Saturday, 16 February 2008

Top 10 analyst misconceptions about Apple - Part 3

In January, Mac Predictions published the following "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 it’s “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
We've already covered off misconceptions 1 to 6. Here's the final installment...

7. Apple should integrate Windows emulation in OS X

The idea that Apple might be working on “native” support for Windows applications in Mac OS X became quite popular with analysts in the run up to the launch of Leopard. The thinking went that the ability to run Windows applications on Macs would massively increase the appeal of the Mac platform. If you look at the issue that superficially, it’s hard to challenge. And anyone who remembers the excellent “Classic” environment that Apple offered in early versions of Mac OS X knows that it’s perfectly feasible. But if you explore it in any greater depth, it quickly becomes apparent the the idea is a non-starter.

The first, and perhaps most important issue is developers (as Microsoft’s CEO, Steve Ballmer, would doubtless agree). What signal would Apple be sending out to their Mac OS X developers if they provided a Windows applications environment on the Mac. It’s very simple, they’d be saying “don’t bother to develop special versions of your applications that take full advantage of Mac OS X - save your money and tell your customers to buy the Windows product instead”. In other words, Windows emulation would undermine the very thing that make Macs special - Mac OS X. Apple would inadvertently be driving developers, and indirectly their customers, into Microsoft’s waiting arms. After all, if you want to run Windows apps, you’ll always be better off with a Windows PC - a Mac running Windows apps is inevitably second best.

The writing was on the wall for Windows app support when MacWorld.com reported that that Phil Schiller (Apple’s VP for Worldwide Product Marketing) said the company would “‘absolutely not [offer Windows virtualization], the R&D would be prohibitive and we’re not going to do it.” You can’t get more unequivocal than that - but oddly, some analysts continue to speculate about it, to this day.

8. Apple’s notorious secrecy is harming it’s business

Every year, the IT industry frantically prepares for the biggest date in the calendar – January’s CES show in Las Vegas. All the big names are there, except one. Apple doesn’t even have a booth. Two weeks later, Apple sets out its stall – in its own time, and on its own terms, at the MacWord Expo in San Francisco. You might imagine that this smaller, single-vendor event would inevitably play second fiddle to CES. Far from it. MacWorld generates a massive buzz, and it seems as if before CES is even over, hacks start to tire of Vegas, and speculate wildly about what Steve Jobs may have up his sleeve for them.

And speculate is all anyone can do, because Apple famously keeps its cards close to its chest. The company never comments on unannounced products. Ever. And when one of their suppliers accidentally spills the beans, they don’t remain a supplier for very long. So what good does all this secrecy really do?

It creates what economists call an “information asymmetry” - where one party knows more about what is going on than the other. In the case of Apple’s press relations, the effects of this information asymmetry are twofold. Firstly, since demand for information massively exceeds supply, the value of the information increases. Anticipation for and coverage of Apple events increases as a result. Secondly, information asymmetries give an advantage to the party holding the information - in this case, Apple - enabling them to manipulate the other party into misjudging the value of the goods on offer. So for example, last year Apple unveiled the iPhone - a revolutionary new product, and a major news story. This year, in contrast, they unveiled a slimline notebook, a movie rental service and a wireless backup solution - hardly a news story there at all. The press gave an excessive amount of coverage for the notebook, because they had been expecting another iPhone - and by the time the had attended the keynote and held the front page, they had little option but to make the most of what they’d got.

Secrecy has certainly served Apple well in PR terms. So where’s the harm? It can certainly get embarrassing during futile analyst quarterly conference calls, where Apple’s CFO and COO play the usual game of not answering the analysts questions. Their deft handling of analyst questions would make C.J. Cregg blush. It’s easy to see why analysts are frustrated by all the secrecy. It can also be a problem with enterprise customers, who expect their vendors to provide detailed long term roadmaps. This argument is sometimes overstated, however, since Apple does publish plenty of technical information about their long term technical plans for Mac OS X, via their Apple Developer Connection. Dave Hyatt, the lead developer on Apple’s Safari web browser even maintains a blog.

So in fact, Apple are not quite as secretive as analysts sometimes make out, and when they are secretive, you can usually just put it down to their highly effective PR strategy. The press are pleased - they get their story in the end, whilst blogs like Mac Predictions have a field day with all the speculation. The biggest losers from all the secrecy are analysts, who don’t get all the numbers they want to crunch - no wonder they gripe about it.

9. Apple doesn’t make a profit on the iTunes store

In 2003, Apple claimed they just about break-even on the iTunes Store, and that this is fine, since they see music sales as a means of promoting iPods. Not a surprising claim in itself, given that this is just the kind of information to strengthen Apple’s hand in their ongoing negotiations with the record labels. Effectively Apple were claiming poverty, and stressing the pivotal importance of the iPod to the entire music industry in the process. What was more surprising was that so many journos and analysts bought it then, and continue to believe it even now.

Whilst there might have been true, back in 2003, when Apple had only sold 13 million songs, it’s hard to believe now, given that Apple have sold well over 3 billion! Surely in an electronic distribution business, marginal costs (the cost of selling an additional track) will reduce massively as the business starts to benefit from economies of scale? Apple takes 31% of the price of every track downloaded. It’s just about conceivable that they might not make much money out of this on 2003 sales volumes, but if they’re not doing good business on this revenue today, there’s surely something wrong with their productivity.

Apple’s “notorious secrecy” (see above) means that they don’t provide a breakdown of results from the iTunes store, choosing instead to bundle it in with all proceeds from music related products and services. But given that there’s only so much income to be generate from replacement headphones, leather cases and speakers, it certainly appears to be delivering healthy revenue ($808 million in the last quarter alone).

If Apple were serious about targeting breaking-even on download sales in order to drive sales of iPods, I suspect that they would have dropped the price by now, or reduced their cut in order to woo truculent TV networks. Mac Predictions doesn’t begrudge Apple their hard-earned profits on the iTunes Store, we just wonder when everyone will stop pretending that they don’t exist.

10. Apple is the BMW of the computer world

Analysts and journalists seem to love this one in equal measure. No other phrase quite cuts it when you’re looking for a hackneyed way to describe what differentiates Apple from the rest of the industry. The thinking is that Apple’s relatively small market share is fine, since they’re a niche player selling luxury, high performance products to a highly discerning target audience... just like BMW. But, as with all our misconceptions, this one is just wrong.

Back in the bad old days for Apple, Jean Louis Gassée pursued what was known as a high-right strategy - focusing on selling high performance machines at a high price. By neglecting the low end of the market, Apple’s market share dwindled, as did its sales. These days, Apple’s product range spans from entry level products such as the iPod shuffle through to luxury products such as the MacBook Air. If you compare like-for-like system configurations between Apple.com and Dell.com, Apple’s prices are pretty comparable, and in some cases even competitive. And that’s before you factor in the value of the bundled iLife software.

The BMW analogy is useful only in demonstrating that a relatively small market share doesn’t don’t mean that a company can’t be profitable. It’s hardly a mission statement. For Macs to achieve their full potential, they need to achieve a critical mass of market penetration for the network effect to kick in. This is where the BMW analogy breaks down.

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