News flash to reporters and analysts: Apple doesn't do loss leader products

I read two articles this morning from mainstream news sources that made me realize most people writing about Apple don't really understand its marketing and how it sells its products. Secondly, both articles show a remarkably poor understanding of product businesses overall.

First, I read TheStreet.com claiming that because of the upcoming recession, Apple should slash prices on iPhones to guarantee it makes its sales goal of 10 million phones by the end of 2008. The second bit of fiction I read was from Silicon Valley Insider claiming that at current prices, Apple is subsidizing Apple TV purchases through movie rentals, because iSupply claims the parts cost of the 40 GByte device is $237 and the device now sells for $229.

Based upon these articles, an uninformed reader might conclude that Apple has a new strategy of selling loss-leading devices and relying on revenue from services to keep its profits aloft. That uninformed reader would also be horribly wrong.

Read my lips: Apple doesn't sell products at a loss. Why? Because its a very risky and largely unprofitable marketing strategy, for one. And even worse, it would undermine the marketing value of their products that they have labored for decades to build up. Frankly, it would be a stupid move, and Apple isn't stupid.

So where do these analyses claiming that Apple is doing stupid marketing come from? Well, theStreet.com seems to lay the blame at the feet of "some analysts", although the quotes cited are more muted about price cuts than the title implies, only claiming that there is room for a price cut. And in an attempt to balance the coverage, the second page of the article does note that the sales to date don't imply there's any lack of demand:

"The 4 million phones sold in the first six months is also double the initial run rate of the Motorola Razr," says Abramsky. "From our perspective, the early performance of the iPhone is nothing short of remarkable relative to other historic phone launches."

So if the iPhone sales are arguably the best phone launch in history, why does Apple have to cut prices? To become like Motorola (given Motorola's trajectory, I don't think that's a good idea)? And why is $399 so high a price for an 8 GByte Apple product when 8 GByte Nokia N95s are selling for $599?

What about the Apple TV article? Well, the key to that article is to read the footnotes on those parts costs. While iSuppli does claim that the parts and manufacturing cost of the 40 GByte Apple TV are $237, the analyst specifically notes that "the processor is a big unknown for us." I argue that the entire motherboard/processor combination, which iSuppli costs at $138.10, is overpriced by about 50%. If I surf over to NewEgg.com, I can find Intel micro ATX motherboards with 1.8 GHz processors and graphics controllers for $67; the Apple TV processor is only a 1 GHz Crofton, so its price is presumably lower. Add on the 256 MBytes of DDR2 memory for $10, and I'm at $77. And those are retail prices; I guarantee that Apple doesn't pay Intel retail prices. Subtract that $62 from the parts cost, and you're looking at a total parts cost of $176 and 24% gross margins for Apple. And that parts cost is probably too high because of the older and slower Crofton processor Apple actually uses.

I've argued before that the number of examples of companies buying market share profitably are nearly nil. The best counterexample is the Playstation 2, which Sony sold at a loss for a year or so while making a profit on the games it sold. But to the hundreds of other product managers who plan to sell their product at a loss and make it up in volume, I have a news flash: you aren't Sony. Most businesses using loss-leaders don't make profits, but simply reduce the amount of money they are losing.

The bottom line: Good businesses focus on making money overall. Great businesses make money on every single product and service. Apple didn't get to where it is today by settling for "good."

Technorati Tags: Apple, Apple TV, Business, iPhone, Marketing, Pricing

Deliver a Presentation like Steve Jobs

Business Week provides 10 easy steps that it claims would help
anyone present like Steve Jobs. Would that more high-tech executives tried.

Technorati Tags: Apple, Steve Jobs

A punishing market shouldn't detract from Apple's value

I've been at another site all day in my new job at Yankee Group, so I only caught up with Apple's record earnings announcement a few hours ago. The short version: the company set a new record for both revenue at $9.6 billion and profit of nearly $1.6 billion for its first fiscal quarter. The company also provided guidance for the second quarter of $6.8 billion in revenue. Earnings reports don't get much better than that. Yet as I write these words at 11 pm EST, the stock is down more than 17 points or about 11%. I suspect a lot of Apple investors are screaming why, why, why?

Here's my take: international markets were down significantly in overnight trading. Apple stockholders waited until earnings were out before selling just in case Apple announced a cure for cancer, Steve Jobs being elected Pope, and an acquisition of Wal-Mart. Failing those events, when Apple only reported records, it joined the rest of the market.

