The Apple restatement: much ado about (almost) nothing

Today's Wall Street Journal has a summarization of Apple's filing to the SEC and restatement of three years of earnings. Here's the story straight out of the SEC 10-K filing:

... The Company has recorded additional non-cash stock-based compensation expense and related tax effects with regard to past stock option grants, and the Company is restating previously filed financial statements in this Form 10-K. These adjustments, after tax, amounted to $4 million, $7 million, and $10 million in fiscal years 2006, 2005 and 2004, respectively. The adjustment to 2006 was recorded in the fourth quarter of fiscal year 2006 due to its insignificance.

Apple's restated net income for those years 2006, 2005, and 2004 were respectively $1.99 billion, $1.33 billion, and $266 million. Therefore, only in 2004 did a $10 million adjustment affect earnings by more than a percent.

In short, Apple's filing appears to indicate that the financial impact of this scandal has been largely zero. It remains to be seen if there will be any goodwill or legal impact, but at present, this story now appears to be much ado about nothing in a slow news week.

But hey, at least it was something different from iPhone rumors....

Technorati Tags: Apple, Options, Stocks

Speaking of options issues, when will we hear about Microsoft's?

This week, the news has been all aflutter about Apple's options practices, and sometime in the next few weeks, we'll probably hear a reprise of Dell's practice as well when it files its delayed quarterly report. But we haven't heard anything about Microsoft's similar practice, as documented in the Wall Street Journal this summer. Further, some have said that the practice at Apple was actually initially pioneered by Deloitte and Touche, Microsoft's auditor.

Just as with Apple, Microsoft discontinued the practice, but to my knowledge, has never restated any quarterly results to account for the costs. Given that the practice actually was quite similar to the allegations against Apple, namely, that options were granted prior to actually setting the actual strike price, the big question outstanding is, "Why?"

My point: This isn't just a financial issue, but a marketing and branding one. The SEC actions to date have been onesies and twosies. But when the new Congress convenes in January, I would expect to see a lot more scrutiny of corporate compensation and lost taxes from improper accounting under the Democratic leadership than we saw in the past 12 years. Companies that haven't reached agreements with the SEC by then could then face much more aggressive prosecution, with a corresponding hit to their brand value.

Technorati Tags: Apple, Microsoft, Options back-dating

New Year's resolutions, crafted by PR crisis managers

In the spirit of end-of-year reflection, there was one article in today's Wall Street Journal that I thought was particularly useful today. Titled Mistakes Were Made: What To Take Away From The High-Profile Blunders of 2006, the article interviews crisis managers from all over the country and asks their advice on how to deal with the biggest mistakes of 2006. I saw that article and thought in the spirit of giving and self-improvement, some of the quotes might prove useful to many executives and marketers in the news this year. So without further ado....

"The Internet neutralizes redemption, because the original sin lives on," says Eric Dezenhall, a crisis consultant in Washington, D.C. "Your darkest side and greatest failures can be showcased forever."

What this means is that no matter how hard he tries, Microsoft founder Bill Gates will never be able to live down Microsoft Bob, especially since some of its features live on in the search function of Windows XP.

"You can be from the smallest town in America and be international news by lunchtime," warns Jonathan Bernstein, a consultant in Los Angeles. "So conduct yourself as if you're on the air at all times."

I do so hope Microsoft CEO Steve Ballmer (aka "Dancing Monkey Boy") takes this one to heart.

"Everyone says, 'I'm sorry.' That's very '80s," says Karen Friedman, a communications coach in Blue Bell, Pa. "It's like saying to someone, 'I love you, now sleep with me.' It's empty, hollow and, quite frankly, pathetic: 'I'm sorry I cooked the books.' 'I'm sorry I beat my wife. I won't do it again.' " In 2007, Ms. Friedman says, nothing less than a full-out explanation, total candor and contrition will do. "You have to say, 'I made a terrible mistake. I offended people. I lied. I was stupid.' "

This one is for HP CEO Mark Hurd, whose PR-written apology actually managed to avoid including the words, "I'm sorry".

The people who survive their missteps tend to have a reservoir of goodwill. If people like and respect you -- if you've treated them well in the past -- "they're more apt to reach out and pick you up if you've stumbled," says Steven Fink, who runs a California-based crisis-management firm.

"Americans will forgive mistakes. We will not forgive arrogance," says Richard Levick, who runs a strategic communications firm in Washington, D.C.

It is a shame that former Sony game unit President Ken Kutagari didn't get this memo before the Nintendo Wii ate Playstation 3's lunch at Christmas.

"All of us have audiences -- our bosses, colleagues, students, families, vendors, in-laws," says Mr. Levick. "You can't violate the trust with your audience." As Ms. Friedman asks: "Who is that family member, friend, co-worker? What will they put up with? What will offend each of them?"

If you misread the temperature of your "audience," you must apologize, even if you're late doing so. Crisis managers mention Oprah Winfrey. At first, she defended Mr. Frey after news broke that he'd fabricated parts of his book. After her initial efforts offended her audience, she admitted she had made a mistake.

I wonder when we can expect an apology for brown Zunes? The latest Amazon electronics best-sellers has a black Zune at #62, but the brown Zune is nowhere to be found.

But one things for sure: once Microsoft Vista starts disabling video cards and monitors, degrading content, and crashing more often for people just to protect the media industry, there will be plenty of time for apologies.

When smart companies are enduring a public-relations crisis, "they try to get through a news cycle or two," says Steven Van Hook, who teaches marketing communications at University of California, Santa Barbara. "The same is true in your personal cycle. Can you wait it out a couple of days?"

With the current flurry of articles (just today's Wall Street Journal has three, here, here, and here) about possible (but unconfirmed) falsified documents in the Apple Computer options investigation, perhaps Apple has taken this approach.

By the time James Lukaszewski, a consultant in White Plains, N.Y., gets calls from high-profile people in trouble, "things are already leaking, foaming, stinking or flaming," he says. The best way to avoid having to call him, he says, is simple. "Live a life of integrity. When in doubt, lean toward the ethical decision."

By the time James Lukaszewski, a consultant in White Plains, N.Y., gets calls from high-profile people in trouble, "things are already leaking, foaming, stinking or flaming," he says. The best way to avoid having to call him, he says, is simple. "Live a life of integrity. When in doubt, lean toward the ethical decision."

Or as Mr. Levick tells clients: "Listen to your mother. If you can't justify what you're doing to her, then don't do it."

And perhaps this is why Steve Jobs gave back the options that are alleged by the Financial Times and others to have been given him without proper authorization. If it is true, I argue that his mother would be proud. After all, how many other CEOs listed above would relinquish $100 million or so because they thought it was wrong?

Technorati Tags: Apple, Bill Gates, Ken Kutagari, Mark Hurd, Opinion, Steve Ballmer, Steve Jobs

No consensus on actual 2006 holiday results

Today's Wall Street Journal says that the last weekend of the holiday shopping season was lackluster. Bloomberg, on the other hand, claims that US sales were strong in the final holiday weekend.. So who's right?

