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Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
Apple has announced the release of the iPad 2 and it is an impressive
piece of hardware, very nicely packaged and comes with margin boosting
accessories (that are actually pretty slick) such as a magnetic cover.
With that being said, the RDF (reality distortion field) and FUD (fear,
uncertainty & doubt) absorbed and regurgitated by the tech media is
simply horrendous and is an example of how difficult it is to get truly
unbiased information (not to mention true grit analysis) these days. I
truly believe, as in the political and banking rags, many tech sites
simply recycle press releases and marketing material from Apple in lieu
or performing critical analysis and independent research. Let’s debunk
some of the myths that I have found on some popular tech sites.
Myth Debunker 1: Apple’s incremental upgrade is enough to kill the competition
Most of Apple’s competition has shot itself in the foot by taking too
long to come to market with a competitive device and appropriate
marketing. Why? Who the hell knows, but that is how they run their
business. Many of the Android vendors are in a totally different camp,
though. They have a markedly superior OS which they bear very little
(relatively) development costs for as well as the 2nd largest and
fastest growing app market in the industry. In addition, they have the
largest global and US reach for said apps. What you do not hear in the
tech rags who proclaim how well Apple is doing against Android in the
tablet arena is that there has only been ONE official Android tablet
running a Google tablet OS released thus far, and that is the Motorola
Xoom. It is sold out of every retail outlet that I have been to (and
allegedly sold out immediately). The Xoom is acknowledged to be a very
capable competitor by most reviews, although it needs some polish. The
reason is that it is running BETA software. That is
correct! Honeycomb (the Android 3.0 tablet OS) hasn’t been released in
AOSP (readily manipulable open sourced code) yet because it is still
being polished. Motorola (like Samsung did by pushing Eclair 2.1 onto
its tablet last year) decided to jump the gun by hacking beta code to
get an early release. With this unfinished product it has produced what
most consider a real contender (spec wise, it is the most capable tablet
device in the retail channel). The finished Honeycomb code is due out
in a few weeks, and with it a slew of tablet competitors who didn’t want
to take the risk of releasing unfinished software. This is why they are
all coming out next month, and also why many features of the Xoom won’t
be ready until next month as well.
Putting all of this into perspective, one should realize that the
first tablet either competes with or best the iPad, depending on taste
and preference (the Samsung 7″ Tab doesn’t truly count since it ran cell
phone software, again to gain mindshare from Apple, like Motorola is
attempting). Looking at how rapid the Android hardware and software
development cycle is in conjunction with how rapidly the space is
commoditized by Android, it would be foolish not to realize that margins
and prices will compress in near real time while tech and capabilities
will spike in the same time frame. We are not talking years here, we’re
not talking a year. Not a quarter either. I mean literally months.
Expect no less than two tech refresh cycles on Android before Apple gets
to refresh once next year for the iPad 3, along with the commensurate
margin compression. To clarify for those who are not getting the point,
the iPad 2 is noticeably behind the Xoom in hardware performance and
features – the Xoom has already been rooted and overclocked to 1.5 Ghz,
which makes it faster than most desktops at mundane tasks. Apple is at
least a generation behind in mobile OS capabilities in that the iPad is
still just an enlarged version of the iPhone
OS with very few differentiating features. I can tell you this from
experience after owning several (7) iOS and Android products and
thoroughly testing all – which I will demonstrate below.
Myth Debunker 2: The Honeycomb OS is subpar to iOS
This is absolutely nonsense. As stated above, Xoom is running BETA
software and can compete easily. The biggest advantage of Android is
that it is COMPLETELY customizable AND open. Almost anything that you
complain about can inherently be modified, and modified to a great
extent. The iOS interface is quite static and confining in relation. I
actually have taken the time to prove this by taking a Barnes and Noble
Nook ereader and customizing it to run head to head with an Apple iPad.
I’ll let you judge the results for yourself. This is not pie in the sky
rocket science stuff either. My ten year old son helps me in the
customization, testing (particularly the games, of which he is an
expert) and configuration and has actually decided to start a business
selling customized tablets and phones that easily bests anything anywhere NEAR their price range, up to almost double their prices.
Here’s the spec sheet below, followed by a few videos that put these specs into real life, real people experiences. To enlarge to print quality, click the graphic to open in a new page, then click again to enlarge.
Note: It actually appears as if my Nook has 1 GB of RAM memory, in lieu of the listed 512k!
Myth Debunker #3: Apple owns the supply chain so no other manufacturer can match them in pricing
This is total bulls1t! If that is the case then why are so many Android phones surpassing the iPhone
in features and capabities (both hardware & software wise) for not
only the same price but significantly less. Anybody who truly believes
Myth # 3 needs to spend some time around the HTC Android phones –
subsidized at around $99, they run circles around the latest iPhone.
After that, see the BoomBustBlog customized Nookie vs. the Apple iPad
videos below. Hardware starting at $200, complete package is put
together by my 10 year old (and he just turned 10, may I add) son for
sale for under $300 retail. Own the supply chain my ass…
When such nonsensical rumors start making rounds in what I thought
were respectable rags in the face of obvious and ample evidence to the
contrary, that is when you know the Apple RDF (reality distortion field)
is truly pumping at full throttle. Those that are really in the know
know that looking towards the future, Apple is not the real threat. The
CEO of the hardware side of the recent Microsoft/Nokia alliance (Elop)
put it most accurately – recognizing what I have been saying for about a
year now, and that is Google/Android is at the forefront of the mobile computing wars – according to Nokia’s Elop: “Our first priority is beating Android!”.