Let's face it. Apple is a consumer electronics and computer company, not a miracle worker. It's growing rapidly, but it can't insert another Christmas shopping season in the spring to boost fiscal Q2 sales, nor can it ensure that recessions are banned from its stores. Steve Jobs' reality distortion field is strong, but it's not perfect.

But any way you slice it, more people are buying Apple products than ever before. Apple is offering customers more products than ever before. Ten years ago, Apple only sold computers. Now the company sells computers, music players, movies, phones, software, operating systems, and has a pipeline of even more to come. Apple operates the most efficient and most profitable retail stores on the planet. It has no debt and has tens of billions of dollars in the bank. By any rational metric, that's a good investment.

Yes, Apple's value is bound to fluctuate with its earnings announcements, with the doom and gloom in the markets, and yes, even with the loss of confidence from the credit crisis. But when I look into the future of always-connected mobile consumers and businesses, what we at Yankee Group call the anywhere economy, someone is going to be making the devices that consumers carry with them. Those devices will keep them connected with their families and businesses, keep them entertained as they travel, and will make a statement about them as people. To me, just as I saw on the subway this evening, many of those ubiquitous devices will have Apple logos, because that's what Apple does better than anyone else in the consumer electronics business. The only question is whether only a few of them or a lot of them have those logos.

Given today's reports, every indication I see says that a lot of them will have Apple logos. And that, not what Apple projects for its second quarter revenue, is why I think Apple is going to be growing and thriving for a very long time to come.

Full disclosure: these opinions are mine alone, and do not reflect the official position or analysis of Yankee Group. The author also holds a long position in Apple at the time of writing.

Technorati Tags: Apple

The MacBook Air is an ideal product -- in the right market

Blogs worldwide are moaning about the MacBook Air's deficiencies, ranging from its slow processor, its lack of an optical drive and wired ethernet, its lack of a user-replaceable battery, and of course, its high price. All we need now is someone predicting that it will be the death of Apple and the second coming of Microsoft, and the moaning will be complete.

Frankly, it strikes me that these people who about the feature set are a bit like the thsose who complain that Ferraris don't have enough trunk space. Apple's going to sell if not a gazillion, at least a few million MacBook Airs in its first year. Why? Because Apple has identified an untapped and very profitable market niche for the MacBook Air that will expand its market share: fashion designers and luxury hospitality companies.

If you're an executive at Ralph Lauren or Prada, the ugliness of carrying around a Dell laptop would give you hives. For these people, style and design isn't a luxury; it's an essential job requirement. And its a category of people whom the computer industry has not served well to date with boxy designs, techie jargon, and a general rejection of the value of fashion. Said another way, how many computers look good with an Armani suit?

The same could be said for the concierge desk at the Four Seasons, or the reception area at the W Hotel. In the hospitality industry, there are two types of products: those for the front of the house (customer-facing) and those for the back of the house (production). Most computers are designed for the back of the house. But you could put a MacBook Air on a glass desk in any one of those front of house environments, and it would fit right in. It's a product designed for this market.

To give you a better concept of this target market, let's do a quick rundown of the published MacBook Air deficiencies with a synthetic fashion executive who is looking for a new laptop, and has admired the design of a MacBook Air:

• Slow processor: "Seems fast enough to me. I have people who can do spreadsheets if it doesn't suit my needs."


• No optical drive or wired ethernet: "I don't want to have to lug around extraneous baggage, and wires and physical media are so last century."


• No user replaceable battery: "If I need it replacing, I'll send it out. I like the fact that the Apple store will service it for me."


• High price: "Expensive? It costs less than my suit."

Fashion isn't about gigahertz and feature sets. It's about design, elegance, and lifestyle -- said another way, it's about focusing on a few, essential and beautiful things, and leaving everything else out. And for the fashion industry -- and the hospitality industry and TV shows and countless other image-driven businesses -- the MacBook Air will be right at home.

Technorati Tags: Apple, Fashion, MacBook air, Marketing

The benefits of a controlled ecosystem

This week, Apple released two brand-new products and various significant upgrades to existing products. In releasing the MacBook Air to the world, an almost unbelievably thin notebook, it re-ignited an age-old debate over openness and user-friendly expansion. The MacBook Air is perhaps best described as a really big iPod nano with full computing functionality added. It's a Mac notebook complete with keyboard, screen and Mac OS X Leopard, but it lacks an optical drive, the hard drive (be it HDD or Solid State Disk) is not user-replacable nor is the battery.

You can already hear the tech journalists, pundits and bloggers scream and shout that this product is doomed to fail.

