Apple and gray market enterpreneurs compete for iPhone customers

There was lots of iPhone news yesterday, what with the Version 1.1.1 software update and the many hacked phones that no longer operate with the new update. There have been some reports of completely unmodified iPhones becoming inoperable after the update; fortunately, it appears that Apple Geniuses have methods that may be able to fix such phones fairly quickly.

Both Robert (my son) and I were fortunate in that we had no issues with the upgrade. I was careful, however, to take all the rest of my USB devices off the USB bus and connected my iPhone directly to my PowerBook during the update. My Powerbook only runs USB 1.0, and I have noticed timeouts in the past because of that's bus's slow (12 MBps) speed. But connected directly with no other devices competing, it all worked like a champ.

All that said, demand for iPhones continues unabated, and Apple has responded to the out of stock conditions at its stores earlier this week. As you can see in the map above, Apple restocked all its stores for this coming last selling weekend of its fiscal year. Only the Tice's Corner Apple store in Woodcliff Lake, NJ is reporting out of stock on iPhones, and the Staten Island store is closed for renovation this weekend. But that still leaves 167 Apple Stores available for your iPhone shopping convenience, in addition to the online Apple store (and the Apple refurb store).

Reader Tim McGuire passed on what I think are some very interesting comments collected from numerous blogs regarding the iPhones selling out recently. As we noted earlier in the week, some of recent demand appears to be from entrepreneurial gray marketers, who are buying phones for unlocked resale or export. I won't post all of them, but thought some of these commenters added interesting color to the story:

I was at the Apple Store Fifth Avenue last night. And, there were about 30 Indians or Asians from near-Indian. And, they were buying up 5 iPhones apeice repeatedly IN-CASH! They also kept trying to buy Gift cards in the exact amount of what 5 iPhones would cost (but they were not allowed by the Apple Employees who told them to tell their 'party' that no more Gift Cards will be sold. If they wanted to buy iPhones, they'd have to pay cash or credit card.)

Now, I know these guys were definitely going to mod their iPhones and either sell them locally or export them. They were buying over 200 units in cash!

So that's where a lot of units are going certainly. But iPhone arbitrage is only a piece of the Apple demand puzzle. Overall, it appears that Apple stores are continuing to be very crowded just because of consumer demand. Tim pointed me at an article over at IfoAppleStore.com noting that while the number of Apple Stores has been climbing rapidly, so has the average number of visitors to each store spiked around the holiday shopping seasons the last few years. You can see the effects for 2005 and 2006 in the following graph:

[Graphic courtesty of ifoAppleStore.com

We don't have the third quarter data from Apple yet, but given the iPhone launch, I expect a sharp spike up for calendar Q3 and for the average to set a new high for calendar Q4.

And what about all those iPhones that are being bought with cash and unlocked? They are providing a nice, tidy third-party business for gray market exporters and software developers while Apple and its partners orchestrate the iPhone's launch internationally. Yes, Apple is going to do what it can to put the unlocking software vendors out of business, simply because its carrier contracts require it make its best efforts to honor their exclusive deals. But what software can do, other software can undo. And when prospective iPhone buyers in other countries are willing to spend thousands of dollars to get one and supply in those countries is limited to the gray market, someone will find a way to fulfill those customers. Meanwhile, Apple will just keep making and selling more iPhones -- regardless of where they end up.

Technorati Tags:
Apple, iPhone, iPhone availability, Apple Stores, iPhone 1.1.1 update, Gray market

MIT donates to Harvard -- at least in the form of Halo 3 garb

I always love MIT hacks (having participated in some minor ones myself when I was there), and this one is both priceless and harmless (as most are). And Microsoft should be happy: it was free PR for the Halo 3 game launch.

Technorati Tags:
Games, Marketing, Microsoft, Halo 3, MIT, Harvard

New York Fifth Avenue Apple Store now out of iPhone stock

[Click on the image for a live map from the Blackfriars Web site]

Following up on yesterday's story, it appears this morning that more Apple stores are out of stock of iPhones today, including Apple's flagship Fifth Avenue store in New York. That's 36 today versus 25 yesterday. The out-of-stock contagion has spread even to Florida, Michigan, and California now. Of course, Web site stock reports may not be updated during the day, so your availability may vary. The holiday shopping season starts earlier every year.

Technorati Tags:
Apple, iPhone, iPhone availability

Amazon's music store should dispell the lousy iTunes business myth

[Blackfriars projections of FY07-08 iTunes Store revenue. Click the image for a larger view, excerpted from our June report, Analyzing Apple: Waiting For The iPhone]

In a recent article, John Gruber of Daring Fireball takes on the launch of the Amazon music download store and dispells one of my favorite media falsehoods: that the iTunes Store is a loss-leading business

"So why Amazon is even bothering with a music download store, given that ‘everyone knows’ the iTunes Store is a loss-leader that Apple offers just to sell more iPods?

Because that’s bull****. Apple is making good money from the iTunes Store.

John estimates gross margin from iTunes at about $900 million from the 3 billion songs sold at the iTunes store to date. Our estimate just for FY07, which ends September 30, 2007 is that iTunes revenue just in this fiscal year is $2.1 billion, with gross margin of $630 million just in this fiscal year.

Just to put those numbers in perspective, it was only about three or four years ago that $600 million was a respectable gross margin number for Apple's entire business, Macs to iPods. And the $630 million in gross margin from the iTunes Store this year is about 1/4 of Amazon's gross profit for its entire business.

And the whole, "Amazon's DRM-free MP3s will give it an advantage over Apple's DRM-laden music," doesn't play either. 95% of consumers never experience Apple's DRM in any way shape or manner. They buy their music from the iTunes store, load them on their iPods, play them on their computers, and never give DRM a second thought. The convenience of one-stop impulse shopping from their iTunes music player vastly outweighs the lower prices and DRM-less features of the Amazon store. Further, Apple itself sells DRM-free music and will increasingly benefit from Amazon's negotiations for that format. So while that vocal minority of music purists who insist on DRM-free music may flock to Amazon's new store, they will only be helping Apple maintain its music dominance with the vast majority iPod owners and music buyers.

The bottom line: Amazon's new MP3 store is great for everyone, and it lends choice to the digital music business. But don't make the mistake of thinking that Amazon's music business threatens iTunes dominance. Amazon's music business will simply will put pressure on music labels to reduce their cut of the digital music distribution pie (since Amazon is undercutting Apple in price and can't do that indefinitely) while expanding choices for consumers. Meanwhile, the vast majority of consumers will continue one-stop shopping for their music, movies and TV shows in Apple's iTunes, preferring convenience over low-prices. Amazon will fight for the number two spot in digital downloads, while Apple's iTunes business will dominate digital music downloads -- and profits -- for years to come.

Technorati Tags:
Digital Downloads, Apple, iPod, Amazon, iTunes, Music

Nokia N95-3 smartphone debuts for $699; where are the articles saying it will never sell?

Note to all who complained about the $599 price for the Apple iPhone 8 GByte version when it launched: I look forward to all the articles you will write about how Nokia's new $699 E95-3 phone and how it will never succeed with US consumers who expect phones for free. After all, $699 is a hundred dollars more than $599, so it clearly will never sell. Really. I'm so looking forward to them.

For those tongue in cheek impaired: Price only matters if you have nothing else to sell. Both Nokia and Apple's high-end phones provide consumers a lot of value. The tough decision: is an unlocked Nokia N95-3 $300 better than an 8 GByte locked iPhone? My bet: not a chance. I predict the iPhone will outsell the N95 this Christmas by a factor of at least 2-to-1 if not 10-to-1, not because of price, but simply because it is a better user experience. Well, that and the fact that no consumer wants to spend $700 for a phone that takes a month to set up and makes them feel stupid in the process.

