Blackfriars' Marketing

Wednesday, October 31, 2007

TidBITS reports that Apple will allow Leopard Server virtualization

The folks over at TidBITS appear to have a pretty interesting scoop, noting that Apple's latest Mac OS X Server license agreement explicitly allows virtualization of the server on Apple hardware, assuming you purchase a valid license from Apple for each copy. The article also notes that Apple's been working with VMWare and Parallels to make this work in a way that all three companies can support.

This is just another nice differentiation point for Apple, and is certainly a lot less complicated than the licensing complexity you might see in Windows Server. And just as in the laptop and desktop worlds, it brings a special aura to Apple's Server products. How's that? They become the only servers that can legally run Windows, Mac OS X, and Linux on one piece of hardware.

Final footnote: it's nice to know that Steve Jobs actually made that call to Diane Green that we suggested back in January 2006. It was nice to get in the meeting before her company became worth $47+ billion.

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Recipe for installing Leopard on unsupported Macs

For those not wishing to go through the tedious clone-and-paste install procedure I did (including having a Leopard install to clone from) to run Leopard on your unsupported Mac, MacRumors.com has a nice step-by-step recipe. Thanks to Dan Knight at LowEndMac.com for the pointer.

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Department of irony: The fastest Windows Vista notebook in 2007 is a 17-inch MacBook Pro

So says PC World. And PC World's blurb has a note of head-shaking in the last sentence to boot:

The $2419 (plus the price of a copy of Windows Vista, of course) MacBook Pro's PC WorldBench 6 Beta 2 score of 88 beats Gateway's E-265M by a single point, but the MacBook's score is far more impressive simply because Apple couldn't care less whether you run Windows.

Mac users have got to love the irony of it all. And if anyone ever doubted whether Mac hardware was worth the price, I suspect this might help convince them.


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Airport, keychain, and Time Machine upgrade challenges for Leopard on old hardware

Today, I have three new pieces of Leopard deployment info that might be of interest to others:

  1. Airport cards not being recognized. This bug bit me this morning when I arrived at work, only to discover I couldn't use our Snow Airport router because Leopard wouldn't recognize the Airport card in my 1GHz G4 PowerBook. You can see how prevalent this problem is in the Apple Support Discussions and Accelerate Your Macintosh has a good set of solutions, including the Apple KBase Document recommending that you start up Leopard in Safe Mode. All that said, I still can't get the Leopard Airport Utility to find our Snow Base station, so I'm glad I have my bootable external drive containing my full Tiger system.

  2. Upgrading your keychain isn't so simple. I had expected Leopard to upgrade my default keychain of passwords and secure notes in place. It didn't. Instead, it renamed it and gave me a blank keychain to populate again. I cured this easily by going into KeyChain Access and making my old, renamed keychain the default, but it was a surprise to me, because I thought I had answered all the keychain upgrade questions such that this wouldn't be necessary. The good news, though, is that you still can use your old keychain by making it the default, so no harm, no foul.

  3. Time Machine demands some serious horsepower. I now have a bit more sympathy for Apple requiring at least a 867MHz G4 for Leopard. I did my first Time Machine backup last night on my dual 800 MHz Quicksilver. To back up 201 GBytes, it took about 18 hours to move, index, and compress my 1.4 million files on my home computer. Now this activity wasn't anywhere close to saturating the disk channel, but it did pin my processor load average at anywhere from 2 to 4 for the entire time. During that time, the machine was useless for watching online videos or the like, simply because it was too busy. All that said, it works fine now that the initial backup is done, but clearly Time Machine does demand a lot of your processor performance.



Despite these glitches, I'm still loving the Leopard experience overall, especially considering most of my hardware is four to five years old. We'll see how that holds up in the days ahead.

Posted simply (or not so simply today) with the power of Leopard.


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Tuesday, October 30, 2007

More observations regarding Leopard on old hardware



We now have four Leopard upgrades running in the house, including my non-supported dual 800 MHz Quicksilver desktop. I thought I would provide some of my personal observations of the corners of the OS I've wandered into.

  • Leopard Front Row is amazing. If you haven't typed Command-Escape yet, do so. Leopard gives you an entire Apple TV in your new OS upgrade, but without the Apple TV box. And unlike Tiger, these functions are available on every Mac, not just the ones that have remote controls (despite what the tech specs on Apple's Web site say). I love it.

  • Photoshop 7 doesn't run. Now admittedly, this is a five-year-old Carbon application, but I'm disappointed that unless I can fix this problem with a reinstall, I'll have to finally upgrade my trust old copy of Adobe Creative Suite. However, my guess is that since the program runs through much of the loading process before it crashes, this problem may only be an incompatible plug-in. More information as I get it.

  • Selective screen capture has new helpful data. I use Command-Shift-4 to take lots of images for this blog, and now that function provides pixel measurement data as you draw your window. That's another nice treat I didn't expect.

  • DVD playing doesn't require a 1.6 GHz processor. I think this requirement has gotten misquoted, with some people noting that a dual G5 1.6 GHz or better processor is required to run DVD player. It ain't true. The 1.6 GHz requirement is for improved de-interlacing. My Dual 800 MHz didn't meet that requirement, so it grayed out the Better Interlacing item, but it still played DVDs just fine and de-interlaced well. So this spec is much ado about nothing.

  • System timing is different. I noted yesterday that I've had trouble with conflicts between my SATA controller and my USB 2.0 add-on cards with Tiger causing kernel panics. I won't say that's gone, but they are now much less frequent (I've seen exactly one). More interestingly, though, is the fact that Leopard appears to run the SATA controller much more aggressively, resulting in disk transfers that are about 4 times faster than I was measuring on Tiger as measured in Activity Monitor. I've got to do more controlled tests to figure out whether that improvement is real or a fluke. But overall, even on my old and slow machines, I say that Leopard feels more friskier and more responsive than Tiger on similar functions.

  • Photobooth and iChat are the source of much entertainment.. My sons have been spending hours checking out the new special effects in Photobooth and iChat. It's fun to see your kids swimming with tropical fish and riding roller coasters without having to leave home. This may not do much for productivity, but for pure entertainment, I suspect these functions are going to get a ton of use.


What has your experience been like?

Posted simply with the power of Leopard.



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First weekend Leopard sales close to first weekend Windows Vista sales



Apple today announced that it sold two million copies or about a million a day of Mac OS X Leopard in the first weekend. I tried to find similar statistics for the Microsoft Vista launch, but the best I could come up with was that Vista sold 20 million copies in the first month (February), resulting in an average sales rate of 714,000 a day. Both numbers reflect pre-orders and machine installs, not just upgrades. So at least for now, Leopard is running neck and neck with the Windows Vista install rate.

All that said, the Leopard numbers will surely fall behind in the next month. Why? Because Apple estimates the total number of machines capable of running Leopard to be only 21 million. I don't think we're going to see 95% market penetration on Leopard in the first month, so enjoy the moment while you can.




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Monday, October 29, 2007

Are Quants blowing up our financial markets?

