunity.
That being said, what I find interesting about audio, is how different it is from video. Video allows people to be more passive or let their brain shut off. Audio is a different story. Listening requires much more attention by the listener. Listening was at risk of becoming a lost art. This is why I think the pure-play audio opportunity is so interesting. One’s audience is potentially much more captive than any visual platform. And captive audiences are lucrative.
Lucrative niches have always been my personal thesis of how the digital world breaks up. I’ve always believed Facebook would struggle because it is too general-purpose as a platform. It was successful at first because it was general-purpose in nature and ultimately why it may fade into irrelevance someday. If your business is advertising, subscription media, or direct-to-consumer content or products, then a focus on a niche is your only way forward. Platforms that empower focused niches, like Substack for niche newsletters, or Shopify enabling as a platform for niche businesses, or in this case Clubhouse for niche audio, all become enablers of lucrative niches with little to no upfront cost.
While it is unclear Clubhouse’s fate, what it is enabling as a platform is the most interesting part of analyzing from my perspective. I caution being too optimistic or too pessimistic at this point. It’s easy to write things off we don’t fully understand yet but, as the thesis I laid out, there is something here.
Helping Intel stay in the semiconductor manufacturing game should be among one of the highest priorities for all US-based technology companies. While TSMC is the leader in manufacturing process technology, they remain a geo-political risk should China decide to enforce its will on the region. Samsung is not far behind, but being a Korean company, again, future politics guarantee no safe bets. Having a leading semiconductor company founded and based in the US is incredibly strategic given how critical semiconductors are to our digital future. Apple may be one of the only companies that can help Intel right the ship.
Why Intel is in this Position
It took a combination of slowing CapEx spends for leading-edge fabs and technical hurdles transitioning from one process node to the next for Intel to now be two process nodes behind TSMC and Samsung. As I wrote for subscribers last week, there are reasons for Intel to hold out hope internally that their process and their architecture are good enough to keep their current course. But when you analyze how Intel got here, it hangs heavily on the volume of premium and cutting edge semiconductors moving to Arm and not x86.
At its best, the x86 market is a 330-350m a year in total shipments for client and server CPUs. Arguably, only a small fraction of that market sells at premium price points necessary to justify the investment in cutting edge process technology. Once upon a time, Intel was increasing their CapEx annually and roughly every 18-24 months, building out a new foundry for cutting edge process. As the PC market matured and refresh rates dramatically slowed, it made it harder for Intel to justify the CapEx for leading-edge nodes on a two-year cycle, and thus they moved more to a 3.5 to a four-year cycle.
The story is a bit different with Arm. When you see the economics of smartphones and the sheer volume of annual smartphone shipments ~1.2 billion, with premium smartphone sales being ~300-350 million (compared to 60-70m for PCs), it is easier to see how this market was large enough and economically stable enough for TSMC to keep investing in leading-edge process technology so aggressively. But, while few may want to admit it, Apple is a big reason TSMC is able to confidently keep investing in cutting edge process technology. Because the bottom line is, you need to have a customer(i.e., product demand) to justify the investment. Apple is a big enough customer of premium smartphone chips and thus worth it for TSMC. Intel alone is no longer a big enough customer of premium PC and server chips, and thus their ability to spend on leading-edge fabs suffered.
The hard truth for Intel is the x86 market alone is not big enough for Intel to justify the CapEx for leading-edge foundries. And that challenge is compounded by the fact that Apple was Intel’s largest customer for premium x86 chipsets, and now Apple has moved to Arm, and x86 chips are not Apple’s future. If Intel continues in the foundry business, they have no choice but to make chips for other customers, AND they need to be a full Arm foundry. Something they attempted and failed at for a variety of reasons. There is where a joint venture between Apple and Intel could be strategically beneficial to both companies.
How Apple Helped TSMC Achieve Process Leadership
I don’t want to dismiss the technological achievement of TSMC by being the first foundry to 7nm, 5nm, and likely the first to 3nm. Anyone who knows transistor designs knows how hard it is, at a micro level, to keep shrinking silicon. However, Apple helped make it easier for TSMC to justify the RND and CapEx costs and to continually invest in leading-edge process technology by being their largest customer, always committing to the latest node. I am not convinced TSMC would have the clear lead they do in process tech without Apple.
As a customer of supply chain components, Apple likes to buy in advance, in bulk, and write big checks to secure pricing and inventory. This played a role in TSMCs confidence to keep striving and investing in cutting edge foundries. While there is no official joint venture between Apple and TSMC at a foundry level, it is a deep partnership. TSMC has committed space, equipment, and supply to Apple. Even if not a JV or partnership on paper, it is very close to that in reality. But, TSMC is the only game in town for Apple to build their A series and M series chips on the leading-edge process. And this is where the real risk comes in and why Apple may want to have Intel as a plan B.
TSMC and Geopolitics
There is no secret among semiconductor insiders that TSMC, based in Taiwan, is a strategic technology asset for both the US and China. It is also no secret, China is spending large sums of dollars trying to develop semiconductor independence, and a lot of that strategy hangs on their own local foundry, SMIC.