How is Elop going to address this by using Windows
OS? He has to do more than just charge more, he has to produce better
product at competitive prices, which keep getting lower. Elop will
have to license the Widows OS, which is an expense, one that he
would bear to nowhere near the same extent if he used Android. I
feel he mistakenly looks at this as Google commoditizing the Android
platform, in lieu of the more reasonable perspective of Google
commoditizing the entire portable computer space. This is where most
pundits are missing Apples Achilles’ heel as well. Google can
commoditize all day and night because they benefit regardless, as
long as the masses are moved to the cloud – and they have willing
partners (minions?) to assist in this process with the likes of
Motorola, Samsung, LG, HTC, Sony, Acer, Asus, Dell, and about 120 other
hardware vendors. Yes, I know Apple can design the hell out of its
products from an aesthetic prospective. Yes, I do believe they hit the
ball out of the park with the iPad when it was launched. Yes, Apple has
very capable management. The fact still remains, they are not immune to
the basic laws of economics, and Google’s Android business model strikes
Apple at its very weakest point – commoditization. Due to Apple’s
prominent position, this may not be evident to all, but it is more than
foolish to deny it when the evidence is ascendant. Androids rise from
last to first in a matter of a year and change should be more than
enough to out more than just Nokia’s management on alert. See some real world examples
of the margin busting capabilities of the smart application of Android
below. For the record, one of the videos below was actually edited and
published on that $295 tablet shown in the video using Google’s cloud
services via Youtube.
OS? He has to do more than just charge more, he has to produce better
product at competitive prices, which keep getting lower. Elop will
have to license the Widows OS, which is an expense, one that he
would bear to nowhere near the same extent if he used Android. I
feel he mistakenly looks at this as Google commoditizing the Android
platform, in lieu of the more reasonable perspective of Google
commoditizing the entire portable computer space. This is where most
pundits are missing Apples Achilles’ heel as well. Google can
commoditize all day and night because they benefit regardless, as
long as the masses are moved to the cloud – and they have willing
partners (minions?) to assist in this process with the likes of
Motorola, Samsung, LG, HTC, Sony, Acer, Asus, Dell, and about 120 other
hardware vendors. Yes, I know Apple can design the hell out of its
products from an aesthetic prospective. Yes, I do believe they hit the
ball out of the park with the iPad when it was launched. Yes, Apple has
very capable management. The fact still remains, they are not immune to
the basic laws of economics, and Google’s Android business model strikes
Apple at its very weakest point – commoditization. Due to Apple’s
prominent position, this may not be evident to all, but it is more than
foolish to deny it when the evidence is ascendant. Androids rise from
last to first in a matter of a year and change should be more than
enough to out more than just Nokia’s management on alert. See some real world examples
of the margin busting capabilities of the smart application of Android
below. For the record, one of the videos below was actually edited and
published on that $295 tablet shown in the video using Google’s cloud
services via Youtube.
Cnet’s Eric Franklin has put together a list of soldiers
looking to fight on the front lines of the Tablet Commoditization wars.
Remain aware that only one tablet running Google’s Tablet OS has been
released, just a few days ago, and it is already be touted as a viable
competitor. Just imagine when things get rolling with the release of
hundreds of tablets, all running arguably a superior OS to that of
Apple’s. Be aware that not only do I and my team of analysts crunch
numbers regularly, not only do I spend nearly all of my workday on these
products, I actually own and use BOTH platforms regularly. I talk to
everyday people, everyday – inquiring into their preferences,
perceptions and desires. Many pundits and analysts fail to do this.
| Name | OS | Price | Release date | Screen size | 4G? |
|---|---|---|---|---|---|
| Acer Iconia Tab A100 | Android 3.0 | Unannounced | April | 7-inch | Unannounced |
| Acer Iconia Tab A500 | Android 3.0 | Unannounced | April | 10-inch | Unannounced |
| Apple iPad | iOS | $400-$830 | Available now | 9.7-inch | No |
| Apple iPad 2 | iOS | $500-$830 | March 11, 2011 | 9.7-inch | No |
| Archos 70 | Android 2.2 | $325-$380 | Available now | 7-inch | No |
| Archos 101 | Android 2.2 | $350 | Available now | 10.1-inch | No |
| Asus Slider | Android 3.0 | $500-$800 | May | 10.1-inch | Unannounced |
| Asus Transformer | Android 3.0 | $400-$700 | April | 10.1-inch | Unannounced |
| Asus MeMO | Android 3.0 | $500-$700 | September | 7-inch | Unannounced |
| Dell Streak 5 | Android 2.2 | $300-550 | April | 5-inch | No |
| Dell Streak 7 | Android 2.2 | $200-$450 | April | 7-inch | Yes |
| HP TouchPad | WebOS 3.0 | Unannounced | Summer 2011 | 9.7-inch | Yes |
| HTC Flyer | Android 2.3 | Unannounced | June | 7-inch | Yes |
| Maylong Universe M-150 | Android 2.2 | $100 | April | 7-inch | No |
| Motorola Xoom | Android 3.0 | $600-$800 | Available now | 10.1-inch | Yes |
| RIM Blackberry Playbook | QNX OS | $500 (16GB) | April | 7-inch | Yes |
| Samsung Galaxy Tab | Android 2.2 | $300-$600 | Available now | 7-inch | No |
| Samsung Galaxy Tab 10.1 | Android 3.0 | Unannounced | Spring | 10.1-inch | Yes |
| T-Mobile G-Slate | Android 3.0 | Unannounced | Spring | 8.9-inch | Yes |
| Toshiba Tablet | Android 3.0 | Unannounced | June | 10.1-inch | Unannounced |
| Viewsonic Viewpad 7 | Android 2.2 | $415-470 | April | 7-inch | No |
| Viewsonic ViewPad G Tablet | Android 2.2 | $580 | April | 10.1-inch | No |
| Vizio Tablet | Android 3.0 | Unannounced | April | 8-inch | Unannounced |
Myth Debunker #3: The PC era is gone
The PC era is not gone, it is most definitely here to stay. It is
just being shrunk to fit in both hands. Tablets are PCs, simply ask the
inventor of the category, Microsoft – the PC software king. This would
be obvious to all who think independently and objectively. What is soon
to be gone and gone for good is the expensive, high margin PC. Yes, that
includes expensive tablet PCs as well. When putting the Xoom through
its initial paces, I thought to myself, “This is a fast, slick, and
flexible tablet. It’s just not worth $800 of my dollars. It is also not
worth $600, nor $500, particularly considering what will soon be
available for a lot less that can do as much or more.” The same goes for
the Apple iPad, and most of the other >$600 competition. Google’s
cloud computing for the masses, coupled with its disruptive open sourced
Android business model has and will continue for the near future, to
collapse margins at a spectacular rate while increasing the rate of
technology adoption and innovation that will make Moore’s law look like
an understatement. As a matter of fact, it already has. Check out the
computing power of the Nvidia quad core, 3d capable chip to the high and
laptop of just 6 or 7 years ago. Over 1,000% increase in power at a
fraction of the price and power consumption. The videos above
corroborate my personal feelings that cute, pretty slates, beefy
powerhouse slabs and competition crushing marketing prowess are cool,
but most prefer strong performance at rock bottom prices. This sounds
more and more like Android, unless Apple and Microsoft shift gears and
do so quickly.