The magazine Technology Review (registration required) has some amazingly wonderful articles for those interested in the fusion of technology and business. One of those fascinating articles showed up in the latest issue titled, The Blow-Up, where Bryant Urstadt lays some of the blame for the credit crunch this past August at the feet of some of my MIT classmates, referred to prosaically as Quants. And while Urstadt has the temerity to include the differential equation for Black-Scholes option valuation, overall the article is a brilliant bit of story-telling for anyone trying to grasp the forces behind today's market spasms. Here's a great example from late in the article:

One trader I spoke with at a $10 billion hedge fund based in New York said that his computer executed 1,000 to 1,500 trades daily (although he noted that they were not what he called "intra-day" trades). His inch-thick employment contract precluded my using his name, but he did talk a little bit about his approach. "Our system has a touch of genetic theory and a touch of physics," he said. By genetic theory, he meant that his computer generates algorithms randomly, in the same way that genes randomly mutate. He then tests the algorithms against historical data to see if they work. He loves the challenge of cracking the behavior of something as complex as a market; as he put it, "It's like I'm trying to compute the universe." Like most quants, the trader professed disdain for the "sixth sense" of the traditional trader, as well as for old-fashioned analysts who spent time interviewing executives and evaluating a company's "story."

High-frequency trading is likely to become more common as the New York Stock Exchange gets closer and closer to a fully automated system. Already, 1,500 trades a day is conservative; the computers of some high-frequency traders execute hundreds of thousands of trades every day.

Linked with high-frequency trading is the developing science of event processing, in which the computer reads, interprets, and acts upon the news. A trade in response to an FDA announcement, for example, could be made in milliseconds. Capitalizing on this trend, Reuters recently introduced a service called Reuters NewsScope Archive, which tags Reuters-issued articles with digital IDs so that an article can be downloaded, analyzed for useful information, and acted upon almost instantly.

All this works great, until it doesn't. "Everything falls apart when you're dealing with an outlier event," says the trader at the $10 billion fund, using a statistician's term for those events that exist at the farthest reaches of probability. "It's easy to misjudge your results when you're successful. Those one-in-a-hundred events can easily happen twice a year."

The events of August were outliers, and they were of the quants' own making. (Some dispute that verdict: see "On Quants") To begin with, quants were indirectly responsible for the boom in housing loans offered to shaky candidates.

Derivatives allow banks to trade their mortgages like bubble-gum cards, and the separation of the holder of a loan from the writer of a loan tended to create an overgenerous breed of loan officer. The banks, in turn, were attracted by the enormous market for derivatives like CDOs. That market was fueled by hedge funds' appetite for products that were a little riskier and would thus produce a higher return. And the quants who specialized in risk assessment abetted the decision to buy CDOs, because they assumed that the credit market would enjoy nine or so years of relatively benign volatility.

It was a perfectly rational assumption; it just happened to be wrong. Matthew Rothman, a senior analyst in quantitative strategies at Lehman Brothers, called the summer a time of "significant abnormal performance"; according to his calculations, it was the strangest in 45 years. James Simons's Renaissance Technologies fund slid 8.7 percent in the first week of August, and in a letter to his investors, he called it a "most unusual period." As Andrew Lo put it, "Unfortunately, life has gotten very interesting." The Wall Street Journal called it an "August ambush."


Now one of the things that MIT taught me is to always ask the question, "What are the assumptions and limits behind systems?" This article hits one of the limits to market modeling and derivative valuation with some of its words. The words that hit me like a ton of bricks were "statistician", "stochastic", and "outliers".

I remember my statistics professor sandbagging my class with one particularly nasty problem set. We dutifully calculated all the appropriate means, standard deviations, and expected outcomes, and yet the experiment he had us model produced outcomes that were wildly different. Smarting from the low marks we all got on that problem set, many of us asked, "Why aren't these answers right?" And I remember the professor's sly smile when he answered, "Your answers would have been right if all these statistical events were independent. They weren't. And when you don't have independent, random events, statistics loses its much of is predictive power."

And that's the moral of "The Blow Up" from last summer: statistics works fine when you have random events. But when programmed trades and options start connecting trades to one another, the events aren't independent any more. We don't see an independent random walk down Wall Street, but rather one dependent on non-random forces, many of which have programmed actions. The assumptions for the models are no longer true, and that makes them produce unexpected results. Boom.

Urstadt's article not only talks about this problem, but provides evidence for it:


Another related explanation for the August downturn was that the quants' models simply ceased to reflect reality as market conditions abruptly changed. After all, a trading algorithm is only as good as its model. Unfortunately for quants, the life span of an algorithm is getting shorter. Before he was at RiskMetrics, Gregg Berman created commodity -trading systems at the Mint Investment Management Group. In the mid-1990s, he says, a good algorithm might trade successfully for three or four years. But the half-life of an algorithm's viability, he says, has been coming down, as more quants join the markets, as computers get faster and able to crunch more data, and as more data becomes available. Berman thinks two or three months might be the limit now, and he expects it to drop.

Said another way, the models only work when no one is using them. As soon as people start using them, they affect the market, and the market changes, sometimes in ways that were never expected by the models. The models break down.

So we're left with an interesting market paradox. Randomness in the market allows hedge fund modellers to rationalize random differences and make money. But the more modellers that do that, the less randomness there is. And because the assumptions behind the models are no longer true, and their outputs are now coupled to unrelated prices, the entire system can become unstable. In financial markets, unstable is bad, resulting in boundary condition events like 1987's Black Monday, where program trading and portfolio insurance created a similar, non-random instability.

So what's this have to do with today's markets? I wrote recently about the trend to create "dark pools" of secret trading information that provide competitive advantage. Allowing trading where prices are no longer visible could break the cycle being created by automated quantitative models. But more likely, it would simply create new risks to financial markets. The difference with dark pools would only be that articles like "The Blow Up" would be much rarer. And that would surely be a loss.


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A modest viral marketing program for Leopard upgraders

I think many Apple watchers are curious about how rapidly Apple's new Leopard OS will make its way onto user computers. We won't be seeing any official numbers for weeks or months, and even then, sales do not necessarily equal installs. And I think many Leopard users are interested in knowing who they can talk to about their Leopard experiences (good and bad), and who is likely to be bored out of their skull by Time Machine, Spaces, and reflective dock minutiae.

So here's a modest marketing suggestion to explore your network of Leopard and non-Leopard friends. We've all seen the famous signatures, "Sent from my Blackberry" and "Sent from my iPhone." But while those lines are so utilitarian, and Leopard is designed to make your life simpler. So why not add a tag line like the following to your email signature if you've upgraded:

Sent simply with the power of Leopard.


If I see an email or posting from someone with that tag line on it, I can feel free to regale them with my new undersea adventures in iChat (Leopard iChat users know what I'm talking about) or how some really hate the new reflective dock. On the other hand, if I don't see such a tag line, I might dial it back a bit and talk about whether the Red Sox are the new Yankees instead. After all, despite the allure of Apple software upgrades, not everyone cares. And if you are going to open up your inner Leopard geek, better to do with with other like-minded people.

The nice thing about signatures like this is that we can count them easily using various mail and text tools, so we should be able to get a pretty good running sense of how popular Leopard has become in just a few weeks. But it only will work if people are willing to identify their Leopard status. I hope people will give it a try; it's on my signature as of today.



