Saturday, 26 January 2008

Are Apple shifting focus from iPhone to iPod Touch?

A few weeks ago, Mac Predictions speculated that iPhone wasn’t doing so well in the UK. That was based upon anecdotal observations at the time. Since then, more tangible evidence has emerged that iPhone sales are not meeting expectations. Admittedly, falling short of target by 10k isn’t the end of the world, but the discrepancy between Apple’s figures for units sold and AT&T’s numbers seems to indicate mounting channel inventory - another bad sign.

It feels counterintuitive that a such a popular device is not selling as well as expected. How can this be? The answer probably lies in Apple’s pricing model - by preventing the networks from subsidizing the handset, whilst taking a share of the networks' billing revenue, Apple is effectively double-dipping. The result is both a high up-front cost for the handset itself, and an expensive ongoing cost for the contract. Apple have chosen higher margins over higher unit sales - an unusual strategy for a company trying to launch an entirely new platform.

More typically, companies launching new platforms will initially sell the product at a loss, in order to gain market penetration. Then, as the component costs come down over time, their margins increase, and, providing that the platform is a success, they ultimately are rewarded with higher volume and higher margins in the longer term. By pursuing a high margin at the beginning of the platform’s life cycle, Apple may be compromising the iPhone’s potential to achieve critical mass.

As any economist will tell you, where supply is unlimited and demand is elastic, a business should set price to marginal cost in order to maximize sales. In other words if lower prices will result in more sales, and Apple has plenty of iPhones to sell, they should price each iPhone at the cost to them of making the next one. As it stands, supply does not appear to be limited (since channel inventory seems to be on the increase) and elasticity must surely be there (after all, iPhone is the most hyped handset in history). This leaves Mac Predictions suspecting that Apple is missing a trick in not going for all-out market domination of their new platform. By allowing their rate of sales to be artificially slow, they’re giving their competitors precious time to copy the iPhone’s innovations and catch up.

There is, of course, one problem with all this. Apple appears to have misjudged the market, believing that they could start off at a high price only to drop it later if it proved to be deterring sales. Sounds good in theory, but this didn’t take into account the PR damage that could be inflicted by vocal early adopters who felt betrayed. After the negative response to Apple’s previous price drop, their room for maneuver is limited. In the light of this, it’s unfortunate that Apple chose to price the UK iPhone at a 10% premium over the newly dropped US price. (The difference is even greater when you factor in the UK’s sales tax).

Apple seems pretty sanguine about the situation - willing, perhaps, to ride-out the lower than expected sales in the short term, in anticipation of the opportunity to drop prices and introduce a 16GB model when the iPhone reaches it’s one year anniversary this summer. After a year, early adopters’ moans will be easier to ignore. In the meantime, press coverage arising from the launch of 3rd party apps in February should add a bit of short-term sales sizzle.

Where iPhone sales did not meet expectations, iPod Touch sales appear to have exceeded them. So what started out as something of a baby brother to iPhone has now become the “first Mainstream WiFi Mobile Platform”. Or so Peter Oppenheimer, Apple’s CFO, dubbed it in a recent Quarterly Earnings Call. What’s all the more remarkable, is that Oppenheimer argued that iPod Touch is more than “just a music and video player”. This is a very significant shift, since in the past, Steve Jobs has stressed that whatever new features they add to iPod, it’s really all about the music. Also indicative of a shift in direction for iPod Touch, is the introduction of the new “January Software Upgrade”, which adds key applications previously only available to iPhone users, such as Mail and Maps. Since early adopter moaning and contractual commitments to the networks are limiting Apple’s room for maneuver in aggressive iPhone pricing, could they now be focusing on iPod Touch instead as their vehicle for early market domination? If so, we can expect to see iPod Touch increasingly positioned as a competitor to iPhone - maybe even with its own iChat application. Time will tell.

Monday, 21 January 2008

MacWorld Wash-up

As the dust has now settled, it's time to review how Mac Predictions did in anticipating MacWorld announcements. This blog certainly got people's attention, with some even mistakenly suggesting that Mac Predictions was an Apple plant! But not all of our predictions were prescient. Whilst we scored some points (in particular, being amongst the first to anticipate the name MacBook Air), some predictions are yet to materialise, whilst others now seem unlikely in the light of what has been announced. Here's a quick summary.

