Maybe Instead of Two Cars, You Just Need a Car and a Bicycle

Friday, 20 November 2009

One thing that strikes me about Chrome OS and Litl is that neither bother trying to do everything Windows or Mac OS X can do. Not even close. I don’t think either even bothers trying to serve as one’s primary computer.

The idea that they’re designed to serve as secondary computers is a big part of the opportunity I see for new Web-focused OSes. I think that’s one of the implicit factors that define what people call “netbooks”. How many people use one of those as their one and only computer?

If you start with the assumption that a computer will be a secondary machine — something purchased because it’s cheaper, smaller, and lighter — you can make all sorts of different assumptions about what it needs to be capable of.

In the early part of this decade, Apple’s turnaround under Steve Jobs was based on the concept of the Mac as a “digital hub” — a device to which you connect and manage satellite devices like iPods and cameras.¹ If you have more than one computer, why should the secondary computer (or computers) need to be just as capable — and just as complex, expensive, power-hungry, and heavy — as your primary one? Why should it run the same OS?

The idea of a computer that does a lot less — leaving out even things you consider essential, because you can still do those things on your other, primary computer — is liberating. That’s the opportunity, and that’s the idea behind Chrome OS and Litl and even Android and iPhone OS.

Long-term, there’s no denying that Google is steering toward a future where typical users have no “primary” computer, but instead where every computer is just a terminal to Web-based software running on servers across the Internet. But there’s an opportunity today for secondary computers that offer just a subset of the functionality of Mac OS X and Windows, especially if they don’t just do less, but (like the iPhone) do less really well. ★

Here’s a YouTube clip of Steve Jobs introducing Apple’s “digital hub” strategy in his January 2001 Macworld Expo keynote. It’s sort of mind-blowing — both in terms of the prescience of the strategy itself and just how long ago it seems. There was no such thing as an iPod yet, Mac OS X 10.0 was still two months away from shipping, and, talking about digital cameras, Jobs mentions that they then accounted for 15 percent of the camera market but would “soon” account for 50 percent. ↩

Friday, 20 November 2009

Thursday, 19 November 2009

The OS Opportunity

Wednesday, 18 November 2009

A few weeks ago, in a piece here titled “Herd Mentality”, I argued that PC makers who want to succeed should create their own OSes:

It’s not just that Apple is different among computer makers. It’s that Apple is the only one that even can be different, because it’s the only one that has its own OS. Part of the industry-wide herd mentality is an assumption that no one else can make a computer OS — that anyone can make a computer but only Microsoft can make an OS. It should be embarrassing to companies like Dell and Sony, with deep pockets and strong brand names, that they’re stuck selling computers with the same copy of Windows installed as the no-name brands.

Hardware and software both matter, and Apple’s history shows that there’s a good argument to be made for developing integrated hardware and software. But if you asked me which matters more, I wouldn’t hesitate to say software. All things considered I’d much prefer a PC running Mac OS X to a Mac running Windows.

Microsoft, I think we’d all agree, sees things the same way (well, in terms of software being more important). They’ve got PC makers under their thumb.

The most common bit of critical feedback I got in response to “Herd Mentality” is an argument that goes like this: You don’t want a world with several additional desktop OSes. It would make for a compatibility and interoperability nightmare. We were there before, in the early days of the personal computer, and it was a mess.

I say two things to that. First, it may have been a mess, but it was a beautiful mess. It was glorious. It was fun. The Apple II, the IBM PC and DOS, Commodore, Atari, Acorn. The TI-99/4A.

Second, this ain’t then. The world is a very different place today.

In those days, before DOS ran most competing platforms out of the market, interoperability and data interchange were at best difficult, and often impossible. Data was stored in incompatible file formats written to incompatible floppy disks¹ by incompatible apps compiled for incompatible CPU architectures. Even later in the ’80s, when networking became common (at least in businesses) the network protocols were proprietary.

That was the world where DOS won out. Get everyone on DOS and you could all open each other’s WordPerfect and 1-2-3 files, if only by sharing them on floppy disks. So DOS gained users, and because it gained users it got developers, and because it gained developers it got more users.

A similar feedback loop is going on with the iPhone today, but it’s far less sticky. The DOS/Windows monopoly grew impregnable because it was a platform where the only way to play along was to join it.