Technorati Tags: Humor, Mobile phones, Nokia

iPhone stocks running low?

[Click on the image for a live map from the Blackfriars Web site]

Reader Dave Sheppard notes that iPhone stocks are running low here in Massachusetts, and a quick check of the Apple Store shows that 13 US stores are showing out of stock of iPhones today. We haven't seen that many stores out of stock since mid-July, and as you can see from the image above or the live map on our Web site, this is largely an east coast phenomenon. What could be causing this?

This note from GigaOM may help. Liz Gannes notes that shoppers are mobbing the New York 5th Avenue store after midnight, and some are buying up iPhones like there was no tomorrow. The reason: they're buying them to unlock and resell in Europe before they are officially launched in November. And given the strong Euro versus the dollar, these entrepreneurs/importers can buy them at $399, sell them unlocked at 499 euros or $705 in Europe (thereby undercutting the official prices), and pocket a tidy $300 per unit. Even paying a 20% VAT to import them (which I'm sure some don't bother doing), that can be a nice business.

The bottom line: The iPhone was already selling well when Steve Jobs cut the price by $200. Holiday shopping, European launches on the horizon, and entrepreneurs capitalizing on differences in currencies are throwing gasoline on that fire. Don't expect iPhone demand -- or demand for other Apple products -- to drop back to anything approaching normal until the beginning of next year.

Full disclosure: the author owns Apple stock.

Technorati Tags:
Apple, iPhone, iPhone availability, Consumer demand, Currency arbitrage, Liz Gannes

Four -- actually make that five -- quick reflections on how my iPhone outshines my Nokia E61i

Blogging should be back now; I republished the entire site last night, and whatever problem I was having yesterday seems to be better now (knock on wood). I must say, I hate these "in-the-cloud" services when things go wrong and there is no one you can talk to debug it.

Thanks to the generosity of a reader (Thank you so much! You know who you are!), my own 8 Gigabyte refurbished iPhone arrived yesterday. And while I don't have much to add to the stream of reviews out on the Web, I do have a few observations because I've just spent two months sparring with my Nokia E61i:

• Physics makes the iPhone interface feel real. We expect physical simulation in a video game, but not in a phone interface. But when you flick scroll lists on the iPhone, they bounce off invisible stops at the end of the list. When you flick through photos, they slow down and come to a stop as if you flicked a photo across a desk. All this video-game-like simulation adds to the sense that you're interacting with real media, not an electronic simulcrum. The Nokia? Physics is just not in its software vocabulary.


• Black on white text rocks. This is a little thing, but after reading my emails and texts as white text on a blue dotted background, I now find the iPhone black on white and gray on white text so restful and comforting. I feel like the iPhone is a first class email and Web client instead of an approximation.


• iPhone typography is gorgeous. While the Nokia occasionally uses multiple font sizes, by and large, everything is 9 or 11 point ugly face type. It has little or no anti-aliasing, so it looks oh-so-computery. The iPhone, on the other hand, uses size of type for design and readability impact. Web pages and emails on the iPhone look like printed documents, not computer-rendered imitations.


• YouTube is watchable!. As a guy who actually did some video in a past life, I find a lot of Internet videos unwatchable, especially because the Flash-encoded versions render it so badly. Because the iPhone uses a H.264 video encoded version of YouTube instead of the lame Flash version, many (but not all) videos that come from there actually look better than they look on a computer. Browsing YouTube becomes much more like channel surfing on TV instead of feeling like I'm looking at an Internet peep show.


• The polish of the interface creates a very high touch experience. Many aspects of the Nokia E61i -- particularly the music and video player -- feel rather ad-hoc and tacked on. On the iPhone, I get the impression every single touch, icon, and animation was designed to create a specific user response. The result: I feel like the iPhone rewards my effort to work with it, while the Nokia feels more like a collection of partner software slapped together.

Now that I've activated my iPhone on my family ATT account, my unlocked Nokia phone is now emulating a brick, since the phone number attached to its SIM is now on my iPhone. So I decided to take advantage of its strength: the fact that there is software available to customize it. So I've downloaded the Gizmo Project IP phone software onto the E61i, done some reprogramming of it, and repurposed it to my younger son David, who isn't yet ready to pony up $30 a month for a cell phone service plan. So now, he can make and receive calls from us on his Gizmo number, send and receive email, and even get voicemail via his email account. It only works when he's in range of a free WiFi network, but since his school and many of his friends have them, that may not be as much of a restriction. We'll see as he works with it.


The bottom line: I've enjoyed the pride and joy my son has experienced by saving for and buying his own iPhone. But I can now say from a day's experience, owning an iPhone is an even better experience and a rare delight. And describing it just doesn't do it justice.

Technorati Tags:
Apple, iPhone, Mobile phones, Technology, Usability, Design

Delay in posting today

There appears to be some problem with FTP from Blogger today. I published a post this morning, but it doesn't seem to be showing up on the blog. Thank you for your patience while I resolve the problem.

Carl

Vanu envisions the network-agnostic cell phone

I had planned to write about Vanu, the creator of software-programmable radios, last week, but postponed it because of workload and other more pressing news. Well, I'm paying the price for procrastination this week because the Sunday New York Times ran their own article in the business section yesterday titled, Software That Fills a Cellphone Gap For those of you not familiar with Vanu's product, it's a software/hardware combination that allows a single radio to speak all forms of cell phone alphabet soup protocols, ranging from GSM to CDMA to HSPDA. And yes, that means a single cell phone could work on both ATT and Verizon networks, eliminating the need for consumers to buy new phones when switching carriers.

My take on this technology is that it is important because it eliminates a lot of wasteful infrastructure investments and cell phone recycling just to please carrier business models. But I also believe that most carriers will fight it tooth and nail. Why? Because carriers want consumers locked into their networks and their technology. Allowing consumers to switch among networks would be, as they say in business, bad for business.

And then there's the other challenge brought up by the first paragraph of the New York Times article:

Vanu Bose is the son of a fabled engineer, but he garnered no mercy when he presented his big idea at a technical conference in 1996. Mr. Bose’s graduate work at M.I.T. involved using software to handle the radio function in a cellular phone. He remembers that after he successfully demonstrated his technology, an audience member stood up and dismissed it with: “Congratulations! You’ve just invented the world’s most expensive cellphone.”

But despite these issues, one company should be looking very carefully at Vanu's technology. That company is Apple.

Apple, after all, wants to make one device that works with many carriers. And its interest isn't limited to just GSM and CDMA -- it would also like a single iPhone model to be able to work in Japan, which uses another set of standards. And wouldn't it be great if a single hardware platform could operate on EDGE, 3G, and 4G networks?

Further, Apple's history is full of examples when it embraced software-driven functions when the rest of the PC world was obsessed with cost. Apple's Macintosh pioneered the processor-managed bit-mapped display when the rest of the PC world was fussing with monochrome and EGA adapters. It was also the first company (and one can argue still is the only computer company) that had plug-and-play hardware, because it embraced a general-purpose model for hardware peripherals instead of special-casing every single driver. It understands that the cost of servicing and maintaining lots of special purpose hardware can dwarf the costs of deploying a general purpose system that costs more initially, but can easily be upgraded over time.

So imagine an iPhone 5.0 circa 2011 that used Vanu's technology sold by Apple. It works on any cell network world-wide, as well as work as a wireless home phone and an IP/WiFi phone. Contrary to Apple's initial forays into the cell phone business, Apple now has enough mobile phone market presence to drop its exclusive carrier agreements and to sell its iPhone as a device that sets consumers free of carrier lock-in. And the price for that freedom? Consumers actually pay for their phones instead of expecting to get them for free from their carriers, something Apple pioneered with iPhone 1.0.

