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Comparing The Profits of The Five Titans Of Tech

Introduction

Today’s five Titans of personal computing are Google, Microsoft, Apple, Samsung and Amazon. Horace Dediu of ASYMCO has created a side-by-side comparison of their respective revenues and profits.

Google

Google is a money making machine, but I think that many overestimate its profitability. As the graph clearly shows, Google doesn’t make nearly as much profit as does Microsoft, Apple or Samsung.

Further, we know that the vast majority of Google’s profits are still derived from its desktop advertising business. Android, for all its success in the marketplace, has not yet proven to be profitable to Google.

In a reversal of Microsoft’s business model over the past twenty years, all of the Android profits currently reside with the hardware makers rather than the software provider. Perhaps this is why Google is moving more and more towards making their own hardware. (Google currently owns Motorola and makes Nexus phones, Nexus tablets, Chromebooks and the newly minted Google Chromebook Pixel.)

Microsoft

Microsoft has been making ungodly profits for almost two decades. Microsoft’s problem isn’t profitability, it’s growth. Despite making money hand over fist, Microsoft has been unable to grow its base for much of the past ten years.

And Microsoft is facing serious challenges to even maintain the profits that it now has. In the above graph, the red portion of Microsoft’s profits come from Microsoft Office and the blue portion comes from Microsoft Windows. Both currently reside primarily on desktop and notebook machines. With those devices declining in sales and with phones and tablets rapidly growing in sales, Microsoft needs to make the transition to mobile and they need to make it fast or their two cash cows are going to be isolated and start to dry up.

As you can see from looking at the graph, Apple’s profits are not just good, they’re spectacular. They far outdistance the other four titans of tech. At yesterday’s shareholder meeting, Tim Cook reputedly said that Apple grew revenue by about $48 billion, more than Google, Microsoft, Dell, HP, RIM, and Nokia combined.

Apple’s problem is the perception that they are the next Microsoft – that they will continue to make great profits but that their growth will stagnate. The graph, above, does not seem to support that view, but past performance is not a guarantee of future profitability.

Samsung

Samsung is an amazing story in oh so many ways. By all rights, Samsung shouldn’t even be on this list of Tech Titans. For the past two decades, the PC manufacturers – the Dells, HPs, Lenovos, Samsungs, etc – were at the bottom of the tech totem pole. Always trapped in a race to the bottom, Microsoft and Intel took all the profits while the hardware manufacturers were relegated to fighting for the scraps.

No more. Samsung has turned that business model on its head. Android – like all licensed operating systems – was supposed to encourage a wide variety of hardware providers. But Samsung has swallowed the Android market share and the Android profit share whole.

Amazon

What can one saying about the amazing Amazon. Their revenues go up but their profits do not. And the less profit they make, the more successful they are perceived to be.

John Gruber once described Amazon as the crazy guy at the poker game. You simply don’t know how to play your cards against Amazon because they don’t play by any of the known rules. And you sure as shooting don’t want Amazon to come after you because they will sacrifice profits in order to win your market. And they are relentless.

Summary

So long as Apple is profitable and their ecosystem healthy, they’re not going anywhere. Microsoft is in it for the long run too. They have the money to sustain their efforts and they well know that they need to be in mobile or they will be locked out of the future of computing. Amazon appears determined to be part of the mix too.

The two titans that seem the most unstable to me are Google and Samsung. Google controls the Android operating system and the ecosystem but they make little profit from either. Samsung makes almost all the profit from Android, but they have little control over the operating system and they make little to no money from the sale of advertising, apps or content sales. That seems like an unsustainable relationship to me. Something has got to give and it’s clear that each side is weighing their options. Google is moving more and more towards making their own hardware and Samsung is flirting with a variety of different operating systems. The future is always uncertain but it seems clear that the relationship between Google and Samsung is certain to change.

Does The Rise Of Android’s Market Share Mean The End of Apple’s Profits?

It’s an article of faith in the Church of Market Share that Android is nearing a tipping point where its market share lead will inevitably turn into a developer share lead, too. ~ John Gruber

Matt Asay, writing for Readwrite Mobile, puts this argument into words in his article entitled: “As iPad’s Market Share Falls, Must Profits Follow?”

For those who say market share doesn’t matter, that Apple still commands most of the industry’s tablet profits, they clearly haven’t been paying attention to the smartphone market. Profit share follows market share…

Only, here’s the thing. I HAVE been paying attention to the smartphone market. Perhaps more importantly, Horace Dediu has been too. And as his chart, above, demonstrates, the facts belie the argument that profit share follows market share. Even as Android’s market share has grown by leaps and bounds, Apple’s iPhone profit share has grown too. How can this be?

What’s Really Happening

Here’s what the facts are telling us. First, Android’s growth has not hurt Apple’s profit share. Instead, Android gobbled up all of the profits from the other smart phone manufacturers. Second, Samsung subsequently gobbled up all of the profits from the other Android manufacturers. Samsung now makes as much profit share as the entire mobile industry did five years ago. Third, the iPhone has not only survived the growth of Android’s market share, it has thrived, growing its profit share from 21% in 2008, to 50% in 2010, to 57% at the start of 2011, 73% at the start of 2012, and 72% at the end of 2012. And since the pool of profits has grown dramatically over the past five years, Apple’s profits have too.

What will it take to get Apple’s critics to acknowledge that Apple’s iPhone strategy is actually a raging success rather than the raging failure they constantly portray it to be? Does Apple need to take in 100% of the profits in perpetuity for them to be convinced?

Faulty Analysis

The problem with our obsession with market share is that it rests on two faulty foundations. First, it assumes that every product sold within a category is always just as valuable as another. Second, it assumes that every customer who buys a product is of equal value. These two premises are laughably wrong.

It’s A Mistake To “Pool” all sales together

Are all smartphones or all tablets of equal quality or used in the same way? Hardly. No knowledgable person would argue that they were. Yet when we use market share as our metric, we assume exactly that.

Kiddie pools and above-ground pools and in-ground pools are all considered to be “pools”. But does the sale of one necessarily impact on the sale of another? Sandals and dress shoes and winter boots are all considered to be “shoes”. But does the sale of one necessarily impact the sale of another? Similarly, when we lump all types and makes of phones or tablets together, we create a false basis of comparison. Is the iPhone or the iPad really competing with the gray market phones and tablets being sold in China anymore than in-ground pools are competing with kiddie pools or dress shoes are competing with sandals? Just because two products fall within the same category, does not necessarily mean that they are in competition with one another.

Not All Customers Are Equal

“(T)he fundamental flaw in the Church of Market Share doctrine is the assumption that users are users. That one platform with, say, 40 percent market share, must be in a stronger position than another platform with, say, 20 percent market share, simply because a larger number of users is better, period. What Apple has shown with the Mac, and now with the iPhone and iPad, is that all users are not equivalent. Counting only the Mac, Apple is not the biggest PC maker by unit share. But it is by far the most profitable, quarter after quarter, year after year. What’s more important than a company’s share of the overall market is the company’s share of the profitable side of the overall market.” ~ John Gruber

The fact that customers are not of equal value is so fundamental that I shouldn’t even have to say it. There are whole industries and entire fields of learning devoted to the art of finding the right customer for the right company or product. Not only do companies target preferred customers, but they actively shun customers who are counter-productive too. Yet when we use market share as our metric, we assume that a customer is a customer is a customer. Nothing could be further from the truth.

For example, I might be an ideal customer for Krispy Kreme Donuts. But I might be a lousy customer for Victoria’s Secret. (This is because I stopped wearing frilly lady’s underwear years and years ago. You can confirm this with my parole officer who will totally back me up on this.)

Being a bad customer is not the same thing as being a bad person. Good people can be bad customers. But being a customer is not the same thing as being a good customer either.

Does Market Share Matter To Apple?

Absolutely. Take a gander at this critique of Apple from Steve Jobs:

“At the critical juncture […], when (Apple) should have gone for market share, they went for profits.” ~ Steve Jobs

Steve Jobs wanted, and Apple wants, market share. But they want the RIGHT market share. Apple wants customers who are willing to pay for their products. And Apple wants customers who are good for their platform. In other words, Apple wants market share in their target demographic. Based on the fact that Apple is taking in 72% of the mobile phone profits with only 8% or 9% of the market share, it sure sounds like they’ve aquired the right market share to me.

Does the rise of Android’s market share mean the end of Apple’s profits? Hardly. You can argue as loudly as you like that developers and profit share must necessarily follow market share. But the facts will shout you down.

Apple’s Penchant for Sophisticated Simplicity

I mentioned in an earlier column that I had finally figured out why iOS is the mobile operating system of choice for me. I take the time to objectively look at all the flagship devices on the market. I don’t just use these products for a day or two and then form an opinion but rather I use them as my primary phones, tablets, PCs, etc., for at least a few weeks and sometimes more. However, for me, all roads lead back to iOS. I always go back to my iPhone or iPad. None of the flagship devices I use can keep me from going back to the iPhone or iPad. I think I finally understand why.

Simplicity

Sophisticated simplicity is the term I think of when I think of iOS. This is true also of OS X in my opinion but for today I am focusing on iOS. This is perhaps why so many non-tech savvy consumers appreciate and choose the iPhone. Believe it or not there are billions of people on the planet who are not in search of the next big thing in technology. Rarely are the masses looking for the pinnacle of innovation in a product; more often they want things that just work and make their lives easier. To put it succinctly the mass market favors convenience over cool. If that product happens to be incredibly innovative then so be it. But it is not the fact of innovation by itself for which they buy it but rather the problem it solves for them. The mass market hires technology products for reasons that are largely based on convenience not specs. They will favor the technology that helps them get their tasks done in the most convenient, efficient, and simple way possible. Sometimes that task is entertainment, sometimes it is productivity, sometimes it is communication, but the point remains that for many, convenience is what is valuable.

The simplicity of iOS translates into convenience for me and my many mission critical tasks. Yet its simplicity provides a feeling of sophistication that allows me to get very complex things done in an efficient manner. Simple solutions require sophisticated technology. In my opinion, iOS is both.

Sophistication

I spend as much time away from a desk as I do at a desk. For me, it is critical that I stay as productive and efficient as possible while I am mobile. No platform that I have used in recent years has come close to iOS in this regard. It is important to point out that this was not always the case for iOS. In the early days of using the iPhone, I still carried a Windows Mobile device for my more work/productive tasks. Apple caught on and evolved iOS in a way that it is now invading the workforce at unprecedented rates. iOS is not just simple to use it is also extremely sophisticated.

Some thoughts from Steve Jobs at the launch of the iPhone bring clarity to the sophistication of iOS. When Steve Jobs announced the first iPhone, he explained how iOS was based on OS X and because of that it ran desktop class applications. This would explain why time and time again we hear from developers that they are overwhelmingly happy with the quality of applications they can write for iOS. More importantly these applications are extremely sophisticated. They are not simply dumbed down mobile versions of desktop software, but an entirely new class of software all together.

Because I am rarely at my desk doing real “work” it is essential for me that I am able to fulfill my job role any place, any time, and with any device I have with me. The bottom line is I don’t always have my notebook, and I don’t always have my iPad with me. However, I always have my smartphone with me. With every single device and mobile OS I have evaluated, I have never felt as productive or efficient on the go with regards to my specific job functions as I do with iOS. As much as I enjoy and appreciate evaluating other other platforms and as much as other platforms have some things that I truly like, at the end of they day I will choose the device that makes my life and my job easier. For the kind of work I do and the manner in which I get things done, other platforms I’ve tried require more work and more time than it takes to do the same thing on iOS. That alone makes the choice easy for me. I don’t want to work for my smart devices, I want them to work for me.

For Me and Maybe Not You

Now I’m sure at this point many passionate fans of other platforms want to point out all the reasons why their platform of choice is better than mine—but let’s remember one thing. Just because your favorite color is green doesn’t mean mine has to be also. Just because you like BMWs doesn’t mean I have to as well. Insert any analogy you like here. The best device is the one you chose for specific reasons unique to your wants. The best device for me is the one that meets my individual needs, wants, and desires. Yours may be different and that is ok. We don’t live in a black and white world and I hope we never do. I fully acknowledge and appreciate the benefits of other products. I also know no device is perfect. But for me, time after time, device after device in which I put through the the paces of my personal life and workflow, all roads lead back to iOS.

Apple iWatch vs Google Glasses and the Next UI Battle

Rumors of the Apple iWatch continue to sprout. Google Glasses will soon be for sale. The “Internet of Things” and wearable computers are quickly transitioning from the realm of science fiction into our everyday reality. Very soon, sensors throughout our homes, on our pets and possibly inside our bodies, all monitored or even controlled by our smartphone, will be the norm. Imagine now if these were ad-subsidized devices, like Android or Kindle, offering no escape from the latest marketing pitch or sponsored social media update. Is this a tolerable future?

While many analysts doubt the ability of Apple to maintain its margins in the face of stiff competition from the likes of Google and Amazon, companies that sell hardware at cost and make it up on advertising and ‘content’, I think the opposite is true: We are on the cusp of a world where personal computing hardware will become increasingly more important and more profitable. This favors Apple. Moreover, as hardware and computing become increasingly smaller and more personal, the Google business model, which fully relies upon advertising, may simply become too intrusive to tolerate.