That’s not the way things are today. Sure, there are massive business markets where Windows remains essential. But the Web is a bigger platform than Windows. The Web is universal. Every computer is on the Web. The Web provides us with a core set of software and APIs that work everywhere.

Supposedly, tomorrow Google is set to unveil the details of Chrome OS, but we already know one thing about it: it’s designed around the assumption that the Web is the most important software platform in the world today.

But last week came news of another, similar initiative, from a far smaller company than Google: the Litl — a $700 “webbook”. If you haven’t seen it, go check out their web site — the videos on their support page offer the best introduction to their UI. It’s fascinating and clever in several ways. It is refreshingly simple. And most importantly: it is truly new. I don’t know if Litl is going to be a success — $700 seems steep for this when you can get a MacBook for $999, and the easel mode strikes me as an awkward gimmick without a touchscreen — but everyone involved with the Litl deserves tremendous credit just for having the stones to do this, to say, Hey, maybe computers in 2010 can do better than a user experience that is fundamentally unchanged from the original Macintosh in 1984.

If a small startup can build the Litl, why couldn’t a big company like Dell or Sony? People today still love HP calculators made 30 or even 40 years ago. Has HP made anything this decade that anyone will remember fondly even five years from now? Inkjet printers?

If Palm can create WebOS for pocket-sized computers — replete with an email client, calendaring app, web browser, and SDK — why couldn’t these companies make something equivalent for full-size computers? The hard part of what Palm is doing with WebOS is getting acceptable performance out of a cell phone processor.

These PC makers are lacking in neither financial resources nor opportunity. What they’re lacking is ambition, gumption, and passion for great software and new frontiers. They’re busy dying. ★

If your computer even had a floppy drive, that is. Some, like the TI-99/4A, typically used cassette tapes. Cassette tapes! ↩

Wednesday, 18 November 2009

Tuesday, 17 November 2009

Oh Joe You Didn’t

Sunday, 15 November 2009

Joe Wilcox published a piece Friday titled “Apple was NOT more profitable selling cell phones than Nokia in Q3” (caps emphasis his). It’s in reference to the widely-cited (and linked from DF here) report last week by Strategy Analytics which concluded that Apple generated more profits than Nokia from mobile phone handset sales last quarter.

Wilcox was skeptical — nothing wrong with that — and conducted his own investigation into the numbers:

Well, hell, that sounds reasonable enough, right? Wrong. Apple and Nokia SEC filings tell a different story. Both companies announced third calendar quarter results a few days apart in mid October. For devices and services, Nokia reported profits of €785 million, which is about US $1.1 billion. Apple reported total profits — that is for all products — of $1.67 billion in its earnings press release, and later the 10-K filing. I searched the 10-K, and, as I expected, Apple doesn’t breakout iPhone profits.

But it doesn’t have to for purposes of this discussion. I don’t doubt that Apple is more profitable per handset, since iPhone is a smartphone, than Nokia. But the numbers don’t add up to Apple’s overall handset profitability exceeding Nokia’s during third quarter, unless someone is making the bold assumption that all, or nearly all, Apple profits came from iPhone. They surely do not. What? Apple made only $700,000 on iPod, Macintosh, retail and software — $1.6 billion — on iPhone. No way.

The disturbing lack of fact checking seems to be a trend when it comes to Apple these days.

This is disturbing. Either Joe Wilcox has uncovered a massive, widely-reported error, or, he has made a fool out of himself. (That Wilcox thinks $1.67 billion - 1.6 billion is $700,000, rather than $70,000,000, offers a clue.)

What Wilcox is arguing is that Apple only reported $1.67 billion in total profit for the quarter, so how could they possibly have made $1.6 billion from the iPhone alone? But that’s not what Apple reported at all. Perhaps if Wilcox had actually read more than just the first paragraph of Apple’s press release announcing the company’s earnings, he’d understand. Apple’s announcement stated:

Apple today announced financial results for its fiscal 2009 fourth quarter ended September 26, 2009. The Company posted revenue of $9.87 billion and a net quarterly profit of $1.67 billion, or $1.82 per diluted share. These results compare to revenue of $7.9 billion and net quarterly profit of $1.14 billion, or $1.26 per diluted share, in the year-ago quarter. Gross margin was 36.6 percent, up from 34.7 percent in the year-ago quarter. International sales accounted for 46 percent of the quarter’s revenue.