Soft radios and true world-wide phones are a great idea in general, and an amazingly great idea for Apple. And consumers have nothing to lose with soft radio technology but our carrier chains.

Oh, and if you are wondering who Vanu Bose's father is, he is of course Dr. Amar G. Bose, founder of Bose Corporation. It would seem that entrepreneurialism and breaking new ground in technology runs in the family.

Full disclosure: the author owns Apple stock.

Technorati Tags:
Apple, iPhone, Mobile phones, Vanu.com, Vanu Bose

Usability data proves that Apple's iPhone really is better

I've been claiming that the iPhone's usability is the keystone of its market appeal for a while. Well, ComputerWorld now has some hard usability study data to back that claim up. They had Perceptive Science, a usability consulting firm, pit the iPhone against a Nokia N95 and the HTC Touch (which is a Windows Mobile 6.0 device) with 10 consumers:

The company brought in 10 testers who had never used any of the three devices. It then asked the testers to perform a series of tasks on each device with quantifiable results, such as the time needed to find and use the on/off switch. Other tasks included setting the phone to vibrate, making a call, saving a phone number to the contact list, sending a brief e-mail, taking a photo and finding a Web site using the device's built-in browser.

Based on the test results and on Thornton's and Ballew's observations, each phone was given a score of between one and five (five being the highest) in each of five categories. In addition, each phone was given an overall score.

It's important to remember that these are usability tests, not tests of functionality. Perceptive Sciences took a broad look at the features on each phone, but largely as they related to usability. For instance, the Nokia N95 is justly famous for its strong feature set. But did that feature set contribute to overall usability, or detract from it?

It's also important to remember that the tests focused on how easy it was to pick up the device and use it right out of the box.

"People can eventually learn to use any device," Ballew said. "But that's not true usability. We wanted to see how long it took to figure out how to use the phones. That's the difference between learnability and usability."

The results

Let's cut to the bottom line: In terms of usability, iPhone blew away its two competitors. Its overall score in the usability tests was 4.6 out of 5. The HTC Touch was a distant second at 3.4, and the Nokia N95 scored 3.2.

"Testers were [typically] about twice as fast doing specific tasks on the iPhone, which is pretty remarkable," Thornton said.

Twice as fast. Yow. So it's not just me that finds the iPhone so much more usable than other phones.

The one other tidbit I loved was how long it took ordinary people to turn on WiFi on the Nokia N95:

"It has a really nice feature set," Ballew said. On the other hand, he stressed, its strong feature set contributed to its relatively poor usability scores in previous categories.

"It's right on the verge of feature bloat," he said. "I mean, I'm not sure when I'd ever use the bar-code scanner. And some of the features are hard to set up." In particular, Ballew said it took four hours to set up Wi-Fi on the N95, which was a fast, simple task on both the HTC Touch and the iPhone.

Didn't I say that the Nokia/Symbian networking was broken?

Nice job ComputerWorld. Now iPhone owners have some hard usability data to back up what Steve Jobs said in his iPhone introduction keynote: Consumers hate their mobile phones because they are just too darn hard to use. At least they were until Apple introduced the iPhone.

Technorati Tags:
Apple, iPhone, Usability, Nokia

2.35 million Macs in Q4FY07?

Scott Moritz at TheStreet.com claims he has heard from a mole inside Apple that the company will sell about 2.35 million Macs this quarter, which is about 400,000 more than analyst estimates. That's 210,000 above what my model says too. Wow.

Not to be outdone, the Zune gets a price cut and an apology to boot

After writing about the strategy and marketing behind Apple's iPhone price cut to $399 yesterday, I was most amused to see Woot imitating Apple with a price cut on the Microsoft Zune to $129. It's a one-day only deal, so I've captured the image up above. But considering that even a refurbished previous generation 30-Gigabyte iPod (Apple no longer makes a disk-based iPod that small) will set you back $200, it certainly demonstrates that the dollar value difference between Apple's and Microsoft's marketing skills.

But note I didn't say Woot's marketing skills, because Larry Stalin's apology letter accompanying the price cut (and lampooning Steve Jobs) is literally priceless. Here are some excerpts.

Second, I am sure that we are making the correct decision to lower the price of the 30GB Zune from $149.99 to $129.99. This confidence is based on more than the holy doctrine of corporate infallibility. The Zune is a breakthrough product, and we have the chance to “ride the lightning” and “shoot the curl” this holiday season, not to mention “kill the messenger” and “rock the vote”, further enabling us to “pay the rent” and “keep the lights on”. It benefits both Woot and every Zune user (but especially Woot) to drag as many new victims as possible into the Zune “dungeon”. We strongly believe that misery loves company this holiday season.

Third, being in technology for 1+ years, give or take a year, I can attest to the fact that the technology road is bumpy. There is always some idiot changing lanes without signaling, and the potholes never seem to get fixed. If you always wait for the next price cut or to buy the new improved model, you’ll never buy any technology product. I mean, why should you? Truth is, you don’t really need any of this junk. We’re afraid you’ll catch on to that fact and overpaid frauds like me will have to go back into fields like telemarketing and burrito construction. Fortunately, most of you continue to languish in a consumerist stupor, wallets spread wide for us to plunder as we please. The bad news for us is that if you buy products from companies that support them well, you will receive years of useful and satisfying service. But we’re hoping you’ll buy from Woot instead.

I have to say, Larry's pitch was so entertaining and funny, I was sorely tempted to buy one just to reward the guy for his creativity. Larry's proven ability to convert someone who has no interest in a product into a prospect demonstrates that he has a very bright future ahead in either comedy writing or marketing. I hope he sticks with marketing. It might pay better, and we need the laughs.

Technorati Tags:
Apple, iPod, Marketing, Microsoft, Steve Jobs, Larry Stalin, Woot.com, Zune

Reminder: today is options expiration day in the stock market

For anyone interested in the economy and finance, I just wanted to post a reminder that today is the last trading day before September stock options expire. That typically means 1) lots of trading, and 2) lots of meaningless volatility focused entirely on intraday prices. I don't know if the market or Apple stock is going to go up or down today, but I do know that it has about as much economic significance as this past Wednesday's International Talk Like A Pirate Day.

Nothing to see in the market today. Just keep on moving....

Memo to Steve Jobs: fix these customer issues before they fester

I may be an Apple fan, but I do think that Jeremy Horowitz over at iLounge.com has brought up four legitimate customer issues Apple should fix. I attribute these issues -- defective iPod touch screens that Apple charges a restocking fee to take back, "Made for iPod" accessories that Apple broke with the new iPods, et cetera -- more to neglect than malice, but that doesn't mean that Apple can ignore them.

Apple needs to get a customer-advocacy SWAT team together and make these customers happy again. A happy customer will tell their friends about their experience, but ones that feel they've been wronged will tell everyone they know -- and that just erodes all the brand work Apple has done over the past decade. And if it means another apology from Steve Jobs, so be it. Apologies are always better than lost customers, regardless of whether you are a $25 billion company or a Mom and Pop shop.

Technorati Tags:
Apple, Brand, Customer experience, iPod, iPod touch, Marketing, Jeremy Horowitz, Made for iPod, Games, Steve Jobs

The gutsy marketing and strategy behind Apple's iPhone price cut

The iPhone price cut appears to be the story that will never die. Leander Kahney at Wired News and I had a great discussion yesterday about the what and why behind the iPhone price cut. Some of what we discussed ended up in the Wired article here, titled, The Perils of Taking the IPhone Mainstream. But there was actually some background and analysis that Leander didn't use, so I thought I would fill in that back story here.