The real question is what companies are measuring and what their benchmarks are. The Wall Street Journal article is looking at a 6.6% rise over last year, which is lower than last year's 8.7% rise according to Mastercard International. The Bloomberg article, on the other hand, is looking at the data from the National Retail Federation, which is predicting a 5% gain this holiday season, which, despite the headline, would still be the lowest gain since 2002. So no matter which way you slice it, this was no gangbuster holiday season for retailers. But the jury is out about whether it was mediocre or downright slow.

Blackfriars' data leans more toward a lower value of the NRF number than either of these predictions: 3% growth over last year because of early and sustained discounting by the likes of Wal-Mart. And while our fourth quarter survey indicates that holiday marketing budgets are higher than they were last year, our data also suggests that actual marketing spending will likely be lower. And if companies spend less on marketing their products, they will sell less, pure and simple.

We'll have more data about the outlook for Q4 and 2007 marketing in our December marketing report, Marketing 2006: A Make Or Break Fourth Quarter (pre-order now to get $100 off the publication price). Meanwhile, we'll be watching the post-holiday sales numbers closely to see how aggressive retailers become this week. But at this point, our bets are that the visitation this holiday season had more to do with the Grinch than Santa Claus.

Technorati Tags: Blackfriars, Holiday sales, Marketing, Retail

How retailer flat panel pain translates into consumer gains

[Pioneer 50-inch 1080p theater-resolution plasma panel]


The Boston Globe today has its own take on the flat panel pricing precipice this season, noting that there has never been a better time to for consumers to buy a flat panel television. Of course, the fact that retailers are often taking losses on the products.

Aggressive price wars over flat-panel televisions, the Cadillac of TV sets revered for their big screens, clear pictures, and sleek physiques, have given shoppers the upper hand this holiday season. Merchants have slashed prices 40 percent on average over the past year, and electronics chains are offering years of no interest and no down payments as they try to fend off discounters and newcomers, such as Home Depot, Office Depot, and Toys "R" Us, that are now selling low-cost LCD and plasma TVs.

"Prices are dropping faster than TVs are growing in terms of screen size," said Scott Erickson , a partner in Deloitte & Touche's consumer business practice. "The average American household that a year ago could only dream of putting in a 50-inch or greater television is actually doing it this year."

And we thought last year's 30% decline in prices was big.

One factor in the price declines that I haven't seen reported much is the fact that consumers seem to have accepted 1080p theater-definition resolution as a differentiating feature (see this article for Blackfriars' definitions of TV displays above today's standard high-definition resolutions of 720p and 1080i). The result has been a near crash in the prices of most of this year's plasma displays, where 1080p resolution was the exception rather than the rule. This is in dramatic contrast to inexpensive LCD panels such as the Westinghouse LVM-42W2 that already feature 1080p resolutions. The irony of all this is that resolution is actually about the third or fourth most important factor in reproducing realistic video images and the fact that 1080p source material is currently nonexistent except for a few Sony Playstation 3 games and Blu-ray movies.

The moral: Differentiation is a powerful marketing force, especially with complex products. But truth be told, it works best when all other factors are equal, and they almost never are. Despite the power of 1080p differentiation, brands and overall consumer experience also matter, and those will continue to keep Westinghouse from knocking Panasonic or Pioneer off their leadership pedestals any time soon. But regardless, flat panel sales for the next year will be anything but flat.

Technorati Tags: 1080p, 720p, Blu-ray, Flat panels, LCD, Marketing, Panasonic, Pioneer, Plasma, Playstation 3, Theater-definition

Apple stores now exceeding Tiffany's sales per square foot

[Graph of Apple retail sales through mid-2005. Click here for a larger version]. Source: Apple Computer financial presentation

Red Herring put out some great data from Sanford Bernstein Research this week showing that Apple's stores are posting more than $4,032 in annual revenue per square foot of space. That's more than six times the revenue per square foot at Neiman Marcus, four times that of Best Buy, and about one and a half times that at Tiffany's.

The article then proceeds to compare Apple's retail store strategy with that of Gateway's, which is a little bit like comparing the Four Seasons hotel chain's strategy with Holiday Inn's: they address different target markets and get different results. But given I spent almost a year defending Apple's retail strategy when they opened their first stores against a crowd of analysts claiming it was stupid, it's nice to have vindication through data, even if it is five years later.

Technorati Tags: Apple, Best Buy, Marketing, Merchandising, Neiman Marcus, Gateway, Retail, Tiffany

Retailers groan as Microsoft extends XBox 360 warranty to one year

Yesterday, I had a great conversation with a Dow Jones reporter about the role of extended warranties in the profit and loss in selling flat panel TVs. I noted in my article about the challenges of flat-panel retailing that add-ons are the only things really keeping flat-panel sales profitable. And that story applies to all consumer electronics nowadays; extended warranties allow retailers to boost their gross margins from single digits to something that can actually drive bottom line profit.

That's why a lot of retailers are probably cursing the gods of Redmond today, because after a full year of XBox 360 sales,
Microsoft finally extended its XBox 360 warranty from 90 days to one year in the US and Canada.. Undoubtedly, this was the result of Sony entering the market with its Playstation 3, which carries a one-year Sony warranty. But the unintended impact on retailers will be to reduce the number of consumers who buy extended warranties for XBox 360s. And that means that Microsoft just reduced the net profitability of XBox 360 sales to the very companies that it wants to sell them. How clever.

It will probably take a few months before the business analysts at Best Buy and Circuit City notice this effect. But given what I consider to be a likely effort by the company to stuff its retail channel with unsold XBox 360 boxes to make its sales goals this holiday season, this move is likely to just add another annoyance to an already testy relationship with retailers.

Technorati Tags: Best Buy, Circuit City, Playstation 3, Sony, Warranties, XBox 360

Why flat-panel TV retailers need Apple to turn the tide in the HDTV war

Blackfriars noted in November that new competition in selling flat-panel displays would hurt retailers this Christmas. Yesterday, the Wall Street Journal reported that widespread discounting of flat-screen TVs has wounded retailers this holiday season. And even the largest retailers aren't immune from this trend:

Electronics specialist Circuit City became a casualty of the battle yesterday, reporting a third-quarter loss triggered by rapid price declines on big-screen TVs. The Richmond, Va., retailer said it was caught flat-footed as it was forced to respond to discounts and other sales incentives offered by its rivals. Circuit City shares tumbled $4.04, or nearly 18%, yesterday [Wednesday] to $19.01 in 4 p.m. composite trading on the New York Stock Exchange.

Other retailers have been dogged by missteps: Wal-Mart, of Bentonville, Ark., is fighting anemic sales gains overall and market-share losses in consumer-electronics despite higher sales of flat-panel TVs. Wal-Mart gets 10% of its $312 billion in annual sales from consumer electronics, computer and game software and DVDs.

"Last year, it was a tug-of-war between Best Buy and Circuit City," says Stacey Widlitz, a retailing analyst at Pali Research. "There are so many more players this year it has been a whole different story." She predicts that the competition eventually will douse smaller retailers that don't have Best Buy or Wal-Mart's clout.

Best Buy, based in Richfield, Minn., is proving to be a fierce competitor. In contrast to the losses posted by smaller rival Circuit City, Best Buy's third-quarter profits rose 9%, though holiday promotions left its results below Wall Street expectations.

