The Critical Path has been an exceptionally well received podcast. It has an audience of hundreds of thousands of thoughtful listeners. Many of the concepts covered can and should be reviewed in a medium that can be referenced and annotated and shared. For this reason I would like to publish edited transcripts of the podcasts as an eBook. This will be an edited and tagged transcript of the first year of The Critical Path.
via The Critical Path: The First Year by Horace Dediu — Kickstarter.
My talk from the 2012 Apple Investor Summit is available on Vimeo. The password is h42Rtz8HJ.
Check out the cool iPad app used for presenting interactively and wirelessly–a foreshadowing of Asymconf.
I first noted a correlation between Apple’s share price and its balance sheet a year ago. In February, when I last checked, Apple’s share price was priced nearly at 4.6 times its cash value. The stock has had a brief rally but has returned to the trend line it’s had since late 2008.
I should emphasize that this correlation between cash and price is abnormal. It should not be happening. Share prices for growing companies should be tracking its future potential, not its assets. I’m only presenting this data to highlight this abnormality. There is no fundamental basis for this happening. In fact, there is a basis for this not happening.
The relationship above is a symptom of another pattern called multiple compression that can be seen in the following charts: Continue reading “Back to the balance sheet”
“Within five years after discount retailing pioneer Korvette’s opened its first store in 1957, over a dozen copycat discounters had emerged. In contrast, the giant discount furniture retailer IKEA has never been copied. The company has been slowly rolling its stores out across the world for [close to 50] years; and yet nobody has copied IKEA.
Why would this be? It’s not trade secrets or patents. Any competitor can walk through its stores, reverse engineer its products and copy its catalog. It can’t be that there is no money to be made: its owner Ingvar Kamprad is the third richest person in the world. And yet nobody has copied IKEA.
Our sense is that the other furniture retailers have followed the positioning paradigm and defined their business in terms of product and customer categories, which are readily copied. Levitz Furniture, for example, sells low-cost furniture to low income people. Ethan Allen sells colonial furniture to wealthy people.
IKEA, in contrast, has organized its business around a job to be done: “I need to furnish my apartment (or this room) today.” When this realization occurs to people anywhere in the developed world, the word IKEA pops into their minds. IKEA is organized and integrated in a completely different way than any other furniture retailer in order to do this job as well as possible.”
Integrating Around the Job to Be Done (Clayton Christensen, Harvard Business School; Scott Anthony, Innosight LLC, Scott Cook, Intuit; Taddy Hall, Advertising Research Council).
IKEA is the world’s leading furnishing retailer and an amazing success story. As Christensen points out the success is all the more perplexing because it seems perfectly defensible. Nobody has tried to duplicate or undermine IKEA.
Positioned around a clear job-to-be-done it integrated design, manufacturing and distribution (including warehousing) as well as “big box” retailing as an experience.
This may sound familiar.
Apple’s entry into retail depended on a clear job-to-be-done, design, carefully selected merchandise and retailing as an experience. Similar to IKEA, Apple also became a dominant player in its segment and even achieved seventeen times better performance than the average US retailer in terms of sales per square foot.
At first glance they seem to be similar businesses in terms of strategy or “architecture” but how do the actual businesses stack up? Can we find data to support any claim of similarity. Continue reading “What retail is hired to do: Apple vs. IKEA”
During the first quarter this year HTC, RIM and Nokia all surprised investors with bad news. The effect is evident in the share price of these companies which, in the case of RIM and Nokia is around book value, and in the case of HTC, neared 12 month lows and a 70% drop from peak.
These “misses” in earnings and expectations are on top of the already woeful news from Sony Ericsson and Motorola, which have not had profits for years and LG, which has been borderline since late 2009.
In combination, this seems to imply a dearth of profits in an industry that is, by all measures, booming. Units are up 7% with smartphones up 47%. Revenues are up 20% and overall profits are up 52%. This are exceptionally strong numbers. Few industries can measure growth in double digits.
So if the industry is booming but the majority of participants in the industry are loss making (and surprisingly so) then what is going on? There are two answers: new market disruption and low end disruption.
The new market disruption is the migration of a large number of demanding customers away from phones-as-voice-products to phones-as-computing-products. The low-end disruption is the migration of a large number of less demanding customers from branded phones to unbranded, commodity phones.
The new market disruption is evidenced by the shift of fortunes to Apple and Samsung and away from every other device maker. Here is the profit picture:
Of the vendors tracked (public companies who report mobile phone divisional performance), Apple obtained 73% of operating profits, Samsung 26% and HTC 1% [1][2]. Continue reading “The phone market in 2012: a tale of two disruptions”
Horace interviews his teacher Clay Christensen to discuss his new book, How Will You Measure Your Life. We discuss some of the concepts of learning, jobs to be done and approaches to self-disruption. We also cover what Clay is working on next in his writing and research. Lastly, we talk about what Apple should worry about in its disruptive journey.
via 5by5 | The Critical Path #36: An Interview with Clayton Christensen.
Sony Ericsson is no more. The company remains but the brand is gone. Now the phones it makes will be sold under the Sony name. Unfortunately, that means we no longer get reports from the company on its volumes, profitability and sales. The units will be part of “Other” from now on.
That vendor’s data disappears as did HTC’s and Samsung’s earlier reporting. Bit by bit, vendors are withdrawing information. RIM stopped reporting its average selling prices some time ago, Motorola may disappear completely and they already stopped reporting tablet sales.