Tim Cook recently said Apple is not a hardware company. With iTunes and iCloud, retail, services and accessories revenue, Cook is technically correct. Nonetheless, Apple makes most of its revenues directly from hardware. Google CEO Larry Page prefers talking about “moonshots” and driving “10X” changes in our thinking. He doubtless understands, however, that his company makes nearly all its money – and has from the beginning – on advertising. Following the money helps us not only to properly value these companies, but serves as a lens into their future. I suspect we will quickly witness fundamental differences in the design philosophy and user experience from the new wearable computing products coming out of Apple and Google.

The next design battle will almost certainly not be about “skeuomorphism” versus “flat design”. Rather, monetizing hardware, the Apple way, versus monetizing data and advertising, the Google way, will set the stage for this next great battle.

Advertising

As hardware becomes ever-more integrated with our physical self, will we dare rely on lesser hardware that is subsidized by advertising? Maybe. While many may reflexively assume that advertising is always bad, this need not be the case. The promise of Google is that it will provide us with the right information at the right time in the right format for the right device. In some cases, this may be an ad. The problem, of course, is that to succeed with such a mission, every user must hand over to Google an exponentially larger set of personal data, more personal than ever before: where we are, who we are with, what we are doing, how high is our blood pressure, how sad is our mood, how many calories in that muffin we weren’t supposed to eat. When will this become too much?

Intrusion

Advertising is not merely built upon data collection. It also requires interruption – what I call the “intrusive business model”. I think the most potentially intractable problem that Google faces in its quest to create connected, personal hardware devices, one that Apple is liberated from, is the fundamentally intrusive nature of its business model. We may all “search” for information, but that does not necessarily mean we want to be bombarded with ads. Ads are already everywhere, it seems; within our (free) apps and games, on Google maps, scattered across web pages, inside YouTube videos, and more and more on the Google search page. Where does this end?

I don’t want my Google Glasses, for example, to pop up ads right in my eye, nor have a commercial play some catchy jingle into the sensor I keep in my ear. I don’t want my iWatch clone, for example, to vibrate every time it thinks I might be interested in some deal or datapoint – when in fact, it’s really because the sender – the intruder – is making money off stealing my attention. As computing becomes increasingly more personal, there is a very real chance that Google’s business model becomes increasingly more intrusive.

Apple is almost the exact opposite of intrusive. What is iPad but a beautiful pane of glass that we operate with the touch of a finger. Complexity vanishes. We are free from intrusion. This is the case for Apple software as well. Consider that both iOS and Mac OS place the focus squarely on, well, focus – and not on multitasking, alerts, notifications and other intrusive messaging forms.

Presentation

There is an obvious tension here, and it may favor Google. With Apple products, when you want data, you swipe the screen, for example, or beckon Siri. Consider Android versus iPhone differences. Notifications, reminders, alerts, home screen messages and the like are all much more readily presented and visible with Android. Apple’s model favors waiting for the user to seek and request data. For advertising, I absolutely favor the Apple way. But not all data is advertising. In many instances, we want immediate ‘glanceability’ for real-time information. Sometimes, when the data is truly what we need, we want to be intruded upon. I want my maps app to tell me that the road ahead is jammed – even if I am on the telephone. Or, as in the case of a Fitbit bracelet, for example, I may ultimately want to be reminded over and over again to do my exercise for the day. This form of data intrusion favors Google.

The question for Google, though, is can they truly intrude upon our personal space only when we really want or need the intrusion? For a company that has made all its money over the years by flashing advertisement upon advertisement across every one of our screens, I have serious doubts.

Through patent filings, we know that Apple has been working on wearable computing devices for at least several years. Such devices can continuously record our heart rate, monitor our environment, potentially know us better than our friends and doctors. As our devices learn more and more about us, know more of our likes, habits – and needs – there will be a great debate on when and why to ‘intrude’ upon the user. Google plasters extraneous information across all their products and services because their business model demands this. Crossing that ‘intrusive’ line will likely become too enticing for them, I suspect, pushing more and more users to Apple and its “expensive” hardware. Apple, however, needs to understand that sometimes, in some cases, intrusion is good.

Tim Cook Addresses The State Of Apple

On Tuesday, February 12, Apple CEO Tim Cook spoke at the Goldman Sachs Conference and provided us all with some miscellaneous thoughts on the state of Apple. What follows are my thoughts on his thoughts. (All quotes are from Tim Cook unless otherwise attributed.)

Cannibalization

“The cannibalization question raises its head a lot. The truth is, we really don’t think about it that much. Our basic belief is, if we don’t cannibalize, someone else will. In the case of iPad particularly, I would argue that the Windows PC market is huge and there’s a lot more there to cannibalize then there is of Mac, or of iPad. I think if a company ever begins to use cannibalization as a primary or even a major factor of what products to go to, it’s the beginning of the end.”

Some variation of this statement should be tacked on the wall of every corporate CEO in the world. We live in an age of accelerating disruption. If you don’t constantly seek to disrupt (cannibalize) yourself, someone else will surely do it for you.

Low-Cost Phone

“We are making moves to make things more affordable. When we came out with iPod it was $399, today you can buy an iPod Shuffle for $49. Instead of saying how can we cheapen this iPod to get it lower, we said how can we do a great product, and we were able to do that. The same thing, but in a different concept in some ways.”

Industry watchers should pay particular attention to these words. Notice that Cook didn’t say that the price of the iPod had dropped. Rather, Apple created a wholly new product in the form of the Shuffle that provided a lower cost alternative to the iPod

During the holiday quarter, Apple sold almost every iPhone 5 that they could make. Apple is not going to make a lower cost phone just to make a lower cost phone. Like the Nano and the Shuffle, Apple will make a lower cost product if they can find a way to provide greater value to their customers. But like the Nano and the Shuffle, it’s likely to be a wholly new product, not just a cheaper version of the original.

Apple Retail Stores

“The average store last year was over $50 million in revenue.”

As the chart from Asymco, below, shows, Apple didn’t just make double the per square foot value of the average retail store, they made double the per square foot value of the second best retail store in the world (Tiffany). To say that this is astonishing is to damn with faint praise.

An average of fifty million in revenue, per store. That’s breath taking. There isn’t a CEO in the world who wouldn’t give their eye teeth to have such numbers.

Demand

“We had a difficult time last quarter with satisfying everyone.”

On January 13, 2013, The Wall Street Journal reported:

“Apple Inc. has cut its component orders for the iPhone 5 because of weaker-than-expected demand, people familiar with the situation said…” ~ Wall Street Journal

Well, “people familiar with the situation” should be embarrassed and the Wall Street Journal should be mortified for printing that poppycock. We now know that Apple couldn’t make iPhone 4, iPhone 5, iPad Mini and iMacs fast enough. Apple’s inability to meet demand may be a problem, but demand most assuredly was not their problem last quarter.

Tablets

“The tablet market will be huge, it will be a huge opportunity for Apple.”

“If you look at the full year last year, there were more iPads sold than HP sold of its entire PC line-up. There has been a sea-change. We’re in the early innings of this game. The projection is that this is going to triple in 4 years. When you think about that, the actual number is 375 million, that’s more PCs than are being sold around the world. The tablet is attracting people who have never owned a PC and people who have owned them but aren’t great in the experience.”

“Sea change” is exactly the right phrase to describe what is happening in computing. The inimitable Horace Dediu commented that: “…iPad revenues were $10.6 billion last quarter. Google revenues (ex-Motorola) were $12 billion and Microsoft’s Windows and Windows Live were $5.9 billion. It won’t be long before iPad will be bigger than both Windows and Google.

Below is a chart showing the relative position of Apple to other tablet manufacturers.

(Image courtesy of Why Apple Will Continue To Climb)

To put it in a nutshell, no one is better positioned to take advantage of the changeover from notebooks and desktops to tablets than Apple is.

So, to sum up, iPhone revenues already exceed all those of Microsoft and the iPad is about to duplicate that feat. That’s a pretty nice little business you’ve slapped together there, Mr. Cook.

Market Share

“I have no idea what market share is, we’re the only company that really reports the units we sell.”

Does Apple’s market share really matter all that much? Well, let me put it this way. During the past year and a half, Android’s market share numbers have exploded. And what is the price that Apple has had to pay? Apple has INCREASED its profit share from 50% in May 2011 to 72% last quarter. And they’ve done all that while only controlling a total of 7.8% of the mobile handset sales. There isn’t a business in the world that wouldn’t gladly take profit share over market share. And that should be the end of the story.

Of course, the counter-argument is that profits are a trailing indicator and that dominant market share must, inevitably, lead to a dominant platform. Only all the available evidence says just the opposite. Apple has the smaller market share, but they have the dominant platform. In fact, Tim Cook just provided us with 8 billion more pieces of proof to support that claim.

“…we built an ecosystem that is the best in customer experience on the planet. In addition, it’s fueling an incredible economic gain for developers. We’ve paid over $8 billion to developers.”

For those of you who are keeping score at home, that’s a jump of $1 billion in payments to developers in just one month.

Here’s a rule for us all to live by: When our theory conflicts with reality, we should create an alternative theory, not an alternative reality.

(As an aside, if Apple has 72% of the mobile phone profit share with only 7.8% of the market share, then with about 50% market share in tablets, what do you suppose their profit share is?)

Apple’s Achilles Heel

“If you look at skills, Apple is in a unique and unrivaled position. Apple has skills in software, in hardware, and in services. The model of the PC industry, that model’s not working for what consumers want today. Consumers want an elegant experience where the technology flows to the background. The real magic happens at the intersection of these, and Apple has the ability on all three of these spheres to innovate like crazy and really cause magic.”

One of the keys to the Macintosh was its hardware and software integration. One of the keys to the iPod was its integration with iTunes. One of the keys to the iPhone and the iPad was their integration with the App store.

Tim Cook correctly identifies one of the keys to Apple’s future – the integration of hardware, software and services. And he’s right when he suggests that the model of the PC industry is not working for what consumers want today. This is evidenced by the fact that many companies are moving toward a more integrated approach.

However, while Cook states Apple’s integration as a fait accompli, it is, at best, a work in progress. Apple has proven its competency in integrating hardware and software but with services like iCloud, maps, game center, etc., the jury is still out.

It is good that Tim Cook is talking about the integration of hardware, software and services. But whether Apple can deliver on the promise of his words is still an open question. And the future success of the company may well rest on the answer that Apple – and its newly revamped administrative team – provides over the next two years.

Should Apple Make A Larger iPhone?

There has been chatter of late around Apple’s plans for the iPhone. Some suggest they need to make a more affordable version of the iPhone. Notice I didn’t say cheap. The logic for a more affordable iPhone is that it will open the door to new customers, especially in emerging markets, who can’t afford the high price of an unsubsidized iPhone. There is a lot of merit to this argument and if done right it can be a healthy addition to the iPhone product line.

The other speculation as of late is that Apple could make an even larger iPhone than the current 4” iPhone 5. This would fall into the larger phone category (some call it Phablets) and would give Apple a competitive iPhone for those who desire larger screens in the 4.7-5.5” range. Apple making a larger iPhone is a newer element to the discussion but one that is worth some thought for those of us who analyze competitive trends.

No matter how you slice it, I believe the time has come for Apple to expand the current iPhone line. This would mean releasing two or three current generation devices in the same year each targeted at different audiences. Apple does this now with the Mac line where they have 11”, 13”, and 15” products in their lineup. Arguably they also do this with the iPad line offering both the 4th generation larger screen iPad and the iPad Mini. I believe it is time this same thinking comes to the iPhone.

Although I think the idea of a more affordable iPhone is compelling, if I had to choose the strategy for either the more affordable iPhone or a larger screen size version for the first product to expand the lineup, I would choose the larger iPhone.

My reason for this logic is the ecosystem. As we have learned from Android phones, focusing on the low-end lowers engagement and ecosystem investment. Those who have cost constraints simply don’t spend as much in an ecosystem. A large question looms as to whether iOS would lead those in the cost conscious category to higher engagement or ecosystem investment. But the evidence we have so far is that the lower end of the market uses these devices very different than the tiers above them. And not in ways that lead to loyalty or deeper ecosystem investment.

Ecosystem investment is important to Apple. Horace Deidu and analyst at Asymco tweeted out the following data yesterday:

Speaking of new legs on the stool, in the last quarter iTunes and Accessories generated as much revenue as the Mac.

— Horace Dediu (@asymco) February 10, 2013

Also in a tweet earlier than that one Horace estimated that gross margin for iTunes is now 15%-17%. This is why for the current growth trend and competitive strategy for Apple, focusing the iPhone lines on segments who can and will invest in the ecosystem is important.

An expanded current generation iPhone line not only gives more customers a path to Apple’s door, it gives more customers an opportunity to invest in Apple’s ecosystem.

Now turning our attention to the topic of Apple making a larger iPhone. I wrote on Friday about my experience thus far with the Galaxy Note II. I made many conclusions in that article and the primary being that larger phones, those above 5” are actually more tablet like than phone like. Yet the value of a pocketable phone/tablet is apparent. The question that needs answering is whether or not the market for larger phones (Phablets) is big enough for a company looking for mass market products—like Apple— to care about. I believe the answer to that question is yes.

Is The Market Large Enough for Large Phones?

The Galaxy Note I sold about 10 million devices world wide in 2012. They will most likely sell at least 20 million this year and most well reasoned analysis I have seen project a steady growth trend for these larger size smart phones. The reasons are simple.

