Tim Cook's Apple

As I mentioned in yesterday's post, Apple has now officially entered the Tim Cook era. That was assured when Scott Forstall, who had a very close relationship with Steve Jobs, was shown the door. The company's leadership team has now been remade to fit with Tim's vision of the company.

In the short term, I like the new structure. I can't see any way that having Jony Ive involved in software UI design won't be an improvement. His sense of style and design is unmatched. I'm excited for the future. The other executives with new roles seem like good fits as well and have proven histories of doing good work. My big worry in all cases is that these talented people will be spread too thin. Having quality people underneath them will be critically important going forward. How does the bench look?

Tim has proven for more than a decade at Apple that he's unmatched as an operations guy. I also feel like he understands what has propelled Apple to these lofty heights. My concerns for the future of Apple are composed of two things:

  1. Who heads up the whole vision thing in the absence of Steve Jobs?
  2. Can Tim manage personnel at Apple?

The answer to the first will take a long time to be answered. It's a complex question and time will tell if Apple has anyone capable of a vision for finding the next big thing.

The answer to the second question concerns me. Nobody who's ever had to identify talent and manage capable people has ever said it's an easy job. Does Tim have the skills to get the job done? Some early signs are distressing.

The first major position Tim needed to fill was the departure of Ron Johnson, the head of retail who lead the Apple Stores to such lofty heights. When Tim announced the hiring of John Browett in January, he had this to say;

“Our retail stores are all about customer service, and John shares that commitment like no one else we’ve met,” said Tim Cook, Apple’s CEO. “We are thrilled to have him join our team and bring his incredible retail experience to Apple.”

Whoops! That didn’t work out too well and he's gone in less than seven months. What allowed Tim to make such a poor assessment?

Other personnel matters also offer some potential cause for concern. The retirement, un-retirement and subsequent promotion of Bob Mansfield smacks of indecision. The decision to dismiss Scott Forstall is also interesting. Scott made significant contributions to creating both OS X and iOS. He worked closely with Steve Jobs at both NeXT Computer and Apple. Steve didn’t suffer fools and saw value in having Scott involved on his team. His role as the head of iOS in particular is noteworthy. Apple’s revenue is now primarily driven by the two products running iOS. How will that software evolve now in his absence? Is Scott’s dismissal a reflection in any way of Tim’s lack of managerial talents? If so, where else may that manifest itself?

It’s an interesting time for Apple. I firmly believe their current products are the best they’ve ever made. There’s no question they’re poised for tremendous growth over the course of the next couple years. I’m also doubting, for the first time in the Tim Cook era, if the new CEO has all the skills required to keep Apple operating as it has in the past. I really hope I’m worrying about nothing.

"Increase Collaboration Across Hardware, Software & Services"

A bombshell in the form of a press release with the above title was released late this afternoon. The explosion echoed throughout the technology and business world.

In the little more than a year since Steve Jobs passed away, there have been countless stupid statements invoking his name in regards to a decision Apple has made. I've resisted because it's impossible to know what would have happened. I'm not even going to do it in light of today's Apple press release.

In what may be the biggest restructuring of Apples’s leadership team in over a decade, the headline news is that Scott Forstall is out and Jony Ive “will provide leadership and direction for Human Interface (HI) across the company in addition to his role as the leader of Industrial Design.”

I will say this. Apple is now fully Tim Cook’s company. Tim has made many decisions since his elevation to CEO, but they all pale in comparison to this one. Scott Forstall has been with Apple since Steve Jobs returned. He’s the man most responsible for the success that is iOS. We're all going to find out if there is a capable successor to take the reigns.

Jony Ive has long been universally respected for his design skills. That he’ll have a role overseeing the UI across the product line seems like a great move on the surface. My big fear is that his talents will be spread too thin. Again, we’ll see.

I'll have more to say in a follow up post. I leave you with links to many other comments on today's events. The times, they are a changing.

External links:

Amazon Kindle Fire v. iPad mini

Amazon is notorious for making sale number claims of its devices while providing no numbers for proof. They're continually allowed by the press to do this without consequence. I say it's about time they put on their big boy pants and release sales figures if they're going to send PR emails like the one AllThingsD says they received.