The irony of these falling profits is that flat-panel TVs have actually been one of two saviors of the consumer electronics industry in the last five years (the other is the iPod and MP3 players) ravaged by rapid price declines in personal computers and digital cameras. Flat panels were such a unique and stylish product that they actually convinced consumers to pay up to three times more than a similar-sized CRT or projection TV. In fact, I would argue that high-definition television would probably have failed to win consumer adoption without the seductive attraction of flat-panel TVs.

Flat-panels are now hitting a crucial inflection point. Large 42-inch flat panels are now falling below the magic price point of $1,000. High-definition programming such as sports and on-demand movies is now prevalent enough to compel a larger population to invest in flat panels. But the problem for retailers is that at sub-$1,000 price points, single-digit profit margins just don't pay for the floor space and retailer attention required by flat panel retailers.

Now of course, retailers figured that add-ons can help mitigate the profit pinch of flat panel TVs. That's why you can't buy a Panasonic or Sony plasma at Best Buy without getting pitched five year extended warranties, Monster cables (retailers love it when they can sell a $10 cable for $95), and home installation. But as prices decline, those add-ons also must decline in price and margins too, leaving retailers back where they started.

And to be fair, flat panel HDTVs are no picnic for consumers to get working themselves. In recent surveys, a quarter of HDTV owners never actually watch HDTV content because they didn't get the right gear from their TV service provider. And with average consumers facing a tangle of composite, S-Video, component, DVI, and HDMI cables to hook up to their TVs, its no surprise that many consumers believe are still watching standard NTSC TV signals on their shiny flat panels instead of HDTV (the good stuff).

This is a retail conundrum. But is also an opportunity.

Just 10 years ago, PCs were in a similar place. PCs had just fallen below $1,000 (causing immense consternation to the dedicated computer retailers), Windows 95 was out, and the World Wide Web and email were intriguing consumers to try out the Internet. But just as with HDTV, the standard three piece PC required a rat's nest of cables to connect, and then the consumer was left to configure dial-up numbers and accounts, set up PPP and DNS tables, and figure out how to log into their POP email accounts. Most consumers threw up their hands.

And then Apple introduced the iMac. It has a simple marketing benefit: it promised to get you on the Internet in 15 minutes of opening the box. Apple even made a TV commercial showing a seven-year-old setting up an iMac racing an experienced PC consumer to get on the Internet. The seven-year-old won by twenty minutes. This one product single-handedly reshaped consumer perception of the Internet, and reshaped their image of Apple to one of elegance and simplicity. And of course, Apple sold millions of iMacs in the process, and in the process, became the highest-margin (by percentage of revenue) computer maker, a title it retains today.

Retailers need a similar product and vision for HDTV flat panels. They need a company who can sell the benefit of an elegant, all-in-one flat-panel HDTV and guarantee a unique product experience. They need a company that will not only market the product, but also a lifestyle brand. They need a company who can deliver HDTV content to play on the product and will manage the brand experience end-to-end. And they need someone who recognizes that they can command and share higher profits with retailers.

Apple, are you listening?

Technorati Tags: All In One HDTV, Apple, Apple Movies, Apple TV, Best Buy, Flat Panels, LCD, Marketing, Opinion, PCs, Plasma, Circuit City, Retail, Wal-Mart

How iTunes may repeat its music domination with video

We've written several times in the last year or two that we think Apple has plans to develop the video market in much the same way . Well, NPD has some initial data saying that Apple is already well on its way, with iTunes now accounting for 90% of all paid-for digital downloads. This is despite many other high-profile launches of video content, including Amazon Unbox, XBox 360's video Marketplace (I forget its name, that's how memorable it is), and Morgan Freeman's Clickstar.

Now this is still a market just getting started, so initial market share doesn't really mean anything. But with the success of iTunes and the introduction of its upcoming iTV set-top box, Apple will certainly be one of the contenders for the title of downloadable movie king. And this latest data suggests two moves Apple could make that could transform iTunes into the clearly dominant provider of digital movie downloads:

1. Introducing its own iTunes-powered all-in-one flat-panel HDTV system


2. Signing deals with video pornography producers

Because Apple cares about branding and brand value, Option #2 is not going to happen. And Option #1? I've been predicting Apple has such a project in the works for about a year and a half. I'll be looking for more clues as to whether it is happening or not during Steve Jobs' MacWorld keynote on January 9. But given the current data, Apple has the potential to repeat its domination of music in video as well.

Perennial full disclosure: I own some Apple stock and wish I owned more.

Technorati Tags: Amazon, Apple, Downloads, iTunes, Movies, Clickstar, XBox 360

Amazon figures out MP3s are its best hope to compete with iTunes

Hypebot picked up this story Monday, but I didn't notice until last night. According to the site, Amazon will enter the downloadable music business with digital-rights-unmanaged MP3 files in late Q1 2007.

What is most surprising (and exciting) about Amazon's new store is that the online giant is apparently telling labels that they will only sell DRM free mp3's and will offer variable pricing.

As the first major download store launch since Microsoft made it clear with ZUNE that it was not supporting it's own PlayForSure DRM, perhaps Amazon was left with no choice. Yahoo! Music, Napster, URGE and others based on PlayForSure are starting to look like forgotten step-children. Only eMusic has gained real momentum against the iTunes juggarnaut and eMusic sells mp3's.

The open question is such a move is what Apple's response might be. After all, if Amazon were to do this, we might see a rapid shift from iTunes to Amazon, since MP3 files would be usable on all players (thereby avoiding perceived lock-ins to iPods that Apple's Fairplay songs provide) and the fact that such music collections would be "future-proof". That is, a collection of MP3 files should be playable for years to come, regardless of whether Amazon or Apple are still in business or supporting the format.

My view: if Amazon can convince the record labels to offer music in DRM-free MP3 form, Apple would be silly not to follow suit. I suggested such a move to Apple back in March when the company was fighting with the French government, but if Apple can let Amazon do all the heavy lifting of getting the labels signed up for DRM-free music, so much the better. Further, the technology for providing watermarks for MP3 music continues to evolve to allow, thereby

But lest readers think that someone will finally eclipse Apple in the music downloading business, the reality is that I don't think labels will sign Amazon's deal for all their music. Instead, I think they'll offer their lower-value back catalogs of music in MP3 form, but will still demand some type of DRM for their hit albums and tracks for, say, the first six months of a record's release. In many ways, this would parallel the window system for movie releases, where movies arrive first as full priced DVDs, then move to video-on-demand, and later get released on network TV where everyone and their brother can record them via TiVO, recordable DVD, or (heavens forbid such archaic technology) VHS tape. There is no reason music should not follow a similar distribution path online.

The result: because Apple controls the dominant DRM system today, iTunes would still hold a huge competitive edge against Amazon for hit music, and therefore, would likely remain the dominant market leader. But another MP3 service would certainly bring competitive pressure to bear on Apple and would help the industry realize that DRM hinders rather than helps the growth of music. But it's the labels who stand in the way of that growth, not Apple. And in the meantime, Apple and iTunes will prosper no matter which way the industry plays the game.

Full disclosure: I do own a little Apple stock.