Apple has
always thrived as a niche company, and entering a space that is being
rapidly commoditized by Android is dangerous and at the very least
guarantees margin compression. It is not as if money can’t be made in
the space, but it is much easier to make money in the commoditized space
when you don’t have to pay for the OS development, you know like the
Android adopters. Witness the success of my historically favorite (at
least for now) handset maker, HTC after they invested full on into
Android and benefited from the commoditization of the high end
smartphone…
The margins
will shrink even further, even as revenues skyrocket. R&D costs will
be massive. There were many who argued with this perspective throughout
all of last year. Apple is the best, Android will never outsell Apple,
etc. Well, come first quarter of 2011, Android has went from near zero
to the market leader in all major markets. The argument that Android
will not take over is now mute, it has already done so. Here is
the complete analysis of smartphone and vendor handset growth up until
Q3 2010. I will parse the numbers and release the most recent quarter
soon, and make it available to subscribers. Be sure to scroll through
the entire spreadsheet model below using the “<” and “>” buttons
in the lower area of the window. The model is very, very extensive!
Note: The embedded market share spreadsheet model that should be here must be viewed at the original post due to formatting issues. Click here and scroll down to the equivalent spot in the article.
Benefiting from the mobile computing wars, regardless of the prospective winner!
Long list candidates
We
have performed a scan to identify long opportunities in the electronics
& semiconductors space that stand to benefit from the mobile
computing wars. The scan was essentially searched for companies that are
proxy play for the battle between Apple, Google and Microsoft. Our
initial list included a set of 125 companies across the US, Europe and
Asia, mostly in the following sectors – Semiconductor, Consumer
Electronics, Communications Equipment, Integrated Circuits and Computer
Hardware.
We performed value and growth analysis assigning rank to each company
on various metrics bucketed into like categories (as below) and arrived
at a final score for each company based on weighted average rank. The
bucks and ranks were as follows -Valuation (20%) (Price-to-sales (3%),
EV/EBIDTA (5%), one year fwd PE (6%), two year fwd PE (6%), Growth (15%)
(EPS growth), Value & Growth (20%) (PEG ratio), Value (35%) (Net
Cash / EV (17.5%) and Net Cash / Market Cap (17.5%)) and Profitability
(5%) (Margin). We then excluded 55 companies which did not have ADR /
direct listing in US. Of the remaining 70 candidates, we came down to a
list of 29 companies based on the attractiveness of their business
model, expected growth rate, valuation metrics, price performance, and
profitability. We later performed a detailed historic analysis for each
of these 29 companies to look into the past performance and see how
these companies had performed over the last two downturns (2002-03 and
2008-09) by analysing revenue growth, gross margin and operating margin
trends for these companies. I will discuss a portion of our findings in public over the next week. Subscribers should refere to the most recent downloads on BoomBustBlog.
For those of
you who have not followed me in the past, here is a description of who I
am and what my accomplishments are - Who is Reggie Middleton!
Interested parties should also read “The Potential Equity Investments Most Likely To Prosper From the Google/Apple/Microsoft Mobile Computing Battle”.
For more realistic, objective contrarian views on the Google/Apple battle for the mobile computing space, see:
- Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming
- Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
- How
Google is Looking to Cut Apple’s Margin and How the Sell Side of
Wall Street Will Enable This Without Sheeple Investor’s Having a
Clue - Android is gaining preference as the long-term choice of application developers
- A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
- Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
- Apple on the Margin
- Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
- How
Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall
Street Will Enable This Without Sheeple Investor’s Having a Clue - Empirical Evidence of Android Eating Apple!
»
- advertisements -
What initial stock did the retailers have? Were iPads also sold in those retail outlets? Did the Xoom outsell the year-old iPad? Without answers to these questions, your statement is meaningless.
Did you see people in line to buy the Xoom? They will line up for iPad 2 next Friday.
What good are superior specs if they don’t translate to superior usability?
“The camera, one of the Xoom's biggest selling points, is a complete dud. Check out the video I took if you need proof. Video capture freezes or jerks around to the point where it's almost laughable.”
Source: http://www.businessinsider.com/google-honeycomb-motorola-xoom-review-hands-on-2011-3#ixzz1FglmhIA5
I’m sure that marketing a beta product will do wonders for Motorola’s reputation and will generate enthusiastic repeat business.
In near real time, no less? How is it then that the iPhone’s margins have failed to shrink, in spite of Android (http://tech.fortune.cnn.com/2010/03/02/what-doth-it-profit-an-iphone/)?
Irrelevant: rooting is not something most consumers are able or willing to do.
Bigger app library, superior battery life, thinnest form factor, immunity from malware, elegant simplicity, outstanding support. Those are quite significant differentiating features. Just because they don’t appeal to you doesn’t mean they won’t appeal to the wider market.
It is both a blessing and a curse. It allows the user greater freedom, but subjects him to the whims of manufacturers and carriers, who can tailor the software to their own ends and may not provide timely updates. Sidestepping that interference requires technical proficiency that only a minority possesses. It also makes it more vulnerable to malware (http://www.theregister.co.uk/2011/03/04/google_android_market_peril/). Obviously, system customization and openness are things you value. It's not the case for most users.
It is rocket science for the great majority.
