Making rain

The following is a slightly edited transcript of a portion of the Critical Path podcast #79. I am reproducing it here for the sake of brevity and focus of discussion.

I’m going to try to put together an analogy together here that maybe will help us think through the Facebook Home and the Google Fiber issue.

I’ve been thinking a lot about how to illustrate Google’s business model. The problem is that discussion has been polarized: Two camps have formed. One camp suggests that Google is a benevolent entity that does great things and only asks that we indulge their hobby of a business model called advertising. Fundamentally they are about pushing the envelope on technology, making wonderful things happen.

That is one camp. I call them the utopians. It may not be a nice thing to call them but I frame it as being exceedingly idealistic.

The anti-utopian camp is one that suggests that Google is an advertising company primarily, and fundamentally and overwhelmingly. And anything they do technologically is in support of that. The implication is that Google is sinister and manipulative, bent on getting away with as much privacy extraction as possible.

I believe that the anti-utopians dismissing Google as an advertising company sounds a bit incomplete. It’s not incorrect. It’s not erroneous. It’s just not a complete story.

Continue reading “Making rain”

Samsung vs. Google: an Interview with Rafael Barbosa Barifouse of Redacao Epoca

On Mar 18, 2013, Rafael Barbosa Barifouse – Redacao Epoca – Editora Globo asked (and I answered):

Q: Why is Samsung creating Tizen?

A: I believe they are collaborating on Tizen development because they want an alternative to Android and because Bada was not good enough to meet that goal. Tizen’s roots include contributions from Intel, Nokia and several Japanese companies so it’s not Samsung’s OS per se. Historically it was the “open” alternative operating system for embedded and mobile systems. See https://github.com/kumadasu/tizen-history/blob/master/tizen-history.pdf for a historic perspective.

In some ways Tizen seems to be a blend of several pieces of code including proprietary Samsung user interfaces. Samsung is presumably interested in having a unique, differentiated experience. This is something every device maker seeks. Put another way, if they did not seek this then it’s unlikely that they would be profitable which would also imply that they would not invest in marketing and development of products. As Samsung invests both in marketing and development it can be concluded that they seek to offer a unique value proposition and, in today’s market, that means a unique experience.

Does it make sense to create a new mobile OS when it has had so much success with Android?

Continue reading “Samsung vs. Google: an Interview with Rafael Barbosa Barifouse of Redacao Epoca”

The cost of building Galaxies (and iPhones)

Although Samsung and Apple are acclaimed as the leaders in profit capture for smart (and otherwise) phones, what is not lauded is how much they spend on capital equipment used in the making of these phones.

In 2012 Samsung spent around $20 billion while Apple spent about $10 billion (excluding leasehold improvements or Apple stores but including real estate).

Compare these figures with Intel at $11 billion, Google at $3.2 billion, Microsoft about $2.8 billion and Amazon $3.8 billion (including presumably new distribution centers.)

Screen Shot 2013-04-04 at 4-4-5.51.15 PM

What each company spends on differs depending on its business model, but as the graph above shows it’s easy to see that there is a class of “big spenders” who spend so much that it makes it hard to imagine just what $10 billion/yr could actually buy.

To get an idea of just how big that figure is consider that Continue reading “The cost of building Galaxies (and iPhones)”

Apple retail vs. Amazon retail

As part of a continuing series on the iTunes economy I described how iTunes fits within Apple’s overall revenue and cost structure. The operation is a modest contributor accounting for single-digits percent of revenue and operating margins.

One additional question is how does iTunes compare with other non-Apple retail businesses. The obvious comparable businesses are Google Play and Amazon’s digital content businesses. Unfortunately we can’t compare iTunes with Google Play because Google does not reveal any details about Play revenues (or units sold/downloaded or payments to developers or any other data.)

Also unfortunately, we can’t compare iTunes with Amazon digital sales because Amazon does not provide that detail either.

What we do have is Amazon’s overall revenues (and operating margin.) So that’s what I have compared:

Screen Shot 2013-03-27 at 3-27-2.09.30 PM

Since we have Amazon’s overall retail revenues it seemed fitting to also add Apple’s physical store retail data on top of iTunes for additional perspective.

Here are some observations: Continue reading “Apple retail vs. Amazon retail”

Interview with Anouch Seydtaghia of Le Temps regarding the Galaxy S4

This interview took place on the eve of the launch of the Galaxy S4. Anouch Seydtaghia is Deputy Head of the Economic & Finance Section chez Le Temps Geneva, Switzerland.

Q: How can you explain that Samsung organizes such a huge event in NY for the S4?

A: The S4 is a very important product as it’s probably the second most profitable mobile phone in the world. Samsung is trying to position it as a premium product and is using every means available to do so.

What are your thoughts about the huge marketing budget of Samsung?

Samsung’s marketing budget has been a constant percent of their sales (approximately). As sales have risen, the budget has risen. This is not considered a normal situation if sales grow very rapidly but Samsung seems to consider x% of sales to be appropriate spending level. Note that Apple’s marketing has fallen as a percent of sales while its sales have grown dramatically.

If we read the media, we see a lot of speculation about the features of the future S4. Can we now compare that to the expectations before a new iPhone?

There are speculations about all phones, from Nokia to HTC and BlackBerry. I don’t see the speculation to be different between all the major companies.

Can Apple regain the lead in the smartphone market? If yes, how?

Continue reading “Interview with Anouch Seydtaghia of Le Temps regarding the Galaxy S4”

LG's new Tele-vision

LG Electronics has acquired HP’s WebOS for an undisclosed amount. When last it changed hands WebOS was part of Palm which was purchased for $1.2 billion in 2010.

