Eddy Cue seems like a nice guy. I can’t say that for sure as I’ve never met him, but he seems to be amiable enough. Maybe it’s because he has a seat on Ferrari’s board of directors. Maybe it’s because he enjoys dancing.

Or maybe it’s because he’s in charge of the only real “division” at Apple. All the other senior managers have functional roles. Eddy has a bona-fide business unit called Services.

Services is Apple’s division of many things. It has the iTunes stores (Music, Video, Apps and iBooks). It has Software with consumer bundles like iWork and iLife and Pro tools like Aperture, Final Cut Pro and Logic Pro. It still has OS X as a product, though revenues are pretty low as updates are now free. It also includes Services with iCloud, Apple Music and Applecare.

These things are not iPhones or iPads but they are many and all together they form a modest little unit. I say modest because not much is said about it. When seen in contrast to the other Apple product lines, it’s hard to be impressed. In the graph below it’s the purple area.

Apple does not help much. Occasionally  Apple offers updates on iTunes/Services using various (rarely the same) metrics. For example, in early August, Eddy Cue offered an update during an interview with USA Today on Apple Music relating how many users there were one month after the service started (11 million).  It was worth a few headlines.

However he also noted in passing that the App store did $1.7 billion in transactions during July. If you convert that to a yearly run-rate it comes out to about $20 billion/yr. Digging through previous announcements, the equivalent figure for 2014 was about $13.7 billion. Nice growth.

But is $20 billion of “transactions” of any significance? Continue reading “(Much) Bigger than Hollywood”

For the last few years, I’ve been proposing that the way to conceptualize Google is as two separate entities: Google A and Google B.

Roughly speaking Google A was the R&D1 organization and Google B was SG&A2. You can find the operating expenses of running each of these organizations in the company’s income statement.  In the last quarter R&D was about $2.8 billion and SG&A was about $3.5 billion3. The two entities are further distinguished as follows:

• Google A was led by Eric Schmidt and Larry Page and Google B was led by persons unknown, but mostly represented by the “Chief Business Officer” Omid Kordestani.
• Google A spends money. Google B collects money.
• Google B sends a check to Google A while Google A sends data to Google B (which then sells it on to advertisers and collects money).
• Google A communicates frequently with optimism and enthusiasm about the future. Google B remains quiet.
• Google A solves problems of humanity, Google B solves problems for advertisers.
• Google A has users, Google B has customers (to whom it sells users.)

In summary, Google A is altruistic, Google B is pragmatic. Google A engages in research, Google B engages in commerce. Google A operates in a structure similar to a Bell Labs for the good of humanity4,  Google B operates in a structure similar to AT&T and collects monopoly rents but without any government oversight.

This was an effective construct for analysis which explained to me much of how Google operated and how it made decisions. So what do we make of Google’s new Alphabet? Is this a dissolution of the Google B/Google A dichotomy?

My initial answer is no. We don’t have a change in this core structure. What we have instead is a split of Google A into Google A and Google A+.

A+ is the crème de la crème of the altruistic Google A. It’s the stuff that really does not make money. It’s the laboratory of Bell laboratories. It’s the moonshot manufacturer. It’s the incubator where hobbies are hatched. It’s the funder of ventures.

After A+ is carved out, Google A and Google B remain exactly as they were, now under a new CEO. The previous CEO no longer has any day-to-day input in the running of Google A and is no longer soiled by association with Google B.

Alphabet is therefore the “holding company” of Google A+, Google A and Google B. I can only suppose that the separation of A+ from A (and the previous A from B) allows the founders to distance themselves even further from the purchase decisions which, through pricing signals, determine where value lies and how resources should be allocated. That must be a great relief.

1. Research and Development [↩]
2. Sales, General and Administrative [↩]
3. Sales and marketing was $2.1 billion and General and Administrative was $1.5 billion [↩]
4. Using a definition of Good as established by the founder [↩]

Will there come a time when Samsung will earn more profits from the iPhone franchise than from its own Galaxy product line?

The problem for Samsung is that although it still sells the most phones1, and the most smartphones, the price and margins for these products are collapsing. The pattern is shown in the graphs below:

Continue reading “Samsung’s profit center”

1. over 80 million but we don’t have a precise figure [↩]