First, here's one of my quotes from the article:

According to Howe, Apple initially priced the 8-GB iPhone at $600 not to milk early adopters, but to purposely constrain demand. While production ramped up at its Asian factories, Apple wanted to restrict buyers to the relative few happy to pay $600 for the phone. Nonetheless, Apple went on to sell a million iPhones in the first two months –- a clear indication of the device's popularity.

Then, as it became clear there was enough factory capacity to produce millions of them in time for the crucial holiday season – when sales explode -- Apple dropped the price to take the gadget mainstream.
With Tuesday's launch of the iPhone in Europe, it's clear that Apple is confident it can satisfy demand in multiple countries.

"(Apple) said they'd like more time before dropping the price," says Howe, "but you can't move the holidays. Clearly, Apple's gearing up for a big holiday season."

Apple has good reason to be gearing up for this holiday season based upon its experience with the iPod. Steve Jobs made an incredibly gutsy call last year in the spring when he told manufacturing to gear up to make more than 20 million iPods to sell over the holidays. Why was it gutsy? Because Apple had never sold more than 14 million iPods in a quarter before. Yet the decision had to be made, and Jobs and his team made it. And it is sounding like Jobs has recently made that same decision with the iPhone by doubling iPhone production for this holiday season too.

But back to the price cut. One London analyst firm has asserted that next year's average selling price for the iPhone will be $200:

"In our projection, we believe there will be about 18 million iPhones sold next year at an average selling price of about $200, and that means a very sizable portion of total handset revenues will move from other manufacturers to Apple. (It) will be in the vicinity of 5 percent that Apple will steal from incumbents."

Not to be outdone, the New York Times asserts that the price might go to zero:

"The iPhone could have an overall impact on the economics of the phone industry. It has put a hardware manufacturer in a highly unusual position of strength relative to the carriers (Verizon, AT&T, etc.). They’re accustomed to calling the shots about what devices get access to their network; not so with the iPhone. It carries its own weight with consumers.

Mr. Saccanaghi, after discussing the issue with various players in the mobile phone ecosystem, estimates that AT&T could afford to pay Apple $15 a month over the lifetime of a two-year contract. That adds up to $360 in payments. And that’s considerably more than the $200 to $350 that AT&T pays other retailers (like Best Buy, Radio Shack) for customer sign ups, Saccanaghi writes.

What does it mean?

Apple could conceivably sell the iPhone hardware at a substantial loss while still generating greater profit per iPhone than it does from the highest-end iPod.

Sounds like a good deal for Apple, with a caveat. If Jobs decides to drop the price of the iPhone, he might consider offering a rebate to existing customers beforehand."

So with production ramped up for the holidays, is Apple going to follow Motorola into the downward price spiral of death?

Oh sure. And it will happen right after Steve Jobs attends an ice skating party in hell with bad Muzak.

What people don't get is that Apple is waging a marketing war to reshape the value chain for the mobile phone industry. Everyone is trying to figure out which trench Apple is occupying, when Jobs is flying in jet fighters for surgical strikes.

Consumers value what they pay for. They don't value things they perceive as free. And that's the marketing blunder the US mobile phone market has bought into over the last 10 to 15 years. By bundling "free" and generic phones with cell phone service, mobile carriers have devalued both the brand values of the handset makers and their own services. The handset makers are hurt because the low values that carriers will pay for free phones eliminates the incentive for those manufacturers to do anything but cut costs. The carriers are hurt because they have to pay subsidy fees to the handset makers of anywhere between $150 and $250 over a two-year contract to actually buy those free handsets. You've heard of a win-win deal? This is a lose-lose deal.

What Apple has done is inverted the value proposition. It has created a phone that consumers see as sexy and desirable, so desirable in fact that they will actually pay $400 to $600 for one (depending on geography). And because the device is desirable, Apple can demand exclusive deals with carriers, which creates valuable differentiation for those carriers that have iPhones and disadvantages for those that don't (yes, I'm talking about you, Verizon and Vodaphone). Because Apple is providing valuable carrier differentiation, Apple can then capture the subsidy revenue stream that the carrier would have normally paid to the handset manufacturers anyway for "free" (and undesirable) phones.

Now, if Apple were to cut the iPhone price to zero, would any of this be happening? Not a chance.

So Apple is going to use its iPod playbook all over again. The original 5 gigabyte iPod went on sale for $399 in 2001. Today, a 16 gigabyte iPod touch sells for -- you guessed it -- $399. Apple chose the price points based on consumer demand and interest. A constant set of features will move down the price scale to more value-oriented price points, but Apple will introduce new and even more desirable products at the old price points. And so long as it can keep that engine going, it will make money hand over fist. And the rest of the handset makers will bang their heads against the wall trying to figure out how they do it.

Don Reisinger at CNET's Crave recently recently asked the question, "Is Steve Jobs really smarter than anyone else?" in this way:

"In the United States, GSM carriers are not the only option, and more often than not, people are willing to go with Verizon Wireless or Sprint Nextel, regardless of the inability to easily switch between the aforementioned companies.

But in the U.K., the economical landscape is much different. In fact, most Britons are more than happy to change carriers and are keenly aware of the terms 'unlocking' and 'SIM cards.' In fact, many people in the U.K. have already purchased an iPhone in the States, brought it home, unlocked it and added it to their own carrier.

Steve Jobs knew that the U.K. is rife with unlocked phones and exclusively GSM coverage. And by looking like the best friend to O2, he's effectively pulling the same trick out of his bag: tell everyone they can only have an iPhone on one carrier, ignore unlocking, take the revenue from O2, and enjoy higher hardware sales due to simple unlocking procedures. Once completed, head to France and Germany, rinse and repeat.

It's amazing to me just how much control one device wields all over the world. Can you think of any other product that could command such respect from a massive cell phone carrier and create a whole new way of doing business in the cell phone industry? I certainly can't.

I can't either. That's because Apple combines award-winning designs with some of the best strategy and marketing in the world. And as long as the press and Apple's competitors keep focusing on the price cuts instead of the strategy and consumer desires, it will continue to reshape the mobile phone industry to its own advantage -- and in the process make its investors a lot more money than anyone wedded to the old mobile phone business expects.

Full disclosure: the author owns Apple stock.

Technorati Tags:
Apple, ATT, Brand, Customer experience, iPhone, iPod, iPod touch, Marketing, New York Times, Price cut

iPhone US market share already exceeding other established vendors

If you live in the US and think you understand the mobile phone market and its operating systems, you should study this chart. It demonstrates just how much the mobile phone market varies by geography. The other amazing thing? Apple's market share in North America is not only visible, but exceeds that of Microsoft in other non-US geographies. That's fairly impressive since Windows Mobile has been around for six years and the iPhone is just coming up on 3 months. Perhaps Steve "iPhone has no chance" Ballmer can provide colorful commentary on how it happened.

Technorati Tags:
Apple, iPhone, Marketing, Mobile phones, Steve Ballmer, Microsoft

More iPhone lessons

I've received a lot of terrific comments and emails about my posting yesterday about Lessons from my son's iPhone. I'm dashing off to a meeting today, but here are some of the highlights:

1. Why the iPhone feels so much more responsive. Anders Brownworth nailed the answer to this one better than I could have:

I think the graphics on the Nokia are noticably slower than the iPhone because the iPhone has a dedicated graphics processor. So for example when you want to do coverflow or scrolling of contacts, the OS just tells the graphics chip that there is a surface with this picture or that text on it. Then the OS just tells the graphics chip where to position that pannel and it's up to the graphics hardware to actually render it. Of course the graphics hardware is much more efficient at rendering things, so it looks extremly responsive without ever burdening the main processor.