Technorati Tags: Amazon, Apple, DRM, DVD, iPod, iTunes, Marketing, Movies, MP3, Music

An important target market: introverts

Being market researchers, we here at Blackfriars are always looking at specific markets for products and services and how we can reach those markets. I was intrigued therefore come across this article today about Marketing to Introverts. The author, Nedra Weinreich, articulates the problem well:

I have found that introverts and extroverts have a Mars-Venus thing going on. It's hard for an extrovert to get inside the mind of an introvert and understand where they are coming from. This article by Jonathan Rauch explains it better than I ever could (and might help you understand the introverts in your life better). We're just hard-wired differently.

This got me to thinking about whether marketers might need to take a different approach to be more effective in reaching introverts, who make up 25-40% of the general population (but 60% of the gifted population!). That percentage is large enough to think about taking the needs of introverts into account in your marketing, even if you are not trying to specifically reach engineers, writers, researchers, lawyers, programmers, college faculty or Star Trek fans, all of whom are more likely to be introverts.

Nedra has a terrific list of dos and don'ts for appealing to introverts, so I encourage everyone to read the article. I fit into several of the categories noted above, so I felt like many of the points spoke to me. But I think Nedra left her best bit of advice for last:

Most marketers and sales people are extroverts. Don't forget about us introverts and you will be much more successful.

>
As an aside, this is one of the reasons why Blackfriars uses a lot of Web-based surveys: we get a much better balance of introverts and extroverts in a Web survey that we would do in a focus group or telephone survey.

Technorati Tags: Extroverts, Marketing, Research, Introverts, Social marketing

Yes, Virginia, there is an iPhone

Yes, Virginia, there is an iPhone -- sort of. Cisco's Linksys brand launched an Internet phone today called iPhone as part of their Voice Over IP series of products. Of course, this product bears no resemblance to the product whose rumored introduction in the next month or so is currently whipsawing Apple's predicted fortunes lately. But I'm sure Gizmodo enjoyed the buzz they created.

Given the presence of this product we now know something very clear: Apple's phone won't be called an iPhone; someone else has already claimed that brand.

Technorati Tags: Apple, Cisco, iPhone, Linksys, Gizmodo

Will HP ever straighten out its corporate governance scandal?

I wonder when Hewlett Packard executives are going to learn the basics about crisis management and realize that they need to publicly address their behavior.

MSNBC reported on Friday that a Congressional committee is now looking at why HP CEO Mark Hurd exercised and sold $1.37 million in stock options on the day he was to be interviewed by outside counsel investigating the pretexting scandal. The exercise and sale was not part of any pre-arranged program.

It isn't at all clear that this was illegal in any way, but to an outside observer, it certainly looks like a violation of insider trading laws. Mr. Hurd had to know that being interviewed regarding a scandal isn't the sort of activity that's going to boost HP's stock price. And Hurd took over from former Board of Directors Chairman Patricia Dunn wishing to wipe the slate clean from the Board's pretexting scandal. Now, he is opening a whole new front for Congress to look into exercising of options on inside information. And even if he is completely innocent of all wrongdoing, in the aftermath of CEO scandals such as those at Computer Associates and Comverse, the HP scandal is now going to take on a life of its own.

Blackfriars noted back in September that HP had to be aggressive in airing and addressing the issues behind this scandal to get beyond it. Instead, the company took weeks to dismiss former Chairman Dunn, and then compounded its error by giving Mr. Hurd CEO and Chairman titles, in essence giving Mr. Hurd unfettered control of the company without much concern for board of directors oversight. If he had remained squeaky clean in all his dealings, he had a chance of getting away with it. But this transaction now taints him as well. And HP's brand will suffer for it.

Technorati Tags: Branding, Hewlett Packard, Mark Hurd, Marketing, Pretexting

The marketing strategy behind a December iPhone announcment

Gizmodo has a three sentence story claiming the iPhone will be announced on Monday, December 18. I can't claim to have any information on the topic, but I can perhaps shed some light on why Apple might do this (if they do)

One of the biggest challenges for marketers is getting "space" for big announcements. When a big show like the Consumer Electronics Show (CES) or MacWorld happens, literally thousands of announcements are scheduled to be released with the show. The result: show announcements can actually get lost in the clutter.

Now we wouldn't expect that to happen with the announcement, but this year, MacWorld and CES are the same week, doubling the normal number of tech stories. And while the week before Christmas is a busy time, there actually aren't that many tech stories cluttering up the airwaves. The result: doing an announcement the week before Christmas might actually generate more press coverage than an announcement at MacWorld.

One more thing: you can bet that Steve Jobs wouldn't announce iPhone this week if that were the centerpiece of his MacWorld keynote. If iPhone were announced next week, that implies that he has bigger and better things to show at MacWorld. It may also imply a broader theme other than music phones at that event (for example, the digital home). Bottom line: if iPhone sends tremors through the phone world in December, we can expect something more earthquake-sized in January.

Technorati Tags: Apple, CES, iPhone, MacWorld, Marketing, Announcements

Sony production woes past for PS3?

Reuters claims that Sony is sticking to its targets of shipping 2 million Playstation 3s by December 31, and 6 million by March 31. That's quite a statement considering the company only managed to ship 197,000 units in November, which is far short of the 600,000 it had planned.

It really is amazing how much Sony's Christmas 2006 is mirroring Microsoft's of 2005, where Microsoft shipped less than a million units when it had predicted at least two. But if Sony actually were to ship two million Playstation 3s, it would not only outsell what Microsoft did last year, but probably would have a shot at outselling XBox 360 this year as well (data point: sales of XBox 360s in November were 511,000 according to NPD). But frankly, I think it is a long shot. My estimate is that Sony's actuals will be in the range of only one million rather than two this Christmas because of production limitations.

Should the Playstation 3 end up in second place this Christmas season, Sony shouldn't feel too badly. The #1 selling console at the moment remains the Playstation 3, which sold nearly a million units in November, and will probably sell nearly double that in December.

Technorati Tags: Games, Gaming, Playstation 2, Playstation 3, Sony, XBox 360

Comscore also says iTunes up, not down

With sales up 84% in the first nine months of 2006 according to Comscore, it doesn't sound like Apple really has anything to worry about. Wait, Didn't I say that a couple days ago?

Technorati Tags: Apple, iTunes, Marketing, Music, Comscore

Review of the original iPod and the loneliness of Zune

Someone found a 2001 review of the Apple iPod before it was even shipping in quantity to consumers. I remember getting one as a review unit at Forrester. It was a big day. It was interesting to hear the reviewer talk about how convenient the mechanical scroll wheel was and how fast and convenient Firewire downloading was (this was in the days when USB maxed out at 12 Mbps; Firewire's 400 Mbps was a huge differentiator).

In contrast, this week, both the Wall Street Journal and CNET both had articles noting how impossible it is for Microsoft Zune owners to find anyone to "squirt" music to using the WiFi system built into that device. Sadly, that's differentiation that doesn't actually matter. But they can't say we didn't warn them.

Technorati Tags: Apple, iPod, Marketing, Microsoft, Music, Zune

Looking at Forrester's side of the iTunes collapse story

[Forrester Research graph of three years of iTunes and iPods sales. Click here for a larger version]

Josh Bernoff, the source of the Forrester report used to claim that iTunes is collapsing, has written a blog entry about the furor he has created with his report. As expected, much of the heat and light is due to reporters extrapolating single data points into a story.