For many markets people can’t afford a smart phone and a tablet. For many markets, especially emerging ones, a product that can merge the benefits of a phone and a tablet is a compelling value proposition. We all know that the phone capabilities of any device is simply just an app, but the portability or pocket-ability is important for a device that is with us 24/7. This is what makes the larger phones a legitimate category. Just how big a percentage of the overall smartphone market large phones are, is a project I am still undergoing. I believe it is larger than 10% but how much larger I am not yet sure. Even if it is only 10% of the overall growing smartphone base of the next few years, it would be in the hundreds of millions.

For more analysis on the value this form factor brings to market read my column on the Galaxy Note II.

Room to Innovate For Larger Devices

Using the Note II, and for that matter the iPad Mini, has led me to think about those form factors as unique sizes to solve challenges for one-handed operation. 5-7” devices, whether phone or tablet, are still manageable to hold and do some operation with one hand. Samsung included some software around the keyboard and keypad to make one-handed operation easy but the device is still to large for full ease of one-handed operation. I genuinely believe this form factor presents some unique opportunities for innovation.

One way could be by using voice, and in Apple’s case Siri. Our research has continually returned many of the primary use cases for Siri not just being search but also automation. Set reminder, add a calendar event, post to Facebook, send a tweet, set an alarm, etc., are all examples of common automation tasks from heavy Siri users. One simple way to address some of the issues with one-handed operation on larger screen devices will be around voice.

Another is sensors. As sensor technology evolves we will be able to embed these sensors into the bezel of the larger devices. The Galaxy Note II was almost impossible for me to reach the back button with just one hand. The back button is a key function of Android and is needed throughout much of its UI. A sensor solution could allow me to have a back button function by simply taping the side of the device. Scrolling was feasible but not ideal on the Note II. This is also a use case I found was capable with the iPad Mini but not as much with the iPad. Sensors could be embed into the sides of the device and allow a slide of the finger down the side to act as the scroll function. There are many more opportunities for sensor control than I can get into here, but I believe this is an area for innovation and improvement. By Apple innovating to solve some one-handed operation problems for a larger iPhone, they can leverage those innovations for iPad as well.

In a market the size of smartphones, staying competitive will mean offering a range of devices. The smartphone market is mature enough that it has begun to segment. An iPhone designed to serve the market that wants a larger screen, which can add to more productive and more media rich experiences in a pocketable form factor, is a good move in my opinion. One that Apple could do right and again put them years ahead of the competition.

Sony’s decline: Have they eaten the poison Apple?

“Those who cannot remember the past are condemned to repeat it.” – George Santayana, 1905

For today’s history lesson, we’re going to look at two of the biggest names in the tech industry that have risen and fallen in complimentary distribution with one another since the 1980’s. As one company climbed to the top, the other plummeted but now the tides have changed.

I’m talking of course about Sony and Apple, two companies with storied histories that bear some key similarities to each other. In the successes and failures of each company, the brilliance and blunders seem to be passed back and forth. In order to move forward towards the future, we must look back at the past; so let’s take it from the top.

The 1980’s were a strange time in America; MTV, big hair, and the Brat Pack are some of the first things that come to mind when I think of that decade. Of course, the 1980’s also ushered in a new era of technology, and Apple and Sony were at the forefront. In the beginning of the 1980’s, Apple came out strong with a record breaking IPO and the Macintosh computer. Things quickly went south for the computer giant, as infighting and a decline in sales ultimately saw Steve Jobs leave the company in 1985; beginning what many would refer to as “the dark years” at Apple. During that same time, Sony had started the 1980’s with dismal profits during a global recession that saw a drop in electronics sales.

One of the things that saved Sony was its creativity and drive to pioneer new technologies. While it lost the “format wars” between VHS and Betamax, it was able to move past and eventually develop technologies such as the Compact Disc and Walkman. Similarly, it branched out beyond consumer electronics and got into the music and movie publishing industries; creating a revenue stream that would allow it to profit several times over from single products. Its latest demise, however, came from the company aggressively expanding into new businesses and technologies with little communication or collaboration between the departments. The question now is “Will they bounce back?”

Apple was able to bounce back from those “dark years” when Steve Jobs came back. Under his leadership, the company was able to re-focus and re-establish its brand. They were able to focus on creating great products from top to bottom, coupled with a user experience that was second to none. If Sony wishes to recover in the same way Apple did, then perhaps they’ll do the same. Sony’s reach is a bit broader than Apple’s so in order to do that, they’ll need to increase the communication and support between departments. They have all the parts they need to return to the top, they just have to deliver what the customers want. Apple delivered things that consumers wanted before they even knew that they wanted them. Sony’s approach as of late has been more stagnant, where they wait for something to come out and find a way to replicate it.

The sting of a few hard blows to a company can send it reeling and certainly bruise some egos. Sony needs to take a whiff of the smelling salts and come out of the corner swinging. Once they return to their roots of innovation, creativity, and quality they’ll be sure to see success once again.

Opinion Cast: Are Phablet’s For Real? Should Apple Make One?

This week Shawn and Ben discuss Ben’s column about the Galaxy Note 2. Ben goes in to more depth on his thoughts on Phablet’s and what they bring to the table in terms of an experience. We also explore whether or not Apple should get into the large phone market. We tried to stay short and sweet and kept this one to about 15 minutes.

For more context as well read Ben’s article on the Galaxy Note 2.

You can also subscribe to our opinion cast in iTunes here.

The Mobile Train Has Left The Windows 8 Platform Behind

Yesterday, Canaccord Genuity, came out with a report on the profits taken in by the mobile phone sector and Canalys came out with a report on the market share in the tabet, notebook and desktop sectors – and all anyone could talk about was whether Apple and Samsung could take in more than 100% of a sectors’ profits or whether the tablet was truly a PC or not.

Please. These are accounting and verbal semantics that are as meaningless as asking how many angels can stand on the head of a pin. Let’s focus on the implications of these reports and ignore the bickering over irrelevant rhetorical flourishes.

Handset Profits

According to Canaccord Genuity, Apple took in 69% of the handset (all mobile phones, not just smartphones) profits in 2012. Samsung took in 34%, HTC accounted for 1%, BlackBerry and LG broke even, Motorola and Sony Ericsson both acounted for minus 1 percent and Nokia brought up the rear with a negative 2 percent of the industry profits.

No one not named Apple or Samsung is making any meaningful profits from the handset sector. Considering that both Microsoft and Google’s Android are based on a licensing model, this is more than a little shocking. Licensing is supposed to encourage variety among hardware manufacturers. Clearly, that is not happening.

Many industry observers have the handset market all wrong. They opinie that Andoid is destroying iOS. What is actually happening is:

1) With 69% of the profits, iOS is doing just fine. More than fine, actually.
2) Android destroyed every phone manufacturer not named Apple (BlackBerry, Nokia, Palm, etc.).
3) Samsung destroyed every Android phone manufacturer not named Samsung (HTC, Motorola, Sony Erricson, etc.).

Pundits like to predict the imminent demise of iOS, but those profit numbers say just the opposite. And even as Android’s market share has increased, iOS’s profit share has increased too. Market share is no guarantor of profits. This should be self-evident. But apparently, it’s not.

The big losers here are Palm, Nokia, BlackBerry and Microsoft. Palm is gone and Nokia and Blackberry’s market shares and profits have fallen off a cliff. And Microsoft? After three years of flailing, Microsoft’s Windows 7 is dead and Windows 8 phone manufacturers are all in the red.

Tablet, Notebook and Desktop Market Share

Worldwide PC shipments increased 12% year-on-year in Q4 2012 to reach 134.0 million units, with pads accounting for over a third. ~ Canalys

There are two things that we can take from this statement. First, personal computing sales are growing at a respectable rate, however all of that growth is coming from tablets, not from notebooks and desktops.

Second, tablets now make up one-third of the mix of tablets, notebooks and desktops. In fact, several groups are now predicting that tablets will outsell notebooks and desktops by the end of 2013. This is a monumental shift in form factors and not everyone is making the changes necessary to stay abreast.

Companies like HP, Lenovo and Dell missed the shift to smartphones and now they’re missing out on tablets too. But of all the companies being hurt by the rise of smartphones and tablets, I think that Microsoft has been hurt the most:

…only 3% of pads shipped in Q4 2012 used a Microsoft operating system. The software giant’s entry into the PC hardware market was something of a non-event. High pricing, poor channel strategy and a lack of clarity regarding its RT operating system led to shipments of just over 720,000 units. ‘The outlook for Windows RT appears bleak. ~ Canalys

Who Is Selling All Of The Tablets?

According to Canalys, Apple – despite being supply constrained – sold 22.9 million tablets for 49% share, Samsung shipped 7.6 million tablets, Amazon shipped 4.6 million tablets for 18% share, and Google’s Nexus 7 and 10, combined, shipped 2.6 million tablets.

Again, companies like HP, Lenovo and Dell are almost non-existant in the 10 inch tablet space and Windows 8 tablets aren’t even competing in the rapidly growing 7 inch tablet space.

As an aside, Canalys seemed impressed with the Google Nexus numbers but I’m not. If you’re selling your hardware at cost and making it up in content and advertising sales, then your sales numbers should be much, much higher. And it has to be an embarrassment to Google that the Amazon tablets – which have the same business model as Google – are far outselling Google’s tablets.

Who Will Be Selling The Tablets Of Tomorrow?

‘Those who control ecosystems, such as Amazon and Google, can obtain revenue from content sales, but pure hardware OEMs must accept decreasing margins or exit.’

Samsung made impressive growth in tablets this year, but their tablet future seems uncertain. With Amazon, Google and Apple all able to supplement their tablet incomes with App and content sales, Samsung is left out in the cold.

It’s still early days for Windows 8 tablets, but it’s not looking good. I expected there to be an explosion of Windows 8 tablet sales last quarter due to pent up demand and holiday buying. The question in my mind was whether Microsoft would be able to sustain its large initial sales momentum.

That initial sales explosion didn’t happen. Windows 8 tablet sales were more than disappointing. An ill omen if ever there was one. And as I’ve stated before, regardless of how well the Surface Pro sells, it is a notebook, not a tablet, competitor. In a world where tablets are clearly the next big thing, Microsoft is still insisting that what people really want are hybrids, not pure tablets.

Conclusion

Smartphones and tablets are growing and notebooks and desktops are stagnant or declining. Only Samsung and Apple are competing in phones. Only Amazon, Google, Samsung and Apple are effectively competing in tablets. The mobile “train” has left the station and companies like HP, Lenovo, Dell and Microsoft are standing on the Windows 8 platform, watching it pull away.

What Tech Company is Healthier Than Apple?

When it comes to understanding the stock market, I acknowledge I am no expert. I am not a financial analyst and my research is not directed at those making stock bets. Yet if I was to put myself in the shoes of a financial analyst or someone looking to make long term bets on tech companies, I would have to wonder what company is a better long term bet than Apple? In my opinion there isn’t one.

I do industry analysis and not financial analysis, however, my work often results in very company specific analysis. I do quite a bit of scenario planning as it helps guide our trend and strategy reports. I can say with quite a bit of confidence that as I survey all the current players in the technology industry, Apple is the one I worry the least about. In fact my only concern for Apple is that they are having trouble keeping up with demand. Their earnings call revealed that Apple was supply constrained in almost every product category. Apple could not make enough products fast enough.

What other company has this problem? Apple has this problem in the tens of millions of devices per quarter range and in the foreseeable future hundreds of millions of devices per quarter. The level of scale for the precision engineering of Apple hardware is unprecedented in consumer electronics. I can’t think of a single more elegantly designed piece of hardware that was mass manufactured to the degree of the iPhone.

I remain confident, as I look at the strengths, weaknesses, executive management, competitive landscape, and the core strategies of all the companies in the technology landscape, that Apple is among the few I am certain will still be relevant and in the game 10 years from now and for much longer.

Others Going Vertical

A question I look at as I analyze specific companies is who is building a strategy to be a long term company. Many tech companies develop strategies and create corporate vision in the 3-5 year range. Many also don’t even go that far as they are only planning 1-2 years out. There are a rare few companies who strategize a bit longer and Apple is one of them.

Yet if you look at some of the core strategies of those who I think are thinking longer term, you will note that they are headed down a vertically oriented path—just as Apple is. Microsoft will inevitably get into more hardware business, Lenovo has their own smartphone OS in China, Samsung will invest in its own middleware solution and Google owns a smartphone and tablet hardware company.

Companies today are faced with the reality that a hardware only business model is not sustainable. That business model always results in a ruthless race to the bottom. Companies who can add unique value at the software and services level can protect their hardware efforts. In mature markets the vertical model is the most sustainable and defendable model there is. So it is easy to see why others are on the verge of going fully vertical the same way Apple has been for decades. Which brings up an interesting point and it gets to the question of my columns title.

Almost every major company who is thinking long term is headed in a vertical direction. This is a model that Apple has used since the beginning. To put it another way, Apple has decades of experience executing the very model that many companies are hanging their future on. This does not mean that others will be successful implementing a vertical model, only that they believe it is the way forward.

There is a massive land grab and Apple does not need to own as much land (market share) as others in order to have an incredibly large and profitable business. If Apple simply acquired and maintained 10% of the global smartphone market (when it is saturated) they would ship five times as many iPhones as they currently do. I believe Apple will get and maintain a larger piece of the global pie for smartphones and tablets but I use that number to make a point.