This works quite will until the graphics subsystem runs out of RAM. Like, for example, if you load the NYTimes page in Safari and quickly scroll to the bottom before the OS has time to render the layout and send it to the graphics chip. At that moment you end up seeing a checker-board pattern. That's the pannel without rendered content on it. As soon as the CPU catches up, you see the content, but the interface never "freezes" while that happens.

That's the revolutionary thing here. No other mobile device that I am aware of offloads graphics processing to specialized hardware. Hence, of course, Apple couldn't just purchase an off the shelf mobile OS. I think of this as a key competitive advantage for the time being. It's not something Windows Mobile contemplates yet but it is something Apple has had in OSX from day one.

My initial reaction to this was, "Well, of course!" And then I thought about it for a few minutes and decided it was actually quite remarkable. After all, who ever imagined that a device designed to facilitate audio communication and playback would need a high-speed graphics processor? To me, this represents a clear example of Apple "Thinking Different" about the mobile phone market and innovating in a significant way.

2. ATT Family Plans. I received a one email saying that this has been a sore point with many in their move to the iPhone. I would have to say it depends on your family plan. My friend Maribel Lopez had the opposite experience: the salesperson she worked with sold her a family plan to actually reduce her total bill, but that was because she was a new (Orange side) ATT customer, not an old (Blue) one. For those of us on the Blue side, there really is no alternative. You will be assimilated by the death star. Oh, by the way, I now have had two people tell me (and one of them was the salesperson at the Small World ATT store) that the Blue ATT network will be shut down in March 2008, so resistance really is futile.

3. iPhones in Canada. One reader asked when we'll see iPhones north of the Canadian border. While we just heard today that the iPhone will go to Germany, Austria, and the Netherlands in addition to France and Spain, word on Canadian availability has been sparse. However, with the Canadian dollar appreciating against the US dollar, perhaps we'll see some progress there soon -- or not. Apparently the sticking point is the unlimited data plan, which Rogers has been resisting, but that's all I know.

4. Why don't I have an iPhone? I have two answers to this question. One is that I have a start-up business and keeping that and my family afloat has taken priority over wonderful new phones. And secondly, I soon will, thanks to the generosity of an anonymous donor. And no, it's not Apple; even when I was a Forrester analyst, they never gave products away. I don't think they've changed that policy since.

Technorati Tags:
Apple, ATT, iPhone, Mobile phones, Canada, Family Plans, Lessons

Musings on the Fed funds rate cut

The stock market was ebullient yesterday over the Federal Reserve's half-point cut in both the benchmark and the discount rates. But while the stock market loved the idea, it occurred to me this morning that there are some new factors to think about in both investing and how we all spend our money:

• Adjustable rate mortgage owners just got a much-needed break. Much of the credit crunch came from adjustable rate mortgages issued two to five years ago whose rates were being reset. A lower Fed funds rate will make those increases smaller -- and keep some mortgage payers from defaulting on their loans. For all the bluff and bluster about the credit crunch, this one direct effect of the Fed cut is probably the one that will make the most difference to the economy and consumer pocketbooks.


• But the dollar is going down. While the stock market loves low interest rates, this move is going to make the dollar's exchange rate against other currencies drop. An example: the Canadian dollar is already at near-parity to the US dollar; you can expect it to hit all-time highs. And you can forget that European vacation unless you really like to pay $10 for a cup of coffee. On the other hand, for companies like Apple who are just moving their products overseas, lower dollar values will actually boost the profits they reap from international sales.


• Happy days are here again for hedge funds. Many quantitative hedge fund strategies are market neutral: they don't care whether the market moves up or down so long as it moves. For those funds, yesterday's rate cut and 335 point rise in the Dow was an early Christmas gift. And given that big market move generally increase overall market volatility, this one move may put funds back into the black for months to come.


• The Fed just gave private equity carte blanche to resume its acquisition binge. The mergers and acquisitions boom of the last few years was fueled by the gasoline of cheap credit. When the credit crunch hit, M&A activity ceased. Now that the Fed is easing credit rates, expect to see those companies start shopping deals funded with other people's money -- not their own -- again. That means more private companies and fewer public ones.

The bottom line: the Fed just rewound the economic tape back to the beginning of the year. While the credit crunch isn't over, a lot of the conditions that caused it are getting reset. The big question though, is whether investors and institutions will make the same moves -- and engage in the same excesses -- this second time around.

Technorati Tags: Financial analysis, Hedge funds, Markets, Opinion, Private equity, Dollar

Lessons from my son's iPhone

My 14-year-old son has saved his allowances and earned money all summer to purchase an iPhone. And after the early Christmas present that Steve Jobs delivered on September 8 -- the $200 iPhone price cut -- he finally scrounged enough money to actually buy an 8 Gigabyte refurbished version for $349 from the Apple Store. And last night his long-awaited purchase arrived, as can be seen below.

I'll spare readers the blow-by-blow, but I will touch on the highlights of iPhone unboxing night last night:

1. Refurbished iPhones come in white boxes. We've bought refurbished products form Apple before, and they've traditionally arrived in brown cardboard boxes advertising their lower cost and refurbished status. But refurbished iPhones break that tradition by arriving in a clean white Apple box with the Apple logo on the top. This nicely sets them apart from new iPhones that come in black boxes. But even more intriguing, Apple appears to have optimized the packaging yet further -- the white boxes are, to my eyes, about two-thirds the size of the new iPhone boxes.

[Robert enjoying the unboxing experience. "It's so small and shiny!"]

2. Not all AT&T accounts are created equal. We've been AT&T wireless customers for about 10 years. That means we've been through the sale of AT&T wireless to Cingular, and Cingular's sale to SBC, and the subsequent rebranding of Cingular to AT&T. And our reward for 10 years of loyalty? We couldn't activate Robert's iPhone on our AT&T family plan because our account was "on the blue system" of Cingular instead of the good "Orange side." We called AT&T, and they literally said they couldn't help us over the phone; we'd have to go visit an AT&T retail store and trade in our old phones for new ones.

So we trekked over to Small World in Acton, MA (an AT&T franchisee, not a corporate AT&T store), and a wonderful gentleman there made it all better with nearly an hour and a half of fussing with the AT&T systems. The bottom line: since I had an unlocked phone (my Nokia E61i), I only needed a new SIM card. But since my wife's ancient Nokia 3650 was locked to the old AT&T wireless, she'd need a new Nokia phone -- which they didn't have in stock. Now given we had a child who had just spent $350 that he saved for months and was dying to turn his iBrick into an iPhone, we asked if there was any way we could get this done today rather than waiting for a phone shipment. To Small World's credit, the agent electronically activated our new SIM cards, transferred a phone from another store, which the agent would personally pick up and deliver tomorrow, and got us up and running after only an hour and a half of customer service calls, computer entries, and activation hassles. We were pleased and astonished at the amount of work the agent was willing to do to help us, but we were similarly appalled by how customer-hostile the back-end systems were he was fighting with.

3. Once our plan was right, the iPhone experience was flawless. Once we got home with our new plan activated and our wallets lighter for the experience, Robert fired up iTunes and activated his phone. Within five minutes, he had a phone number and a working phone on our family plan. The contrast with the AT&T store experience was like night and day; it was just click, click, click, and go.

So now I have a son with an iPhone, a family AT&T plan "on the orange side", and a wife with a new Nokia. And even with less than a day's experience, I already have some takeaways from the transaction.

1. Even with my recent vintage Nokia mobile, I'm jealous of my son's phone experience. As I've written before, the specs on my Nokia E61i far surpass those of the iPhone; it has 3G data, WiFi, video recording, zoom camera, installable software, and countless other whizzy features. Yet, I'd trade my phone for even a 4 Gig iPhone in a heartbeat. Why? Because I've spent nearly two months configuring my phone to do about half as much as my son could do within minutes of unboxing his phone. The experience of using my Nokia compared to the iPhone is comparable to using PC DOS compared to Mac OS X. The former is painfully functional but never helpful, while the latter is delightful and simple.