Just like the iPhone and iPod before it, two other disastrous products Apple released to the world that serve distinct purposes and have no user-replaceable batteries or disk drives / flash storage units. But I'd rather not spend too much time explaining the beauty of the MacBook Air when Wil Shipley has defended the Air so well already. Suffice to say, if you think about the intended purpose of the MacBook Air, you'll soon realize that Apple did a fantastic job here.

Then there was the announcement of iTunes Movie Rentals, paired with Apple TV "Take 2" — a version of Apple TV which forgoes the need of a computer (Mac or Windows) running iTunes and hosting your content in primary form. Apple TV is now a fully independent media player for the digital age, driven entirely by a broadband connection, opening up that market at last. Time will tell how much (or little) consumers want this market to exist. Given the ever-increasing shift towards digital everything, we suspect the answer to that question to be "very much."

And then there's Time Capsule.

Wireless Time Machine-driven backups of all your Macs (running Leopard) for every hour of the last day, every day of the last week, and every week for as long as storage permits? Without any configuration needed? I'd love to see Microsoft try that. Or Dell, or HP or Sony.

Integrated, seamless services that greatly add value (or stability or security) to your entire lifestyle without getting in the way or taking up any of your time at all are not just fantastic, they are the way of the future.

The iPod was the first home run by Apple that showed the world that a seamless and tightly-integrated experience is what consumers want. Not all of them perhaps, certainly not every tech geek that just can't stop fiddling with things by hand, but very clearly most of them.

The iPhone took that concept and drove it further, merging all electronics we tend to carry with us every day into one device and integrating it with our computer, giving us all of our most important needs on the go without the need of any instructions to the end user. The user-friendliness of the iPhone is the reason behind its incredible success; no tech product has ever scored higher satisfaction ratings amongst its users.

Time Capsule may not be as sexy a device as the iPhone or as commonly used as an iPod, its function and use will be more constant than either of those products. It will be backing up your data safely and securely every hour while you're at home or at the office, wherever you may have a Time Capsule plugged into the wall, and be there when you need it.

Paired with Apple's .Mac service and Leopard's (.Mac-driven) "Back to my Mac", Time Capsule now offers you access to your data in a very handy backed up way, easily accessible even if you've left your files at home and have only your laptop with you at work. You can go Back to your Mac at home with the click of a button, and if you accidentally deleted something or saved the wrong version last, you can go back in Time on your home Mac to retrieve it, then send it over via Back to your Mac.

But Time Capsule's true shine is in its invisibility to the user: no cables to plug in (beyond power of course, but nothing into your Mac(s)), no configuration needed beyond simply selecting the unit on your Mac to use as the Time Machine backup drive, and everything… just… works.

Apple has moved itself into a fantastic position within the technology industry where it can innovate in ways and at a pace that no other company can. By controlling a large ecosystem of computers and portable devices it can integrate products and services that delight consumers and create increasingly compelling user experiences, all the while extending or improving functionality of some or all of your devices.

If you think that Time Capsule is the extent of the possibilities that are slowly opening up for all-Leopard households or offices, then "you ain't seen nothin' yet!" We're confident that we'll see many more great products that have Leopard at the heart of it all, not just from Apple but also from its third-party developers.

Like Jobs said at the end of his Keynote earlier this week: there's 50 more weeks to go in 2008.

iTunes Movie rentals officially announced

Steve Jobs' Macworld keynote is still going on, but he's already confirmed one feature I've been expecting Apple to announce for more than six months: iTunes movie rentals. The terms are interesting: you rent a movie for 30 days, but you have to watch it within 24 hours of when you begin playing it. Movie rentals will appear 30 days after DVD release, and Apple signed all major movie studies. And of course, that means that Apple TV now has a whole lot more content. Movie rentals are $2.99 and $3.99 depending on the movie.

But that's not all -- Jobs also announced Apple TV2, which works without a PC to host the content on. Apple TV2 can buy content directly from iTunes and also play podcasts, Fickr photos, .Mac photo galleries, etc. Oh, and it supports high-definition and Dolby 5.1 sounds. HD movie rentals are $4.99.

Apple TV may have been a sleeper last year; I doubt it is going to be one this year. Oh, and the best part? The Apple TV2 software is a free upgrade for existing Apple TV owners. That just shows what accrual accounting does for you.