I recognize that investors have a distorted and mostly short term view of the world. So I can’t fault them for being short sighted. But I would encourage them to dig deep down and ask themselves what tech company is more heathy than Apple and better positioned for success in the long run? If Apple isn’t still on the forefront of innovation then who is?

At the launch of the first iPhone, Steve Jobs said this:

“Every once in a while a revolutionary product comes along that changes everything”

Stop expecting Apple to make every once in a while happen every year.

Apple’s Transparency

I don’t hear the topic of transparency brought up nearly enough. I asked the question in my column today of what company is more healthy than Apple and now I ask what company is more transparent than Apple? The cost of being transparent is that inevitably you will expose some dirt. Most companies want to sweep dirt under the rug. But as I read the latest supplier responsibility progress report from Apple, it hit me that Apple is not just interested in exposing the dirt but actively trying to clean it up.

Now I know many tech companies do this but I have to emphasize that it is a very difficult problem and its not one that a company who is in a commodity race to the bottom would have the time or money to truly invest in. However, this most recent report from Apple released today included something that I thought was extremely interesting.

Take a look at the following core violations Apple found and the action taken.

The part that stuck out to me was that Apple terminated business with the supplier. This is more than just a small detail. Apple chooses suppliers for very specific reasons largely unique to a product or process. Often times heavily customized processes are in place at these suppliers for Apple’s products thus making a relationship with that supplier more like an investment. For Apple to terminate business with a core supplier could have significant supply chain ramifications. Replacing that supplier is also not an overnight process but takes time and more equity to get a new supplier up to speed.

This is interesting to me because if all Apple was interested in was a pure profit motive, they would not have taken an action like this.

Here was another one I found interesting on the topic of bonded labor or human trafficking.

Apple actively investigated and worked to resolve accounts of forced (slave) labor in factories that make their products. Again what does this say about Apple and their philosophy as a company? Are these moves a profit at all costs kind of action?

These kinds of things impact change of a positive nature. I know from many sources I speak with in the supply chain that getting a deal with Apple can literally change the fortunes of many overnight. Actions like this will hopefully help those companies bidding for Apple’s business in future product follow ethical principles in their business practices if they want a chance at Apple’s lucrative business.

Fascinating stuff and very encouraging. Obviously global supply chains are hard to manage and often filled with dark secrets most care to keep in the closet. We can only hope that continued work like this and greater corporate transparency becomes common practice throughout the industry.

Miscellaneous Musings On Apple’s Earnings And The Future Of Personal Computing

Yesterday Apple released their earnings for the fourth quarter of 2012. It is important to note that Apple had 14 weeks, as compared to the normal 13 weeks, in their year ago fourth quarter. In order to equalize results, all comparisons will be done on a week to week, rather than on a quarter to quarter basis.

(All quotes are from the Apple earnings call.)

(Chart via Ars Technica)

Mac

Apple sold 4.1 million Macs compared to 5.2 million in the year ago quarter. That’s a decline of 16% on a week to week basis. My initial reaction to this news was that Macs were suffering from the same malaise that is plaguing all notebook and desktop computers. I’m sure that this is somewhat true, but Apple laid the blame squarely on supply constraints. In other words, they couldn’t make their Macs fast enough to meet demand.

…we were significantly constrained with respect to the new iMacs and we’re only able to ship them for the final month of the December quarter. We believe our Mac sales would have been much higher absent those constraints. ~ Peter Oppenheimer

Further, it does not appear that Apple is confident that they will be able to make enough Macs for the upcoming quarter either.

On iMac we’re confident that we’re going to significantly increase the supply, but the demand tier is very strong and we’re not certain that we will achieve a supply/demand balance during the quarter. Peter Oppenheimer

iPad

Apple sold 22.9 iPads compared to 15.4 million in the year ago quarter. That is an increase of 60% on a week to week basis.

Clearly the iPad Mini was a big seller, although Apple didn’t break out the specific numbers. Again, Apple couldn’t make enough iPad Mini’s to satisfy demand and they’re still struggling to make enough, even now.

…the iPad mini was very constrained.

We believe that we can achieve supply-demand balance on iPad mini later this quarter.

One interesting note is that the popularity of the lower priced iPad Mini brought the average sales price (ASP) of all iPads down by $101 on a year-over-year basis.

iPhone

Apple sold 47.8 million iPhones compared to 37 million in the year ago quarter. That’s an increase of 39% on a week to week basis.

Again, for much of the quarter, Apple simply couldn’t make enough iPhone 5’s to satisfy demand. More surprisingly, Apple was unable to make enough iPhone 4’s to satisfy demand and they are still struggling to do so.

If you look at the iPhone sales across the quarter, we were very constrained for much of the quarter on iPhone 5.

iPhone 4 was actually in constraint for the entire quarter…

…supply of iPhone 5 was short to demand until late in the quarter and iPhone 4 was short for the entire quarter.

We believe that we can achieve supply/demand balance … on iPhone 4 during this quarter.

This information, along with reports from Verizon, would seem to suggest iPhone 4 sales were growing in caparison with the iPhone 5. However, we have two statements in the earnings call that seem to counter this conclusion.

…the ASP for iPhone was essentially the same year-over-year in the quarter that we just finished.

If the mix of iPhones was drifting towards the older models, one would expect the average sales price to go down, not remain the same.

…if you looked at the mix of iPhone 5 to total iPhone and then in the previous year you look at 4S to total iPhones towards the top iPhone those mixes are similar.

That’s about as plain as it gets (although I still wish it were plainer).

iOS

All told, Apple sold over 75 million new iOS devices this quarter bringing their total to over half a billion. Kantar estimates that Apple gained 6.3% market share in the U.S. and maintained market share in Europe with growth of only 0.2%

Revenue, Income & Cash

Apple’s revenue for the quarter was 54.5 billion compared to 46.3 billion in the year ago quarter. That’s an increase on a week to week basis of 27%. To put that into perspective:

— Apple generated more revenue in one quarter than Google did in all of 2012.
— Apple is getting close to generating as much revenue in one quarter as Microsoft does in one year.

Apple’s net income (profit) was 13.1 billion. That’s an increase on a week to week basis of 8%. To put that into perspective:

— Apple made over a billion dollars in profit a week.
— Apple made more in profit (13.1 billion) than Google made in revenue (11.34 billion). Further, Apple generated as much profit in three weeks as Google did in three months ($2.89 billion).
— Apple’s 13.1 billion in earnings this quarter was the fourth largest of all time.

Apple’s cash totaled $137 billion compared to $121 billion at the end of the September quarter. That’s a sequential increase of almost $16 billion.

The Future Of Computing In Two Parts

I have a pet theory that mobile computing is breaking into a premium iOS operating system and a commodity Android operating system. Please pardon the following very long quotes from Apple’s earning call, but it appears that Apple is thinking along the same lines:

While other mobile devices and operating systems faced increasing security risks and fragmented inconsistent user experiences iPhone and iOS continue to deliver an exceptional experience that people love. They also provide a secure and trusted ecosystem that IT departments require. iPhone continues to be embraced by government agencies and businesses across the globe.

Many U.S. government agencies are issuing iPhones by the thousands as part of their new mobile strategies. Some examples include NASA and National Oceanic Atmospheric Association, Immigration and Customs Enforcement, and the Transportation Security Administration.

We’re also seeing continued growth iPhone growth in business across the board from companies replacing existing smartphone deployments to businesses adding first-time smartphone users. Companies around the world like Neiman Marcus, Skanska and Volvo are issuing iPhone to their employees to improve interactions with customers and give workers access to essential corporate data.

In addition to the tremendous response from consumers, iPad continues to be the tablet of choice for businesses and government agencies, transforming the way their employees work. Financial institutions like Barclays, Nomura Securities, and Bank of Beijing are deploying iPad to enable employees to better service customers and work securely with financial portfolios and products. In particular, Barclays’ rollout of over 8,000 iPads has generated tremendous employee engagement and feedback, making it the most successful IT deployment in Barclays’ history.

State and local governments in the United States are also rapidly adopting iPad. Court systems, accounting inspectors, and law enforcement agencies use iPad to streamline processes and replace huge amounts of paper. And state legislatures in Virginia, Texas, and West Virginia are all using the iPad to give lawmakers instant access to government documents and information.

Outside the U.S., 10,000 iPads are being deployed as part of broad adoption of the local government workflow solution in Sweden and over 5,000 iPads have been purchased by the government in the Netherlands for the Dutch tax authority and the Dutch court system.

Note the adoption of iOS devices in business, government and education. These were areas where Microsoft ruled supreme but now their dominance seems to be waning. And these are areas where Android is struggling despite its massive mobile market share.

Conclusion

Apple is engaged in a battle for control over the future of personal computing. Microsoft and Intel won the last battle but, in terms of unit sales and potential profits, that battle seems almost trivial. While Microsoft and Intel controlled the desktop and notebook markets, it appears that the combination of the smartphones and tablets is going to eclipse the PC’s numbers and profits by far.

There are many companies vying to become the king of personal computing. Each company has its strengths and each has its weaknesses. Apple has the hardware and software in place, but the future of computing is the cloud acting as the digital hub for all of that hardware and software and Apple has not yet proven its competency in that realm. Google has the most popular mobile operating system in the world but they haven’t figured out how to monetize it…yet. Microsoft is the king of the notebook and the desktop but that market is diminishing and Microsoft can’t seem to get any traction in mobile (smartphones and tablets). Samsung is making money – though not as much money as Apple – but they are not in control of their operating system or their ecosystem. Amazon? Geez, how does one evaluate Amazon? The less profit they make the more successful people think they become.

Tech is involved in its own personal game of thrones. And there are many new contestants waiting for their chance to steal the crown. It’s difficult to predict the future of personal computing but it’s easy to see that it’s going to be fascinating to watch.

Game on!

Apple and Imperfection

Near the end the dot-com bubble, smart investors finally realized that a major problem with tech stock pricing was that dozens of companies were priced to perfection: Their stock prices were so high relative to the underlying financials that only a perfect performance could justify the share price for any length of time. Very few companies could deliver perfection and the house of cards folded.

Apple these days seems to be the opposite of a bubble dot-com. Despite a depressed stock price–it was trading at a very mediocre 11.6 times trailing earnings before accounting for a sharp after-hours post-earnings plunge. Apple has now given up all the gains of the past year,

And while I am no financial analyst, this is ridiculous. The sharp run-up in the stock that ended abruptly this fall was fully justified by the company’s stellar performance and even at its peak, Apple was still underpriced by most fundamental metrics. Two things have been true about Apple’s performance for some time: Its margins and growth rate were both unsustainable. But in a reasonable world, there was room for both to decline, as they have, and for shares to keep rising, as they most certainly haven’t.

Apple has always been a stock that traded heavily on emotion rather than analysis and now is no different. If pessimists want to drive it lower, they mill, despite a P/E heading for single digits and a price that’s just a bit more than three times the cash on hand.

Disclosure: I do not have any direct position in AAPL stock, though funds I invest in may.

Should Apple Make a Hybrid or Convertible PC?

In a Tech.pinions piece I wrote a few weeks back, I stated that in our talks with IT directors they have been sharing with us their interested in the hybrids or convertibles that are just starting to get into the marketplace. Products like Lenovo’s Yoga or HP’s Elitebook Convertible are attractive to them for various reasons, but the main one is that instead of having to support a separate tablet and laptop, these converged products give them both in a single package.

An IT capable tablet might cost $600 or $700 and an IT grade laptop might cost upwards of $900- $1300 depending on configurations. These convertibles or hybrids are priced around $900-$1300, which is cheaper than buying a separate laptop and tablet combined. Thus, cost of support and cost of ownership is reduced and with IT budgets being stretched these days, lower priced, yet highly functional devices like these hybrids or convertibles makes a lot of sense to them.

We are also seeing some real interest in hybrids and convertibles with SMB and some consumers as well. The compactness of having a 2-in-1 device seems to be of real interest to them as well. At a personal level, I have used a Bluetooth keyboard with an iPad for over a year and in many cases, this has replaced my laptop. However, I still need my laptop to handle what we call heavy lifting tasks like managing my media, doing large spreadsheets or complex documents.

Looking to the Future

In my 2013 predictions column last week, I suggested that hybrids and convertibles could be a sleeper product next year and could catch on with business users in a big way. However, in this same column I made a bolder prediction that Apple would create something I called the AirPad or iPadAir that possibly would be ultrathin like the current MacBook Air and be more like an actual laptop but the screen would detach and become an iPad. Since I made this prediction I have had a lot of calls and emails from people who today have iPads, but tell me they would love to have an iPad/laptop combo device and they would be first in line to buy it.

There is one big problem with my prediction of an Apple hybrid though. Apple CEO Tim Cook has gone on record saying that Apple does not believe this type of device makes sense. They appear heavily opposed to this idea and seem to stand strong around the idea that a laptop is a laptop and a tablet is a tablet. At the moment, you can’t argue with their logic as they are selling a record numbers of MacBooks and iPads, and they may be right. Hybrids and convertibles from the PC crowd have only been out for a short time. Microsoft’s Surface product being the poster child for hybrids also clouds this issue since it acceptance in the market has been lukewarm at best.

Given the type of work we do at Creative Strategies, we get to see a lot of products behind the scenes before they ever hit the market. Over the last three months, we have seen about a dozen hybrid’s or convertibles that will hit the market in Q1 or Q2 of 2013 and some of them are stunning in their design and functionality. On some of them, the screens stay attached and either slide down over the keyboard to become a tablet, or they twist and fold down to also become a tablet in its own right. In our work, we define these types of products as convertibles.