In video #3, you ask a lady, in what appears to be your home, to try out the Nook and iPad. She carries out a few operations on the Nook first. You help her out with it and provide instructions. After a while, you tell her: “And after you finish, try the same thing on iPad. Tell me which one you think is… This (pointing to the Nook) is 1/3 the price of the iPad.” You then let her figure out the iPad on her own. When you ask for quick first impressions, she appreciates the smaller Nook’s portability, but also expresses a preference for the iPad’s bigger screen. Though the conversation is largely inaudible, you appear to counter by defending the Nook’s screen, point out yet again that the Nook is only $250 and other advantages. What if you had touted some of the iPad’s advantages instead? You essentially coax her into choosing the Nook. If you show higher enthusiasm for one product over another, especially to someone you know (as seems to be the case here), that person is more likely to agree with you. Hardly a scientific study and certainly not “real life, real people experiences”! In video #2, you reveal: “89% of people allowed to use both devices offered by BoomBustBlog would prefer a $295 (no contract) Android tablet over a $500+ iPad.” If that conclusion was reached with video 3’s methodology, it’s worthless. To produce a meaningful study, you must take your bias out of the equation. Then, you might get a clue.
Many phones surpass the iPhone in some features and capabilities, while lagging it in others. Because many consumers value the iPhone’s features, they’re willing to pay a premium for it. Apple chooses not to compete on price.
You have to catch up with #2 before having a shot at #1.
Apple generates the highest margins and profit in the computer industry after more than 25 years. The same goes for smart phones, where Android has been on the market for two years. When will this margin compression materialize? Will it be significant if/when it does?
It’ll be the iPad vs. everyone else, just like it’s the Mac vs. all Windows clones and the iPhone vs. all Android clones. HP understands Apple’s advantage and is rightly trying to stand out from the pack by developing an integrated tablet based on its proprietary WebOS.
Android has gone from near zero to the unit share leader in all major markets. Apple remains the profit share leader. The argument that market share is the most relevant metric is mute.
Apple is not entering a space: it created the space. If margin compression is guaranteed, why has it not happened to the iPhone yet?
Witness the success of Apple after it reinvented the smartphone and benefited by providing a superior integrated experience: http://tech.fortune.cnn.com/2010/10/30/iphone-4-of-market-50-of-profit/
In short, you fail to make a case for either Android overtaking Apple in the tablet market or for margin erosion. That's because you focus on the wrong metrics, pick and choose the facts that fit your theories, while ignoring facts that contradict them, rely on dubious anecdotal evidence, and wrongfully project your buying criteria to the wider market. Most prospective tablet buyers will care more about ease of use and the right specs, the ones that enhance a tablet's usability and portability, not raw horsepower. Apple has proven it can maintain its margins in the face of the Android onslaught. Few consumers share your technical proficiency: rooting is beyond their reach; they want something that works out of the box.
Bottom line is that at 14 1/2 oz of silver, the iPad 2 is an overpriced locked in piece of planned obsolescence.
Absolutely stellar post.
Thanks Reggie, as I ignore most of the AAPL and other gadget hoopla, I had missed those Nook abilities beyond e-reading so far. Very impressive, especially for that price!
lol @ $40 hdmi option and still no usb.
they might as well dump the speaker if they cant manage decent stereo.
give me a 10 inch that i can put linux on for $100
and i'm in. til then a netbook makes way more sense,
wow you can actually create content on it, what a concept.
i'm sure those guys who lost 7 years of gmail messages
are really sold on the cloud now.
Must see iPad 2 review video:
http://www.youtube.com/watch?v=ct1_r_61sk8&feature=player_embedded
man this thread is so far over my head it's comical
just want to commend rm for the article and the others
for their diff takes really interesting the give & take
bandwidth-wise im a trickle you guys is a frickin runaway
river flood
salutes & respects
Keep it up Reggie. You keep talking this stuff, and Steve will not send you anymore Christmas cards....
By the way, good report. The way you hear things on the MSM , they are always talking up Apple and dissing Android. Now I see why. Android is kicking ass. I am sold on the honeycomb.
Not once does your article mention user experience. Tech specs mean nothing to a majority of consumers. If competitors continue to design and market products with this mindset, they will continue to lose.
As you mention, Honeycomb is still BETA, meaning competitors have a long time before they are ready to truly compete. Reminds of me another technology.... we've been promised Adobe Flash for years. It's hardly available on a few devices and performance is embarrasing.
re: Margins. Apple doesnt need to maintain it's gross margin on devices --- not that they couldn't. They already have (or are developing) even higher-margin anncillary services which augment hardware sales. AppleCare, MobileMe, several applications, and, of course, the iTunes store.
HTC and motorola have none of these. Until they develop a comprehensive user experience, and not just a piece of hardware, they will be second-rate devices.
we've been promised Adobe Flash for years. It's hardly available on a few devices and performance is embarrasing.
WTF? Talk about reality distortion. I am a web developer and I am just waiting for this brief crapple interegnum to be OVER so I can go back to using flash in my work without clients whimpering because people can't see it on their fucking iCrap. AS3 FTW. ;~p
It should be ready in a few weeks. I have ran it myself. In the mean time, the iPad 2 and iOS 4.3 is not available at ALL, except for a select few developers. In the meantime my iPad crashes regularly when manipulating graphics.
I did include user experience and demonstrated it in the videos. Did you see the lady who couldn't view the Youtube video on the iPad but saw in on the Android device at 2/3rds the price? How about when I replicated the experience? Did you see the extreme difference in web page download performance? Since when is waiting around for pages to load a superior experience.
Apple is playing catch up to Google in cloud services. Google offers these services through Android, hence HTC, et. al. have them by default.
Reggie,
When comparing margins & revenue of tablets, you have to look at the entire spectrum of offerings from each ecosystem.
The tablet is not just a piece of hardware, even moreso then a PC. Traditional product analysis focuses on the MSRP and seems to forget these complimentary products and services that have a big impact to overall profitability (not to mention the user experience, lets ignore that for now).
I focus on profitability in six areas:
Hardware (both MSRP & carrier sharing agreements)
Warranty/maintenance services
Developer Services (Developer tools & support systems: i.e. App Store, Developer programs)
Cloud Services
Software sales (Apps)
Media store (e.g. iTunes)
You take a holistic view at these six areas and you get quite a different picture then if you just look at hardware sales. Reggie, as a mobile product developer and financial hobbyist, I'd love to work with your team to expose a more complete view of tablet profitability.