But even more interesting is the fact that Josh published his graph of iPods versus iTunes sales. Where our graph was an attempt to be conservative and not overhype the growth of iTunes by using a log scale, Josh plotted the data vertically on a linear scale. Anyone who thinks that iTunes is collapsing should ponder this graph for a few minutes. If anything, that graphic makes it look like iPod sales are slowing, not iTunes, which appear to be approaching escape velocity.

Now take another look at my graph below:


[Blackfriars' graph of three years of iTunes and iPods sales. Click here for a larger version]

One of the things that is more evident from my graphic is that the gap between iPod sales and iTunes sales is actually growing lately. What that means is that the number of iTunes tracks sold per iPod continues to grow. Some articles claimed that iTunes tracks per iPod remain stuck at about 20. That number is presently about 23 and climbing.

The moral of this part of the story is that presentation matters. Differing graphs and graph types will emphasize different pieces of data. If I'd been Josh trying to make my case about sales slowing, I would have used a much less vertically oriented graphic. And given the near exponential growth of both iTunes and iPod sales, I would probably have used a log scale, even though that would be harder to explain, because the variations would have been more proportional to the quantity of sales. The linear scale makes small percentage changes appear larger than they are proportionally.

Meanwhile, Apple has publicly denied the Forrester report, breaking one of their long-standing rules about not commenting on things like this. I do think Josh unfairly blames Apple for some of the brouhaha. Apple has no obligation or incentive to share its internal business data given how many companies would love to replace them at the top of the digital music food chain. And as regular readers will know, I consider their secrecy and close-mouthedness an important part of their product mistique and marketing.

And so the debate goes on. But let's just say that the rumors of iTunes collapse remain exaggerated.

Technorati Tags: Apple, Forrester, iPod, iTunes, Josh Bernoff, Marketing, Music

More reaction to the iTunes music store non-collapse

It's been an interesting day. I've heard everything from "right on" to "you're lying" responding to my counterpoint to the Register article titled "iTunes Sales Collapsing" and Forrester's original research. So perhaps I can make some additional comments that might clarify things (or not, you never know).

First, my understanding of the report that Josh did is that it is actually a pretty thoughtful piece of work. And even the Register article says,

Speaking to The Register, Forrester analyst Josh Bernoff warned against extrapolating too much from the figures. It may reflect a seasonal bounce that hasn't yet manifested itself. However, it might not.

But most importantly, I say "my understanding" above because I have not been able to read Josh's report, since I'm not a Forrester client. So I can't rebut any of his data point by point.

And to be clear, the data he cites is simply how many transactions his sample of consumers made, and what the average transaction was. And he has that data month-by-month, and we don't. So while we can look at the aggregate numbers (what my graph does), he can actually calculate some of Apple's month-by-month revenue (although not all, since he doesn't include gift cards nor non-US households; in fact, it's also not clear if debit cards are included). Hence the 65% drop in revenue observation: he's looking at January through August of 2006. We have no visibility into month by month trends there, he does.

In my graph, I'm looking at TOTAL iTunes sales since the beginning of time, while Josh is looking at incremental iTunes sales. Since incremental sales are the first derivative of the total sales number, it's going to vary more. And in fact one of his quotes was really about the growth or decline of those incremental sales, meaning he's looking at the second derivative, which is going to be all over the place statistically. Sales change month to month. We shouldn't be surprised by that in retail.

The bottom line: Yeah, it's annoying that Forrester is predicting the collapse of iTunes from a carefully selected 7-month period coming down from the Christmas peak of last year. Anyone in retail knows that January through August aren't like September through December (let's see, do we buy more music at Christmas or in the summer? Let me think about that). But let's recognize that a lot of the heat about this is just people reacting to short term trends like day-traders instead of looking at the long-term business, year over year. And Apple's long-term iTunes business is pulling in revenue of about a billion dollars a year and fueling a juggernaut of iPod sales where it's making multiple billions. I'll take that type of problem any day of the week.

And just to note that Josh is a bit more circumspect in his published material than the Register is, here's his summary from the actual report on Forrester's Web site:

EXECUTIVE SUMMARY

Forrester's recent analysis of more than 2,700 US iTunes debit and credit card transactions reveals that 3% of online households made an iTunes purchase in the past year. Apple's iTunes proves that $0.99 micropayments for digital music can lead to substantial revenue; buyers spent an average of $35 at iTunes over the past year. With half of all transactions costing $3 or less, though, transaction fees threaten to make iTunes unprofitable. Since the introduction of the iTunes Music Store, Apple has been steadily selling just 20 iTunes tracks for each iPod sold, suggesting that even at $0.99, most consumers still aren't sold on the value of digital music.

Frankly, that doesn't sound anything like a collapse to me.

Technorati Tags: Apple, Forrester, iTunes, Josh Bernoff, Marketing, Music

Do the math: iTunes sales aren't collapsing

[Graph of three years of iTunes and iPods sales. Click here for a larger version]

I always enjoy Forrester's Josh Bernoff's writing and analysis, but we often don't see the same data the same ways. So when I read yesterday's New York Times quick article claiming that iPods aren't driving iTunes sales, I decided that they must have misquoted him. When I saw today's article in The Register claiming that iTunes sales are collapsing, I decided there was enough silliness being repeated over and over that I had to run some numbers myself.

The data point in question in the New York Times is from this quote:

Although both [iTunes and iPod sales] are successful, the relationship may not have worked out exactly as expected. At any given point, the cumulative number of songs sold by the iTunes store has generally been about 20 times the cumulative number of iPods sold, according to Forrester Research, the technology consulting firm. That ratio has recently crept up to roughly 22 to 1, as 1.5 billion songs have been sold. The figures were compiled from public statements by Apple.

The numbers suggest that iPods are not driving iTunes sales as much as early supporters may have expected.

The graph above looks at cumulative iPod and iTunes sales on a logarithmic scale. Now to review a little high school math (yes, high school was a long time ago here as well), when you plot things on a logarithmic scale, exponential growth shows up as a straight line. A gradually tailing off curve generally still implies substantial growth -- iTunes sold a billion songs just in the past 12 months. So the first takeaway from the above curves should be that both the iTunes and iPod sales are growing dramatically.

Secondly, let's look at the ratio between songs and iPods. in December 2003, iTunes had sold about 25 million songs for 2 million iPods, or a ratio of about 12.5 to 1. Today, that number is more like 23. So songs per iPod have actually grown over three years, and that's why the curves are getting farther apart. Further, some of those iPods sold now are not operational (although my December 2001 first generation iPod is doing fine, not everyone is so careful or lucky), and some iPods go to repeat buyers. So the actual ratio of songs to iPods is actually higher than this graph would indicate.

The bottom line: anyone who claims iPod sales are collapsing can't do basic math. The rate of song purchases is going to change month-to-month, and Forrester's data shows that. But the iTunes Store is the fourth largest online retailer of any type and is selling almost three million songs a day. And of course, none of that counts revenues from TV shows or movies either, each of which amount to millions of dollars of revenue per year. If that's a collapse, I don't know what these authors consider success.

Full disclosure: I do own a small number of Apple shares.