This makes the picture of the market fuzzier each quarter. We have to rely more and more on analysts who publish estimates. I try to pick from the available data the best assumptions but the errors are undoubtedly increasing. Here are the charts showing unit volumes in terms of absolute, share and ranking.
Continue reading “400 million phones per quarter and everything's topsy turvy”
Apple’s recent margins are nothing short of spectacular. It’s hard to convey just how remarkable 47% gross margin and 39% operating margins are. For a company that sells hardware these are simply unheard-of numbers.
The best way I can illustrate this is by comparing Apple’s operating margins with those of two other platform-based companies, Google and Microsoft.
Microsoft invented the software-as-a-business model and, as software is easily reproduced, their margins are phenomenal. The gross margins are typically in the 80% range for software. Overall, the company had higher R&D and SG&A expenses so their operating margins are a more modest 37% on average. However, Apple managed to exceed this value even though it has the disadvantage of actually having to build things made of atoms. Continue reading “Which is best: hardware, software or services?”
I analyze my performance every quarter to see if there is any pattern of error in my analysis. I devised a scoring method analogous to the grade point average system used in most US schools. You can read about the fourth quarter here.
This quarter I made one public release of data here and a semi-public update on the iPhone shipments here.
The resulting scores for both early and late estimates are shown in the table below:
Continue reading “What did I get right and wrong about the first quarter?”
This is a transcript of a voice interview conducted April 19th 2012.
The interview is available as an audio file here.
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Jim Zellmer: I thought we’d start by describing your education from the beginning, Horace.
Horace Dediu: OK, that’s good, yeah. I like to say I’m the product of the public school systems. I went to public schools in three different countries, and probably maybe a dozen different schools altogether because we moved a lot, moved over 30 times.
My family emigrated, and we were what you might call political refugees for a while. We were stateless. We didn’t have passports. We were officially not citizens of any country. So, for a period of about four or five years, that was the case. I started having regular schooling in Romania, and then moved to Italy and was enrolled in a school, actually, in the city of Verona, which is where “Romeo and Juliet” was originally set.
I was saying…my background. I spent a year in school in Italy, and I went to school in the north of Italy, in Torino. The thing was that I didn’t know Italian, so I actually had to learn. But that’s a lot easier for children. I was about nine, I think. And so, I learned Italian, was able to have a good school year. But then we moved.
In the summer, we moved again, and we emigrated to the United States. It took about a year to get the paperwork for that–because that was our ultimate goal was to be in the US. I was enrolled in the public schools. First, in Cleveland, where we found someone to help us. I actually went to, I guess, elementary school in the city of Cleveland, where we lived.
And then, later on, for middle school… What happened in Cleveland around that time was that busing started, desegregation. It would have meant, for me, more than one-hour journey across the whole city, from the west end to the east end of Cleveland, and my parents would have none of that. So, we moved to a suburb, immediately adjacent, which is called Lakewood. I went to middle school and high school in Lakewood, Ohio, for three years in high school.
And then, we actually moved yet again, to Boston. My father got a job in the booming tech sector at the time, which was in the early ’80s. I ended up in a suburb of Boston called Medford. We didn’t know much. Again, we were flying pretty blind here. We weren’t familiar with neighborhoods or what were good schools or anything like that–“good schools.” Mostly it was a question of, “Can we find affordable housing?”
Medford turned out to be a pretty lucky choice. In one hand, at the time, it was a blue-collar town. It was one of the near suburbs. So the closer to the city, it tends to be the older the immigrant generations are. It was settled mostly by Italian Americans. And so, a lot of the children I met in school were of some ethnic background.
Again, in the Midwest, that was a bit more rare. So East Coast, for me, was a little bit more vibrant in the sense that there were more interesting ethnic backgrounds and people from different histories and so on.
I enjoyed it, but I only had one year at Medford High School. It was actually more enjoyable, that year, I would say, than my years in Ohio. I have friends that I retained from that one year, and I don’t have friends I stay in touch with from Ohio.
But it has changed. The city since has become much more, I would say, a lot of those families moved yet again, probably to a further suburb, and has changed character. I think it’s more Hispanic now, the city overall. Nothing wrong with that, it just probably would feel different to anyone there now.
I was, again, in Medford. My choice, my next question, was where to go to college. I had been doing OK in school. And that was an interesting puzzle to solve as a kid, because you don’t quite know how to fit in, the usual problems. Fortunately, having moved around so much, I had a pretty thick skin, and having had an accent or a strange background just made you a little bit tougher. And so, I was pretty immune to some of the high-school politics.
I focused on studies, and my parents are both educators. My father has a PhD in mathematics, and my mother had a Master’s in mathematics and she taught. Actually, her job was as a teacher. They both got certified as teachers in the United States. My father had taught, also, university in Romania, but he ended up teaching high school and other two-year colleges in the US. It’s very hard to go into academia from another country.
In any case, the fact that I had such devoted, academically inclined parents helped in focusing me on academics. That also, I think, was my nature. As far as college, my concern, we always had financial concerns, right?
Jim Zellmer: Right.
Horace: So, for me, I wasn’t interested in the social aspect of college. For us, really, the decision was, “Can we keep expenses down?” I was accepted at Tufts University and also at Brandeis, which were local. That was important to me, that it would be near to my home and I could actually commute to these places. Continue reading “Jim Zellmer interviews me about my life”
Asymmetric Competition