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Upgrading to Leopard, ancient hardware edition

It's Monday, and we have three and a half upgrades done. The three upgrades completed in as many hours were:

  1. My 1GHz G4 Powerbook

  2. Son David's 2GHz Core Duo Black Macbook

  3. Son Robert's 2GHz Core Duo Macbook Pro


So what's the half upgrade? My dual 800MHz G4 PowerMac. It's not a supported machine, so the installer prevents me from installing Leopard on it. No problem, I said; I'll just put the PowerMac in target disk mode and use my laptop to install. Sadly, that strategy failed because I upgraded the PowerMac with a PCI Serial ATA controller for dual 300 GByte disks a while back, because the built-in ATA bus doesn't support drives bigger than 120 GBytes. But target disk mode only works with the built-in ATA bus. Oops.

So I've now put my laptop installation into target disk mode and have cloned that image onto my Quicksilver G4. But of course, I don't have all the same files on my laptop and my desktop with much larger disks. So now I have to copy over all the files that I don't carry around with me all the time, like my iTunes and iPhoto libraries and my 20+ years of financial records. It's not a major hardship; it's all just tedious.

Two issues have been slowing this process over the weekend: 1) my Quicksilver has also been upgraded with a USB 2.0 PCI card that seems to annoy the above-mentioned SATA controller and causes occasional kernel panics, and 2) I have caught a cold over the weekend, which is annoying me (and also causing personal crashes. ;-)). Interestingly, the kernel panics are much less frequent on Leopard than on Tiger, which encourages me to get the system upgraded. And, with over a million files on my hard disk to move over, the disk system is getting lots of stress testing. Since I have to configure the system all manually anyway, I'm converting the machine into a dual-booting Tiger/Leopard machine, just so I can run some of my historical games and software. And assuming all goes well, the upgrade should be done in the next day or two.

The process has been harder than I would have liked, but as a stockholder, I can't expect Apple to test and support its latest and greatest OS on six-year-old hardware that isn't even of the current processor architecture. But being a life-long thifty Yankee (meaning a person who lives in the northern US, not a baseball term), I see no reason to let perfectly good hardware go to waste. And if nothing else, I get a little more value out of 35-year-old computer science degree to boot.

UPDATE: I am now updating this post from my dual 800 MHz Quicksilver machine running Leopard (and Tiger if need be -- I set it up to dual-boot). And now that it has finished its Spotlight indexing, it's purring like a kitten and quite responsive. Details tomorrow.




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Saturday, October 27, 2007

Apple officially confirms iPhone sales limits

As I noted yesterday, Apple confirmed today that it is limiting iPhone sales to two per customer and that cash sales will not be accepted. The AP article provides details:

The new policy started Thursday, said Apple spokeswoman Natalie Kerris. Before then, there was no cash restriction and the purchase limit was five per person.

"Customer response to the iPhone has been off the charts, and limiting iPhone sales to two per customer helps us ensure that there are enough iPhones for people who are shopping for themselves or buying a gift," Kerris said. "We're requiring a credit or debit card for payment to discourage unauthorized resellers."


Thanks to a Blackfriars reader for the scoop and to Apple for confirming that they were worried about iPhone stocks for the holidays as well as unlockers.




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Friday, October 26, 2007

One machine up with Leopard



So far so good. I'm now writing this entry on my 1 GHz Titanium Powerbook running 10.5. We'll see how it goes on my dual 800 MHz PowerMac at home tonight. Overall, I like the look, but it does feel a bit more sluggish than Tiger on the G4. However, I note that the system is re-indexing my hard drive for the new Spotlight, so any serious comparison will have to wait until that is done.



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Apple returns to restricting iPhone sales to two per customer

One of my blog readers wrote in with the following very interesting story:

"I am a regular there and was talking with one on the higher-ups when he told me about a change in policy effective yesterday (10/24) regarding the sale of iPhones. Effective immediately, there is a limit of 2 iPhone purchases per person (not, the individual was clear to tell me, per transaction). No cash, no checks. Additionally, they are checking transaction histories on individuals, to insure that they are not violating the 2 per customer limits.

I was told that this was expressly done to cut down on the "unlocker's" market. So far, I was told that this was not much of a problem (in 2 days) but he was expecting real problems this weekend with the increased traffic.

Given that Apple estimated in its earnings call that about 250,000 iPhones have been sold to unlockers, and that Piper Jaffray's Gene Munster estimates that Apple earns about $432 per AT&T activated iPhone, I can see how Apple might want to take this approach. But it does suggest a possible problem for particularly well-heeled Christmas shoppers who may want to buy an iPhone for everyone on their gift lists.

More worrisome from a business point of view, though, is the "no cash" policy. Last time I looked at my US currency, the bill had printed on it: "This note is legal tender for all debts, public and private." I am not a lawyer, but that notice signed by the US Treasurer would suggest that a person or business can't legally refuse to take cash simply because that is your preferred method of payment. Should Apple actually intend to implement this policy in all its stores, I think it will have a hard time making it stick. They can require proof of credit-worthiness for the AT&T contract (and iTunes in fact does that), but I don't see how they can legally refuse cash for the original purchase. (UPDATE: Commenter Jeffrey notes that the US Treasury says that businesses don't have to accept cash for goods and/or services. Who knew? So much for the sanctity of the US Dollar).

All this said, I suspect that these restrictions have less to do with squelching the unlocking business, and more to do with Apple's holiday marketing and sales strategy. If Apple lets consumers buy five or ten iPhones at a time, it runs the risk of 1) depleting limited stocks of iPhones over its critical holiday selling season, and 2) having those resold phones, which get sold for very high prices with possibly buggy unlocking software, sully Apple's consumer experience and brand image. That would be, as people in consumer marketing business would say, bad. Want proof? Ask Nintendo how much fun it was last year not to have stock of Wiis at Christmas.

Despite what seems like an endless iPhone launch, the iPhone has only been on the market for four months now, and Apple's manufacturing capacity is probably still only about 500,000 iPhones a month, if that. With the iPhone launching in Germany and the UK in two weeks and in France in a month and with holiday shopping demand ramping up, the last thing Apple wants to happen is to run out of iPhones for any of its markets.

In my opinion, Apple is just trying to make the most sales to real customers who will generate additional carrier revenue payments and might later become repeat customers of other Apple products. Apple can't do that if it runs out of iPhone stock during the holiday season and disappoints those same consumers. It also can't do that if amateur resellers poison its consumer market. And while I said above that this is just marketing and sales, it's really more than that, because if it gets these strategies wrong, the effects of missteps could dramatically hurt its 2008 iPhone business. And while the policies may seem draconian (and sometimes perhaps wrong), you have to give Apple managers credit for not leaving retail success to chance.

Full disclosure: the author owns Apple stock.




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Happy Leopard Launch Day



It's the Apple fan's equivalent of Christmas Eve in October. Apple's countdown clock is now measuring hours, not days, until the official launch of Mac OS X 10.5. We're doing our final full disk backup before the upgrade here (Never do an upgrade without a full backup to retreat to lest you offend the upgrade gods.), and we're expecting our Family Pack coming from the Apple Store here by 10:30 am. So for us, Apple's countdown clock is running about 8 hours slow.

I'll spare you my rendition of "The Night Before Leopard" (although I am tempted to call out "Now Spotlight, Now QuickLook, Now Spaces and Boot Camp; On Time Machine! On Boot Camp! On, Back To My Mac!" Note to Apple: for next year, we need at least two major Mac OS X features to rhyme.), but I hope those who are upgrading have a great day or evening. For everyone else, just tune out and watch the stock market or the World Series or something, because all your Mac user friends are going to be complete bores for a while. But hey, at least it's a Friday.