Technorati Tags: Apple, Apple TV, Movie rentals, Movies, Steve Jobs

Christmas iPhone traffic spikes above all other mobile devices

For a few days around Christmas, iPhone traffic at Google exceeded that of any other mobile device, at least so says the New York Times. Research in Motion and Nokia must be looking at those numbers and saying, "Yikes!" -- especially given that iPhones comprise less than 2% of the global mobile phone market.

Technorati Tags: Apple, Google, iPhone, Nokia, Research in Motion

A new beginning for me in 2008

Happy New Year all. I hope everyone is starting 2008 with optimism about the fresh new year. I know I am. I am leaving Blackfriars and joining Yankee Group in downtown Boston as of today, Monday January 7, as Director for Enterprise Software Research.

I'm excited about this opportunity to return to the commercial analyst business, which I discovered late in my career was probably the best fit for my personal interests that I've ever found. Some of the analysts and executives at Yankee are people I've previously worked with, while others will be new people to discuss and bounce ideas off. But overall, I've been impressed with their work since CEO and former Forrester colleague Emily Green took over the business, and I'm looking forward to seeing what I can do to contribute to their success.

But at the same time, I feel great sadness about leaving Blackfriars, which Joe and I started more than five years ago and built into a profitable and enjoyable small business. Blackfriars was my first start-up that I helped found (at the age of 50, no less), and one that I will always remember fondly. We've probably had the best clients we could ask for, clients who took chances on engaging our company, challenged us to deliver our best, and made us stretch our skills. Joe will continue to serve those in the future as he continues the company, but I will miss them greatly. And all the while, Blackfriars has given me the time flexibility for me to see my children's school concerts, attend their student teacher conferences, and generally not be away on business trips for many of their younger years. And of course, I've had the opportunity to devote endless hours to writing the more than 1,350 posts I've made to this blog and to engage with my wonderful readers.

Monday will be a big change for me. My commute will go from 10 minutes to about and hour and a quarter each way. Joe will be continuing Blackfriars here, but I'll sorely miss his good humor and marketing wisdom. And sadly, I won't be able to post significant analysis here anymore; my employment contract requires that I devote my writing and efforts to my new clients at Yankee. I'm hoping to emerge with a new blog related to that effort there; if that happens, I'll post a link to it here. Regardless, I do hope to contribute an occasional non-work-related observation here from time to time. I know I would miss it if I didn't.

So thank you to all the Blackfriars readers out there for your time, your attention, and your interest. I'll try to contribute a few more posts as I wind up loose ends here (with MacWorld coming up, I'm not sure I could resist), but they'll rapidly become more of the once-a-week or month variety than the daily posts you've come to expect. But I hope everyone will look for my reports and quotes at Yankee Group and in the press. And if you need research or consulting on Enterprise Software and Mobility (or even if you just want to tell me something cool that's going on), I hope you'll contact me there. I expect my email will be chowe@yankeegroup.com and you can reach me through their main number at (617) 598-7200. And regardless, you can always get my latest contact information from http://www.carhowe.com and write me at carlhowe@mac.com.

Thank you again to all. And Happy New Year.

A consumer discovers the ticking DRM time bomb in Windows Vista

Despite lawsuits that Apple is abusing its monopoly in digital music (a lawsuit which should do reap damages comparable to snow cone sales during the near-zero temperatures this week in Boston), the real unrestrained monopoly out there remains Microsoft Windows, now sporting new and improved high-definition digital rights management (DRM) in Windows Vista courtesy of the digital ignorati in Hollywood. The particular issue at hand is that because Windows Vista is capable of streaming and playing high-definition content, Microsoft felt it necessary to prevent this high-value content from being copied through what is known in the industry as "the analog hole" -- that is, by converting the signal from digital to analog, thereby stripping DRM restrictions that existing in the digital stream. So Microsoft implemented a feature in Windows Vista that prevents consumers from viewing high-definition content unless it detects a digital video monitor that it acknowledges as being able to prevent copying.

Well, this week, the implications of that flawed strategy became apparent. Computer owner David Freeberg bought a new high-definition monitor to edit home videos on his Vista computer. Being a law-abiding consumer, David purchased digital movies from Amazon Unbox and wanted to stream digital movies from NetFlix, both services that he paid for. And on New Year's Eve, he entered the following DRM Twilight Zone (note: the original site has exceeded its bandwidth, but this link points to a copy of the article on Seeking Alpha):

I first found out about the problem on New Year’s Eve, when I went to log into my account. When I tried to launch a streaming movie, I was greeted with an error message asking me to “reset” my DRM. Luckily, Netflix’s help page on the topic included a link to a DRM reset utility, but when I went to install the program, I stopped dead in my tracks when I saw this warning.