In accordance with the subscription accounting treatment required by GAAP, the Company recognizes revenue and cost of goods sold for iPhone and Apple TV over their estimated economic lives. Adjusting GAAP sales and product costs to eliminate the impact of subscription accounting, the corresponding non-GAAP measures for the quarter are $12.25 billion of “Adjusted Sales” and $2.85 billion of “Adjusted Net Income.”

As everyone who follows Apple should be aware, Apple is accounting for iPhone sales over eight quarters. This practice is unusual, but it’s not complicated. This is how they’re able to give software updates to iPhone owners free of charge, and, conversely, because iPod sales are not accounted for on a subscription basis, why iPod Touch users must pay for the same updates. When Apple sold an iPhone last quarter it only accounted for one-eighth of the revenue and profits for that quarter. The remaining seven-eigths will be accounted for over the next seven quarters.

Subscription-based accounting does not mean that Apple doesn’t pocket the cash from iPhones all at once. They do — at least since June 2008 when they switched to the model of being paid an up-front subsidy from the carriers, rather than the per-month revenue-sharing model they used with AT&T for the first year. It’s all just a matter of accounting. What Apple calls “non-GAAP measures” are its way of saying “this is how much money we actually made this quarter”. The “adjusted net income” of $2.85 billion is effectively what Apple would have reported as profit for the quarter if they weren’t using subscription based accounting for the iPhone and Apple TV.

This is how Apple’s cash on hand has grown by $21 billion in the last three years, from $14.5B on 30 September 2006 to $36.2B on 26 September 2009. (Click “Balance Sheet” and “Annual Data”.)¹

It is true that Apple does not specifically break out the revenue or profits from iPhone sales. But unless you think Apple is selling a lot more Apple TVs than most of us do, it’s pretty safe to say that the iPhone accounts for nearly all of the difference between Apple’s GAAP and non-GAAP reported profit, which difference came to $1.18 billion for the quarter. That suggests Strategy Analytics’s numbers are in the ballpark. It’s also worth noting that Nokia does not account for its handset sales as Apple does — Nokia accounts for them “normally”, up front, in the quarter in which they were sold.

Even if Strategy Analytics’s $1.6 billion figure is a little high, they’d have to be wrong by over $500 million for their overall conclusion (that Apple made more profit than Nokia selling phones) to be wrong. Here’s another back-of-the-envelope calculation. Apple does release the total number of iPhones sold during each quarter. Last quarter it was 7.4 million. So take Strategy Analytics’s estimate of $1.6 billion in profit, divide by 7.4 million iPhones, and you get $216 in profit per iPhone, which, again, sounds like it’s in the ballpark. (Unsubsidized 16 and 32 GB iPhone 3GS models — the most popular iPhones — sell for $599 and $699 respectively, and Apple’s reported gross margin for the quarter was 36.6 percent.)

As for Wilcox’s would-be exposé, I’m almost embarrassed to quote his concluding paragraph:

As for Apple’s overall phone profits being higher than Nokia’s, don’t believe it. Just because dozens of Websites report something as true doesn’t make it so. Because of the extent of misreporting, I can’t say where the fault lies. The Strategic Analytics report, which again I haven’t seen, might have gone no further than present numbers showing that Apple makes more profit per phone than Nokia. That absolutely makes sense. But to assert that iPhone generated $1.6 billion profit during a quarter when all Apple products generated $1.67 billion is simple stupidity.

Simple stupidity indeed.

If you subscribe to the Market Share gospel, it’s perhaps very hard to wrap your head around the idea that a company with 2.5 percent unit sale market share generates more profit than a company with 35 percent market share. But the numbers aren’t complicated. The iPhone really is that big a deal. ★

That Wilcox is so utterly befuddled by Apple’s iPhone accounting — convinced that Apple is generating far less cash than they actually are — makes me wonder how many analysts and investors are likewise confused about this. Probably many. So it’s worth noting that a recent accounting rule change may change the way Apple reports these numbers in the near future, such that Apple could report revenue from iPhones the way casual observers expect — in the quarter the sales occurred. Here’s what Henry Blodget wrote about the rule change in September:

The new rule will allow Apple to recognize the iPhone hardware revenue and profit at the point of sale, while an estimated value for the software will be recognized over the life of the device.

A change in accounting shouldn’t make a difference, but I’m guessing it will. Look for Apple’s stock to jump up if they make this change. ↩