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Thursday, October 25, 2007

Apple's payoff on Leopard upgrade Family Packs



John Gruber at Daring Fireball has some great statistics about Apple Leopard upgrade Family Packs, which allow customers to install Leopard on up to five machines in a household. He also has data about which versions of Leopard that his readers are ordering through his Web site:

The links for pre-ordering Leopard are doing well; as of last night, 579 orders have been placed by DF readers. One thing I find interesting is the breakdown between single-license copies and five-license “family packs”: 408 and 171, respectively.

What’s interesting about this is that the single-computer license isn’t enforced in code by the operating system. (Or at least that’s been the case with Mac OS X 10.0 through 10.4.) And, I suspect, most DF readers are aware of this. Which means many readers are doing the right thing simply because they’re honest. I have no idea if this breakdown is representative of the Mac user base as a whole, but if it’s even close, these family packs are a huge success for Apple.

So being a geeky numbers guy, I'm curious. These family packs are a huge success, but how huge? I'd like to know if we can actually make a business case that Apple Family pack strategy actually benefits Apple and its shareholders. So lets run some revenue numbers using John's breakdown.

According to Apple's earnings call Monday night, there are 21 million Mac owners who can run Leopard. My assumptions are as follows:

  1. Leopard buyers has the same 30% family pack/70% single-user proportions John notes,

  2. About 66% of Macs that can run Leopard overall will upgrade to Leopard using a combination of single-user or family pack offers. If only an unprotected single-user version is available, we assume that number would rise to about 75% because roughly half of the upgraders who buy family packs would buy multiple single-user licenses instead. The rest, however, would simply make copies off the unprotected single-user disk to cover their multiple computer households.

  3. Apple receives an average price of $109 for a single-user version and $189 for a family pack (some buy retail, others buy at discounts)


After running the numbers through the ENIAC (actually Apple Numbers) here, I come out with the following results for the two scenarios:

Family Pack license scenarioSingle user only scenario
Total available customers21,000,00021,000,000
Percent purchasing upgrades66%75%
Upgraders purchasing Family Packs4,158,0000
Upgraders purchasing Single Licenses9,702,00015,960,000
Family Pack Revenue$785,862,000$0
Single Upgrade Revenue$1,057,518,000$1,739,640,000
Total Upgrade Revenue$1,843,380,000$1,739,640,000
Family Pack Upgrade Strategy Value$103,740,000N/A


By providing its customers the option of buying multiple licenses in a family pack, Apple reaps about $103 million more in revenue than if it went with a "We only sell single license units with no quantity discounts" strategy, despite the fact that would sell roughly two million more single-user upgrades if it didn't offer a family pack. Of course, this doesn't take into account the greater good will Apple gets from its customers from trusting them.

The bottom line: Not using copy protection (which tends to offend loyal customers while doing little to combat actual piracy) and providing reasonable upgrade options is not only good marketing; it's good business. Apple's Family Pack licensing strategy will increase its upgrade revenue about $103 million or 6% over the $1.8 billion Leopard upgrade cycle. And in the process, Apple will cement customer loyalty to boot. It's just one more proof point that treating customers with respect and trusting them to be honest pays.

Full disclosure: The author owns Apple stock. Model depends on assumptions and prices stated above and may not be indicative of your actual driving. Prices do not include taxes, title, or delivery. Your mileage may vary. Always wear your seat belt.




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Storage Wars: Sun ZFS versus Network Appliance



Tom Yager over at InfoWorld claimed today that ZFS is close to perfect. Frankly, I like it too, especially because it offers both a simpler and more powerful foundation for storing information on everything from desktops to high-end servers.

But some aren't as convinced; apparently Network Appliance (NetApp, NASDAQ symbol NTAP) is suing Sun, claiming that the open source ZFS software infringes upon patents they own. But there's more to the story here. Why? Because many elements of Sun's technology are also in NetApp's products (the Network File System, being a notable example) and widespread adoption of ZFS might also make NetApp's storage systems increasingly irrelevant. Sun CEO Jonathan Schwartz has responded, noting that it has just as much interest in protecting intellectual property, noting that Sun is indemnifying its customers and its developers on this point. And just to make things interesting, Schwartz plans to file a reciprocal suit to enjoin NetApp from selling any of its products -- permanently. Oh, he's looking for financial damages too. Touche.

This battle is about more than storage. It's about whether the commercial interests and patent portfolios of corporations in markets should trump community and open source development interests, who may or may not have legal resources to defend their intellectual property. We've seen similar battles between Microsoft and Linux vendors and SCO versus IBM, and to date, frankly, the open source folks have been winning most of the battles when and if they get to court. The only problem: it can take years and millions of dollars in legal fees for them to do so.

Kudos to Sun for fighting to allow nearly any technology vendor, including Apple, to use its "near-perfect" ZFS technology. Just as New York's public Central Park makes all the private property around it more valuable, public open source communities and foundational software only enrich innovation and the markets for new products. Further, the more NetApp tightens its grip on its patent portfolio, the more free Sun ZFS systems will slip through its fingers. Good luck Jonathan Schwartz; may the open source be with you.


UPDATE: NetApp's David Hitz has a rebuttal point of view that you can read here. And to be fair to them, they don't seem to be angling for world domination through patent portfolios, contrary to Jonathan's assertions. However, at the end of the day, I stand by my assertion that all companies including NetApp would benefit from ZFS being widely deployed and accepted; ZFS being available is not going to replace or diminish NetApp's existing WAFL base. It would be far better if the two companies settled the dispute out of court. Let's hope they do.

Full disclosure: At the time of writing, the author has no positions in Sun, NetApp, or any open source software company. He does own Apple stock, and Apple is using ZFS in its new operating systems.





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Wednesday, October 24, 2007

Verizon discovers the two-way Internet

I'm amazed it has taken this long for the carriers to discover there's a market for these services, but Verizon has started sampling 20 megabit symmetrical Internet service for consumers in some regions of New York, New Jersey, and Connecticut. What does that mean? It means that consumers will be able to upload videos to YouTube and Flickr as fast as they download them, instead of it taking 4 to 10 times longer.

I'm a big fan of symmetric Internet access, because it allows anyone to be both a producer and a consumer of content. But the marketing aspect of this is probably more important to Verizon than the technical one. Why? Because while it's easy for Verizon to roll out a symmetric service on it's all-fiber FiOS infrastructure, that capability will be very hard for cable companies and DSL-centric carriers to duplicate on copper-based last-mile links. The result: Verizon gets serious differentiation for its products and a unique selling proposition for its sales reps as it rolls out FiOS service.

My prediction: this symmetric 20 Megabit FiOS service is going to be a big seller for the high-end, tech-savvy media junkies who pay the most for Internet service and generate significant consumer Internet profits. But more importantly, both the relatively high speed and symmetry are going to be marketing bludgeons for sales people to use against Verizon's competitors.


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Behind the Apple money machine

I've been poring over Apple's fourth quarter earnings call transcript at Seeking Alpha, and I found this question and answer sequence interesting:

Katy Huberty - Morgan Stanley
Thank you. Europe out grew the U.S. now for four quarters in a row. Is that sustainable or are there some currency factors that are showing up in the numbers?