At the iPad 2 annoucement, Steve mentioned they've written checks for $2bln to iOS Application developers. At Apple's 30%, thats $600mm high-margin SAAS revenue not included in any iPad/iPhone margin analysis.
I don't have accurate figures for Apple's MobileMe service, but in 2010 they had around 2million subscribers giving $100 a year, another $200mm in high-margin SAAS revenue for Apple.
Apple gets $99 per developer from thier developer program. I don't have recent figures, but I know Apple has at least 25,000 registered developers (another ~$2.5mm for Apple). I know Android has at least 4,000 registered developers ($0 for Google/HTC/Motorola). Worth mentioning but it's probably an insignficant amount to extrapolate to the number of iPads & iPhones sold.
Apple sells its own apps, many of which are very compelling: Pages, Keynote, Numbers, Remote, iMovie, Garage Band, etc. They sell millions of copies. I wish I had more numbers on App sales. All indicators point to a big advantage for Apple in Application sales.
Media store. The easy of use, selection, and availability of iTunes has huge revenue implications for the iPad. HTC/Google/Motorola music store? Big Advantage Apple.
AdMob. Wow, what a story. Clearly destroys iAds in revenue, impressions, ecosystem. Talk about disgusting profits-- puts prop trading to shame. Big Advantage Google. Ironically, more of AdMob Google Inc's profits come from iOS then Android. It remains to be seen how important Advertisment revenue will be relative to hardware/services. Reggie, do you see advertisment being a significant portion of revenue for these products? Could we see ad-subsidized hardware in the future?
AppleCare has a huge attach rate. I've heard rumors around 40% for iPads. Again, huge additional revenue stream. I need more information on the Android warranty programs and sell throughs but I suspect its still a big advantage Apple.
Perhaps from a technological & infrastructure standpoint Apple is behind Google's cloud services. But from a montization standpoint, I don't think Apple is playing catchup. Apple is very selective in the services they role out, they focus on core services that enhance thier products, and (mostly) charge for them. Google's approach is quite different: they role out any service that's cool, check adoption, then move to monetize.
Advantage Google, but only because of volume and reach. In the long run, their approach will probably win. Today, if you subtract advertising, Apple makes more money on mobile-centric cloud services then Google.
Please compare App sales on iOS vs. App sales on Android. Look at gross revenue, gross volume, but also look at per user app downloads & sales. Compare paid apps vs free apps. More then 50% of Android users have never downloaded a paid app. ~34% of Android apps are paid vs 66% of iOS Apps are paid, AND Apple commands a higher margin (and volume!).
BTW Reggie, I love your analysis (especially on the banks!), but there's a bit of a dissonance as to if you are evaluating the companies (stocks) involved, or the products themselves.
What's good for the product (end user), may not be good for the stock (investor).
I'm evaluating the companies and thier products. I believe the equity markets have been detached from the underlying fundamentals for some time, which is what investors need to look for. Many investors believe the markets are always right, which is far from the trutruth.
I'll be tackling Apple in detail in a couple of months, so would appreciate any worthwhile input. I have not overlooked anything you mentioned, but objective analysis is always helpful. For instance, comparing SaaS for Apple to include in margins brings the same for Google. the advantage of Android is that nearly all services on the OS drive Google revenues - email, ads, enterprise, video, etc. Many of these businesses are literally startups or nascent and most have been built into billion dollar plus businesses (run rate) with a year. Google's biggest promise is cloud services, IMO.
Apple will not be able to compete with Google in Ads, but it will have to gain as much share as possible. The reason is simple. Hardware is going to be commoditized to thin margins regardless, but it is probable that Google can push the software market to that of an ad model if they gain enough momentum and reach. This is something that Apple cannot allow if they don't have superior reach for they will be priced out of the general market, save of few niche or vertical segments. Think towards the future, not the present. 12 years ago, no one would have ever thought anyone would be offering the web services that we take for granted now for free, but here we are. Google's ad driven model is both powerful and disruptively destructive at the same time.
If, or once, Google commoditizes the hardware and pushes software into a free, ad driven model, it would be very difficult for anyone to compete without government intervention. Think Microsoft style monopoly. That is what makes Google very, very dangerous. Unfortunately (or fortunately if you got stock or LEAPS inexpensively - depending on your perspective), most people cannot see the long term prospects as a venture capitalist or long term strategist would and look for quarerly results and cash now.
Think how much Google would have given up if it was looking for immediate cash in the youtube acquisition, or even worse, the Android acquisition. Android is more valuable than iTunes, by far but many don't look at it that way because they are looking for cash profits now versus the NPV of potential future cash streams. The same goes for Youtube, which is when combined with Google TV can literally change video consumption on the web. Think the disintermediation of network TV, which would be huge. I am also quite sure that both Apple and Google are planning on disintermediating the carriers as well. Google has already tried with the original Nexus One distribution model, and will try again. The fact that almost every carrier and hardware vendor besides Apple, RIM and MSFT/Nokia are trapped by Google due to reliance on Android, it won't be as difficult as many believe. Apple is currently building in dual GSM/CDMA chips. You know what the means.
I'm not even going to mention cloud services, wherein Google is one of the biggest competitors to Microsoft in large municipal accounts wherein they win more often then many would assume, ex. LA county with over 20,000 installed seats (#'s are approximate from memory).
I will admit that... Apple is playing catch up in cloud services... but AMAZON is quietly coming on very strong. Phenomenal services there and now with their new Simple Email Betas... look out.
And one last thing... Google is going to get a lot of competition in cloud services as their user interface work is absymal. And I use them all.
Amazon's cloud is mostly enterprise, while google's is universal and is probably the larget cloud operator in the industry, with MSFT being the only possible viable contender in terms of users.
Google does need some work with GUIs, but they have hired the guy that designed WebOS and he is doing his job. Give honeycomb a spin and you will see what I mean.
reggie, you have no clue what you are talking about. the ipad is heads and tails better than the competition and like the iphone, it will take many years for the competition to catch up if they ever really do. they will always be playing catching up. if they 'start' catching up.
yyou cut the ipad price in half to the price of the iphone...and you won't have any competition.