We have also seen a lot of what we call hybrids, in which the screen completely detaches from the keyboard and becomes a much lighter stand-alone tablet. In both cases, some of these are ultra-thin and extremely well designed and I can’t help but believe that when these products hit the market interest by business users and consumers will be piqued. Hybrids dual functionality as a full laptop as well as a real tablet, along with lower pricing than if you bought the tablet and laptop separately, will resonate with many people.

I have also been hearing that the PC side of the house is very bullish on these two-in-one designs and since most of them fall under Intel’s ultrabook designation, they will be heavily promoted next year as part of an increased campaign to get people to buy Ultrabooks. Because of the innovative designs in hybrids and convertibles, which are really eye catching with most priced under $1000, this duality of design and functionality should get a lot of attention next year.

What if the Market for Hybrids Takes Off?

If our prognostication that hybrids and convertibles are correct, and they really take off, Apple will have to look harder at possibly creating a similar type of product for their customers. Today they just let them go out and buy a third party keyboard and force their users to piece together their own hybrid solutions. We have talked to a lot of people who have done this and just love the fact that in a very small package the iPad becomes a powerful productivity tool as well as one that they can use for consumption of media, pictures, etc.

There is strong precedent as well that a product Apple said they would never do they eventually bring to market anyway. Steve Jobs said Apple would not get into phones. And he also said he believed 7” tablets were worthless. However, market dynamics have a way of changing Apple’s position on products they dismiss as not being viable for them to do.

That is why I believe that if hybrids and convertibles really strike a chord with consumers, Apple will have to respond to this possible threat to them, especially in business markets where these types of products are garnering a lot of interest now. Imagine a MacBook Air like design with an iPad tablet that detaches. Given Jony Ives brilliant design acumen, I could imagine an Apple hybrid that would not only be competitive with the PC crowd, but one that would re-define the market for these types of products in the future.

We are in the very early stages of bringing hybrids and convertibles to business users and consumers, so it is too early in the cycle to predict with any certainty the level of adoption of hybrids. But our early research in this area continues to point to the fact that these types of products could be attractive to a large amount of users, and if they do take off and become a threat to Apple, it would not surprise me if Apple responds in kind and creates a product that could turn this market upside down.

4 Technology Trends, 5 Technology Predictions

Prediction is very difficult, especially about the future. ~ Niels Bohr, Danish physicist (1885 – 1962)

Trend #1: Two Seperate And Incompatible Types Of User Interfaces

Personal computing will be divided into two types of user interfaces:

1) Touch; and
2) Pixel-specific (surface-required)

Touch will require the use of only a finger for user input and will work best on the go. Pixel-specific will require the use of a mouse or trackpad which, in turn, will require the use of a flat surface. These two user inputs are inherently incompatible with one another – and that has consequences.

Prediction #1: There Is Little Room For A Category Between The Tablet And The Notebook

I do not think that there is room between the touch-only tablet and the mouse/trackpad-only notebook for the new category of computer that Microsoft is trying to create with Windows 8 tablets. Tablets are becoming more capable. Notebooks are becoming ever thinner and lighter. There is little room for the hybrid. Hybrids will survive as a niche – but they will not thrive as a category.

Many disagree with this opinion, including some who write for Tech.Pinions and everyone who works for Microsoft. That’s the beauty of free speech and free markets. Time – and sales numbers – will tell the tale.

Prediction #2: Tablets Are Going To Be Even Bigger Than We Thought

Tablets are the future and in a much bigger way than even I had imagined.

They are not just becoming an equal to the pixel-input, surface-only devices, they will soon be the default, go-to device of choice. We’ll use our tablets whenever we can, our phones whenever we’re traveling and our surface bound devices only when we absolutely have to.

Pixel input personal computing devices will become like land line phones. They will persevere but with an ever shrinking base and and ever decreasing significance to our lives.

Prediction #3: Apple Will Create A New iPad Mini In The Spring

This is really a sub-set of prediction number two, above.

I believe that tablets are going to be huge in education. Last year, many school districts tested the waters with tablets. This year, many are going to move from trial programs to initiating programs designed to eventually put a tablet in the hands of every single student. This is a profound computing shift which will have a profound effect on education. By 2014 and beyond, the flood gates will have opened and tablets in schools and colleges will be accepted as the new norm.

Apple knows that they currently have an in with the education market. Educational institutions make most of their buying decisions in the Spring. In my opinion, Apple is not going to let the Spring go by without refreshing the iPad Mini.

Trend #2: Two Phone Operating Systems

In the Ninties, there were only two personal computer operating systems that mattered – Windows and whatever Apple was running on the Mac. Windows dominated, but the Mac survived and, in terms of profits, thrived.

Simiarly, there are going to be two operating systems that matter to smartphones. But this will be a duopoly with a difference. Google is not a strong and domineering operating system shepard the way Microsoft was. iOS has 500 million users and is self-sustaining. This time, iOS will be the premium operating system while Android will be the majority operating system.

Prediction #4: iOS will become the premium model, Android will take the rest

iOS will appeal most to businesses, government and education. (The irony of predicting Apple as the preferred operating system for business is not lost on me.) Android will take the rest.

Both operating systems will unhappily co-exist with developers flocking to iOS and cost-concious buyers flocking to Android. The dollars will continue to flow to Apple and the market share will continute to flow to Android and both sides will continue to insist that the other side doomed.

In the meantime, RIM and Nokia will continue to fade and Microsoft’s Windows Phone 8 will stubbornly cling to third place. But a licensed operating system does not fare well as a minority player.

Trend #3: Freemium v. Premium

The chief divide between tablets will not be their size, but their business models. Amazon and Google follow the freemium model. Samsung and Apple follow the premium model. The Freemium’s give away their hardware at or near cost and seek to make money on the sale of content and services. Apple’s premium model seeks to sell their hardware at a profit and encourage those sales through the use of both content and services.

Prediction #5: Samsung Will Be Forced To Create Their Own Ecosystem

In a world where your operating system provider (Google) is undercutting you by selling hardware at cost and taking in all the content and service dollars, there is simply no other choice — Samsung needs to create their own content and services ecosystem. Samsung has been preparing for this moment for quite some time. And we’ll see the fruits of their labor in 2013.

Trend #4: Multiple Screens

I think the biggest trend that is receiving the least attention is that of multiple screens. In 2001, we had one computer screen and it sat on our desktop. In 2006, we had, at best, two computer screens – our desktop and our notebook. In 2013, we have 4 computer screens – our phones, tablets, notebooks/desktops and TVs. And the when and why we use those screens is going to help to shape the future of computing.

I’m going to cop out here and not make any predictions other than to predict that this trend is going to change everything. People are already using two screens – a television and a phone or tablet – to watch TV. And the way we rapidly switch from phone to tablet to notebook and back again is already baffling that way pundits think about categorizing and pigeonholing our computing buying and using habits. Multiple screens deserve not just a simple prediction on our part but ongoing examination and analysis. It is not an emerging trend but an existing trend. It is the consequences that we haven’t yet fully fathomed. Expect to see us talk a lot more about the effects of multiple screen computing in 2013 and beyond.

Despite Competition, Apple’s US Market Share Gains

Happy Friday to anyone working today–or not working–and poking around the inter webs. Although it’s the Friday before the holiday break, some interesting data came out from the Kantar Worldpanel today that I thought I would highlight. Kantar’s latest smartphone sales data is showing that despite the increased competition, Apple has actually grown its smartphone platform market share in the United States.

Global Consumer Insight Director Dominic Sunnebo stated:

“Apple has reached a major milestone in the US by passing the 50% share mark for the first time, with further gains expected to be made during December.”

Other data from the report highlights platform share in other parts of the world and the various changes. However, despite all the questioning I continually see from the investor community of whether Apple can remain competitive despite increased competition, increase in latest Android smartphone subsidies from carriers, other platforms like Windows Phone 8 emerging, yet amidst those questions and what seems like steep odds, Apple is actually gaining market share.

Keep in mind this is all being done with a limited iPhone lineup. One current generation, and two legacy products still selling well in the marketplace. I’ve said for a while now that Apple is competing against an army of Android devices. The continual sales numbers and marketplace demand for the iPhone remains incredibly impressive despite the massive Android army they are competing with.

That alone is enough to show this market is not acting like many of the pundits and financial analysts assume. Many assume this market looks like the PC industry of old where the market is dominated by one single platform. Wrong on every level.

Take a deeper look at this chart (click on it to enlarge it) as it is very telling in a number of areas. First iOS grew from 35% to 53% in the US market, a change of 17.5% from the same period a year ago. Android went from 52.8% to 41.9% in the US market, a decline of 10.9%. The US market is arguably the most mature smartphone market on the planet. I wonder the degree other markets, as they mature, begin to look like the US, keeping in mind the carriers and how and what devices they subsidize over others. All things equal, however, may paint a similar picture. And don’t think for a second the US an insignificant market and/or litmus test for others. No sane executive at any OEMs believes that and in fact I continually hear from them how important the US market is.

This is a huge market and keep in mind the total addressable market for smartphones is not static but it is dynamic. It is growing by hundreds of millions of new customers every year and will do so for at least the next five years. So to say Apple has increased market share in the US, means that they are also attracting new customers and benefiting from the TAM expansion, arguably more than any current vendor.

I’m yet to write my predictions for 2013, and I will the week following the holiday break. But I believe the smartphone market will look very different this time next year and perhaps not in some of the ways assumed by the pundits.

Patents: That Word Does Not Mean What You Think It Means

Yesterday, the internet was abuzz with reports that the U.S. Patent and Trademark Office had “rejected” another Apple iPhone patent. Many commentators jumped to the conclusion that, since this patent figured heavily in Apple’s recent legal victory in a case claiming infringement by Samsung, Apple had been dealt a heavy legal blow. But, it turns out, not so fast. Patent law speaks its own language in which you have to forget about the plain English meaning of words.

What are we to make of a statement like this, in the USPTO finding?

No rejection of the claims, as presently written, are made in this Office action based on the Hill and Ullmann references because the teachings of those references are essentially cumulative to the teachings cited in the rejections below. However, in order for claims to be found patentable and/or confirmed in this ex parte reexamination proceeding, the claims must be patentable over every prior art patent and printed publication cited in the order granting the request.

I think I know what all those words mean, but the passage as a whole reads like something from a nightmare version of a reading comprehension test. I am not a patent expert, and I count on folks like the Verge’s Nilay Patel and Matt Macari, intellectual property lawyers by training, to illuminate the dark ways of patent law. And, as Macari pointed out with regard to a similar USPTO ruling on another Apple patent, the rejection of claims following a request from reexamination, also known as a “first Office action,” is the first step in a very long process.

In this case, the challenge was filed by Samsung and, as is the normal practice, its challenge was considered without any response from Apple (that’s what ex parte means.) Macari cites USPTO statistics that such request are granted over 90% of the time. Apple now gets to come in an defend its patent before the UYSPTO–Samsung isn’t actually a party to the case. In a bit under 70% of such cases, some of the claims of the original patent are invalidated in reexamination while the rest are upheld; the patent in question contains 21 claims. About 11% of the time, all claims are rejected, leaving the patent invalid.

Although the USPTO reconsideration order came to light because Samsung filed it as part of its attempt to change or overturn the recent judgment in favor of Apple, the action is not light to have any impact on that case, at least not any time soon. Under U.S. law, a patent is presumed valid until the USPTO says otherwise. At least for now, the reexamination order should not change anything.

A Deep Dive Into The Morgan Stanley Holiday Quarter Survey

On December 16, 2012, Morgan Stanley issued the results of a consumer survey.

We surveyed 1,010 US adults between November 26 and December 3 2012. The sample is representative of US individuals (18+) by gender, age, income and geographic regions. Conclusions based on total sample have a maximum margin of error of +/- 2.5% at 90% confidence level.

(NOTE: All quotations are sourced from the Morgan Stanley report.)

1) TABLETS

The first and most obvious result of the survey was that tablets, as a whole, were going to be clear winners of the 2012 holiday quarter.

One-third of respondents own tablets today, compared to only 8% a year ago.

While this can come as no a surprise to anyone following the tech industry, it is important to note that, in terms of gift giving for this holiday quarter, the growth of the tablet has come at the expense of notebooks, desktops and especially e-readers.

2) E-READERS

Among consumer electronic gifts, tablets are the most popular, followed by smartphones, while e-readers experienced the largest decline.

— Tablets (50% in 2012 vs. 31% in 2011)
— Smartphones (26% in 2012 vs. 17%)
— E-readers (9% in 2012 vs. 31%)”

Tablets are the number one gift idea in consumer electronics this year, while it was a tie between tablets and e-readers last year.

iSuppli seems to concur with this sentiment, indicating that general purpose tablets are harming e-reader sales.

It appears that they e-readers may well be relegated to niche status as general purpose tablets – which also serve as e-readers – become lighter, smaller and lower-priced.

3) AMAZON KINDLE FIRE

While the Kindle Fire is not strictly an e-reader, it too seems to be suffering this holiday season.