  • The MacBook Air name. OK, so the name was a pretty easy guess after those "something in the air" posters went up. Nonetheless, this blog was amongst the first to put two and two together, and it's remarkable how may people claimed that Apple would never come up with such a "dumb name".
  • Apple TV Update. We made several predictions in this area - but only two proved to be correct: movie rentals and price cuts. Other changes over the next twelve months now look unlikely, except for a possible update to the Apple Remote (most likely to happen in August, when new iPods are announced).
  • iPhone SMS to multiple recipients. Whilst most of our iPhone predictions are yet to materialise, we were on the money with addressing SMS messages to multiple recipients.
  • Induction charging. It was a neat ideal, but ultimately it was not to be. Since the Air is fairly standard-sized (albeit thin) notebook, docking don't seem to be a big issue. Apple's optical drive sharing provides an elegant solution to the absence of an optical drive.
  • Sub-notebook design. Our prediction of white keys on an aluminium base, with a black glossy frame around the display proved to be wrong. The keyboard does have black plastic keys, however - a much needed switch from cheap-looking silvery plastic, in Mac Predictions opinion!

Still to come
Several predictions in this blog have not yet com to pass, but remain likely in the future:
  • DRM-free iTunes store
  • Talking iPhones
  • iPhone three new icons
  • iPhone - MMS, Copy & Paste, Search, To Dos, Sending Contacts Syncing Notes

The keynote contains many hidden clues for future directions from Apple - over the coming weeks, Mac Predictions will explore these in greater detail.

Sunday, 13 January 2008

Game theory points to an iTunes Store free of DRM music

Apple’s negotiations with the record labels could be described, in game theory terms, as an "iterated mutual hostage game". Looking at it from this perspective, we can expect a drawn out process of each side switching between cooperating and not, until eventually both sides start to play nicely together (i.e. the music labels give Apple DRM-free music, whilst Apple concedes to some of the record labels demands). To achieve this, Steve Jobs will need to be nice, provokable and forgiving. Here’s why.

A mutual hostage game is one where, from each players perspective, the choice between cooperating or not cooperating seems impossible (in game theory terms, neither strategy dominates). The payoff of the game for each player is determined by his opponent’s choice. So, for example, in a real hostage situation, if you choose to give your hostage back, that’s great news for your opponent, but bad news for you if he does not reciprocate. In a one-off exchange, the results are therefore pretty random, since neither side knows if the other is going to cooperate. But if both sides are holding the same number of hostages, over time the negotiators on each side may build trust, to the point where all hostages are returned, two at a time.

With Apple and the record labels, the hostages are music sales. Both sides stand to gain from selling music on the iTunes store, but both sides want this to happen on their own terms. If neither side cooperates, both will be punished by lost sales. Of course, the record labels can sell through other stores such as Amazon, but Apple has historically been a better partner. Equally, Apple could survive on iPod/iPhone sales alone, buy why cede control of the download business?

So both sides want to reach a deal, but both sides are willing to hold out a little (“defect”) to get the best deal that they can. That’s why you can expect to see the record labels making exclusive deals with Apple’s competitors, whilst Apple will use its formidable PR machine to grandstand about the labels' truculence. But ultimately, behind the scenes, both sides know that they must reach an agreement in the end.

Successful strategies for a mutual hostage game tend to have some things in common. It is critical to establish trust, but it’s also important to demonstrate that you’re no push-over. You will retaliate if your opponent cheats. But ultimately, you must be ready to forgive a cheater when they come back in line - after all, both sides lose in the long run if no one co-operates. The press love to describe Jobs as “mercurial.” They probably imagine that Apple hates this kind of coverage. In fact, from a game theory perspective, for mercurial read provokable, and it plays to Apple’s advantage to let the record labels know that non-cooperation will be punished.

I have a feeling that the Music DRM game is coming to an end. If the music industry are giving non-DRM music to Amazon, why not give it to Apple as well. After all, most end users still don’t seem too averse to DRM, so iTunes' digital sales may well continue to be much larger than Amazon’s. All the time that the music industry allows Apple to carry on selling DRM music, they’re increasing Apple’s lock-in with end users. Precisely the scenario that the music industry wants to avoid. Time to end the game.

Friday, 11 January 2008

MacBook Air - sub-notebook with no cables

As usual, Apple has thrown us a bone to chew on for the weekend before MacWorld. Banners raised around San Francisco's Moscone Center are reported to feature the tease "2008 There's something in the air". For what it's worth, here's my guess at what this might mean.

The design of the banner features a lighter cut of Apple's corporate font (Myriad). The font is very thin indeed, and this, together with the reference to air, suggests a very thin product - further evidence of a sub-notebook. But I can't help thinking that the use of "air" is multi-layered - implying more than just a "lighter than air" design. reported that Apple had filed a patent for an iMac-style dock for a notebook - one which could communicate with the notebook wirelessly. Imagine if it charged the MacBook wirelessly as well, using inductive coupling like an electric toothbrush. Cables and sockets could be eliminated altogether.