Amazon claims that Wednesday, the day after Apple revealed details of the iPad mini, was the best day of sales for the Kindle Fire HD. Prove it.

If true, I'd say what it really proves is there are plenty of people out there who'd much rather have an iPad than a Kindle Fire. The only thing stopping them is price. Give it time. Apple will find a way in the coming years to lower the entry price to own an iPad.

Microsoft Surface: Early Trouble

Microsoft is now officially in the modern tablet fight with the release of the Surface RT on Friday. It's obviously a very new product, so there are bound to be some growing pains. That said, this could be a make or break moment for Microsoft and it's really important that the Surface RT provide a good user experience for those willing to take a chance.

If this early review from Brent Ozar describes the typical experience, Microsoft is in for some trouble. Brent, for the most part, loves the hardware. The software is where the problem lies. I know software will be updated and bugs will be fixed. Sometimes quickly, sometimes after more time passes. I'd still say most of what Brent experiences is inexcusable when you're a late entry to a product category. Microsoft is frustrating the very buyers willing to take a chance. They will talk to friends and family about their experience. Some will blog and tweet.

The whole experience smacks of a company that arbitrarily picked a device launch date, reality be damned. Errors and problems like those shown in the videos simply can't be foisted upon the user. They need to be worked out before launch.

I'm not the market for the Surface RT. I'm entrenched in the Apple ecosystem for many reasons. I don't see that changing in the short term. That said, I really want products like the Surface to be successful for fans of Microsoft and for those you are still brand agnostic. Competition is good and if they're successful with the Surface, Microsoft will force Apple to raise their game. Everybody will win.

I can't say I'm optimistic.

Product Dictates Price

We're three days after Apple's introduction of the iPad mini and pricing is still a popular topic in the press, on blogs and in podcasts. Tim Cook & Peter Oppenheimer were questioned about it during the Apple earnings call last night. I wrote about it extensively two days ago.

One of the arguments for lower pricing came from Daring Fireball's John Gruber on Wednesday. I learn something every time I read John and I encourage you to read the post here. It really got me thinking. Something in his reasoning bothered me, but I couldn't put my finger on it. I finally got it last night. I often do my best thinking while I'm asleep.

Here's the pertinent information from the post:

And the iPad is hard to compare to any previous Apple product other than the iPod....iPad Mini’s $329 starting point leaves a price umbrella in tablets that Apple never left for MP3 player competitors....I’m just saying it wouldn’t have been unprecedented for Apple to focus more on price.

The trouble, I think, is with the last bit. John assumes Apple focused on price with iPod model creation. I have no way of knowing, but I'd wager iPod model pricing revealed itself as the job to be done was defined.

That is, product dictates price rather than price dictating product.

All iPods created during the expansion phase of the product (ignoring the iPod touch) had a very basic purpose. They enabled people to listen to their music on a small portable device. The devices differed fundamentally in two ways. Storage capacity and physical size. If you were backpacking through Europe for a month and wanted all your music, you chose what came to be the iPod classic. If you wanted the smallest possible device for your gym workout, the shuffle was your pick. The mini and then the nano occupied the middle ground.

There were significant price differences in these products because their job to do was very different. Apple still maintained a healthy profit margin on each device.

There's no correlation to Apple's tablet lineup as they've chosen to define it. Thus far, Apple views the difference between the iPad and iPad mini to be one of physical size only. You can see it in their marketing tagline; 'Every inch an iPad.'

The reason this makes sense is because there is no single, company defined purpose for an iPad. It's a different thing to every user. It can be a different thing from hour to hour. That makes it largely impossible for Apple to tailor it, beyond size, to the market. What has always made the iPad magical is that the device disappears and becomes the app you're using.

The original iPad defined the experience of using an Apple tablet. That experience is comprised of many things, including device quality, OS, and app environment. Anything Apple could have done to lower iPad mini pricing to approach that of the competition (which is admittedly making no profit on device sales) would have compromised the experience. This would have been far more damaging to Apple than leaving a price umbrella at the low end.

Apple has chosen wisely here. They've broadened the addressable market for the iPad and they've done it in a way that preserves the user experience and maintains their premium brand. If, someday, Apple can find a way to bring the iPad experience down market still further, I have no doubt they'll take it.