How can you read such cogent report and not agree with it?
Reggie... I agree that Android is likely going to get the most "market share" in the Pad segment, as well as in the smartphone segment. But, market share does not always translate to profitability. Apple computers don't dominate the PC market. Yet, they own the high end market - the profitable zone. What HP and Dell would kill to own. The thing you need to remember is that there is room for more than 1 player. For me, as long as Apple demonstrates technical leadership (along with the fashion factor) in phones and pads, it will always be a player to contend with. That said, you are right to point out that Google Android is underestimated. But, the real losers here are RIM, Microsoft and Nokia.
That's a lot of hot air for somthing pretty simple.
Apple iPad cool/sexy . . . Androids not so cool/sexy.
Reggie... I agree that Android is likely going to get the most "market share" in the Pad segment, as well as in the smartphone segment. But, market share does not always translate to profitability. Apple computers don't dominate the PC market. Yet, they own the high end market - the profitable zone. What HP and Dell would kill to own. The thing you need to remember is that there is room for more than 1 player. For me, as long as Apple demonstrates technical leadership (along with the fashion factor) in phones and pads, it will always be a player to contend with. That said, you are right to point out that Google Android is underestimated. But, the real losers here are RIM, Microsoft and Nokia.
But what is seldom ever stated is that Apple is significantly behind the curve in "technical leadership". The iPad 2 is playing catch up with Xoom, and has not even caught up yet, or launched yet. The iPhone 4 is still trying to play catchup with the Evo, and is not there yet. Apple does have the fashion factor going for it, but that is much, much easier to attain than technical leadership, which they have not only lost, but appear to be falling even farther behind.
I 100% *dis*-agree. Since when has fashion been easier than science for TECH NERDS?
Do you really thing tech nerds design Apple's recent products? They design the insides, and professionally "cool" designers design the outside. The key to being a good manager is knowing to hire the right person for the job.
Reggie, your point that a huge part of Apple’s worth is tied up in single products, that when competitors come along they’re a sitting duck to be toppled off the world's financial pinacle, is right on. It has long been my opinion, and many others in Silicon Valley, that they are extremely vulnerable to competition now.
Yeah that 60 Billion in Cash and Number 2 in Market Cap based on a forward PE of 14 would make them incredibly vulnerable :-)
The fact is, I have been watching Apple since 1980. At no time did they have as much product variety than they have now. Having more SKUs to hit every price point is not variety, its pure hell especially if they tool up for different enclosures and Printed circuit boards that is no different from what they have in a different line. That's what got them in so much trouble in the 90s.
Product lines with different form factors based on the same technology and the Clones. When they finally did sell the clone manufacturers it was with one purpose : to enlarge the market share of the Mac O/S. Instead, what they found is the clone manufacturers do what every one does and takes the least line of resistance which was selling against Apple.
Having 100s of SKUS of like product is no longer a viable product management scheme. That's why I perceive that people think they are vulnerable because they focus on one product at a time while any company would love to have the numbers they have on all their other products.
People who don't understand the company tend to believe the iPad is all they have. What we don't know and what we won't find out till it falls like a ton of bricks is what is in the pipeline. If they use the same strategy they use on the iPhone when competitors showed, they will slam dunk anyone who is close.
As far as the Reggie's claim of a the Droid having a massive market share over Apple which may be a little reality distortion on his part, a recent scientific study showed they were tied among people who owned and activated their phones.
Finally as for the 90% market share: 2 Months have gone by in 2011. Can Reggie say for certain if there has not been an increase by Apple? I didn't dream they would sell 16 million in year one which is a bit above what they are selling per quarter in iPhones.
It will be interesting to see the cash increase from Q to Q is this time. Apple is too expensive to buy but at the rate they are increasing their cash there is very little they can't do to their competitors.
Finally , none of the OEMs have the near the brand equity Apple has. Overseas , even in China, it is a status symbol. That's very tough to break especially if all the competitors are doing is playing catch-up.
Good points, thanks!! Sounds like you're an Apple expert.
I do love my iPhone. I find the execution on everything is pretty good. Things work well, but I give up a lot of control and customization for this. I find I don't use nearly half of my data plan with my carrier, because 90% of the time, I'm on wifi, but it can be a bit of a data pig once you start doing youtube etc., while using your carrier data.
I still have no use for an iPad.
The iPad (and iPhone) are designed for and marketed to people who want simplicity: affluental children, moms, teenage girls, older people who are afraid of PC's. Throw in the fanboys and fangals and you have quite the sustainable market. My70 year-old father-in-law told me in December that he wanted an iPad but was waiting for the second one.
Haters always gonna hate. AAPL ain't goin anywhere for a while.
Affluent children want what is marketed to them, teenagers want the in thing. Both are very volatile market segments. Android is quickly becoming the in thing because it is both inexpensive and capable, backed by a business model that is currently Apple's weakness.
The key to being inexpensive is that you can pack more capability into the same price point in lieu of lowering the price point. If there is anything that affluent children and teenagers will not be able to wither, it will be to have their friends wield a bigger or better gadget than they have. Then that new gadget becomes the in thing, and gets the marketing push.
I have three kids - 5, 10 and 18. Two of those videos were taking at and near my young girls school and a nearby cafe - both Apple strongholds. Everyone who saw the Android do its thing said they wanted one or were strongly interested.
The same is happening at my oldest son's super liberal (read Apple stronghold) college, as well as my 10 year old's private middle school a block or two away from the old Goldman Sachs headquarters.
You and Denninger need to get a room. Both of you seem to think that customers actually care about the internals of these devices or the "openness" of the business model.
I like most of your analyses and your contrarian spirit, but you're starting to sound like Baghdad Bob on this one.
That's what the videos were for. People care more about price points more than anything else and it is shown in the videos. In order for Apple to match those price points, margins inevitably have to come down.
That's what I've always said. Apple has nice gear, but it costs too much. I can get the same job done cheaper on a rig half the price, when it comes to PC or notebooks.
