5by5 | The Critical Path #11: The Thermonuclear Option

Episode #11 • October 26, 2011 at 12:00pm

Dan and Horace talk about patents and litigation as a means of defending innovation. We go way back to the beginning of the last century and talk how patent wars have played out in the past and how they affected the fortunes and fates of innovators.

This episode is sponsored by Squarespace and TinyLetter.

—

 

IMPORTANT: I made an error in claiming that Mauser litigated for royalties during WWI. The litigation with Mauser preceded the war, but the bullet design used in the rifle was the subject of litigation before, during and after the war. The story of that patent fight is described here: The Tale of the Spitzer Bullet Patent Lawsuit | asymco

To read more about the Wright Brothers patent war see: The Wright brothers patent war – Wikipedia, the free encyclopedia

The other tablets

Analysts have to count things in order to measure value. It sounds easy but it can be tricky. As I pointed out with PCs vs. iPads, if you count an iPad as a PC you can get into a lot of trouble with your clients. But if you don’t you end up directing them away from confronting an existential threat. Only very rarely is a market report published in contradiction to widely held sustaining beliefs. More often than not analysts bow to the source of their paychecks and in so doing show their rear end to the truth.

This comes up again now with respect to how to count tablets. Consider that there is little difference in architecture, software or design between an iPhone and an iPad. They run the same OS, use the same microprocessors and have similar communication methods, inputs and sensors. However they are considered completely different products and counted as part of separate markets. The only physical attribute that differs is the screen size. So we have to conclude that the size of the screen is a huge determinant factor in deciding whether a product is a tablet but not a smartphone (or music player).

But what about tablets themselves? Their screen sizes vary widely. A 10″ screen is certainly a tablet device, but a 4″ screen certainly isn’t. Where is the boundary exactly? Continue reading “The other tablets”

Putting capital to work

Apple’s Cash and Marketable Securities has been the focus of attention for many year now. It has now reached $81.6 billion equivalent to a value of $86.8 per diluted share. Currently each share is worth about $393 making the enterprise value $306/share or 11 times last twelve month’s earnings.

The division of liquid cash and cash equivalent asset types is shown in the following chart.

The company added $5.4 billion to its cash reserves during the quarter and now keeps two thirds of that outside the US. Long-term securities (bonds mainly) are now Continue reading “Putting capital to work”

The growth surprise in Apple retail

In Apple: For What It’s Worth Jeff Matthews asks a question “about the most disturbing pattern coming out of Apple’s earning release: the measly 1% year/year revenue increase at Apple’s retail stores”.

He notes that prior to the drop, Apple stores were growing at 36%. Such a huge drop quarter on quarter seems suspicious and he thinks something is happening.

Something is happening.

To find out what, let’s start with the revenue from Retail that Apple reports[1]

 

 

The concern is with that low growth between calendar Q3 last year and this year. That is being contrasted with the growth in the previous quarter (Q2) of 36%.

Continue reading “The growth surprise in Apple retail”

Are Apple’s investments in PP&E extraordinary?

In his recent posts Horace took a look at Apple’s fixed assets and their development over the recent years. He also tested the hypotheses that Apple is making investments into machinery & equipment on which iOS devices are produced by overlaying iOS volumes with preceding changes in property, plant and equipment (PP&E).

The question that has arisen is: Are Apple’s investments in PP&E extraordinary?

To answer, I have compiled the capital expenditures (CapEx) for our previously established peer group [1].

But first we need to clarify what CapEx include and not include. CapEx includes investment into property, plants, equipment, office furniture, larger IT hardware and in some cases patents; CapEx do not include investment into long-term marketable securities or other long-term financial instruments, acquisitions or capitalized R&D. Furthermore, CapEx are gross values and are not net of any sold equipment [2]. CapEx are largely depending on a company’s business model and strategy. For example if you are a manufacturer you need equipment to operate, if you are a software company or a retailer, your business will not be capital intensive.

As the second calendar quarter of 2011 is the latest quarter for which all companies have reported figures, we will take a look at last twelve months’ (LTM) figures from Q2/2011 backwards. The following stacked bar chart shows the combined CapEx of our peer group:

 

The combined capital expenditures of our peer group for the Continue reading “Are Apple’s investments in PP&E extraordinary?”

5by5 | The Critical Path #10: The Means of Production

Dan and Horace talk about Apple’s quarter with an eye toward the operational commitments being made. We cover the cost of store openings, data center purchases and machinery used in manufacturing iOS devices. By tracking capital expenses we can get a clue about where Apple wants to go.

This episode is sponsored by Sourcebits, Handelabra Studio, and Shopify.

via 5by5 | The Critical Path #10: The Means of Production.

How did I get the iPhone number so wrong (part II)

Last quarter I was wrong because I thought Apple would throttle production of the iPhone 4 in the fourth quarter post-launch. “The reason growth would moderate was that Apple slowed production of the old model in order to switch out to the new model–we saw the same thing happen with the slowdown in iPad 1 and transition to iPad 2.”

As a result I seriously under-estimated iPhone volumes in the second quarter (FQ3). That failure led me to question whether the theory I was using in forecasting was still valid. When it came time for a new estimate I hesitated.

I had to choose whether to apply the old seasonality theory or to assume that the game had changed and that the product would now grow organically.

The first assumption would put the iPhone growth at 100%+ while the second would place it in the 60% to 80% range. I decided to dial in a figure somewhere in between at 90% but I’m not very confident in this

The result was an over-estimation by almost the same error as that of the previous quarter. Most of the other product lines were accurately predicted, but again, as a always, the whole forecast rides on the iPhone.

So where does that leave the theory? Continue reading “How did I get the iPhone number so wrong (part II)”

Clayton Christensen and Siri

At the Open Source Business Conference in March 2004 Clayton Christensen gave a presentation. It’s available as an audio file for download here: Clayton Christensen | Capturing the Upside. I strongly recommend listening to the whole thing because it’s the quintessential Disruption lecture.

It has relevance in many areas of analysis, but when I was trying to think of a way to characterize the potential for Siri I recalled one particular passage that I saw as almost clairvoyant. Seven and a half years ago, Clay said:

… the next time you go to a computer superstore, go to the voice recognition software shelf and pick up a box there that’s called the IBM ViaVoice.  Now don’t buy it, but just look at it!  They have a picture of the customer on the box, and it’s an administrative assistant who is sitting in front of her computer wearing a headset speaking rather than word processing.

Continue reading “Clayton Christensen and Siri”

How much do Apple's factories cost?

In the last two posts (How much does an Apple store cost?, The down payment on iCloud) I discussed two line items in the PP&E asset class on Apple’s Balance Sheet. In isolation, the data is interesting as it gives us an idea of the cost structure of stores and facilities being developed to sustain its current business model. In aggregate, it provides insight into Apple’s strategic intent.

To complete the picture, I will look at the third asset: “Machinery, equipment and internal use software.” It’s the yellow line in the chart below:

It’s plain to see at first glance that it’s the most significant asset. What does it represent and what conclusions can we draw about Apple’s strategy? Continue reading “How much do Apple's factories cost?”

Asymco

Asymmetric Competition

Skip to content ↓