Update: I have seen a few postings referencing this article saying that Josh and I are looking at the same data. We are not; he has access to some proprietary Forrester data that I don't have access to. And the numbers he has cited are averages from a sample of about 2,000 US credit card records (which, by the way, ignores all the European and Asian iTunes stores), which may or may not be representative of the entire population of iTunes music buyers. My interpretation of his data is that the second derivative of revenue may have changed in the last few months, but as the data clearly shows, that is very very far from iTunes sales collapsing. It simply means that its growth has slowed somewhat. Nonetheless, given that Apple took nearly three years to hit a billion songs sold, and the fact that it sold a billion just in the last twelve months, iTunes music sales remain quite healthy and producing revenues of more than one billion US dollars a year.

Update 2: That little discontinuity in the graph above at December 2005 is because Apple sold 14 million iPods last Christmas, up substantially from its average quarter of only 4-8. This Christmas, I'm predicting Apple will sell 20 million (and Apple always beats my projections). Periods of disproportionate iPod sales drive down the ratio of songs to iPods. Further, Josh's analysis does note that iPod gifts and gift card usage are not included in his count. Guess when those items are used most often. That's right, around now, not during the first nine months of the year.

The bottom line: iTunes is doing just fine.

Technorati Tags: Analysis, Apple, Apple Store, Internet, iPod, iTunes, Marketing, Music

Fun with Microsoft press releases, or why XBox 360 may not be posting as big a lead as you think.

We have a game we play around the office here with Microsoft press releases. The game is, "Find the words that make the headline true." It's not always easy.

Let's start with XBox 360s. Last week, Microsoft said that it expects to sell more than 10 million XBox 360s by the end of 2006. Sounds plausible, right?

Well, sort of. Unfortunately, NPD just released their numbers for November. The outcome was pretty close to Blackfriars forecast last week:

Nintendo Wii: estimate: 600,000+, actual: 476,000
Microsoft XBox 360: Blackfriars estimate: 600,000, actual: 511,000
Sony Playstation 3: estimate: 200,000, actual: 197,000

Sounds pretty good, right? XBox 360 beat the Nintendo Wii in November with half a million units. They should be fine with the projection, right?

Well, not if you go back to Microsoft's earnings statements and notice that through September 30, Microsoft had only sold 5.9 million units according to its SEC filings. XBox 360 sales in Q3 were averaging 300,000 a month, so let's say October sales were 400,000. Adding on 511,000 for November, that brings us up to 6.8 million. Estimates are that Microsoft will sell about 1.5 to 2 million XBox 360s for Christmas. That leaves the total about a million units short of the 10 million goal.

The secret sentences in the first press release cited above that make the projection possible are the following:

That "sold" number refers to units "sold into retail," which refers to units in transit, units sitting in store inventories and machines sold to consumers.

So how can Microsoft make its stated goal? It's simple: they "stuff" the retail channel by requiring retailers to take XBox 360s over and above those they need by the end of the year.

Now some might argue that retailers won't want to take inventory they don't want this time of year. But Microsoft has a nice trump card to play here. They simply say, "Well, we have a big consumer product launch of Windows Vista and Office 2007 coming up on January 30. Those who don't take XBox 360s might have some trouble getting inventory of those products." And given that those products are pretty much guaranteed to sell in the millions of units for the year at price points of hundreds of dollars, most retailers will just take the XBoxes and call it a day.

See, isn't that a fun game? Now try playing along at home for fun and prizes. Here's an article noting Microsoft's reaction to the first few weeks of Zune sales. In response, a Microsoft spokesperson noted that they weren't terribly worried about initial sales, since they intend to sell at least a million Zunes by the end of June 2007. Ignoring the fact that Apple is selling that many iPods every 10 days (actually faster than that this time of year, but that's an average for 2006), can you find the words that make this statement especially likely? Hint: Zunes can mean today's Zune or other products under the same name.

Our point: Microsoft has a long history of using press releases to promote their product momentum in shall we say interesting ways, using words like as "fastest growing" (meaning, the number we started with was really really small) to redefining words such as "sold". It's not good marketing practice. Why? Because once consumers and press people figure out you are playing lawyer, they stop believing you and your brand. And that's more likely to do you harm than good.

Technorati Tags: Blackfriars, Brand, Branding, Games, Gaming, Marketing, Microsoft, Nintendo, Playstation 3, Press release, Sony, Wii, XBox 360

Now entering our third year of blogging

Happy birthday to us! December 7, 2004 was the first blog entry here at Blackfriars Communications, Inc. So that means we're now into our third year. Woot (or words to that effect)!

I have to apologize that we've been tied up with week with client projects, but regular blogging should resume next week. Meanwhile, thanks for reading (and all the fish, if you're a Hitchhiker's Guide fan).

A holiday gift for cellphone marketers: unlocked phones

Today's Wall Street Journal notes that the US copyright office has ruled that consumers are allowed to unlock their phones with another carrier provided they own their phone. Frankly, the whole justification for locked phones was always a bit silly:

U.S. cellphone companies lock devices primarily because they want customers to stick to their service contracts typically lasting one or two years, analysts say. Since the carriers often subsidize the cost of the phones, they want to make sure they are repaid.

Right. Now answer me this: if you have a contract with your service provider, presumably with penalties for cancellation, why do you have to lock the phone as well?

The real answer is that carriers have locked cellphones to make exclusive handset deals with cellphone manufacturers work and to guarantee a market for future contracts. If Cingular boasts an exclusive deal with Palm for its latest smartphone, it doesn't want a consumer buying the phone through Cingular and then shifting service to T-Mobile later. It wants that customer locked into its service as long as it can.

US carriers need to look at business models in Europe and Asia, where carrier acceptance of unlocked phones has created a huge secondary market for both new handsets and competitive services. Why? Because phone subsidies actually add significant costs to the carriers that acceptance of unlocked phones can eliminate. And while consumers love low costs for phones, those low costs encourage those same consumers to treat them as low value devices, decreasing brand value for the carriers. The result: locked phones actually lock in carriers to subsidies that reduce their profits, while hurting their brand value with a poor customer experience.

There's some marketing data that supports this point. If we look at Interbrand's top 100 global brands by value, there are four handset manufacturers in that list: Nokia, Samsung, Siemens, and Motorola. But in that same list, there is not a single telecom carrier. Not one. And a recent Forrester report by mobile phone guru Charlie Golvin rated the brand trust, brand potential, and brand adoption of both mobile handsets and carriers. Not a single US carrier scored above a C.

And this divergence between handsets and service is only going to get worse. Increasingly, phone handsets are as much a window into online lives as our computers are, storing text, email messages, music, and even video for us. With phones becoming more complex and expensive, the concept that consumers have to throw those experiences away if they want to change their carrier is as absurd as forcing them to throw away their computer if they change Internet provider. And consumers are smart enough to know this.

Locked phones are only a piece of US wireless carrier marketing, but they are the part of the brand experience that consumers can feel and touch. The wired phone world of AT&T changed completely when the FCC allowed consumers to buy and connect their own handsets. The same will happen with wireless, but only if the carriers embrace, not resist, unlocking their customers from their service.