Personally I am waiting for a pair of sunglasses that do the same thing . With a mouse that is a ring on my pointer finger .Also I want the glasses to incorporate an ear piece so I can take cell calls . Steve jobs is way behind what consumers want the media makes him out to be some kind of God . My point being even I can dream up something better than what is being done .I think this is a fad that is going to get swallowed up quickly by something else as reggie points out . The Ipad will become the betamax of a VHS or what WHT is to cable . Or what pong became after atari 2600. If someone can do it cheaper better and easier to use/convienent they will
I've got a Ipad, and it's good. No regrets.
I'm even working on a project to adopt them for our entire salesfore with acces to citrix so they can work with any pc programm on it.
There are just so many advantages through cloud computing that I do think it's the future.
The downside of a android is that it's open source so very easy to hack, and I'm a security freak.
Explain how Android is easier to hack than iOS because it's open source. I hacked my iPad simply by going to a website and clicking a button to Jailbreak it. This exploit was reproduced no less than 4 or 5 times despite Apple's extreme attempts to close it out. As it stands, you can still easily jailbreak your iOS device.
Linux is open source, thus going by your logic it is easier to hack than Linux - yet Windows gets hacked more often. The reason is most likely installed base, but the logic is worth looking at.
The iPad absolutely sucks for content production and real work, but is wonderful for content consumption. The problem now is that it has no real advantages over the better built Honeycomb, or even (on a cost adjusted basis) the older 2.2/2.3 phone based tablets.
Google wins if the fight moves to the cloud. Apple has a strong chance if they can keep the battle app and device centric. It's as basic as that.
uh. no. iMovie as just one example.
I agree that cloud computing will be huge. Remote storage of data will expand functionality, reduce costs and improve efficiencies and reliability of hardware.
Android will evolve far more quickly than MicroSoft and Windows, IMO. it already has, by light years.
Reggie's point about how Apple is resistant to open-source is a critical one, too.
Cloud computing is quite old technology really, and Microsoft offers a lot of free and secure storage and collaboration space/software with their devices. The new Windows Phone 7 is just a tip of the iceberg.
By the way AMAZON is doing AMAZING work in the cloud arena. I have converted all my server tech. EC2, RDS and S3... amazing stuff and saving me a bunch too.
Apple = purposefully crippleware device.
Get an Android or wait for the new Windows OS-on-a-chip device.
Here's where you're wrong, Reggie: AAPL can increase prices without losing customers.
People buy AAPL products in large part irrespective of price.
Again, Reggie, you fail to take into account that once you're into AAPL products, you're into an entire ecosystem. People who buy one product eventually buy more than one.
You're comparing AAPLs with oranges.
"an entire ecosystem"
The funny thing is, I bought an iPad last year--first Apple product--but I will NEVER allow myself to become part of that "ecosystem". I've spent zero in any of the app stores. I enjoy the basic product but refuse to become one of the idiots who shells out 0.99 times 1000 for stupid diversions. I will not become an Apple fanboy, even as I'm surrounded by them. The whole thing is sickening, if you read Apple blogs--the superiority complexes [viz "Daring Fireball"], the association of individual identity with a corporation. It is laughable beyond degree. I enjoy the iPad, it's good for "consuming" internet content, but it's also a very limited device for the average guy shelling out $500+. (This is a device that doesn't include a software calculator for that price--jesus!) -- while Apple would have us believe that everyone is producing albums on the fucking thing.
Get real, it was always meant to be a "consumption device", so I remain fairly confused about the latest CNBCesque stories about rolling these things out in corporate environments. Why, because it's "neat"? You couldn't have managed the same portable rollouts using laptops and intelligently designed Windows applications or net services, half a decade ago? Please.
I remain interested in the demographics of the "average" iPad owner. Who is going to take up these devices and keep using them in the long run? Is it so "magical" that it will be used by diverse groups for diverse purposes? Products don't usually succeed that way.
I do feel like a sucker, even to the mild degree I've become involved with Apple products. Whether it's the fact that they can't include a mouse and keyboard with a fucking Mac Mini, or what have you, and their ridiculous fetishist "accessory" 90% profit centres--I plan to extricate myself from this environment--or at the least contribute nothing further to it--going forward.
And yes, I pirate iOS apps. Bwahaha. (FWIW, the only app I would have bought is free.) It's the only way to get any value back having spent C$550 on the low-spec iPad. One again, free software must subsidize overpriced hardware among average consumers. That hasn't changed. Certainly without jailbreaking, I'm never buying another iPad.
"Who is going to take up these devices and keep using them in the long run?"
Students, purchasing them on credit.
Yeah, which means that the iPad is the company's ultimate achievement as "Apple-as-marketing-behemoth": they're selling $600 devices that people may well forget about a month after buying. Lol! I asked the above question because the iPhone has, obviously, a well-defined purpose and market. The iPad, not so much.
I am actually not a hater, but a skeptical approach is necessary. Especially when dealing with a company that has the sheer power that Apple does. Their attempt to have all content run through them, and have it purchased only on their hardware, makes Microsoft's antitrust stuff look mild in comparison. A rational** consumer at this point reviews Apple's situation and thinks, "concentrating more power with Apple is not rational; I don't want to do business with them". This is the ultimate context of all my posts today.
**In an ideal market, yeah: a rational consumer, not an antitrust commission. Good luck with that.
>>>Get real, it was always meant to be a "consumption device", so I remain fairly confused about the latest CNBCesque stories about rolling these things out in corporate environments. Why, because it's "neat"? You couldn't have managed the same portable rollouts using laptops and intelligently designed Windows applications or net services, half a decade ago? Please.<<<
If you visit a financial firm and the little dorks are walking around attached to their ipads...run the other way.
These "conversions" have not gone well for some firms.
I can certainly imagine the smaller form factor and simplified GUI being useful "on the go"--but doesn't a real worker need a real input system? That's #1. #2, the closed development environment for iOS (and the lack of "corporate manageability") is such a convolution that I can't figure out who would take the jump.
How do you get information off an iPad at the end of the day? Well, maybe you don't; it's all network-mediated. Then the iPad is a dumb terminal with a touch GUI and no robust input. You're telling me a business need has popped up in the last year where a laptop or related industrial equivalent wouldn't work, but a hard-to-manage, completely-closed device with only a touch screen fits the bill?