Timothy D. Cook
Europe did have excellent growth. In fact, year over year, we were up 37% in revenue and 47% in units, as you combine the retail stores with the channel results.

In terms of Mac units, this is over four times the IDC projected gain for Western Europe, and so we are thrilled with the result. Europe did not have the typical lull in August that we have seen. The iMac announcement and then followed by the iPod announcement early September was enough to overcompensate for that.

We factored our view of the future into the guidance that Peter provided earlier.

Katy Huberty - Morgan Stanley
And then just quickly, Peter, are there any nuances that will show up in the model as non-U.S. revenues become a larger percentage of the business, as it relates to either the margin profile or tax rate over time?

Peter Oppenheimer
Well, I’m not sure how to really answer the first part of your question, but in terms of the second part, generally for most U.S. companies, growth in foreign earnings is a benefit to your taxes, your U.S. tax rate.

The US dollar has been weakening against the Euro for over a year now, and that combined with 14% to 17% European VAT taxes have resulted in iPhone prices in Europe that are 40% to 60% higher than they are in the US, when converted into dollars. Combine that with the higher-then-US European sales growth and the reduction in US tax rates due to foreign income, and suddenly, I those forces driving Apple's 17% net income rate become a lot more clear.

I also found a couple more interesting numbers in the report down in the little-noticed categories of Peripherals and other Hardware and Software sales. Peripheral sales were about $20 million higher than I had forecast, while Software sales were more than $100 million greater. Those two little-noticed categories contributed more than $2.75 billion in revenue in Apple's fiscal year 2007. Given that total iPhone sales are so far less than a quarter of that total, it's a category that perhaps deserves a bit more notice.

One final note: In these new days of subscription accounting, Apple investors should be tracking Apple's balance sheet quarter to quarter. At the end of June, Apple's assets were valued at $21.6 billion, with $13.8 billion in cash and short-term investments. As of the end of September, those numbers had swelled to $25.3 billion in assets with $15.4 billion in cash. Said another way, Apple is growing its assets at a rate of just under 6% a month. That's an annual growth rate of 92% a year. And with a cash machine like that, it's no wonder the stock price continues to go up.

Full disclosure: the author owns Apple stock.


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Tuesday, October 23, 2007

What is with those RIM guys, anyway?

OK, so you'd think after rising 11 points (6.8%) on stellar earnings news, you'd think Apple would be the darling of the stock market news today. But no. Research in Motion, maker of the Blackberry, had to announce that it signed a deal to offer the Blackberry in China, pushing it up 9.8% or 11 points as well. Sheesh. Some days Apple just can't get ahead. But to be fair, its new $162 billion market capitalization did pass both IBM and Intel today, so Apple really can't complain.

Seriously, though, congratulations to RIMM shareholders. When I look at their chart and the fact that RIMM stock has nearly tripled in the last 12 months, AAPL stock, which has only doubled in that period, looks like a downright conservative investment. But RIMM should watch out -- Apple sold about a third as many iPhones as RIM did Blackberries last quarter. And if Apple's efforts with Salesforce.com bear fruit (no pun intended), RIM could see some real competition for business customers, especially the small ones RIM has targeted for future growth.

Full disclosure: the author owns Apple stock.



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Monday, October 22, 2007

Apple results off the charts -- and there's more to come

The earnings press release is up on the Apple site. I've just started looking though the stellar results, but two results jump out at me right away:
  • $2 billion in deferred revenue. We knew that iPhone and AppleTV revenue was going to appear on Apple's balance sheet instead of on its income statement. And sure enough, Apple has nicely broken out its deferred revenue in a separate statement which you can see here. The interesting bit: Apple added $600 million in deferred revenue for iPhones and AppleTVs since last quarter. I don't yet understand the difference between current and non-current deferred revenue; perhaps someone can enlighten me or I'll read about it on the transcript from the earnings call. But no matter how its accounted for, the numbers are big.

  • Upward guidance on revenue and earnings for the holiday quarter. Steve Jobs said in an interview with the New York Times today that he believed Apple has the strongest product lineup for the holidays ever. Today's projection says that Apple is putting its mouth behind that money: it's projecting it will earn $1.42 on $9.2 billion in revenue in the upcoming quarter, surpassing analyst estimates by far. And given the company's tendency to keep expectations in check, you can bet that there's upside to that forecast.


Bottom line: You know a company is doing well when it exceeds even the most optimistic expectations. Apple is in that zone now; the stock is up 13 points in the aftermarket already. With this start and only four days to the Leopard release, it's going to be a very exciting week.


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Four Apple tidbits prior to Apple's earnings today.

We put our Mac OS X Leopard Family Pack order in this weekend, so we're looking forward to getting our DVD on Friday to upgrade our home laptops and desktops. However, my son Robert pointed out to me that Mac OS X 10.5 Leopard is rumored to not be supporting Classic applications any more. Given we still have a few G4-based machines and some old games that go back to 1985 that currently still run (!), that would certainly mark the end of an era for us should it turn out to be true. So we're hoping to install Leopard as a dual-boot system on my old dual-800 MHz G4. Oh, and lest anyone note that Leopard won't install on that machine because it doesn't meet the minimum requirements, have no fear -- we intend to install it by mounting its disks via Firewire to a faster machine. We'll let you know how that goes. Given that we've had great experiences installing Mac OS X on other old machines, I doubt this will be any different.

Meanwhile, data like this from Harvard University showing that Macs now comprise 30% of its computers on average seems to lend credence to the idea that Apple is going to report blow-out Mac sales in its earnings call today. We've had similar data in our model for more than a month now, so our prediction for the call is for earnings of $0.97 a share, and $3.98 for the year. Whether that meets or exceeds investor expectations is anyone's guess. Despite it being a blow-out, I expect that the share price to be up and down big time over the next 24 hours. Such is the life of the stock market.

And finally, Walt Mossberg has a terrific article today titled Free My Phone where he argues that consumers should have the right to use any handset and any handset software on any wireless network here in the US, just as they do with wired phones. This is not a new idea -- Google has been pushing a similar idea in its bid for 700 MHz spectrum, but it's terrific to see Mossberg bringing his consumer advocacy into this public debate. I agree with his point of view 100%.

Finally, I hope to get a blog entry up this evening after Apple earnings are announced. However, if I don't, I won't be able to post an entry until Tuesday afternoon because I'm doing a major client presentation in Boston Tuesday morning. My apologies; I'm sure there'll be some juicy data to discuss.

Full disclosure: the author owns Apple stock (still).

More full disclosure: I recognize that it may be annoying to regular readers to have to re-read the above disclosure on most of my posts. Perhaps this explanation will help: some of the syndication networks that carry my articles require the disclosure statement to ensure that I have no hidden conflicts of interest (there's that private versus public data thing again). I consider the disclosure to be important so that readers can properly weigh my opinions, so I will continue making them, considering them one of the prices of broad distribution. But I do apologize for the inconvenience to regular readers.