Technorati Tags: Brand, Branding, Cingular, Interbrand, Marketing, Mobile phone, Motorola, Nokia, T-Mobile, Samsung, Siemens, Telecom, Telephone

EMI's Blue Note recognizes the marketing potential of MP3 music

In a somewhat surprising move, today's Wall Street Journal notes that EMI is now selling Norah Jones' latest single in MP3 form through Yahoo.com. They key point here is that these songs are not encumbered by digital rights management restrictions such as those in Apple's FairPlay or Microsoft's Windows Media formats. So why are they doing that? One reason: they want their music on iPods:

The releases come as some high-tech and music-industry executives are becoming increasingly concerned about Apple's growing clout in the music business. Only online music files purchased from iTunes, ripped from users' own CDs or downloaded from pirate services can be played on the popular iPod. Copy-protected songs purchased from Yahoo and other legitimate sources don't work on it. By selling music in the MP3 format without copy-protection software, Yahoo can offer music that works easily on iPods.

We here at Blackfriars have previously advocated Apple taking the same approach to satisfy upcoming laws in France and Denmark designed to promote competition and compatibility in the music market. And to be fair, this is just a baby step along that path; the labels will need a lot of convincing with sales numbers before they'll embrace MP3 music.

But as the article notes, the music industry already sells unprotected music on CDs; moving to MP3s would just allow them more channels of distribution and compatibility with more music players. And much of the software industry (excluding some of the BMA supporters like Microsoft and Adobe) have learned to live with software disks that are similarly unprotected. They key insight is that while sharing of music and software is inevitable no matter how many DRM systems there are, standardized and unrestricted formats boost viral and word-of-mouth marketing of those same products. Let's hope more label executives figure that out.

Technorati Tags: Apple, Blue Note, EMI, iPod, iTunes, Marketing, Music, CDs, Retail

Did Nintendo's Wii outsell XBox 360 in November?

The data here is still a little sketchy, and we should get a better read at the end of the day Thursday when NPD releases its sales numbers for video game consoles. But by my estimates on the data I have available, Nintendo's Wii gaming console outsold Sony's Playstation 3 and tied Microsoft's XBox 360 in November. The Wii's success against XBox 360 is particularly interesting, because the Wii was on sale only for 11 days and in limited quantities. The Playstation 3 also was available for only 13 days, while the XBox 360 doesn't currently have any supply constraints and was available all 30 days.

The numbers as best I can come up with so far are as follows:

Nintendo Wii: 600,000+ (source Nintendo)
Microsoft XBox 360: 600,000 (Blackfriars estimate)
Sony Playstation 3: 200,000 (source Playfuls.com)

Why the 600,000 estimate for XBox 360 when other analysts are up around 750,000? Well, for one thing, it's not new, so it gets no bump from a launch event like Sony and Nintendo did. Further, using Microsoft's own data, shipping 600,000 in November would equal the monthly rate of its best selling quarter ever (calendar Q2 of this year). And in the most recent calendar quarter, Microsoft only shipped an average of 300,000 an month. So it they made 600,000, they doubled their typical rate.

But the best argument for a somewhat tepid November, even with Black Friday in there, is that Microsoft did relatively little marketing of the console. If we look at an article published by the In-Store Marketing Institute, we find significantly more and broader marketing programs for both the Ninendo and Sony products. And as we all know (or should know), marketing drives sales.

We'll have some additional data points in the next few days. But for the moment, Nintendo's Wii appears to be setting the pace for next-generation (or now that they are all launched, current-generation) gaming platforms this Christmas.

Technorati Tags: Analysis, Games, Gaming, Marketing, Microsoft, Nintendo, Playstation 3, Sony, Wii, XBox 360

Britain doubles US spending percentage in online advertising

The New York Times today published some remarkable data showing that British advertisers are spending more 10% of their ad budgets online, compared with about 5% here in the US.. This is despite the fact that just two years ago, the US and Britain were tied at about four percent of ad spending. The article bases this difference in ad buying on the fact that British ad buyers are just more aggressive and opportunistic than their US counterparts:

Ad buyers at the major American brand companies may be reluctant to commit larger sums to the Internet because they believe they do not have control over where their ads appear, analysts say. Many Internet advertisements in the United States are still sold through online networks that place ads on member sites. In Britain, more advertisers work directly with Web publishers, giving them greater say in where and when ads appear.

In contrast, large advertisers in Britain appear to be leading the push onto the Internet. British financial-services companies have been particularly aggressive online spenders, in some cases allocating 30 percent or 40 percent of their advertising budgets to the Internet, Mr. Noss said.

Big British advertisers have also been quick to jump at the opportunities provided by paid search advertising, like that sold by Google and other search engines. Search accounts for 56 percent of Internet ad spending in Britain, compared with 42.5 percent in the United States, according to the Internet Advertising Bureau. “We’re all searchaholics,” said Guy Phillipson, chief executive of the bureau’s branch in Britain.

Our data about US marketing spending supports the view that US advertisers are falling back on traditional methods, and relegating Internet ad spending to only about 6% of all marketing spending in Q3 2006.

Bottom line: the Brits get the power of search to cut through the tyranny of too much content, while the more risk adverse US advertisers are falling back on what they are comfortable with. And given that marketing spending efficiency is a pretty good leading indicator of future business results, we may see some divergence between the US and British revenues in coming years.

Technorati Tags: Advertising, Internet, Marketing, Great Britain

Where are the Zune TV ads?

One of the factors that was supposed to herald the ultimate success of Microsoft's Zune music player was the millions of dollars that Microsoft was putting into marketing the device. And, truth be told, there are at least five Zune TV ads on the Zune Web site. So here's the question of the day: has anyone actually seen any of these ads on TV? I'm not the best judge of advertising, since I own a TiVO and therefore don't watch commercials on the few TV shows I watch. I have seen the iPod shuffle commercial several times in passing, but have yet to see a Zune commercial. If this is the result of Microsoft's multi-million dollar spend on Zune marketing, their marketing plan isn't working. And with holiday shopping in high gear, this is prime time for putting those marketing dollars to work; big ad spends in January will produce significantly fewer sales.

So has anyone seen a televised Zune ad? And did it make you somehow want to buy a brown Zune in hopes of being selected at random to receive a pink one?

Technorati Tags: iPod, Marketing, Microsoft, Zune

Pink Zune's Dark Side Of A Launch

To be honest, I credit Microsoft with taking a marketing chance and fielding a pink Zune. And frankly, it looks a whole lot more appealing than I would have guessed, especially for a possible 10 to 18-year-old female demographic. But the whole Bait and Switch model of seeding the market with them?. Bad karma, dudes. It's so not, "Welcome to the social", know what I mean? At the very least, you're going to have 99 out of 100 very ticked off customers from this. And while the program will undoubtedly create press, I don't think this is the press you were looking for.

Technorati Tags: Marketing, Microsoft, Pink, Zune

Podcasting's done? Wait until you have an iPod capable car

I was browsing through various blogs today, and I came across this one at MarketShift titled, Podcasting's 15 Minutes Almost Up. It it, the author notes this statistic:

According to the most recent survey from the Pew Internet & American Life Project, only 1 percent of Internet users download a podcast on a given day. Only 12 percent of webizens have ever downloaded a podcast for later listening, according to BuisnessWeek.

Podcasting technology has been around for a decade, and just because the "Pod" name was put on it a few years ago doesn't mean it will be any more successful.