AAPL 2012 Q4 Earnings

​Apple released their fourth quarter earnings results this afternoon. Visit Apple for the complete details and a link to the earnings call audio (available for 2 weeks).

A quick summary:​

  • Quarterly Revenue $36.0 billion
  • Net profit $8.2 billion​ or $8.67 per diluted share
  • Gross margin 40.0%​
  • International sales 60%​
  • iPhone sales 26.9 million (58% growth over year-ago)​
  • iPad sales 14.0 million (26% growth over year-ago)​
  • Mac sales 4.9 million (1% growth over year-ago)​
  • ​iPod sales 5.3 million (19% decline over year-ago)​

Apple's guidance for 2013 Q1 is:​

  • ​Quarterly Revenue $52 billion
  • ​Diluted earnings per share of about $8.67

It's safe to say if there's a disappointment anywhere, it's the iPad numbers. They're weaker than I would have expected. Apple's explanation seems plausible, but perhaps the iPad mini is arriving on the scene at the right time.​

I couldn't be more optimistic about Apple's future product line. I think the biggest question mark for next quarter is Apple's ability to manufacture enough products to put in the hands of willing buyers. If they can ramp the new products fast enough, and Tim Cook seemed to believe there were reasons to be optimistic, it will be a monster quarter.

Last year, Apple's Q1 blew right ​past their guidance to the tune of $9 billion. If they can reproduce that beat, Apple's quarterly revenue will skip the $50 billion mark and land in the low $60 billion range. If they can't ramp quickly enough, the quarter will still be remarkably strong and set up Q2 to be the monster.

It's a good time to be a fan of Apple products.​

​Full Disclosure: I own a very small number of Apple shares.

It's All About the Margin

Yesterday, Apple released the much anticipated smaller iPad. The iPad mini is a real device anyone can order on Friday. To hear the loudest talk, people are disappointed with the starting price of the device. Even popular bloggers John Gruber and Marco Arment expressed some disappointment in the $329 entry price.

I'd simply ask; Is there really anything to be surprised about with regards to the price? Why would people expect that Apple would be the low price leader on a device as popular as the iPad mini will likely be? Is there a common thread to most all the product segments Apple plays in?

A brief history. As I wrote yesterday, Apple products have always commanded a premium price. Some consumers see value in Apple products and make purchases. Others don't see value or can't afford the entry price and don't make purchases.

Let's take a look at the markets Apple is involved in right now, before the iPad mini hits the market. Particularly, let's look at the computer, portable music player, smartphone and large tablet markets.

Apple was in the computer game from practically day one. Apple has made a fortune by being the high quality, low volume, high margin computer company. They've had no problem allowing other manufacturers to drive themselves into the ground as the low quality, high volume, no margin players.

Apple came to the portable music player game a little late. They quickly became the high quality, high volume, high margin company. The players in the market have disappeared by attempting to become the low quality, low volume, low margin option.

Apple came to the smartphone game very late. Over a period of a couple years they became the high quality, low volume, high margin company. The existing players and most challengers in the market have largely disappeared by attempting to become the low quality, high volume, low margin option.

Apple essentially created the large format tablet market. Apple has made a fortune by being the high quality, high volume, high margin player. The competition, such that it is, has floundered as the low quality, low volume, no margin players. Walk into any electronics store and you'll see a host of inferior, large tablets collecting dust on display tables.

Now, Apple is entering the smaller tablet market. It's a very interesting space and is perhaps most similar to the portable music player and smartphone markets. The reason being, Apple isn't an original player in the space. What's the current state of this market?

When manufacturers failed in the large tablet space, they shifted focus to a new market. One that didn't require them to compete with Apple. There have been a couple bit players, but two device manufacturers largely own the space. Amazon with their Kindle Fire line and Google with the Nexus 7 tablet.

This discussion will largely ignore the user experience on these devices and focus on what they contribute financially to their companies. Amazon has publicly stated that they break even on selling the Kindle Fire and hope to make money selling content for the device later. Google has publicly stated they lose money on each Nexus 7 device they sell.

Leaving aside technical talk of feeds and speeds, the user experience on the new iPad mini will be superior to the competition. The refinement level of the operating system, the frequency of operating system updates and the overwhelming number quality tablet apps in the Apple App Store ensure this. The quality of the device will also be higher than the competition. Hold the iPhone 5 and tell me I'm wrong. Apple is setting new manufacturing standards across their product lines.