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"Dark pools" of competitive information


Tim O'Reilly has written two fascinating articles recently on the role of Web 2.0 social networking sites and herd behavior in hedge funds and business. Part 1 is Facebook, the Quant Fund Meltdown, and the Techmeme Leaderboard; Part 2 is More on Techmeme and Financial Markets. To grossly simplify his argument, O'Reilly's claim is that technologies like Techmeme and real-time financial data create a herd behavior where everyone chases the same stories or opportunities. You can see the phenomenon on Techmeme easily; someone breaks a story like "Apple To Ship Mac OS X Leopard On October 26", and within a few hours there are literally fifty commenting stories on that same idea. Everyone ends up talking about the same ideas. And the same thing happens in hedge funds -- as soon as a fund identifies a pricing inefficiency in the markets, it becomes in everyone's interest to exploit it. The result: everyone chases the same opportunity, and it disappears to everyone's loss.

What I find most intriguing is the concept currently the rage on Wall Street of dark pools of liquidity, where price and trading information is hidden. The problem with that technique: when there's no transparency in prices or activities, how do you know the price is the correct one for the underlying information? The answer: you don't. That was one of the root causes behind the credit crunch this summer and promises to be a topic for financial mavens -- and possibly regulators -- to address for months and years to come.

Yet, I think that O'Reilly has hit on a business trend that extends far past Web 2.0: markets increasingly value businesses by those things that make them unique or different, not by the things that make them the same as their competitors. Public data, processes, and knowledge, by their very nature, are rapidly integrated into the woof and warp of the marketplace. Private data, processes, and knowledge, allow the market to identify the unique value of a business, while that business can shift and move to opportunities the market hasn't yet recognized. Private data can be anything from KFC's secret recipe for fried chicken to the proprietary card fraud detection systems at American Express. Privacy means differentiation, and differentiation is necessary (but not sufficient) for business success.

Private data also prevents the business from succumbing to market commoditization. After all, if a business has exactly the same offer as its competitors, the only marketing differentiator it has to work with is price. And when competitors lock horns in a commodity price war, they're locked in a race to failure and bankruptcy, not success. Need proof? Ask Dell how much fun the commodity PC business has been over the past ten years.

This fact is why there's been such a hue and cry about disclosure requirements for public companies; the more public information they release, the lower their business advantage. And it's also why the hedge fund business is very concerned about government regulation. It's not the government they actually fear; most fund managers don't think the government could understand their strategies to say nothing of acting on them. They worry that public disclosure of their private data would erase their trading and money-making advantages over their competitors. And you know what? They're right.

Regular readers know that I believe private data -- outright secrecy might be a better phrase -- is at the root of Apple's success over the last eight years. No one I knew of had any idea that Apple was working on a music player when the iPod was introduced in 2001. Apple's worked on its Macintosh transition to Intel processors for five years before it was made public, yet I would argue it fundamentally reshaped its computer business. Apple was developing the iPhone for two and a half years before Jobs announced it in January 2007. Time and time again, Apple has generated immense publicity and buzz about its products simply because at the time they were introduced, no one knew the market opportunities it was attacking. And since its competitors required years to respond to those opportunities, Apple has captured significant market share in each market it has attacked. Yet, if Apple had publicized those efforts before launch, those initiatives would never have seen such success.

O'Reilly recaps what this means to the Web business at the end of his second article:

What does this tell us about the future of Web 2.0? It tells us that the pendulum is going to swing from public data to private. I'm not sure when this will happen, but I'm quite confident in the trend. (If you see signs of areas where this is already happening, be sure to let us know.) There's still a LONG way to go in making all the world's information accessible, but maybe one sign of the maturity of the Web 2.0 trend will be when more companies are started on the premise of keeping information hidden than on building publicly accessible repositories that grow through user contribution.

The only thing I can add is that this isn't just a Web 2.0 effect; the Internet's free flow of business information is reshaping every business on the planet. IBM has probably done the best job of articulating this issue with its "What Makes You Special?" series of ads and case studies around innovation. But the real leaders will likely be those that aren't in IBM's ads. Why those companies? Because their competitive advantage will be a secret, not a case study.

UPDATE: for a contrary view claiming that Wal-Mart's recent swoon is the result of too much IT differentiation when it should be using commoditized software and systems, see this recent article by Nick Carr at his Rough Type blog.

Full disclosure: the author owns Apple stock.


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Friday, October 19, 2007

The Google Internet index



Google announced earnings last night (Seeking Alpha transcript of the call is behind the link). Google blew out its quarter. Oh, and the sun came up today too.

Now, I have to admit, when Google originally went public in 2004, I was a skeptic. After all, how could a company that had a nice search engine be worth $30 billion? Boy, was I wrong -- today, Google's market cap is about to cross $200 billion. So much for Google's value being obvious in 2004.

But today, I suggest it's worth every penny of that $200 billion. And in fact, I'm going to repeat my suggestion from this past summer: I think Google nowadays makes a pretty good Internet Index; think of it like the Dow Jones Industrial Average, but instead of stock prices, it tracks Internet business activity. When Google revenues, earnings, and stock price are up, the Internet business is good. If Google's earnings go down (hasn't happened much), that's a good time to start shorting Internet positions. My simplistic justification: If Google is making more money, the Internet business has to be pretty healthy, since most of their traffic and revenue comes from other sites and companies. if Google is making less money, you can be pretty sure everyone else is too.

Now I know lots of people are going to say, you can't just use Google to measure the Internet; Other companies have slices of the Internet pie too! To my mind, though, that's like saying that there's more to great chocolate mousse than just chocolate. There is, but if you took the chocolate out, it wouldn't be the same.

Here's an experiment: try going an entire day without using a single Google service. No Google searches, No Google Maps, No Google Finance, No YouTube, No GMail, no Google Mobile, no Google Docs, Blogger, Picasa, etc. Keep a tally of each time you find yourself discovering you either want to do a search or use one of those Google services throughout the day. At the end of that day, charge yourself $0.05 or each tick in your notebook. Then multiply that final value by a billion Internet users and 365 days a year.

You've just defined the value of Google. Maybe that $200 billion market capitalization isn't so crazy after all.

Full disclosure: the author owns a few shares of Google stock.



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Thursday, October 18, 2007

Racing against deadline: Thursday Apple news

Today, I'm under the gun to deliver a presentation and some analysis reports to a client, so I'm just going to point readers at a few interesting bits in the news overnight instead of writing any detailed analysis. In no particular order, these are:


Clearly, next week is going to be a huge Apple week, beginning with its earnings announcement on Monday and ending with the Leopard release on Friday. Because of client commitments, I haven't been able to release the new Analyzing Apple report yet, but expect to update that forecast soon. However, I will say that my current numbers and price forecast for Apple stock are nearly identical with the forecast in our last report, iPhone Summer Heat. Therefore, if anyone is trying to figure out if Apple stock is a buy or sell based on my analysis, the price prediction and forecast in that report is, as they say in politics, "still operational".



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Wednesday, October 17, 2007

Apple launches third-party iPhone development -- and a more secure Leopard

Steve Jobs has released another letter to customers (no separately link is available yet -- it's on Apple's hotnews site, and this one's a doozy. Apple is now promising an SDK for the iPhone and iPod touch for February launch, but has warned developers that it will have features to protect the iPhone platform from viruses and malware.