Listening to recorded discussions is good for when you are traveling, the subject is extremely compelling, or you are bored out of your skull. If you have an iPod, most of the time you are going to listen to music. If you are online, you aren't going to divide your attention between the screen and your ears because it takes too much of your brain to digest a podcast. Music is a nice background noise that doesn't prevent you from "working."

Right. And in 1949, less than 1% of America watched TV too. But in two years that climbed to nearly 10%. Why? Because in 1949, TV was mostly radio shows with pictures of people reading. But when we got into the 1950s, people discovered programs like Kraft Theater and Hallmark Hall of Fame that captivated viewers. It was something different and justified having a TV.

Fellow analyst Maribel Lopez and I were just talking about this at lunch recently. See, podcasting isn't just about playing pre-recorded content (Boring). What it is is a digital video recorder (DVR or perhaps you know it by its brand name, TiVO) for radio. And when you put it in your car or listen to it when exercising, it rocks. Why? Simple: you get to listen to what you want, not what some station programmer wants you to hear.

I recently bought a refurbished iPod shuffle ONLY for listening to podcasts. Why? Because my daily iPod regimen is that I use it when power-walking between 5:30 and 6:30 in the morning. It gets loaded up by my Mac overnight with the daily weather (from Weather.com), the latest CNN headlines, NPR's Story Of The Day, Garrison Kieler's Writer's Almanac, and the Wall Street Journal Tech report. By the time I'm back from my walk, I'm completely up to date.

Now I only have a 10 minute commute to Blackfriars World Wide Headquarters, but if I had a longer commute, I'd kill to have that same content in my car. And nowadays, more than half of all cars are available with iPod integration gear, so it's completely possible. It just hasn't hit most people yet that this is a completely different way to consume content.

So it could be that podcasting version 1.0 is done, just as radio with pictures was done in 1948. But Podcasting as a medium is just getting started. And the name is actually right; it only reaches its potential when linked with an iPod.

Technorati Tags: Apple, iPod, Maribel Lopez, Podcasting, TV

Microsoft Windows Vista Goes On Sale To Corporations. Yawn.

Today's New York Times covered Steve Ballmer's announcement yesterday thatMicrosoft's Vista and Office 2007, as well as a lot of server products, are now available to corporations. The Times' photograph showing Steve Ballmer ringing the opening bell for the NASDAQ with gusto portrayed many other corporate executives sharing the euphoria of the moment with Steve and presumably, with the anticipation that billions of dollars would soon be raining down onto their heads and into their backdated stock option packages.

The ringing of the opening bell for the NASDAQ was completely and appropriately symbolic. Why? Because both events -- the ringing of the bell and the release of Windows Vista -- were in the words of MacBeth, "full of sound and fury, signifying nothing."

The bell signified nothing because the NASDAQ is a completely electronic exchange. There is no trading floor. The big electronic scoreboard in Times Square was in fact built entirely for marketing purposes, so that investors and consumers could be shown something that had comparable impact to all those traders running around the floor of the New York Stock Exchange. But be assured that if Steve Ballmer had not rung the bell yesterday, somehow the NASDAQ still would have managed to trade a few billion dollars anyway.

But the corporate release of Windows Vista and Office? Surely they must mean something?

Um, actually no. They are completely immaterial to Microsoft's earnings this quarter and next. And it's not just me saying this; John Dvorak, and The Wall Street Journal are chiming in with similar takes (the latter being less extreme than the former).

See, most large corporations don't buy software the way you and I do. Instead, they sign enterprise licensing agreements that provide a customized suite of software including Windows, Office, and other products for every desktop under license. The licensing agreements are largely secret in detail, but they provide substantial discounts from list prices of the software packages in exchange for the enterprise agreeing to rather stringent (and in my opinion silly) terms, such as guaranteeing that they are licensing every desktop in the company, regardless of whether it runs Windows, Office, or any other software being licensed, or not. Oh, and by the way, this license fee is in addition to the cost of Windows bundled with PCs for the corporation; Microsoft insists that that version of Windows doesn't actually grant a corporation the right to use it. The terms of these licenses run anywhere from two to five years and, provided that the company signs the "Software Assurance" license, include upgrades.

What this means is that most corporate editions of Windows Vista and Office 2007 have already been paid for. The net impact of the Vista corporate release on Microsoft's actual cash flow and revenue (as opposed to the GAAP accounting which has reserves for these payments) is largely zero. The only way Vista would have affected Microsoft is if it hadn't been released. After five years of Software Assurance contracts with no upgrades, companies might have started bolting at renewing their contracts. And that would have had a very negative impact on Microsoft's future earnings.

The reality is Microsoft isn't really a technology company. It's a toll collector. It buys up toll-generating properties and then just collects the tolls on them, just as Spanish and Australian consortia are buying up the Chicago Skyway and the Indiana Toll Road. Don't believe it? Take a look at this list of Microsoft innovations; you'll find that most of them actually were built at other companies, and then bought by Microsoft. That's why Vista took five years -- Microsoft actually had to build something instead of just maintaining it. It's just not the company's core competency.

Make no mistake: there are a lot of great technology people who work at Microsoft. But what innovations they might be able to achieve have been stifled by corporate organizational chaos and stifling development processes. When it takes 24 developers and their management to design a single button in your product, you know there is something wrong with a company. When you combine this with the fact that Microsoft has bought, not built, most of its successful technology, you don't exactly have a formula for the next great technology breakthrough. Remember, only two of Microsoft's product lines consistently make money. All other product lines actually dilute earnings instead of contributing to them.

So what's wrong with being a toll collector? Not a thing. It's just like being a utility -- it provides a consistent earning stream that should generate significant dividends. The only problem: Microsoft isn't valued like a utility; it's valued as a technology company with a price earnings ratio of 23, whereas utility companies tend to be in the teens. And its dividend yield of 1.3% is a far cry from the 2% to 4% of utility firms. And utility companies don't devote seven billion a year to research and development either, nor do they launch me-too music players like Zune. They do, however, have an obligation to do maintenance on their properties, and that's exactly what Vista and Office are: maintenance.

But the story is actually more dire than I've described, because while Microsoft is counting its tolls, competitors are now building lots of quite viable bypasses to Microsoft's toll roads. In operating systems, Apple and Ubuntu now have quite competitive offerings that run on the same hardware base as Windows. With Office 2007, migrating to Open Office now will require less training than moving to the Microsoft product. And the list goes on and on; someday, someone will have to explain to me why anyone ever pays for Microsoft's Outlook Mail licenses when they could have Google run their mail systems for them for close to free. Despite the corporate licensing deals, demand for those licensing deals will soften as Microsoft continues to do five year release cycles.

If Microsoft ever wants to become anything other than a toll collector with a valuation to match, it really has only one option: change the leadership and break up the company into smaller pieces that an actually compete. But until that happens, we should stop pretending that Microsoft is driving the technology industry any more than we think that Australia's Macquarie Infrastructure Group is driving the US auto industry. Toll collection isn't innovation, no matter how many billions get collected. And the sooner we stop praising the toll collectors as the apex of US business success, the better.

Technorati Tags: Apple, Microsoft, Office, Office 2007, Operating Systems, Opinion, Ubuntu, Utilities, Vista, Windows