2. The iPhone is going to undermine cellular carrier's business as usual The experiential difference between an hour and a half activation at a store and a five minute activation at home is huge. Add to that fact that iPhone purchasers are paying full retail prices and signing up for unlimited data plans, and you're seeing significant cream-skimming of the mobile phone market by Apple. Don't be surprised if Apple gains even more power over the mobile phone carriers simply because of the massive buying power that iPhone customers will come to represent. And in the process, manufacturers of "free" carrier-subsidized phones are going to be at a significant disadvantage competing with Apple's high customer satisfaction (and even higher margin) business model.


3. AT&T still has significant work to do. The whole "blue versus orange" distinction, while understandable, is something AT&T has to fix and fix fast. The store agent said that they plan to require all customers to be "on the orange side" by March 2008. But the fact that we had to buy at least one new phone, spend $130, and commit to new service contracts just for the privilege of adding an iPhone after being 10-year loyal AT&T customers leaves a bad taste in my mouth. Somewhere in AT&T there must be a person in charge of customer experience who should be forced to go try to put an iPhone on a blue AT&T plan every day until he gets the service fixed. As it stands now, it's the biggest blemish in the iPhone experience.

Bottom line: While the Nokia E61i is less than the sum of its specifications, the iPhone experience is more than the sum of its parts. Apple has raised the bar about six feet on what users should expect from a mobile phone. And when even a high-school kid can save his money and buy his own iPhone, that experience isn't just for a few well-heeled technophiles; it's going to affect everyone who owns a phone and every carrier who sells them.

Full disclosure: the author owns Apple stock.

Technorati Tags:
Apple, ATT, Customer experience, iPhone, Marketing, Mobile phones

A new word to keep an ear out for: femtocells

Sunday's Boston Globe had a great article about Airvana, the company bringing cellular phone coverage to your living room using your broadband Internet connection. My former boss from Forrester, Paul Callahan, has been working at Airvana for a few years now, and his calls on network technology are uncannily good, so I'm expecting big things from this company. And the carriers have got to love the idea; after all, what's their not to love about consumers building out new infrastructure for your network?

Technorati Tags:
Airvana, Femptocells, Technology, Mobile phones
Paul Callahan

When a window of Mac opportunity closes, several doors open

[Photo featured on the front of Sunday's New York Times]

This weekend's New York Times had what I thought was a seriously flawed article written by Randall Stross titled, A Window of Opportunity for Macs, Soon to Close. In that article, Stross trots out the old canard of Apple's three percent market share in the PC industry, and blames it all on Apple missing an opportunity to distribute its wares through Best Buy and other big box retailers when Windows Vista was sucking wind (i.e., most of this year). He also adds the following throw-away:

Apple has not even begun to try to re-enter another domain from which it had withdrawn its Mac sales teams: large corporations. Given such strategic decisions, the Mac has limited room to expand.

With that out of the way, Stross declares that that improvements in Vista will soon lock Apple out of the market because it will become unstoppable. Cue the Darth Vader theme, end of story.

So I was most amused this morning to read a series of headlines that seem to refute this screed, I'll just run down three of them:

• Apple's market share is rising. Ars Technica notes recent studies that say Apple's US notebook computer market share was 17% in the last quarter, and 28% of prospective buyers are planning to buy an Apple notebook in the next 90 days. That doesn't sound like retail channels are standing in the way of those buyers.


• Switching trends are getting stronger. Jason Fry over at the Wall Street Journal considered switching to a Mac last week and asked for reader feedback. This week, he writes that readers pushed him overwhelmingly to make the switch -- and in the process cited Vista as the final straw that was pushing them out of the Microsoft camp.


• Corporate use is growing despite Stross's arguments. Roger Ehrenberg at Information Arbitrage notes that consumers are forcing IT to accept Macs as corporate platforms because they just work better, in contrast to the typical "Do only what we let you, otherwise it might break!" IT philosophy. He concludes saying that corporate Mac adoption is "nothing if not inevitable."

But the first and best rebuttal to Stross's article came when I opened the Times newspaper on Sunday, and I was greeted with a large front page photo of a woman considering preventive surgery for possible future cancer. The article wasn't about computers or technology, but the photo (shown at the top of this article) told a very compelling story about Apple's increasing influence with consumers: she was using a MacBook Pro to do her research.

Technorati Tags:
Apple, Marketing, Randall Stross, New York Times, Roger Ehrenberg, Macintosh

Can HP do what's needed to become a great marketer?

Last week, Hewlett Packard announced it will hire Michael Mendenhall, a 17-year veteran of Walt Disney Company, to be its new Chief Marketing Officer. Given HP's struggles to market its PC products, I think this move is long overdue. And I think Mendenall is the ideal candidate to turn HP's marketing around. Why? Because few companies understand consumers and marketing better than Disney, as was illustrated by a trip I took to visit the Mouse several years ago.

I took my late Dad and my family on a Disney land/cruise combination trip back in 2000. For those who aren't familiar with these deals, you get four days at the Walt Disney resorts in Orlando and access to the parks, followed by a three day cruise in the Carribean. You're given park passes in the form of magnetic stripe cards that also act as your room keys to your hotel. And we thoroughly made use of those passes, wandering from our Boardwalk hotel to Epcot to Walt Disney World for those full four days, sometimes eating in the parks, and at other times at our hotel.

The full magnitude of Disney's marketing integration only became apparent when we left Orlando for the Port of Miami and our cruise. When we boarded the Disney Wonder, we discovered that our Disney passes, which had been our room keys in the park hotel, also unlocked our stateroom on the ship. And when we sat down to eat in the evenings, I was surprised to hear the waiter suggest wines that were similar to, but a step up from, the wines we'd been enjoying at Disney World. Unknown to us, Disney maintained a running list of our preferences and purchases. And our waiter, who was in many ways our personal ambassador to the ship experience and followed us from dining room to dining room, both had access to and was trained to make suggestions based on that purchase history. In short, we were quietly and subtlety marketed a better experience based on our prior Disney experience. And I fully expect that if we returned, that experience would continue from where it left off seven years ago, with age-appropriate adjustments for our now much-older kids. Disney's systems really are that sophisticated.

Disney's great marketing came from a commitment by Walt Disney to create the best customer experiences possible. We don't yet know if a similar commitment is forthcoming from HP, but I do know this: if Mendenhall brings even half of the marketing sophistication that Disney has in its resorts to HP, it's going to create a much better customer experience than it has today. The big question will be whether HP's IT-centric and customer-unfriendly culture can accept the need for such integrated marketing and the big changes needed to make it happen. Let's hope it does.

Technorati Tags:
Marketing, Brand, Branding, Customer experience, Disney, Hewlett Packard

More voices on the coming crises in private equity and hedge funds

I noted back in June that when private equity companies such as Blackstone Group want the public's money, it's time to hold onto your wallet. Why? Because it means they've exhausted their sources of "smart" money. And if they go looking for "dumb" money, it means they are heading for the exits.

Well, today's New York Times notes that esteemed voices such as Michael Jensen, the Harvard business school professor emeritus and the father of private equity, are sounding a similar alarm:

“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”

Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.

He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.

“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”

Ironically, the same business section of the New York Times also ran a parallel article titled, "Hedge Funds and Private Equity Alter Career Calculus". It's headline: today's hedge fund gurus and analysts are now eschewing business school educations in favor of making money instead. So investors in those funds can go to sleep at night knowing that the teachers at their local middle school, most of whom have masters degrees, may have more formal education than the people who are managing their investments.