When I was looking through the 300+ Leopard features last night, two of them leapt off the page at me:

Tagging Downloaded Applications

Protect yourself from potential threats. Any application downloaded to your Mac is tagged. Before it runs for the first time, the system asks for your consent — telling you when it was downloaded, what application was used to download it, and, if applicable, what URL it came from.

Signed Applications

Feel safe with your applications. A digital signature on an application verifies its identity and ensures its integrity. All applications shipped with Leopard are signed by Apple, and third-party software developers can also sign their applications.


Those features jumped out at me because the very first Forrester report I wrote in 1996 was about desktop security and the threat of active content. In that report, I wrote that if you want a truly secure platform, you need both app signing and run-time validation to guarantee that you only run trusted code. I further noted that Windows would never become a truly secure platform without these features. The fact that these features they are built into Leopard says that even as Macs gain in popularity, Apple has no intent of letting its OS or its iPhone become an easy security target. And these two features are worth the entire cost of upgrade and more to anyone worried about desktop and server security.

Of course, this is going to make life complicated for Leopard users for a while. Why? Because there are thousands of Mac OS X applications that users will want to run, but that aren't signed today. Some will never be signed. That means that users will have to designate each of them as trusted the first time they run them. But given that Leopard actually remembers the trust state of each application, users will only have to do that once for each application. And given that most users only run an average of between 10 and 100 applications, it's a small one-time price for a more secure system. And it's better to start now than waiting until there are 100 or 200 million Leopard computers in the field.

It's nice to see Apple not only talk about platform security, but to actually do something about it. And the fact that the millions of iPhones in the world will be both 1) open and 2) secure because they use the same secure foundation says volumes about their bright future.

Nice work, Apple.

Full disclosure: The author owns Apple stock.


P.S. This announcement confirms my speculation earlier this month that the iPhone is a Leopard device and requires Leopard development tools.

P.P.S. Please note that Apple's February launch date for the SDK means that top developers will have had the full six months of cleansing karmic meditation Steve Jobs mentioned would be required today.


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Unlocked iPhones in France?

The Register has an interesting tidbit about Orange's deal to sell the iPhone in France:

French law will require Orange to offer unlocked handsets as well as ones locked to their network
:

French law prevents carriers from tying handsets exclusively to their networks - consumers have to be able to move to a different network provider and take their phones with them. The upshot is that Orange will sell a locked iPhone for €399 alongside an unlocked model for a price that's yet to be specified by either party.


The big question is what the price of carrier freedom will be. My bet: an unlocked iPhone will cost €699 or €799. Why? Because Orange will have to pay Apple about €240 that Apple would have received over time from its cut of Orange the locked Orange service contract. And since Orange may never see the customer again, it needs to make a profit on the sale as well. I don't know how much Orange needs to make on an unlocked sale to make it worth stocking the phones, but the range from
€60 to €160 seems reasonable. According to the article, we'll find out in November before the iPhone goes on sale in France on November 29.




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Fake Steve Jobs provides karmic guidance on EDGE versus 3G



Steve Jobs wrote last night privately to expand upon his public praise of Blackfriars' Monday article noting that EDGE versus 3G matters less than you think. In his private email, Steve notes that while my technical explanation was a nice cover, the real reason that EDGE works so well with the iPhone uses clear tantric channels on the ATT network that aren't available to phones that have a less pure karma. He also said that the reason that third-party applications weren't being allowed on the iPhone yet was because Apple requires all software developers to undergo at least six months of cleansing chakra meditation before they can be certified to be worthy of iPhone development. We're pleased that Steve cleared that up for us, and we now feel suitably enlightened.

Oh, and Steve, feel free to link directly to the Blackfriars blog in the future; the more direct the link, the better the linking karma. Namaste.





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Tuesday, October 16, 2007

Stop the "Sue Apple for cutting prices" madness

I'm finding it hard to believe my eyes, but when reading the comments over at Ars Technica about how Apple's iTunes is offering more iTunes Plus DRM-free music for $0.99, one sub-meme that seems to keep popping up is that people should sue for refunds.

Excuse me? Do people sue Kellogg for refunds when Kellogs' Cocoa Krispies go on sale at Shaw's for $1.88 instead of their regular price of $3.99? That price cut is more than 50%, whereas Apple's reduction of $1.29 to $0.99 is only 25%. And people want to sue because they are going to pay less? Is this still America?

I, for one, welcome our new $0.99 DRM-free music masters. And there's clearly a marketing opportunity for Apple to institute a member-based price protection scheme for its customers similar to that provided by Amazon or Target (By the way, those of you who like to take advantage of those price-protection policies should know about sites like PriceProtectr.com, which I discovered through DealMac.com.). But meanwhile, I think Apple customers should get used to Apple products decreasing in price. It's certainly happened with every Apple product I've owned, and I expect it to continue happening. And even with those "losses", they'll still have a lot more money in their pockets than hiring a lawyer.

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Following up on why EDGE versus 3G matters less than you think

After being Slashdotted, yesterday's article regarding EDGE and 3G certainly stirred up a lot of commenting and controversy. I thought I would try to clarify some points today that came up in comments on the article.

First and foremost, I want to point everyone to the title of the article: Why EDGE versus 3G may not matter as much as you think. Despite comments to the contrary, I didn't claim that EDGE was better than 3G; I simply said it didn't matter as much as most people thought. Unless we agree on that initial point, further argument probably won't convince anyone of anything. And I completely agree that EDGE is quite slow from a bandwidth perspective. It is. Really.

What I did say, though, is that bandwidth doesn't matter as much as most people think. Specifically, I made the point that user experience is going to depend just as much on 1) latency, 2) error rates, 3) phone processor speed, and 4) power consumption. And not all of these characteristics improve with higher speed networks. In fact, at least one of them -- power consumption -- gets worse. And to the commenters who questioned whether error rates do in fact go up with higher bandwidth, that question a good one, but too complex to discuss here; a good starting point for discussion is Claude Shannon's Mathematical Theory of Communication, but that's just a beginning.

One of the issues that makes this a challenging topic to write about is that while there is only one EDGE, there are many 3G networks and layers, including UMTS, W-CDMA, CDMA2000, EVDO and others. Further, all those alphabet soup standards have real world implementation warts when they get actually built. Some networks have great latency characteristics, and others have not so great ones ones. So it's necessary to be specific about the comparisons.

My understanding is, in fact, that UMTS networks specifically have much better latency than EDGE (I don't have a UMTS network here to play with on a daily basis, but that's what I've read). However, they are also quite wideband technologies, using 5 MHz channels, which has meant that US carriers have had trouble getting spectrum for them, and hence, we don't see a ton of UMTS here, except in major urban areas where carriers have been able to buy additional spectrum. We do, however, have some HSPDA (which, to be clear, is a type of 3.5G version of UMTS) in major cities like New York, and on those networks, latency runs anywhere from 150 to 250 milliseconds. To put that in perspective, the average WiFi network provides latencies on the order of 1 to 10 milliseconds. One commenter did point out, though, that I haven't measured the latency of the EDGE network. Your point is well-taken, and I intend to do so soon.

I also have no direct experience with the Verizon EVDO network since I'm not a subscriber, so I can't compare its latency or error characteristics. Overall, I"m a big fan of spread spectrum systems because they manage to multiplex data streams in much better ways. That said, I'm a GSM user because that's the dominant standard and it's not going to change any time soon.