Kindle Fire appeal seems to be waning as 16% of potential tablet buyers would pick the device vs. 21% in last year’s survey

Lower end tablets may be suffering from the effects of increased competition. While the Amazon Kindle Fire was the a hot holiday gift in the fourth quarter of 2011, it now has to compete with the Nexus 7, Windows 8 tablets and the iPad Mini. As a result, Kindle retention numbers dropped from an already low 40% to and even lower 36%.

If these numbers bear out, this has to be terribly dissapointing for Amazon. Last year, there was a burst of enthusiasm for the Kindle Fire line during the holiday quarter but that enthusiasm seemed to all but evaporate as soon as the quarter ended. This year, Amazon introduced several new lines of tablets and vastly improved the quality of their hardware offerings. Surely they anticipated increased, rather than decreased, enthusiasm for their products.

It is too early to tell for sure, but it is possible that we’re seeing a trend away from single purpose tablets and a trend towards higher quality, general purpose tablets instead.

4) SAMSUNG

Samsung phones made an impressive leap in rate of retention from 37% to 63%. (Note, however, that this still does not match the iPhone’s stellar 83% rate of retention.)

While Apple’s retention rate is by far the highest, iPhone users who plan to buy a Samsung device increased slightly from 3% to 8%, though this share came entirely from other Android vendors who saw less interest from current Apple users compared to a year ago. This reflects Samsung’s dominating position in the Android ecosystem and success in marketing itself as an iPhone alternative.

You simply have to be amazed at what Samsung has accomplished and in such a short time. But ironically, Samsung’s growth is not only coming at the expense of competitor’s like RIM and Nokia, but it is also coming at the expense of other Android manufacturer’s as well.

One of the strengths of a licensed operating system like Android is supposed to be diversity of hardware manufacturers. That simply hasn’t happened. While Microsoft distributed its software licences to thousands of hardware manufacturers, Samsung has become the one and only hardware manufacturer that matters to Android. We’ll have to save the discussion of the consequences of this unexpected development for another day.

5) MICROSOFT

The survey contains two interesting points regarding Microsoft’s recent tablet efforts.

First, Microsoft Surface is preferred by 12% of those planning to buy a tablet.

Second, while 81% of iPad users plan to stay with Apple, 8% plan to purchase Microsoft’s surface.

Additionally, a different survey indicates that Windows 8 is a very distant third, to iOS and Android, when it comes to developer’s platform preferences.

I think these results have to be terribly dissapointing to Microsoft. Some pundits were expecting a flood of defections from the iPad once Microsoft debuted its tablet offerings. That clearly is not happening.

Further, I had anticipated an initial burst of enthusiasm for Windows 8 tablets. The real question, in my mind, was whether Microsoft would maintain that initial enthusiasm. Instead, sales of Windows 8 tablets has been tepid, at best. Having 12% of consumers intending to buy your products is far better than having 0% able to buy your products, but I believe that it is far, far less than Microsoft was hoping for or expecting.

6) APPLE

It seems as though the bad press for Apple has been endless of late, but that negative view is not supported by the Morgan Stanley survey. They point to at least four reasons why Apple can be optimistic about sales this holiday quarter.

First, more survey respondents want to buy the iPhone 5 today than the iPhone 4S a year ago.

34% of consumers plan to buy an iPhone in the next 6 months, compared to 30% in last year’s survey

If I recollect, the iPhone 4S was pretty popular last year. And one would assume that even more enthusiasm for the iPhone 5 should lead to even more sales this holiday quarter.

Second, analysts keep opining that Apple needs to sell a cheaper phone but customers keep disagreeing.

More respondents plan to buy the newest iPhone model today than a year ago (86% vs, 82%), likely due to key hardware improvements in the iPhone 5: LTE, brighter screen, and lighter and thinner phone.

Third, the iPad Mini does not appear to be cannibalizing the larger iPad but it does appear to be bringing new customers into the Apple ecosystem.

We believe iPad Mini’s cannibalization risk to iPad 9.7” is manageable. 47% of iPad mini purchasers are new to Apple, according to our survey. This is only slightly lower than 56% for the larger iPad 9.7”, suggesting the smaller iPad is attracting new users to the platform in addition to some incremental or replacement purchases from the existing 9.7” iPads.

Fourth, Apple actually INCREASED its already industry leading retention rate.

Apple’s iPhone retention rate improved 10 points over the last year, and 83% of iPhone users today plan to buy another iPhone.

I find it hard to believe that Apple’s sales are going to suffer this quarter when both purchasing enthusiasm and retention rates are going up.

7) CONCLUSION

There is definitely going to be a shake-out in the mobile sector. There are just too many entrants with too little differentiation.

In phones, not only are Samsung and Apple rapidly increasing their sales numbers but their RETENTION numbers are also rapidly rising. This bodes ill for the likes of RIM and Windows 8 contenders like Nokia and HTC.

In tablets, Apple seems to be maintaining its grip on half the market while Amazon, Google, Microsoft and Samsung battle it out for the other half. Again, in the long run, retention numbers may be what matters most but it is too soon to measure retention for newly minted products like the Google Nexus 7 and the Microsoft Surface.

We’ll know far more in January when (some of) the numbers come out. But until then, the Morgan Stanley survey may give us a peek at what we should expect.

How I Met My Computer: Technologies That Changed My Life

I got into computers because I was fascinated by a friend’s programming manual. It was at the University of Michigan, probably in early 1966, when I had my first look at The MAD Manual, a beguiling guide to the Michigan Algorithm Decoder that borrowed from both Mad magazine and Alice in Wonderland. I was hooked, got a student account, and taught myself to program, which in those days meant pounding out your code on an IBM 026 keypunch, turning in your program deck, and getting output in a day or so.

MAD, a derivative of the now largely forgotten Algol language, was uncommonly elegant and powerful for its day. But the IBM 7090 mainframe on which it ran was soon replaced by a monster System/360-67. It came with time-sharing terminals, but no MAD, so we all had to learn Fortran IV and some 360 Assembler. (Bonus question: What was a Green Card? Hint: It had nothing to do with immigration law.) By then I was working on a thesis that used a big data set and while we had access to lots of canned subroutines to do data analysis (the collection became SPSS), you had to write the code to glue them together and handle input and output. I became a programmer–not a terribly good one–in spite of myself.

After graduating from college, I mostly left computers aside for a few years. Journalists in those days wrote on typewriters–manuals, mostly. Editors cut and pasted, literally, with scissors and rubber cement, then sent their copy off to typesetting or gave it to a Teletype operator for transmission. But in 1979 or ’80, I played with an Apple ][ at a friend’s house and knew I had to have one. I didn’t know what I might do with it, but I knew I needed one. I got an Apple ][+ with a monochrome monitor and two floppy drives . One of the first things I did with it was the “shift-key mod,” jumpering a pin on the keyboard connector to a pin on a chip on the motherboard; this allowed the Apple to type and display lower-case letters.

I spent many happy hours with my ][+; I mastered Zork, my kids learned to program on it, and it was the only computer I ever understood at a deep level. For some reason, I still remember that you generated a beep from the internal speaker by writing to memory location 2030, and you could make a kind of music by controlling the frequency of POKEs. By the mid 80s, I was doing most work-related stuff on an MS-DOS machine, but through many successor PCs and Macs, I never lost my affection for that original Apple. For me, the personal computer has never again been as personal.

By the mid 1980s, BusinessWeek‘s New York editorial operations were running on a VAX-based Atex system but bureaus were still using typewriters. The time had come to computerize. We had no IT staff resident in Washington. I didn’t know much, but I knew more than anyone else, so the job of supervising setup of the computers and installation of a local area network fell to me. We used proprietary 3Com networking software and servers. But the key tool was XyWrite, a DOS text word processor created by folks from Atex. It was by far the most advanced word processor of its time, fast, flexible, and powerful. It was ideally suited to the needs of the publishing industry and let us mimic many of the functions of the expensive Atex system on cheap hardware. XyWrite was amazingly customizable. An acquaintance created a XyWrite template that could be used to create weaving drafts for setting up looms. Internally, we customized it to the point where a story in XyWrite could be fit against a magazine layout.

The big problem was that our LAN in Washington had no way to communicate properly with the Atex system in New York. We could send files into the system and they sent output back to our printers. The two systems communicated, such as it was, using custom software and hardware created by a company that had long since disappeared. No one knew quite how it worked and we just had to treat it as a black box. The crowning achievement of my career as a developer was overseeing creation of a program that solved the communication program that made our LAN look like a single teletype machine. Incoming messages were received by a server, parsed for addresses (four-character Teletype codes), and in addition to being printed, were directed to the inboxes of recipients on our 3Com local-only mail system. It was a hideous kludge, but it worked and was used for several years.

In time, we moved to a real email program, cc:Mail, that not only linked all our offices but provided gateways that connected us to the world. I had been using MCI Mail and CompuServe mail for some time, but cc:Mail (later acquired by Lotus) was a huge breakthrough. Without the help or, indeed, the knowledge of our corporate IT folks, we set up an internet connection with a small local ISP and an SMTP gateway. (I also registered the domain mh.com. It’s still owned by McGraw-Hill, but inactive. The ought to sell it–two-letter .com domains are worth something.) Email quickly went from being a better way to send messages internally to a primary way of doing business. Our network also gave us very early access to the rest of the internet, including the nascent World Wide Web, though it was some years before that became very useful.

In 1994, I gave up managing this stuff (as a sideline to my day job as deputy bureau chief) and took up writing about technology full time. Finally what had been more or less a hobby for nearly 30 years became my occupation. It was a time of tremendous change in the personal technology business, which was just on the cusp of moving from early adopters to a true mass market. (My very first “Technology & You” column took a look at the updates Apple Newton MessagePad 110 and a would-be competitor called the Motorola Envoy. I presciently predicted that such devices required reliable, reasonably fast wireless communications to be useful. Less prescient was my belief that the Magic Cap operating system that powered the Envoy had a future.)

I all my years reviewing devices, there were very few products that I believed at first glance would really change the game. One turned up in early 1996, when Ed Colligan stopped by my office with an early production unit of the Palm Pilot. Those first Palms had no wireless communications, but the computer sync (over an RS-232 serial cable!) was, for its time, a masterpiece of simplicity, as was the device itself. It was a very Apple-esque design–many of the Palm folks had deep roots in the Apple world–and it set the standard for what Apple would accomplish a decade later with the iPhone and iPad.

The second came in 1999, when Mike Lazaridis showed up with the first BlackBerry. It was basically a two-way pager–it ran on a paging network–that differed from existing devices in two critical ways: It had a tiny, curved keyboard that you could actually type on with reasonable speed. And it had a network back end that reliably and securely exchanged mail with corporate servers. The BlackBerry, probably more than any other device, changed the way I and millions of others worked. It meant that for better or worse, if you had network coverage–and the coverage of that slow pager network was in many ways more ubiquitous than today’s 3G and 4G networks–you were in the office. At a time when remote access to corporate networks from a laptop was a very iffy thing, this anytime, anywhere connectivity was a huge breakthrough.

The last few years in tech have really been wonderful ones, but I have been saddened by the demise of Palm and the decline of Research In Motion. These are companies that produced products that changed my life, and the world.

Why Apple Manufacturing Needs Few Workers

Apple CEO Tim Cook’s announcement that the company would do some Mac assembly in the U.S. brought on a flurry of publicity vastly disproportionate to the importance of the development. It’s good that manufacturers see opportunities for U.S. operations for a variety of reasons, but a big surge of employment isn’t one of them. Dan Luria, a labor economists with the Michigan Manufacturing Technology Center was quoted by Bloomberg as saying that the Apple operation is likely to add only 200 jobs.

That’s not surprising to anyone who has visited a modern manufacturing facility, or who has seen only pictures of crowded Chinese assembly lines. Most factory work these days, especially in high-tech operations, is done by machines, not people (this is how a manufacturing company like Intel achieved revenues of more than half a million dollars per employee last year.)

The change is most striking in electronics assembly. Circuit board manufacture used to require humans to mount components on boards and solder them in place. Today, components have shrunk to the point where it is difficult at best for humans to place them with sufficient accuracy and impossible to solder by hand. Instead, high-precision robots place the parts on boards, which are then soldered in a quick trip through an induction furnace. Many Chinese factories still use lots of people for final assembly jobs because labor has been cheaper than robots; this is changing fast as Chinese wage rates rise.

A narrowing wage differential is one reason manufacturing in the U.S. is becoming more attractive. Rising shipping costs is another. As Quentin Hardy wrote in the New York Times Bits blog:

“The labor cost on a notebook, which is about 4 to 5 percent of the retail price, is only slightly higher than the cost of shipping by air. Soon even that is likely to change because of the twin forces of lower manufacturing costs from automation and higher transportation costs from rising global activity.”

The good news is that while the jobs are fewer, they are much better than most old factory work. Machines have taken over the heavy, dirty, dangerous jobs. (During my one summer of factory work, I spend a couple of weeks on the shipping line, sealing boxes, and applying shipping labels and postage. Back then, this was all done with glued tape and labels and I ended each shift covered head to waist in glue. I would have paid the robot myself to escape.) The jobs that remain are more for technicians than operatives. They require higher skills and generally offer higher pay and certainly better working conditions.

My Notebook and I are Growing Apart

I can’t help but have the feeling as of late that a close friend and I are growing more distant. These feelings are encapsulated with gratitude, sorrow, and also an understanding that it is for the better. That close friend is my notebook. Up until the last year or so my notebook as been my trusted partner in this industry and the computing device I depended on more than any other.