A final sobering thought: none of today's 30-year-old hedge fund managers who have no time for business school have ever experienced a significant bear market (2001 would be the closest approximation, and that was relatively mild), to say nothing of a true market crash like that in 1987. These people have decided that the school of hard knocks is a better teacher. It will certainly be a wake-up call when they learn that failing the test in that school will cost them more than a bad grade, but in fact their futures and their livelihoods. And those that entrusted such untested executives with their money will pay the real price.

Technorati Tags: Economy, Hedge funds, Markets, Opinion, Private equity, Michael Jensen

More cautionary tales of iPhone roaming

Anders Brownworth has some excellent (and cautionary) details of his experience taking his iPhone to Argentina. He noted that even if you select one of AT&T's international calling plans, you then are in a quandry about what to do about the exorbitant international data charges. And given that the iPhone was designed with an unlimited data plan in mind, the phone seems to be a little more cavalier about using EDGE than many users will be happy with.

Personally, I don't find this experience restricted to the iPhone. I don't have an unlimited data plan, yet my Nokia E61i Internet phone with WiFi just loves to make connections to the EDGE network even when I have a WiFi network selected. My solution there has been to completely delete the EDGE access points from my access point list, and then insert them when I think I may want to use the EDGE data network. But I can't claim that this is either user friendly or convenient. And I would expect Apple to come up with a better solution in its re-invention of the cell phone experience.

Anders speculates that this may be a class-action lawsuit in the making. Given US legalistic propensities, I wouldn't be surprised, but I think a better outcome would be for Apple to come up with a "restrict data access" setting and push that out to iPhone users via a software update in advance of seeing such a lawsuit filed. This problem isn't limited to AT&T, and we're going to see more of this type of complaint as the iPhone moves into more geographies and more types of roaming. This is one issue Apple should be getting ahead of before it requires a letter from Steve Jobs and rebates to fix.

Technorati Tags:
Apple, iPhone, Marketing, ATT, International roaming

A great combination: European iPhones, Starbucks coffee, and Pavarotti

[My apologies to the memory of Pavarotti, but I just couldn't resist]

Reuters says that Apple has called a UK press conference for Tuesday, September 18. The big buzz is that this is the beginning of the iPhone Europe barrage, whereby we find out which carriers -- the current favorite in the UK is O2 -- and which stores will carry Apple's flagship phone/ipod/internet communicator. But you never know with these special events. Given the love Steve Jobs was passing out for Starbucks at the iPod special event, perhaps, we'll be getting an announcement of the iLatte.

Personally, I am intrigued by an idea passed on by reader Paul Rudé, who suggested that Apple perhaps might want to use its Starbucks relationship as a new vehicle for selling iPods and iPhones in Europe. Given my prior observation concerning Apple's lack of retail stores and Genius Bars in Europe, having a channel relationship with Starbucks could extend Apple's reach into European retail. Such an arrangement might be particularly effective with some type of "Mobile Genius" support, where Apple Geniuses would hold scheduled service sessions at local Starbucks shops and thereby provide some of the on-the-ground support that customers look for at Apple Stores, and do so in a friendly, neighborhood environment. Yes, it would be a huge undertaking and would require a deep relationship with Starbucks in terms of logistics, training, and compensation. But on the other hand, if Apple can manage to create stores-within-stores in Best Buys in the US, the idea may not be completely crazy. And for those worried about disconnect between the prices of expensive Apple electronics and Starbucks coffee, don't forget that Starbucks already sells $1,000 expresso machines here in the US.

In Paul's note, he also suggested another exciting idea to Apple Europe: Apple should buy the video rights to the full Pavarotti funeral mass and sell video copies via the iTunes store. In Europe, where opera fans are much more common than here in the US, such a video program could be very popular, and there are no conventional sources for that content. Without the constraints of shelf space, the iTunes store is the ideal venue in which to sell such a program. And it would further demonstrate to international Apple customers that Apple appreciates their interests as much as US ones. It would be a very smart marketing tactic in Apple's iPhone launch into Europe; I think Apple should pick up on it.

Technorati Tags:
Apple, Europe, Humor, iPhone, iTunes, Marketing, Starbucks, Pavarotti

US ad spending slips, and online companies fight for their futures

In our Marketing 2007 report at the beginning of the year, we noted that our index of marketing budgets and spending plummeted for the year. That report suggested that advertising budgets were targeted at about half what they were in 2003. Well, we're now getting some good data to suggest that prediction was spot on. TNS MediaTNS Media Intelligence reports U.S. advertising expenditures decreased 0.3 percent in the first half of 2007. Now advertising is only a between a quarter and a third of marketing usually and is the categories companies almost never pull back on. The fact that advertising is falling overall should be taken as a negative sign for the overall business economy. After all, when companies don't advertise, they don't pull in as much new business, and that means worse results farther down the road.

And the rise in online advertising dollars? As Om Malik points out, that's little comfort too, When companies cut back on advertising, they tend to use cheaper media, and the online sites are substantially cheaper than traditional advertising. And today, literally millions of Web sites are competing for that fairly small (by traditional advertising standards) number of online ad dollars. The result: while overall online spending may be up, ad prices are softening.

We have one more data point here: demand for our own marketing research. We stopped publishing our Blackfriars marketing reports this year, because demand for them just dried up. Companies cutting back marketing budgets often cut market research early in the cycle too, and we fell victim to that phenomenon like anyone else.

The bottom line: 15 months ago was a great time to start an ad-driven online company, and even then there were too many companies chasing too few ad dollars. This year? It's not looking like such a great idea. And as Om Malik points out, keep a close eye on the results from Google, Yahoo, and MSN. I predict that Google, as the dominant company in online advertising today, will grow its business, and all the other portals will be static or see shrinking results. When US advertising was growing willy-nilly, everyone can post good results. When US advertising slips, results tell you who is winning and who is losing.

Full disclosure: the author owns some Google stock.

Technorati Tags: Advertising, Google, Marketing, MSN, Om Malik, puppy, TNS Media Intelligence

Why a million iPhones in 74 days is better than you think

[Click on the above image for a movie of iPhone availability for the month of July; Quicktime required]

Both commentators and bloggers continuing to claim that the iPhone million unit mark represents weak demand, including some commenters on my post from yesterday. Silicon Alley Insider Dan Frommer joined the fray yesterday with this commentary titled, Apple's iPhone 1 Million Is Below Plan:

Days after Apple gets hammered by the Street over iPhones sales, Steve Jobs tells us that he's selling plenty of fancy phones: 1 million of them in 74 days. The news, announced before the market opened, bumped up AAPL: Shares immediately jumped to $137. But now they're dropping down again, below $135. So is 1 million a good number or not?

It's not -- not even by Apple's own low-ball public sales goals. Jobs has announced plans to sell 10 million iPhones by the end of 2008 -- a year and a half after launch. But a million iPhones in 74 days works out to a little less than 5 million iPhones per year -- if you're selling them at a consistent rate. Apple sold 270,000 machines in the first two frenzied days it was on sale, which means it took 72 more days to sell another 700,000 phones. That's a 3.6 million annual run rate, which would give Jobs a total of 5.8 million by the end of 2008.

The iPhone hasn't been introduced in Europe yet, and when it does that run rate will certainly increase, as consumers there are comfortable with the idea of buying pricey phones without carrier subsidies. And Jobs obviously intended to cut prices -- eventually -- to boost sales again. But if Jobs was selling enough $600 iPhones, there would be no reason to drop prices by one third after just two months on the market. Lehman Brothers' Harry E. Blount, who had correctly pegged Apple's first weekend sales, predicted this move in July.