If you follow the news, there are worries of increased tension between China and Taiwan. Taiwan is independently governed. But China considers it part of its territory. While a lot of my logic is game theory at this point, should China consider TSMC essential to their plans for semiconductor independence, which would also grant them semiconductor leadership, it is not out of the realm of possibility that China could officially reclaim the region. Nearly every technology executive dealing with the supply chain I know has been worried about this and I’m sure it is on Tim Cook’s radar as well given his deep knowledge of the Asian supply chain.
In that scenario, the risk for Apple and the many other companies who manufacture their semiconductors with TSMC is China either prioritizing their needs at TSMC over others or cutting off supply as a whole. Again, not a great business, but not out of the realm of possibility given how central semiconductors are to our digital future.
Samsung is another option as Samsung Semiconductors is rolling out their 5nm solution, and it appears to be quite good. Samsung Semiconductors also makes chips in the US at a foundry based on US soil, and Samsung as a backup is a viable option. Unless, of course, semiconductors’ importance does indeed become a national strategic asset for the future, and thus Korea decides to pull Samsung back locally. Even if one doesn’t buy Samsung is geopolitical risk, should the worst-case scenario happen with TSMC, Samsung would be in a position to be the only leading-edge fab companies like Apple, Qualcomm, Nvidia, AMD, could use and could create price hikes and supply constraints.
Back to Intel
What I’m laying out is a worst-case scenario, but it is a plausible scenario. Intel is the only future-forward guarantee to a foundry from the perspective of US-based companies making computing devices. And because Apple is the largest purchaser of premium semiconductors on the cutting-edge process, Apple is the best positioned to do a joint venture with Intel to help them invest in future nodes and secure space in their foundries for all their future Arm-based products. This would position Apple to make their Arm-based chips on US soil with a US company.
A move like this would be highly strategic and beneficial for both Apple and Intel, and the US. Of course, Apple could be a part of a JV between TSMC and Intel where TSMC 5 or 3nm chips are made for Apple and Intel foundries, but there is still a risk and no guarantee Apple would have continued access to TSMC technology should China be aggressive. As I said, Intel is the only guarantee in what may become an actual chip war between nations.
This article is exclusively for subscribers to the Think.Tank.
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Yesterday, Apple announced a record quarter where it became the third company to bring in more than $100 billion in a single quarter. The achievement is pretty remarkable given the timing. We are in an unprecedented global pandemic, where economic uncertainty is concerning, consumer confidence is shaky, and Apple and their carrier retailers having to close stores or limit capacity.
Those who recall the last major recession of 2008-2009 may remember that Apple was an anomaly during that recession. They continued to grow and shatter sales records despite a deep recession. At that time, the smartphone, or namely the iPhone, was one of the most talked-about products in the tech industry, so it was not a total surprise for me that Apple did so well in that recession, although it confounded Wall St. analysts. This time around, Apple was up against even tougher odds to have produced a record quarter, and sure enough, they crushed it. Their many markets and consumer dynamics that I think played a role in Apple’s monster quarter. Still, the thing that really stands out to me is Apple’s ability to have impeccable timing.
I firmly believe, Apple has the best understanding of their customer base than any other technology company in our industry. This does not mean Apple has been right about their customers or market 100% of the time, but they are extremely precise when you look at the body of decisions they have made regarding anticipating demand. If anything, they misread the market because they underestimated demand, not because they overestimated it.
When you listen to Apple executives on earnings calls, they mention performance relative to their assumptions whenever they discuss a past quarter or future quarter. Like most companies, Apple builds market models to try and anticipate demands, and more importantly, understand what product decisions they make and how that impacts sales cycles.
Another unique element of Apple’s customer base is the makeup of customer segmentation they have. As a product, iPhone is the only tech franchise that has customers that span the spectrum of consumer profiles. Apple has customers from bleeding-edge early adopters, all the way to late adopting tech laggards. This makes coming up with market assumptions extremely difficult since each of these consumer segmentations behaves differently and make purchasing decisions using entirely different factors.
Historically, Apple has seen a bigger portion of their customers buy or upgrade when either a design refresh occurs or a leap forward in technology is offered. The last true super cycle for Apple was the 2014 iPhone cycle, where Apple increased the screen size of the iPhone, introduced the Max, and had a design refresh. This cycle, Apple introduced four new iPhones, including the smallest and largest offered simultaneously at a launch. Included a design refresh and a wireless generational moment with 5G.
Supply chain reports in August indicated Apple was gearing up to build 75-78m iPhones. This seemed high given the market conditions. Apple’s timing proved to be impeccable, and this moment in the market was the absolute right timing for Apple. Apple sold a record number of iPhones, likely over 80m last quarter for a record number of sales. Revenue was at an all-time high, and Tim Cook mentioned on the call they believe they could have sold even more iPhones if their retail stores were open. But at the end of the day, Apple knew this year would have the makings of a strong cycle, pandemic aside, and had been planning for it years in advance.