My relationship with my notebook peaked in 2011 with the 13” Macbook Air refresh which I dubbed at the time the perfect notebook for me. However, over the past few years, we have been growing apart and the iPad is the culprit.

I have written extensively about the profound industry impact I believe tablets will have, however there is a quote from Steve Jobs when he first launched the iPad that I believe captures every bit of why my notebook and I are growing apart.

“The iPad is more intimate than a notebook, and more capable than a smartphone” – Steve Jobs

Nail.On.The.Head. Smartphones are personal, but tablets are intimate. In light of that profound quote and perspective, we may be better off thinking about tablets as intimate computers instead of personal computers—even though they are both.

In a column a few months ago, I advanced a similar theory to that of Steve Jobs where I connected this intimate relationship I have with my iPad by making the observation that things we hold we love. This is why I believe a handheld computing device like our phones and tablets will garner a deeper connection than the desktop or notebook ever could with consumers. Desktops and notebooks are designed to be used at arms length and roughly around 24-36 inches away from our bodies. Yet tablets and smartphones are specifically designed to be used 8-12 inches from our bodies. Tablets and smartphones–by nature–are more intimate and thus will yield fundamentally different emotional connections with those who use them.

This observation, of not only the intimate nature of these products but also the proximity in which we hold and use them to our bodies, is in my opinion, the root of why my notebook and I have grown apart. When you use a device like an iPad or iPad Mini and are used to holding it closer to your body, and your eyes in particular, you simply get used to consuming information on a screen much closer to your face and eyes.

This observation was cemented in my mind most recently when I and my family were traveling to New York for both fun and some business. During this trip we spent a lot of time out and about in the city and I took my iPad Mini with LTE modem everywhere we went. I spent quite a bit of time using that device to take photos, search for points of interest, browse the web, etc, and didn’t end up touching my notebook for three days. When I did finally get my notebook out and open it up, it felt distant, it felt like I was too far from the screen and I needed to hunch over and get close to it. Now this is not because I have bad eyes, I have perfect vision, it was simply because I was used to computing in this intimate fashion and using my iPad at a distance less than 12 inches from my eyes. Simply put, because the notebook screen is used at a farther distance, it seems smaller and seems harder to see after you have been using a screen much closer to your person. Use an iPad only for three days then go back to a notebook where the screen is 24-36 inches away and you will know exactly what I mean. The fact is the more I use the iPad the farther away my notebook feels every time I use it—and I mean that in a number of ways.

Now, it is not that my notebook is going away, however, because of this change in dimension of computing, I have found that my ideal use case for my notebook is when it is docked with my larger screen. The iPad and using it in such close proximity to my face makes it feel like its a larger screen than it actually is thus conditioning me to prefer this kind of feeling. I find myself more and more leaving my notebook stationary and connected to my bigger screen. That way when I need to use it, it doesn’t feel so far away or that the screen is harder to see. In this scenario a desktop would suffice but I am using my notebook as a desktop in this case.

Now I know this experience may not be the same for everyone since what I am sharing is my personal experience and preference. I do, however, think the intimate element of computing that tablets subconsciously garner with consumers may have a more profound impact on the market than we assumed before.

One last thing needs to be shared. My experience with the iPad Mini being used as my exclusive iPad over the past few weeks has drove my notebook and me further from each other and quicker than my iPad ever did. There is something about the pure ultra-portability and ultra-intimate experience with the iPad Mini that I will be the cause of many consumers re-evaluating their relationship with their notebook.

Why Android’s Market Share Is No Threat To Apple’s iOS Platform

iOS Is Winning The Profit Battles

Everyone concedes that Apple’s iOS is currently winning the mobile profit battles. However, many pundits still contend that Apple is losing the mobile wars because Apple does not have the most market share. How can this be? In almost every industry in the world it is profits – not market share – that matters and profits – not market share – that matters most.

Tiffany’s does not care how much costume jewelry their competitor’s sell. Nor do we judge the sales of cars, blue jeans, steaks or any other good or service soley by its market share. Companies like Best Buy, Radio Shack and K-Mart stand as stark testaments to the fact that the one with the most stores or the one that sells the most low cost items is seldom the one with the best prospects.

Does Platform Matter More Than Profits?

Ah, but apparently in a platform war it is platform – not profits – that matters most because it is platform – not profits – that inevitably leads to profits. And it is market share – not profits – that matters most because it is market share – not profits – that inevitably leads to platform victory.

John Koestier of Venturebeat puts it this way:

“As Android hits 75% market share, can anyone tell me why this is not Mac vs PC all over again?”

Dan Lyons, writing for ReadWrite, goes even further:

If this sounds familiar, it’s because we’ve seen this movie before, only in the original version Apple was losing out to Microsoft in personal computers. Now Google is using the same game plan in smartphones: Come in late with an alternative product and gobble up market share by licensing the OS to loads of hardware makers instead of trying to do everything yourself.

Look, when three out of four phones sold worldwide run your operating system, I think it’s safe to declare victory.

And Henry Blodget attempts to spell it all out:

The reason market share is important is that mobile is a “platform market.” In platform markets, third-party companies build products and services on top of other companies’ platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

iOS Is Winning The Platform Battles Too

Only there’s one little problem with the theory that market share matters most in a platform war. By every imaginable measure and in every way that conceivably matters, it is iOS – not Android – that is winning the platform wars. And it isn’t even close.

A computing platform is made up of any number of attributes. Some examples of those attributes are:

adoption of operating system updates; accessories; advertising revenue; app primacy, quantity, quality and profitability; business adoption, BYOD, commerce; consumer assurance, entrustment and confidence; content revenue; control of the platform; credit card numbers; culture; demographics; developers; ease of use; eCommerce; ecosystem; education adoption; engagement; enterprise adoption; government adoption; in-app commerce; integration; lock-in; loyalty; monetization; profits to developers, content providers and publishers; popularity with teens; re-sale value; reliability; repeat customers, retention; safety; satisfaction; security; shopping; stability; stickiness; store quality; switching costs; trust; usage; video views; web traffic.

In every platform attribute listed, it is iOS – not Android – that is leading and in many cases it is iOS that is dominating.

Market Share Does Not Equal Platform

The pundits got it halfway right. Platform matters. But market share does not equal platform. Not by a long shot.

How can this be? The equation of “market share equals platform” is the foundation of the Network Effect – the idea that the value of a product or service is dependent on the number of others using it. Only here’s the thing. In computing platforms, it’s developers and dollars – not units and users – that count towards market share.

This just isn’t that hard. The two basic realities that matter most to a platform are that developers get paid to develop more and better apps and that consumers get incentivized to buy more apps and pay more for those self-same apps.

When the facts do not fit the theory, you either question the facts or you question the theory. The theory that “market share is all that matters” is flawed because the opposing facts are incontrovertible:

1) Developers are deveoping for iOS first;
2) Developers are making more money via iOS;
3) Consumers are downloading more content and apps, engaging in more eCommerce and consuming more advertising via iOS; and
4) Consumers are spending more on the content, apps and items they buy and the advertising they consume on iOS.

The Network Effect that John Koestier, Dan Lyons and Henry Blodget are banking on is alive and well. But it is iOS – not Android – that is reaping all of its benefits and rewards.

Why Android’s Market Share Is No Threat To Apple’s iOS Platform

Again, from Henry Blodget:

The biggest and most important difference between the PC market of the 1990s and the mobile market today is that many of the most common smartphone “apps” are available on all phones, regardless of platform. These include:

Phone
Email
Web
Texting
Popular games and apps

What this means is that you’re going to get most of your smartphone functionality regardless of which platform you use.

Ironically, spot on.

The pundits – including Henry Blodget – have it exactly backwards. You don’t HAVE to have a great platform to be successful in mobile. Android is living proof of that. Remember, when Android first emerged, it was iOS that had a 200,000 app head start. If platform was all that mattered – if we were re-living the PC v. Mac wars – then Android would have played the role of the Mac – or worse, the Amiga – and never have emerged from its nascency.

The bottom line is that there are really two smartphone markets. Android is an excellent smartphone. iOS is an excellent platform. Both can, and do, co-exist. And therein lies the answer to the seeming paradox.

The Right Diagnosis But The Wrong Prescription

Let’s re-review Henry Blodget’s argument:

The reason market share is important is that mobile is a “platform market.” In platform markets, third-party companies build products and services on top of other companies’ platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

Henry Blodgett’s diagnosis – that platform matters – is entirely right. His prescription – that market share cures all ills – is entirely wrong. Android can continue its unit and user market share dominance without impinging on iOS’ platform dominance because it is developers and dollars that are the only market shares that really matter.

— It is iOS – not Android – that is attracting the third party companies to build products and services on top of their platform.
— It is iOS – not Android – that is becoming more valuable with greater customer lock-in.
— It is iOS – not Android – that developers, content providers, advertisers and eCommerce sites are standardizing around.
— And it is Android – not iOS – that is in danger of having the value of their smaller platform collapse.

Conclusion

Don’t get me wrong, Apple has plenty of things to worry about. But a flawed theory regarding platform and the Network Effect isn’t one of them.

Let’s stop focusing on market share without context and let’s start focusing on what matters. Market share does not necessarily equal profits. Market share does not necessarily equal platform. And in the long run (and in the short run too), market share that doesn’t ultimately lead to profits is meaningless.

Anyone can get market share. All you have to do is give away your product at cost or, better yet, for free. But you can’t beat Apple’s iOS just by losing money. Somewhere, somehow, sometime you’ve got to make a profit. Let’s stop pretending that market share is the bottom line or the only thing that matters. Profit and platform matter. Let’s focus on them, instead.

It’s Going To Be A Very Apple-y Holiday Quarter

Tightwads, Value Buyers and Spendthrifts

Oscar Wilde once said that cynics know the price of everything and the value of nothing. Similarly, tech pundits are often obsessed with price to the detriment of value. Despite all evidence to the contrary, pundits think that price is the number one consideration of consumers. In fact, some pundits seem to think that price is the ONLY consideration of consumers. But for most consumers, value is what matters most and price is only one component of that value.

There are three types of consumers: Tightwads, Value Buyers and Spendthrifts. There are two things you should know about these three types of consumers.

First, there are far more value buyers than there are of any other type.

Second, you not only want to ignore the tightwad customers, you want to actively avoid them. They’re a plague on your house.

Pundits seem to think that all consumers are tightwads and all of their analysis reflects that conviction. Smart companies know better.

Reality matters

Remember, reality matters. It doesn’t matter what the pundits think. It doesn’t matter what I think. It doesn’t matter what you think. What matters is what the market thinks. If our thoughts don’t reflect market realities, then we, not the market, are in the wrong.

Naysayers v. Reality

For the past month I’ve read and listened to every imaginable reason why Apple is going to fail. Well, Apple may fail eventually, but not this holiday quarter they won’t. Not by a long shot.

Here are a couple of miscellaneous reasons why I think Apple is just going to crush it this upcoming quarter

1) Mac Sales Continue to Grow

Sales of Mac hardware to U.S. businesses grew by 49.4 percent year over year in the September quarter, posting continued growth while PC sales shrank.

Charlie Wolf of Needham & Company highlighted Apple’s success in the enterprise as the “big story” regarding Mac sales in the September quarter. With PC sales to U.S. businesses declining 13.3 percent year over year, Apple had a 62.7 percentage point difference.

Yeah, yeah, yeah, I know. No one thinks that Macs are important because they’re still such a minority player. But they’re not so niche as you think.

Overall, the Mac’s unit share of the U.S. business market was 9.3 percent in the September quarter. That was up from 5.9 percent of total sales in June, and 5.4 percent in September of 2011.

Apple had an even bigger share of revenue of PC sales to U.S. businesses, accounting for 17.4 percent. That was also up from an 11.5 percent share in June, and 10.7 percent share a year prior. ~ AppleInsider

Overall Mac sales may even shrink this quarter, but their overall importance in the Enterprise will grow. Remember, phones are already outselling Windows machines and tablets are rapidly headed that way too. (EDIT: NPD: Tablets to Outsell Laptops in Q4, Beyond.) Windows is not nearly as monolithic as people think. And Macs are not so nearly as unimportant or niche as people think either.

2) China

Apple’s iPad shipments for China nearly doubled in the third quarter after Apple settled a lengthy dispute over the iPad trademark name.

People forget that over 60% of Apple’s sales come from overseas and that Apple’s overseas sales numbers are rapidly growing. Yes, it will be a big holiday quarter for Apple in the Western world. But it will be a big quarter for Apple in the rest of the world too.

3) Nielson’s Most Wanted Gift Survey

Have you seen the Nielson most-wanted gifts survey? I mean seriously, it is out of sight. What do American kids aged 6 to 12 want this holiday season? Four out of the top five items on the list are made by Apple.

Let’s take a quick look at the top six items on the list:

48% want iPads
39% want Nintendo Wii U’s
36% want iPod Touches
36% want iPad Minis
33% want iPhones
31% want computers

Now there’s a couple of observations that I take from that list.

First, Apple continues to maintain high consumer mindshare. People think Apple first.

Second, Apple’s popularity is growing. Despite a plethora of competing tablet, smartphone and gaming devices, kid’s attraction to the Apple brand in general and iOS in particular has grown steadily over the past three years.

Third, the iPad Mini is fourth on the list. Yet I strongly suspect that an awful lot of parents are going to walk into an Apple store looking for iPads and iPod Touches and they’re going to end up walking out of that store with an iPad Mini.