So, Apple enters the smaller tablet space as the high quality, unknown volume, high margin player. The competition will be the  lower quality, unknown volume and no margin player.

Does any of this sound familiar?

Assuming Apple priced the iPad mini to maintain their usual margins, the price is right. The iPad mini will sell really well in markets where Google and Amazon have a presence. In most of the world, where they're not even available, the iPad mini lowers the price of entry and offers an alternative to the larger iPad.

It's all about the margin.

​

Apple Releases Everything

Apple held an event today and released a new version of everything they make. Well, not quite, but pretty close. This year has previously seen the release of iBooks Author, OS X 10.8, iOS 6, the 15" Retina MacBook Pro, new AirPort Express, updated AppleTV, iPad 3rd Generation, iPhone 5, new iPod nano and new iPod touch. I might even be missing something.

Today Apple added the 13" Retina MacBook Pro, Mac mini, iMac, Retina iPad 4th Generation, iBooks Author 2.0 and the all new iPad mini to the list. This product list is really crazy and it leaves almost nothing in the line untouched for 2012.

Anyone who reads this blog has probably already seen a link to a favorite post of mine from Asymco showing Apple Capital Expenditures for 2012. The last chart in the post is particularly mind blowing. I think we're getting a sense for what that extreme level of spending is enabling Apple to build.

I'd encourage you to visit Apple and just look around a bit.

Thoughts on Smaller iPad Price

​Speculation on Apple's pricing has run rampant over the last couple months as rumors of a smaller iPad have become more probable. I'd like to take a moment and lay out my thinking.

Currently, to enter the tablet game with an Apple product requires $399 for an iPad 2. Many competitors have priced smaller tablets at various price points below that level. A couple of the most prominent recent products follow below.​

  • 7" Amazon​ Kindle Fire starting at $159 to $174
  • ​7" Amazon Kindle Fire HD starting at $199 to $264
  • 7" Google Nexus 7 starting at $199 to $249
  • 8.9" Kindle Fire HD starting at $299 to $614

So where will Apple price the new smaller iPad? That depends in large part upon what their goal is and what's motivating them. ​

​The popular speculation has been that $299 would be the high end starting point, $249 would be very aggressive and $199 would be the nuclear option to destroy the competition. It seems to me that anything but the $299 price would not allow Apple to maintain their usual margins.

So why would they consider anything lower? They'd do it if they felt some real threat to the category coming from the competitors tablets. While none of these products have set the world on fire, we know Apple's market share in the tablet space has begun to shrink over the last year.

We already know that Amazon breaks even on their products and Google is likely losing money on theirs. Amazon has chosen to make their money on media sales after the fact, while Google doesn't seem to care about this being a revenue generating product.​

I think Apple's supplier relationships and advantage of scale would allow them to enter the market with a base model priced at $249, then moving quickly upwards with increased storage and cellular wireless capability.​ They'd hope that few people would actually purchase the base model.

Yesterday I linked to a 9to5Mac story suggesting that pricing would begin at $329 for the base model. This is certainly higher than most rumors, and there would be some negative press about the price being too high.​

I agree that it seems high, but not if Apple isn't releasing a smaller iPad as a result of the competition.​ There's another argument to make for why the smaller iPad exists. Because it stands on it's own as a way to solve a problem users have.

If Apple thinks of the new smaller iPad as a unique device that has attributes that users will place value on, there's no reason to discount pricing. The natural starting point would be lower than the 9.7" iPad, but not extremely so. Under this scenario, a prospective buyer would value the thinness, light weight and smaller size as almost equal features to the current iPad's large screen.​

Seen in that light light, $329 seems about right. I've always felt at first glance that Apple's prices seem a bit higher than they need to be. The lone exception being, ironically, the current iPad. ​

Apple will want to maintain a premium margin on a product line that's as young and prestigious as the iPad. ​They'll be weighing that desire against a move to secure market share and make a very real dent in the education market.

My guess is the higher number is more likely. If the response isn't what they want, they can always lower prices. They've done it before. So, will you be ordering a 16GB Wifi iPad Mini for $329?​