How much will that help? Remember that most potential iPhone customers can't buy one no matter what the price is without considerable hardship, because they have long-term plans with other wireless carriers other than AT&T. You may be more inclined to buy a $400 iPhone than a $600 iPhone. But if you're locked up with a two-year Verizon contract, you're not going to buy one at any price. We hear, second-hand, that Apple is running 25% below their internal sales goals, and we're in no position to confirm that. But we think that if the iPhone was on track, we wouldn't have seen a price cut this early, and we would have heard about 1 million units even earlier.

Most amusing. I say amusing, because the post conveniently ignores three important factors that make such a straight line extrapolation of the first 74 days silly:

• Seasonal sales He is using straightline projections assuming no holiday bumps, which we know historically are important boosts. He also conveniently ignores the fact that summer is probably the worst selling time for consumer electronics.


• Never expiring carrier lockups.The article assumes that if you're a Verizon customer today, you'll never become an ATT customer because of your two-year contract. But, over the next 18 months, three quarters of all two-year-contract carrier lockups will expire, creating new consumers who can be sold iPhones.


• Near non-existent iPhone availability for three weeks. Everyone is focusing on estimates of about 700,000 iphones sold over 74 days. But in reality, iPhones were very hard to find for nearly 21 days of that selling period!. I've included a (admittedly very rough) movie showing iPhone availability at Apple stores during the first month of sales. Suffice it to say that if you wanted an iPhone during the period between July 1 and July 21, you had to be either lucky or determined to get one, because most Apple stores were out of stock of them.

This is a very typical pattern for Apple. Whenever it tries something new, various pundits bet that it will fail in the effort because, well, just because. BusinessWeek wrote the epitaph of Apple retail when it launched, and now those stores garner more dollars per square foot than any other retailer, bar none. The iPod was written off by Slashdot as "No wireless. Less space than a Nomad. Lame.", and the iPod is now by far the dominant music player. And now bashing the iPhone's success (which by the way, writers from Bloomberg and CNET to Suckbusters, not to mention John Dvorak, claimed would fail horribly) and price cut has become the latest journalistic parlor game.

But it's also important to remember that even with all the launch and sales-bashing, the iPhone remains one of the best-selling consumer products in history as measured in dollars, passing Microsoft Windows 95, Microsoft's XBox 360, and even the Nintendo Wii launches. At one million phones, Apple has pulled in about half a billion dollars in sales that will add to its balance sheet over those 74 days, And at the new price point and with the holiday season approaching, those numbers will only go up rapidly, regardless whether the actual sales for the year are 2 million, 3 million, or 10 million.

No matter how you slice it or try to discount it, the iPhone has already proved most of the aforementioned pundits wrong. If they want to claim that Apple didn't meet their expectations, that's fine. But any business writer or analyst who claims that selling a million units of a completely new product at an average price of $575 in a little over two months "isn't a good number" just is trolling for traffic. Last time I checked, half a billion profitable dollars in sales was real money in most people's minds. Claiming otherwise is just sour grapes.



UPDATE: My apologies to anyone getting snagged by this post sharing a URL with yesterday's. I'm using a new blogging program, and it has some quirks I'm not quite used to. If you are looking for yesterday's post debunking Apple's Cold Christmas, it is here.

Technorati Tags:
Apple, Dan Frommer, Financial analysis, iPhone, Marketing, Silicon Alley Insider

A million iPhones sold, expect millions more for the holidays

Apple has a little note on its hotnews page noting that it sold its millionth iPhone on Sunday. So much for the rumor that sales were soft, as promulgated by the aforementioned TheStreet.com story predicting a "Cold Christmas" for Apple. If we exclude the first weekend from those numbers, the steady state of iPhone sales is about 10,000 a day, or 300,000 a month. Expect that number to ramp up to double that for the next three months based upon the holiday selling season and the new lower price. That means about 3 million iPhones sold by the end of the year, which any way you look at it, is a pretty impressive debut in Apple's new line of business.

Technorati Tags:
Apple, iPhone, Marketing

Coming soon to an iTunes store near you: movie rentals

David Watanabe notes that the latest iTunes store has the ability to select problems with movie rentals in its reporting mechanism. We had predicted that movie rentals would arrive this fall back in June. I'm expecting to see the announcement in October, but it could happen as soon as later this month.

(Via David Watanabe).)

Technorati Tags:
Apple, Marketing, iTunes, Apple TV, Movies, Movie Rentals

Apple's secret holiday weapon: the iPod Touch

[Click on the image for a larger version]

Based upon last week's iPhone price cut and some analyst opinions stating we won't see a 3G iPhone this year, Scott Moritz at TheStreet.com today is predicting a "Cold Christmas" for Apple.

Boy, has he ever gotten it wrong.

First, he argues that the iPhone price cut validates a rumor that Apple was cutting iPhone production in half. Yeah right. Economics 101 says that when you lower prices, demand increases. So Apple would cut production why? Heck, my son even bought a refurbished iPhone over the weekend with his own money, so I'd argue that Steve Jobs' goal of bringing more customers to the iPhone for the holidays is all but assured.

But in my opinion, the real reason Moritz has it so wrong is that he ignores Santa's secret weapon that will put Apple's holiday results over the top. That secret weapon is iPod touch. And our analysis says that is going to be huger than huge.

Why do I think that the iPod touch will be such a hit? Because the iPod Touch

• Already is selling well. The iPod touch is currently the most popular music player on Amazon's list and the #2 top seller in all of Amazon Electronics -- and it isn't shipping yet.


• Instantly offers world-wide appeal Unlike the iPhone, which requires six month carrier certification and blessing in each country in which it will be offered, the iPod touch is a garden-variety piece of consumer electronics. That means that so long as it doesn't spontaneously burst into flame and complies with all necessary packaging and safety guidelines, it can be sold in almost every country in the world within weeks of it being offered in the US.


• Can be sold through distribution. Because of its exclusivity carrier relationship, only Apple and AT&T can sell the iPhone in the US, and no one can yet sell the iPhone internationally. But the iPod touch has no such restrictions. iPod touches will be available at Amazon, Target, Best Buy and countless other stores in the US. You'll also be able to buy them in other countries in such varied venues as Dixon's in London, FNAC in Paris, and 7-11 stores throughout Japan.


• Isn't locked to another company's fortunes. A lot of consumers won't buy an iPhone because they already have a phone with Verizon or Sprint. Or, they may simply know and like their current phone. Or they don't like converged devices. The iPod touch appeals to all these consumer segments that the iPhone doesn't address -- and that makes its available market considerably larger.

So what's our projection for Apple's holiday season? I'll be publishing a detailed analysis in the September Analyzing Apple report (some previous reports are here), but I expect Apple to significantly exceed last year's 21 million iPods sold, and I also expect the average iPod selling price to rise.

There is one open question looming over the iPod touch though, and that's how Apple will recognize the revenue from its sales. Apple amortizes both iPhone and Apple TV revenue over 24 months because of undelivered upgrades to those products, yet normally recognizes iPod sales immediately. Technology-wise, the iPod touch is just like an iPhone and will presumably benefit from many of the same upgrades that happen to the iPhone. And yet, it is an iPod and has no carrier revenue affiliated with it, and therefore, Apple can legitimately recognize the revenue from it immediately, just as it does with other iPods. We probably won't know the answer to this question until the October earnings report, but it will have a significant impact on the holiday forecast.

But regardless of which way the answer turns out, I'm sure TheStreet.com is going to have trouble explaining their forecast of a cold Christmas for Apple come January. They could just blame the miss on global warming. But more likely, it will just be the heat of holiday iPod touch sales.

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Apple, iPhone, Marketing, Financial analysis, iPod, iPod touch, TheStreet.com