Fourth, as an aside, that list ain’t good for Microsoft. Microsoft has lost an entire generation of users – kids who will be growing up using Apple products, not Microsoft products.

It’s Going To Be A Long Harsh Winter For Some Of Apple’s Competitors

Why PC manufacturers Should Fear Apple

The tipping point for tablets has come and gone.

It seems like just yesterday that I was writing articles arguing that tablets were the next big thing. It seems like just yesterday because it WAS just yesterday.

But suddenly, it feels like that battle is over and and done with. If you look through the Nielson survey for whatever age, you see that tablets dominate. Not only are Apple tablets popular, non-Apple devices are on the rise too. Yesterday I was arguing with people who insisted that the tablet was a toy or a fad. As is usual with new ideas, we’ve suddenly moved from the “that will never happen” phase to the “of course that happened and I knew it would all along” phase. True, not everyone is convinced but for the most part the naysayers have learned to remain silent lest they be thought of as quaint, at best, or out-of-touch with reality, at worst.

The age of the tablets is upon us – (just as we all knew it would be, all along.)

Why Microsoft Should Fear Apple

Yesterday, Ben Bajarin wrote an excellent article entitled: “Why Competitors Should Fear the iPad Mini“. A couple of his key takeaways were that families expected to own more than one iPad Mini, that with an iPad Mini consumers feel they pay more but they get more and that “the tablet is taking the place in the hearts of many consumers as the new personal computer.” He couldn’t be more right.

The final word on Microsoft’s tablet efforts has not yet been written, but the preliminary reports do not look good. Not only has Microsoft missed a generation of phone users but now they are missing a generation of tablet users too.

PC sales continue to decline and there are reports that a staggering 42% of Windows users say that they plan to buy an Apple product – either a Mac or an iPad – rather than a Window’s 8 device. I take such claims with a huge grain of salt, but as I said in my article: “Windows 8′s Greatest Sin“, consumer’s now have choices that they didn’t have before. Microsoft is making their long-standing customers choose between Windows 8 and other options. And many are choosing to opt out.

Why Google and Amazon Should Fear Apple

Apple may dominate tablet sales, but there are going to be a ton of Google Nexus 7’s, Amazon Kindle Fire’s and even Barnes & Noble Nook tablets sold this holiday quarter. But the people buying those tablets are buying media tablets that run stretched phone apps. The people who are buying the iPad and the iPad Mini are buying a tablet that runs tablet apps and that can also act as a Media tablet. That’s my opinion. But I think that’s also the opinion of the market and I think we’re going to see that opinion expressed in hard sales numbers come this January.

Remember, there are three types of consumers: tightwads, value buyers and spendthrifts. Tightwads are going to be drawn to the Amazon Kindle and the Nexus 7 because of their subsidized prices. The Nook, at least, is trying to make money on the sale of its hardware. Kindle Fire’s and Nexus 7’s sales are empty sales. Neither Amazon nor Google makes a penny of profit until they sell additional goods, services or advertising. And their chances of doing that when selling to tightwads is not good. Not good at all.

You Can Hang Your Hat On It

I actually think Apple’s margins may be lower this quarter. They’ve introduced, re-newed or refreshed almost their entire line and some of their products – the iPad Mini in particular – will make them less than normal margins. But Apple’s margins are absurdly high to begin with. And since many of Apple’s products are supply constrained, the high margins truly reflect the high value that consumer’s place in Apple’s products.

The last time I paid attention to such things, Apple – a hardware seller – had higher margins than Microsoft – a software seller. That just shouldn’t happen. And in any case, I can guarantee you that Apple’s less than usual hardware margins are going to be far, far, greater than the virtually non-existant hardware margins of either Google or Amazon.

The future is uncertain and predictions are always perilous. But if Apple doesn’t have a banner quarter, I’ll eat my hat. Then I’ll go out, buy another hat, and eat that one too.

It’s going to be a very Apple-y holiday quarter. You can hang your hat on it.

Why Competitors Should Fear the iPad Mini

We have been conducting tiers of research trying to gauge consumer sentiment around tablets and in particular of late, the iPad Mini. Part of my interest with this research is designed to get deeper insight into the 7″ form factor in terms of perceived value and core uses cases for consumers versus the larger tablet form factors.

Bear in mind, when we do research it is rooted in ethnography and observational methods not surveys. We interview consumers and strive to understand things from their perspective. I like to explain it by saying we strive let consumers perspectives help shape our own rather than the other way around. That’s how Creative Strategies has done it for over 30 years and its never let us down.

Another thing worth mentioning for those not familiar with our work is that we target consumers in our interviews on specific parts of the adoption curve. Most of our focus is on the mass market consumer and late adopters not the tech elite and early adopters.

Our research on this matter will get packaged in a more formal way in the future but I wanted to share a few highlights.

Shifting Mindset

One thing I found interesting was that nearly everyone we spoke to who expressed interest in the iPad Mini, simply assumed the next version would include a Retina display. More interestingly this did not seem to be a deterrent to their intended purchase this holiday season. When I dug into why there was no interest to wait, the overwhelming consensus was that over time their intention was not just to own one but to own many. Ideally one for every person in the house. So the logic goes, when the new one comes out the older gets handed down. This used to be the logic for notebooks.

Price was certainly a driving factor for the interest of the iPad Mini over the iPad. But to many the price premium did not seem to be a deterrent. One of my key takeaways is that the perception with the iPad and the iPad Mini, relative to tablets, is that even though you pay more, you get more. This in terms of hardware and software quality as well as ecosystem and perhaps more importantly the experience.

The vast majority we interviewed had not owned a tablet yet and were on all parts of the economic scale. Those in the lower income brackets were also intending to research a few other tablets in the 7″ form factor. The leading three were the Nexus 7, Kindle Fire HD and Nook HD. Even with that bit of feedback over 60% said they were still leaning toward the Mini.

When we discussed the intended use cases for the iPad Mini, every single person with kids mentioned it as a part of their child’s educational process as a key use case. This did not surprise me. What did surprise me was that over half of those who brought up using it as a part of their kids educational process made the point that they believed the iPad would be used in schools in the future and making sure their kids were proficient with it was important and that they wanted their kids to use the same technology at home they will be using in schools.

This bit of feedback is very interesting. Here again we have a thought process that was used for notebooks and PC literacy skills being used for tablets. I truly believe we are moving into a touch literate world.

Some concluding thoughts. I firmly believe, now more than ever, that the tablet is taking the place in the hearts of many consumers as the new personal computer. This again cements in my mind the fact that this market will be much larger than the notebook and desktop market ever was and I believe even closer in size to the smartphone market than people realize.

Our research is continually bringing to light that consumers are thinking about tablets the way they used to think about notebooks. Validating again our conviction of a PC Cliff.

Continually we hear that although price is a consideration they don’t simply want cheap. Consumers are smart and they will pay for value. I believe way to many believe that price is the ultimate decision factor and our research continually validates that is not true. If the mindset around tablets continues to have emotional and personal appeal then there will always be a market for more premium experiences.

What I would be worried about if I am an Apple competitor is that the iPad, and perhaps specifically the iPad Mini, becomes the tablet that large portions of the market cut their teeth on thus becoming the standard. The iPad family, in my opinion, is the only no compromise general purpose tablet on the market. The bottom line is price not as big of a deal as we believe and consumers will pit the iPad against the competition (all which I have had extensive time with). That comparison, with the reality that price is not the ultimate driver, is what competitors should be most concerned about.

An iPad Mini Epiphany

So, I’m reading this article entitled: “Physicians excited about lab coat pocket-ability of Apple’s iPad mini” and I suddenly have an epiphany. Or, at least, a mini-ephiphany. Or indigestion. Not exactly sure which.

Anyway, it occurs to me as I’m reading this article that there is an entire sector of computing where the iPad, in general, and the newly minted iPad Mini, in particular, have no competition. They OWN this market.

From the article:

Epocrates, a maker of point-of-care applications for medical professionals, gathered data from 48 different physicians that use its products. One in three of those physicians said they are planning to purchase an iPad mini due to its convenient small size.

And earlier this year, one survey found that more than a quarter of European doctors use an iPad at work, while another 40 percent said they planned to buy an iPad within six months.

Emphasis added

They say that a picture is worth a thousand words. Try this thought experiment:

Picture a doctor walking from patient to patient, either in their private practice or in a hospital setting. Picture them inputing data into an iPad or using the iPad to share information with their patients.

Now picture them holding the iPad Mini in one hand and doing the same kinds of things…then slipping the iPad Mini into thier coat pocket.

An easy picture, no? The picture of the iPad works, but the picture of the iPad Mini – held in a single hand – just feels right, at least to me.

A Smaller Piece Of The Puzzle That Fits In More Places

In July, I wrote an article entitled: “The PC is the Titanic and the Tablet is the Iceberg. Any Questions?” The purpose of that article was to show how the tablet would undercut the PC because many of the things that the tablet did well, the PC did poorly or not at all. I went back and re-visted that article with the iPad Mini in mind.

Picture this:

STANDING:
Tablets excel at working while you are standing. The iPad Mini would do most of those tasks even better. Tasks done by matre d’s, inventory takers, tour guides, concierges, face-to-face service providers and order takers of every kind, would benefit from the use of the iPad Mini.

ROOM TO ROOM, DOOR TO DOOR AND REMOTE LOCATIONS:
Tablets excel at working when one has to move and stop and move yet again. The iPad Mini would do those tasks even better. Car dealerships, like Mercedes Benz, are giving tablets to their salespeople. European doctors are rapidly taking to the tablet. Service technicians at Siemens Energy are using tablets while servicing power installations. Scientists are using tablets during field research. Nurses, realtors, journalists, park rangers, medical technicians…the list of users and uses is nearly endless. They would all benefit from the use of an iPad Mini.

SALES:
If you’re in Sales, you’re into Tablets. For some salespeople, the larger iPad would make a better presentation device. For many others – and perhaps most others – the iPad Mini would do the job even better. Whether you’re traveling or standing or presenting or taking an order and acquiring a signature – tablets are a salesperson’s best friend. An iPad Mini would be more like a bosom buddy.

KIOSKS:
While the PC makes for a terrible Kiosk, the tablet is almost ideally suited to the task. Tablets as Kiosks are making their presence known in places as diverse as malls, taxi cabs, hospitals, the Louisiana Department of Motor Vehicles, and the FastPass lanes at Disney World. I think the larger sized tablet is more appropriate for a Kiosk that the iPad Mini. But the iPad Mini would be perfect for smaller spaces such as in car dashboards, taxi cabs, banks, and such.

LOANERS:
Tablets are starting to show up as “loaners” that are lent out as entertainment devices. They’re being purchased by libraries. Airplanes run by Singapore Airlines and Qantas use them as in-flight entertainment devices. Airports like New York’s LaGuardia, Minneapolis-St. Paul International and Toronto Pearson International, lend them out to waiting passengers. The tablet is ideally suited for the task. It is light, it is portable, it is versatile, it displays content beautifully and it is sublimely easy to use. If the larger size tablet is ideal, then the iPad Mini is a dream come true.

EDUCATION:
PCs in schools are mostly relegated to teachers and computer labs. Tablets live in the classroom and they reside in the hands of the students. No one wants to learn HOW to use computers anymore. Students simply want to use computers to help them learn.

The tablet is starting to take educational institutions by storm. It acts as an electronic blackboard, as a digital textbook and as an interactive textbook.

It’s at the K-12 level (the San Diego School district just ordered 26,000) and at the Universities (Adams Center for Teaching and Learning at Abilene Christian University, George Fox University, North Carolina State University in Raleigh). Tablets are even finding their way into the top-tier high schools in China.

Some schools have even reported a 10% improvement in the exam scores of students who use tablets in lieu or paper books.

We’ll have to see how the education market sorts itself out. But for smaller children at least, the smaller size of the iPad Mini seems like the perfect teaching tool.

The Competition Comes Up Small

Now try to picture any of the above tasks being done with an Amzaon Kindle Fire, Google Nexus 7, or Microsoft Surface? More difficult, right?

— The Amazon Kindle Fire has little chance because it has no tablet optimized apps and because the tablet is designed to pull the user into their store.

— Nexus has little chane because it has no tablet optimized apps and because it relies on content and ad sales in order to make money.

— Windows Surface has little chance…yet.

Microsoft is very good at ecosystem, but their tablet offerings are currently unsuitable for the one-handed tasks that I listed, above. First, their tablets are too large. Second, the 16:9 ratio makes them awkward to hold in portrait mode. Third, their current iterations seemed focused on surface use, not hand held use. Fourth, and most importantly, they do not currently have the job-specific apps necessary to perform the required tasks.

Job Specific, Proprietary Apps Are The Key

It is this last point that I want to dwell upon for a moment. When the press and the pundistocracy talk about apps, they usually focus on the big ticket items like Angry birds, Instagram, Facebook, Flipboard, etc. But the key to Apple’s app dominance are the untold number of proprietary, job specific apps designed by and for doctors, hospitals, park rangers, restaurants, entrepreneurs, businesses, educational institutions and government entities. THAT’s where the power of apps lies.

Neither the 9.7 or the 7.9 inch iPad tablet are competitor proof. But if you need a hand-held tablet that’s serious about apps, then no one competes with the iPad Mini in that space.