Palm has thus been effectively divided into several smaller pieces distributed as follows:

HP will own:

  • Support of existing Palm users
  • Palm back-end assets including source code, infrastructure and talent
  • webOS patents

LG will own:

  • Stewardship of the Open WebOS and Enyo open-source projects where the source code resides
  • Associated talent
  • WebOS websites
  • License for IP related to webOS

LG announced that it plans to offer an “intuitive user experience an Internet services across a range of consumer electronics devices.” In an interview, the CTO of LG said that given the current situation with Android, LG does not plan on making smartphones running webOS but will use it in televisions and other devices such as cars, signage and appliances where there are no embedded OS’s. “We’d like to secure a software platform across all devices.” Continue reading “LG's new Tele-vision”

The iTunes Value Structure

The International Federation of the Phonographic Industry (IFPI) reported that global digital revenues were $5.6 billion in 2012. This represented about 9% growth from 2011 and accounted for 34% of total industry revenues[1].

Apple regularly reports iTunes as a separate revenue item and occasionally it also reports payments data for developers and app download rates. By interpolating the data published and combining it with some assumptions it’s possible to estimate the mix of revenues (and costs) associated with iTunes.

My yearly estimates are summarized below.

Screen Shot 2013-02-26 at 2-26-6.04.23 PM

Note that I also included historic digital music industry revenues (as a line). I also included the following summary items: Continue reading “The iTunes Value Structure”

Apple's International Retail Strategy

In 2012 Apple opened 41 stores. The total is the second highest yearly opening rate since the stores first began operating. The highest total was in 2008 when 47 stores opened.

Although it is a healthy total, the surprising story about retail is that stores are not being opened as quickly as Apple’s sales and reach are growing. The following graph shows the yearly opening rate.

Screen Shot 2013-02-25 at 2-25-6.28.22 PM

The line in the graph above shows the change net sales since 2006 (right scale).

The store opening rate has been around 40/yr. during the last five years, up from 30/yr. during first seven but a 33% growth rate it’s still a frustratingly slow rate of growth. Consider that during 2007 when Apple opened 34 stores, Apple’s net sales were growing at the rate of $7 billion/yr and that in 2012 when it opened 41 stores sales grew about $37 billion or more than 5 times faster.

Although performance for the stores has improved (i.e. the sales per store went up), sales outside of their own retail channel are now a far higher portion of total. 2007 retail revenues were $4.7 billion or 17% while 2012 were $19.1 billion or 12%. You can see the mix by region in the following graph: Continue reading “Apple's International Retail Strategy”

Are the ecosystem wars won on the factory floor?

I’ll be speaking at the Harvard Business School Technology and Operations Management Digital Seminar Series on “The evolution of value chains in a computing markets measured in the billions of units per year.”

​Abstract

2013 will see two billion phones shipped into a market of over 6 billion points of network connectivity for over 4 billion consumers. In addition to phones, there will be a few hundred million more tablets and mobile computers shipped. It’s very likely that the majority of these devices will be “smart”, meaning designed to be a part of an ecosystem of software, content and services. Contrary to the common assumption that larger markets sustain more competitors, this immense and rapidly growing market has become profitable for only two device vendors. The reason is that the windows for competitive advantage are fairly narrow and although production can be ramped more quickly than ever, the resources needed are available to few.  The frequency and amplitude of market flux benefits only those who can operate at scale and punishes those who can’t. Close observation of the investments of these “superpower” competitors shows an extraordinary level of capital purchases of manufacturing equipment, regardless of their nominal position in the value chain. These capital expenses have been growing in proportion to in the frequency of product launches. I present data showing a correlation between manufacturing equipment CapEx and ecosystem success and put forward a hypothesis that this relationship is causal. I also discuss the implications for ecosystems owners with regard to the processes, resources and priorities necessary to succeed in this evolved value chain.​

 

The event is open to the public and taking place March 7th, 3:00PM to 4:30PM in the Cotting Conference Room.

A short interview with Jasna Sykorova

A short interview for iCon where I’ll be presenting tomorrow. The interview originally took place on January 9th, 2013.

Jasna Sykorova: You have focused on mobile devices for some time now. What made you to start to give a special attention to Apple related data?

I began to look at Apple in 2005; long before they were in the phone market. I had an iPod and liked the Mac but I did not have particular reason to think about the company. You might find it strange that it was the launch of two very peculiar products that caused me to change my perception of the company. They were the iPod Shuffle and the Mac mini.

These are not seen as important today nor were they back then.  But they signaled to me that something dramatic was happening: the company was shedding its “premium” image. This and the earlier move of iTunes to Windows signaled [to me] that Apple was serious about the mass market and the minimum price that a person would need to pay to become an Apple owner.

This was pivotal to me also from the point of view of disruption theory. If a company takes the fight to the low end it means it protects itself from a low end disruptor and may even enter new markets. So if the thinking is that Apple would disrupt then it would have to get into new categories. I then asked myself what it would target. I told myself (again, in 2005) that Apple will do three things:

  1. build a phone
  2. disrupt the PC market
  3. enter the living room.

1 and 2 are well understood to have happened and 3 is nearly here with Apple TV.

Each of these were tremendous opportunities and it’s been fun watching it happen over the last 7 years.

By the way, my expectations were right not because of any insight into the company. I had not studied Apple much at the time. All my expectations came from understanding the psychology of a disruptor. Nor does it mean that what Apple did was deliberately planned. It’s possible to predict what people will do even if they don’t know what they will do themselves.

Can data tell stories? Can you judge just by data?

Continue reading “A short interview with Jasna Sykorova”