I tweeted yesterday, and it is worth mentioning that 5G played a role in this cycle’s strength, particularly in China. Had Apple not settled with the legal battle with Qualcomm in April of 2019, they would not have had a 5G device out this year and not capitalized on this iPhone cycle.
While there is more we could dive into, particularly around Mac’s upside and the continued strength of Wearables and services, I did want to call out one thing Tim Cook said that I think bears repeating.
Investors on the earnings call kept focusing on the COVID-related lift to certain segments. Tim Cook called out that while the situation around COVID added some wind to the sails, he did not want to detract from also attributing the product itself as a driver. It is a subtle point, most would not disagree with, but I think it bears re-emphasizing that great products get the attention of consumers and move the needle. While COVID did provide some lift, let’s not let that take away from the highly desirable products to Apple customers.
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To the casual observer, the excitement around Apple Silicon is concentrated around the specific benefits to Apple and the competitive advantage awarded to Apple thanks to their efforts in custom silicon. There are, however, much wider industry implications.
I have been extremely bullish on Apple’s custom silicon efforts since before Apple silicon began showing up in iPhones. My analysis at Apple’s time acquiring PA Semiconductor stated the writing was on the wall for deeper vertical integration by Apple into more of their products. I vividly recall being at Intel not weeks after Apple’s acquisition of PA Semiconductor. The consensus was quickly established that Apple would make custom silicon a cornerstone of their differentiation and competitive advantage.
Since Apple has now proven they are a force to be reckoned with when it comes to custom silicon, a trend I’ve long predicted is about to accelerate.
Competing in the Race Requires Components Built In-House
A great analogy came to me as I was watching AMD’s CES keynote. AMD CEO Lisa Su invited to the stage, virtually, Formula One race car driver Lewis Hamilton. Hamilton’s presence on stage was mostly to talk about his love of gaming and how AMD helps push the bar in PC and console gaming. While trying to affirm AMD as an innovative technology company, he also made a fascinating point by remarking on how his own industry consists of highly customized components. He stated that all Formula One cars, which extend to all professional race cars, consist largely of components all built in house. The obvious reason for this is a competitive advantage. Every race car driver wants an edge above the competition, and the industry itself has established the only way to do that is with highly customized parts, not stock ones.
To establish this analogy more clearly to the tech industry, Apple products are more like Formula One race cars, which compete against a field of competitors using off the shelf components. As Apple goes deeper into in-house parts for their products, it will inevitably cause others to follow whether they compete with Apple or not.
This is the trend that will accelerate that I mentioned above. While it will be harder for most tech companies to go as deep as Apple in verticalization, I anticipate a much more widespread move to customization.
In an article last year, I dug into this broad semiconductor trend where I highlighted the importance of specific purpose chips over general-purpose ones. The computer industry was built largely on general-purpose silicon. The increased need to differentiate and compete on different planes drives the need away from general-purpose silicon and more to specific purpose chips that are used uniquely by product companies.
I made the point that I don’t think other tech companies will go as deep as Apple in semiconductor customization. Still, I think companies will be at a strategic disadvantage if they don’t include some custom or specialized chips that enable some unique product advantages.
Examples of this trend starting to accelerate have been popping up more often. Microsoft has worked closely with Qualcomm and AMD to offer specific customization to the chipsets that run in certain Surface products. The goal of that work was to differentiate these devices from the pack. Microsoft has even been rumored to be looking more deeply at designing, or co-designing, their own Arm processors, which could have both server and client impact. For many generations of Xbox, Microsoft has created some custom components and co-processors for years as well.
Amazon and Google have become more aggressive in custom/specialized processors to differentiate their cloud platforms. Amazon with its Gravitron processors, and Google with Tensorflow. Both key initiatives to help them compete more uniquely with specialized components and set themselves apart from competitors who use generic parts.
Qualcomm made some news recently that emphasizes this trend when they acquired Nuvia last week. Ex-Apple silicon engineers founded Nuvia, and they created a custom Arm architecture they intended to use for the server market. With their Kryo architecture, Qualcomm used a semi-custom design from Arm but mostly using a more generic Arm IP. Qualcomm recognized their ability to compete depends on more deep customization of technology at every SoC level. This Nuvia acquisition puts them back on the path to more deeply customized semiconductor offerings.
Years ago, the belief that more custom or specialized components were not needed because all computing would be in the cloud someday had never manifested and proven to be a much far off future even if it happens. What has become exceedingly clear is that differentiation at the software level is no longer enough for the tech sector’s biggest competitors. The idea of a “full-stack” company must now extend into components as well.
The race car analogy could not be more apt for the tech industry as the competitive environment increases in every market. The simple truth is companies will need to invest more in specialized components because the nature of competition will demand it.
The bottom line is the more companies create “in-house” technology that extends down into components, the better their chances at competing. The more companies rely on generic solutions, the more they run the risk of falling behind.