However, the most important point I want to make is the one I made in yesterday's article and has nothing to do with technology: obsessing about 3G bandwidth in the absence of consumer use and applications makes no sense. The reality is that ordinary consumers use very few high-bandwidth applications of any kind for regular communication. Even the high speed video streaming pushed by the likes of Verizon and ATT is of no interest to 75% of consumers. Instead, what consumers do use is a lot of applications that demand an always-on, fairly low-latency network. Examples of that include phone calls, email, instant messaging, Web browsing, VOIP, Google maps, you name it. Any company, not just Apple, who can figure out how to deliver great experiences on low-bandwidth networks, has a huge advantage over those that require 3G because 1) they have a much larger addressable market, and 2) their service can get used in more places for years to come. And no matter how much we may argue about the various technical merits, that market reality isn't likely to change within this decade.




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Monday, October 15, 2007

A sign of the times

My son points out to me this evening that Steve Jobs' Wikipedia entry is longer than both Bill Gates' and Machiavelli's. I'm not sure what how it got that way, but I'm sure the end justifies the means.


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Why EDGE versus 3G matters less than you think

We've all read articles about why the iPhone won't sell because it doesn't boast the latest and greatest 3G technology, which can transmit data at 1.8, 3.6, 7.2, and in some places, 14.4 megabits per second. Instead, Apple chose to go with the more ubiquitous EDGE system, which tops out at 0.2 mbits per second here in the US, and presumably will do the same in the UK and Germany when the iPhone launches there next month.

But the question left unasked as been, "Does 3G really improve the user experience dramatically?" Most pundits would reply, "Well, of course Internet experiences improve with higher bandwidth. That's why the world went broadband." And if the pundit is having a bad day, they'll add "Duh."

Funny thing though. They're wrong. Bandwidth doesn't affect the mobile phone experience nearly as much as most people think. And in some cases, high bandwidth Internet is actually worse for the user than a low-bandwidth one.

How can this be? Because:

  • People confuse network bandwidth with latency. Think of latency as how long it takes bits to go from the server to your phone, while bandwidth is how many lanes of highway those bits can use to get there. Because mobile phone networks use narrow-band radio signals, their latency is on average 2 to 10 times that of a wired network. And because of the way the Web HTTP protocol works, the quality of a Web user experience depends much more on low latency than high bandwidth, because Web pages typically contain lots of different elements such as pictures, ads, and widgets coming from many different sources. The result: loading Web pages on a 3G phone may actually take about the same amount of time as a phone loading those pages over an EDGE network because all the network time is spent setting up and tearing down connections, not actually sending big amounts of data. And so far, most carriers have preferred to optimize bandwidth at the expense of latency. Why? Because it's more marketable (see erroneous analyst quote above).

  • High bandwidth radio networks are more error-prone. Because of the sophisticated signaling needed to do high-data rate transmission over narrow-band radios, higher bandwidth networks don't do as well in real-world radio environments as a lower speed network will. Multi-path interference, doppler frequency changes, and radio noise disrupt high-bandwidth signals more than low. And since phones using TCP connections -- the dominant connection type used in Web browsing -- have to retransmit data that is corrupted by errors, even an error rate only a few percent higher will dramatically slow down Internet experiences.

  • Phone processors and software don't necessarily keep up with fast data transmission. I noted this phenomenon when I compared my Nokia E61i with the Apple iPhone. Despite the Nokia's 3G and WiFi network capability, the phone actually felt significantly slower than Apple's iPhone on the same networks. Why? Because the Nokia processor/OS/software combination was simply slower at moving bits than the iPhone is. The result: even with a 54 megabit WiFi network -- a network several times faster than the fastest 3G network -- the Internet experience on the Nokia was significantly slower and poorer than that of the iPhone. The phone just couldn't keep up.

  • High bandwidth networks drain batteries. Power consumption of any chip increases according to the frequency. That means if you want your network to go 10 times faster, the chip inside your phone managing that network consumes 10 times the power that a slower chip would (It's not quite that simple because of different signaling techniques, and in fact there are additional power losses due to frequency that aren't in the standard dynamic power equation, but the overall principle still holds). This is why Steve Jobs has decried the power consumption of 3G networks -- that speedy signaling actually matters in a battery-powered device. So why don't European users see this power-draining effect today with their phones? Well, check out the Nokia message boards and you'll find that they do experience some of the effect, but that effect is diminished by the fact that Europe has a much higher density of cell towers than the US does. And since cell phones decrease their radio power output when signal strength is high, the frequency effect of 3G transmission is partially offset by the fact they can use lower power amplifier settings for their radios.


The bottom line: Carriers, analysts, and consumers alike have an unhealthy obsession with bandwidth to the exclusion of other important factors that affect the user experience with a phone. Just as the computer industry finally figured out that more gigahertz wasn't necessarily better for users, the phone industry is going to discover the same point (and for the same reasons). And companies that use limited bandwidth in smarter ways to deliver a better user experience -- like Apple -- are going to have a leg up on their competitors no matter what network they use. Let's hope it doesn't take phone carriers as long as it took the computer industry to figure out they need to sell something other than technology to win over the average consumer.

Full disclosure: the author owns Apple stock.







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Friday, October 12, 2007

Keynote: the presentation tool of Nobel prize winners



The big news this morning is that Al Gore is sharing the Nobel Peace prize with the UN Intergovernmental Panel on Climate Change. Despite many claims that Gore's Academy Award-winning movie, An Inconvenient Truth, was a PowerPoint presentation, Al Gore, Davis Guggenheim, and Lesley Chilcott actually developed the visuals for the presentation and movie entirely in Apple's Keynote presentation software. The high-definition Keynote output was then exported directly to Avid software that was used to make the final film.

This may be one of the first times that a commercial software presentation tool has played such a prominent role in raising awareness of a global issue. Congratulations to Al Gore and the entire movie production team for thinking differently about this project and the tools they used. And kudos to the Nobel Committee for recognizing their tremendous achievement in raising the global awareness of this problem.


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Thursday, October 11, 2007

Fall Apple morsels

I'm heading off to a dentist appointment in a few minutes, but I felt I had to at least acknowledge a couple articles that caught my eye.
  • Glenn Fleischman at Tidbits.com claims thatApple is nearing a third-party developer announcement for the iPhone. Particularly interesting is the claim that certification of programs will primarily be for programs that want to use the EDGE network and not for those using WiFi. Intriguing -- and it makes some sense.

  • Marketwatch claims that Swisscom is reportedly keen on launching the iPhone in Switzerland. If that's true, it would add momentum to Apple's planned November European iPhone launch.

  • ifoAppleStore.com has new information on an Apple Store plan I hadn't heard about: a multi-story Apple Store across from the Empire State Building in New York City. Of particular interest is the fact that an existing building there would be demolished and a completely new building erected with a multi-story Apple facade. Personally, I think that would be a high-traffic location that might rival the 5th Avenue store for visitors.

  • It's quiet -- too quiet. Once again, Apple appears to be back in a very quiet mode leading up to its earnings announcement on October 22. No press releases, no special events, no comments. We know that these moments of quiet are like observing a duck swimming -- while the top looks very quiet and placid, there's a lot of paddling happening out of sight. And with the Leopard launch expected at the end of the month, I expect there's a lot of Apple paddling indeed nowadays.



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