The only way this makes sense is if there are legions of currently unproductive staff who can't really use computers for the simplest, MOST DEFINED tasks (e.g. cashiering)... who will be more productive with a touch screen. The Apple blogs were certainly excited at the report a few months ago that a cashier was using an iPad in the New York metro! (Or something.) The innovation! Couldn't have been done before!
My family (including my son, a computer engineer, who in the 90s took your position, only to be completely converted to AAPL) have been with AAPL since the early 90s. We have also owned competitive products.
AAPL provides transparent technology. What do I mean? Think of a garage door opener, which is primitive technology which has achieved complete transparency. People use the technology without thinking of it as technology.
AAPL has made technology transparent in a way no other -- no other -- company has been able to do. Anyone can pick up an iPhone, iPad, AAPL computer or iPod and use them intuitively in a manner that cannot be said of any other collection of products.
I don't disagree, and that's the positive bit missing from my rant. I still believe that what you say is as much a marketing perception as a reality. The psychology of using Apple products is different, and better, for a certain demographic. No denying it. From there, the rest is self-fulfilling. Apple excels at bobbles. I mean that as a compliment. Why is a photo slideshow "nicer" on a Mac than on a PC? Who knows? How high can the bar of comparison be? But they've got that "something" achieved in good part through marketing, and in a shallow culture people will throw money out windows for bobbles and gradients.
I just showed how it was done in the video above as a Mac user adopted to Android in seconds. My 5 year old daughter (actually 4, her birthday is Sunday) uses it without a glitch. What you stated was more Apple marketing than actual fact.
Look at the videos above, those tablets are actually mine. I own an iPad. I (used to) own and iPod. I can't stand iTunes. I am too savvy to be locked into Apple's ecosystem without a key, and as a very educated consumer of both Android and iOS products along with not caring a whit from an emotional perspective, the capabilities of the Android products blow the Apple products out of the water. That was what the videos were for. I though proved the points visually. If you haven't noticed, the market agrees for Androids are now outselling iOS products both locally and worldwide, not only by a large margin abut an increasing margin as well. As for the nonsense that Jobs spills, one should actually do some fact checking. Here are some excerpts from his keynote at the iPad two launch as annotated by one of the very few reporters on the topic who still believe 1+1=2, Seth Weintraub from Forbes, see http://tech.fortune.cnn.com/2011/03/03/steve-jobs-reality-distortion-tak...
As part of the opening iPad bullet points, Apple included this gem:
"First dual core tablet to ship in volume." That's funny, I tested a Dell (DELL) Streak 7, which had a dual core Nvidia Tegra 2 chip in January. They've been shipping ever since on T-Mobile.
In volume.
Of course, the Motorola (MMI) XOOM also has this same dual core processor and is certainly shipping in volume as well. In fact, I've been using an Android phone (the Atrix) with a dual core chip for weeks and it wasn't the first to ship in volume. As for Apple (AAPL), they haven't shipped one iPad 2 yet -- iPad 2's hit shelves on March 11.
Perhaps this has to do with Jobs' subjective view of 'Volume' which may start at whatever numbers iPads are currently selling? And 'ship'? Well, I don't know.
Seth goes on to attempt to counter more RDF and FUD...
He next pulled out a thoroughly debunked, mis-translated quote from a Samsung VP:
Some people only hear what they want to hear, but that quote should have ended with "quite smooth." That translation was officially corrected a long time ago. Here's the recording. Shame on Apple Keynote fact-checkers, if such a role even exists.
Then Seth shows how Jobs and the many loyal followers actually believe 2+2= 90!
">90% market share". OMG Math.
Both Apple and Samsung measure sales the same way -- into the channel. Apple has just as many points of sale for the iPad as Samsung has for the Tab and likely many more. So Samsung sold 2 million (in the last quarter) in 2010. Apple sold 14.8 million (in three quarters). That seems like a pretty fair comparison.
Apple would have needed to sell 3.2 million more to reach 90% of 2010's tablet market share against just Samsung alone (in triple the time). That's not including all of the Android-powered Nooks out there, those cheap $100 Androids you can buy at Walgreens or Amazon and even Windows-powered Tablet PCs (which are mentioned two bullet points above!). If you choose to include the Kindle, Apple may not have even reached 50% of the market.
Perhaps Jobs meant market share of tablets that start with the letter "I."
Then there's the issue of pricing, where he makes the same point that I have made...
As for pricing, Jobs compared the most expensive Android tablet -- the XOOM --against the iPad. While specs don't matter to the typical consumer, components do largely affect the price of a device. The XOOM's are simply better. It has (expandable) 32GB of storage built in and 3G built in (upgradable through a painful mail-in process to 4G). So, on that alone, it compares with the $729 iPad.
But then consider that the XOOM has a much better, bigger 720P+ screen compared to the iPad's 1024x768 job (it has less Retina™). Then, add far superior cameras (w/flash), stereo speakers (iPad 2 has one), 4G and a micro-USB/SD Card reader. Apple won't say how much RAM the iPad has, but I'm willing to bet it is about half of the XOOM's 1GB.
You see, Apple loves to talk about specs when it is in its best interest (speeds and feeds). There are plenty of specs on size and weight that were repeated over and over:"8.8mm thin", "1.3 lbs". Tech Specs? Lots: "Retina display has 326PPI", "1GHz Dual Core Processor", "64GB of storage", "Fingerprint-resistant oleophobic coating", "Back camera: Video recording, HD (720p) up to 30 frames per second with audio; still camera with 5x digital zoom", etc. etc. But ask them how much RAM the iPad has and they'll tell you it doesn't matter.
Perhaps Jobs could have also compared the iPad 2 to other Android tablets' prices? Samsung's Galaxy Tab and Dell's Streak both now start at $499 and have better cameras, 3G radios and GPS, which seem to compete well with Apple's $499 Wifi-only offering. Reality distorted.
REALITY DISTORTED! Indeed, 'nuff said. Readers should email Forbes and commend Seth for retaining the ability to count...