Not only would that enable Apple to make the world's thinnest notebook, but it would define a whole new class of gadget.

UPDATE: Just discovered another Apple patent relating to inductive charging, reported by which seems to make this idea all the more possible.

Sunday, 6 January 2008

Top 10 analyst misconceptions about Apple

  1. Apple is really a software company
  2. Apple should license the Mac OS to other PC manufacturers
  3. Apple formats are proprietary, whereas Microsoft formats are standards
  4. Apple is making the same mistake with the iPod that they did with the Mac
  5. Apple is now a monopolist
  6. Apple’s success is down to its “legendary ease of use”
  7. Apple should integrate Windows emulation into Mac OS X
  8. Apple’s notorious secrecy is harming it’s business
  9. Apple doesn’t make a profit on the iTunes store
  10. Apple is the BMW of the computer world

If ever there was a company misunderstood by analysts, it’s Apple. The trouble is that Apple’s business defies classification, spanning a wide variety of sectors, and owing it’s continued existence to its relentless pace of innovation. As a result, all too frequently analysts crow that Apple should zig, when instead they zag.

Back in 1997, analysts the world over were writing Apple off, and yet the foundations for Apple’s success today were already in place back then – NeXTSTEP, Mac OS, QuickTime and hardware design expertise. What the analysts lacked, but Steve Job’s management team had in abundance, was imagination.

The following 10 misconceptions illustrate how poorly framed many analyst’s perspective on Apple truly is.

1. Apple is really a software company

Nothing could be further from the truth. Apple does two things: software and hardware. Their success is due to a synergy between these two businesses, best illustrated by the iPod. Companies like Sony lost market share to Apple by focusing solely on hardware in an age where electronics and the Internet were making a new range of devices possible that required tight hardware/software integration. The market had shifted in Apple’s favour, and Apple seized the opportunity with confidence.

Ironically, back in the late 90s, some analysts were arguing that Apple should get out of the hardware business altogether and focus on software. Imagine if Apple had taken that advice! There certainly wouldn’t have been an iPod, and Apple’s shareholders would have been much poorer as a result.

2. Apple should license their OS to other PC manufacturers

The argument goes that Apple could enjoy some of Microsoft’s success by licensing Mac OS X to PC manufacturers as an alternative to Windows. It’s a superficially appealing argument, but it fails to take into account some key facts. First and foremost, the Mac is not just a software product – it is a tight integration of software and hardware. This makes Apple’s life much easier, since they don’t have to support the endless variety of hardware configurations and legacy dependencies that slow down Microsoft’s development cycles. It makes their 3rd party developers’ lives easier too, because they can make many assumptions in terms of target systems. Finally, and perhaps most importantly, it allows Apple to differentiate the Mac’s proposition from the Windows hegemony of its competitors.

On top of all this, there’s the salient fact that Apple did try licensing the Mac OS in the mid-90s and it proved to be a costly mistake, resulting in other manufacturers cannibalising Apple’s hardware sales.

3. Apple’s technology is proprietary, whereas Microsoft technologies are standards

At the crux of this argument is a confusion between de facto standards and real standards. A de facto standard works as if it was a real standard because it has become so dominant that the vast majority of users adopt it. Microsoft controls many de facto standards, such as Office, Active Directory, Exchange and Windows Media. In the IT industry, de facto standards tend to be proprietary, controlled by software vendors for their own commercial benefit. By contrast, open standards, such as TCP/IP and HTML, are controlled by non-profit organisations, for the benefit of all users. The Internet is built entirely from such open standards.

As its market share has increased, Apple’s technologies, such as the FairPlay DRM system, have become widely adopted. Calls have grown for Apple to support “standard” Microsoft technologies such as Windows Media. Ironically, Windows Media is no more a standard that Apple’s FairPlay. The former is an existing de facto standard, whilst the latter is an emerging one. Forcing Apple to support an established monopolist’s proprietary technologies is hardly in the interests of users – legislators should instead seek to promote industry-wide support for genuine open standards.

Finally, it’s worth noting that Apple has a far better track record of implementing standards than Microsoft. For example, Macs support Windows File Sharing, whereas Windows PCs do not support Mac file sharing. Apple’s Safari web browser has been fast to adopt standards, whereas Microsoft’s Internet Explorer has been very slow to do so.

Tune in next week for more…