The minute I saw “this will potentially remove playback licenses from your computer, including those from companies other than Netflix or Microsoft” I knew better than to hit continue. Before nuking my entire digital library, I decided to call Netflix’s technical support, to see if I could get to the bottom of my C00D11B1 error message.

When I called them they confirmed my worst fears. In order to access the Watch Now service, I had to give Microsoft’s DRM sniffing program access to all of the files on my hard drive. If the software found any non-Netflix video files, it would revoke my rights to the content and invalidate the DRM. This means that I would lose all the movies that I’ve purchased from Amazon’s Unbox, just to troubleshoot the issue.

Technically, there is a way to back up the licenses before doing a DRM reset, but it’s a pretty complex process, even by my standards. When I asked Netflix for more details, they referred me to Amazon for assistance.

Perhaps even worse than having to choose between having access to Netflix or giving up my Unbox movies was the realization that my real problems were actually tied to the shiny new monitor that I’ve already grown fond of.

Netflix’s software allows them to look at the video card, cables and the monitor that you are using and when they checked mine out, it was apparently a little too high def to pass their DRM filters.

Because my computer allows me to send an unrestricted HDTV feed to my monitor, Hollywood has decided to revoke my ability to stream 480 resolution video files from Netflix. In order to fix my problem, Netflix recommended that I downgrade to a lower res VGA setup.

As part of their agreement with Hollywood, Netflix uses a program called COPP (Certified Output Protection Protocal). COPP is made by Microsoft and the protocol restricts how you are able to transfer digital files off of your PC. When I ran COPP to identify the error on my machine, it gave me an ominous warning that “the exclusive semaphere [sic] is owned by another process.”

My Netflix technician told me that he had never heard of this particular error and thought that it was unique to my setup. When I consulted Microsoft, they suggested that I consult the creator of the program. Since Microsoft wrote the COPP software, I wasn’t sure who to turn to after that.

I wrote two and a half years ago that Microsoft's HDTV DRM features were a volatile customer relations disaster waiting to happen. Why? Because Windows Vista actually disables viewing content you already have bought and paid for and been able to view on prior systems. This is rather like your new CD player deciding it won't play your CD collection because it might sound too good. It's just absurd marketing.

Aggressive DRM didn't work for Sony Music with its root kit CDs that infected user PCs with spyware; now Sony is on the verge of ditching music DRM altogether. It hasn't worked for the DVD industry, whose high-definition DVD formats are being ignored by consumers and whose copy protection has already been broken anyway. And it won't work for Windows Vista either, particularly now that consumers can "upgrade" to the more svelt and less-DRM-laden Windows XP for the foreseeable future.

Technology vendors need to remember a simple rule: the people who pay them for their products are their customers, not hardware OEMs, Hollywood studios, or music labels. Tech vendors who ignore that rule -- no matter how big they are -- risk the future of their business. It's that simple.

Let me return to the place where I started this article: Apple's so-called monopoly of digital music. Microsoft has already seen Apple eclipse its efforts in music because of its OEM friendly and customer-hostile DRM. With Windows Vista, Microsoft has opened the window for Apple to do the same to it with high-definition TV. If Microsoft doesn't want to have to compete with sleek Apple-branded HDTV systems delivering TV content along an Apple-managed digital turnpike, Microsoft has to deliver an alternative that works reliably and that customers will pay for. The question is how many years consumers will wait for Microsoft to figure that out.

Technorati Tags: Apple, Certified Output Protection Protocol, COPP, Digital Rights Management, DRM, HDTV, High-definition TV, Marketing, Microsoft, David Freeberg, Windows Vista, Windows XP

Apple gains market share again -- as if that mattered

Yesterday, Bryan Gardiner over at Wired noted Apple's recent market share gains reported by Net Applications (which personally, I don't put much stock in, since they are largely browser-based). But Bryan was also kind enough to also reference my recent article citing Wharton's study debunking of market share strategies (Thanks Bryan).

Here's a quick question that will demonstrate how little effect market share has: Think about the manufacturer of the most expensive product you own, which is probably your car. What market share does that manufacturer have? If you're like most people (i.e., not a marketing and technology geek like me), you probably have no idea; you bought the car because it met your needs. So why should products that let you drive on the Internet be any different than those on the highway?

But forget cars and browers; anyone wanting to figure out Apple's influence has only to look at 1) how crowded the Apple stores were over the holidays, 2) how many white headphones they see in crowds, and 3) how many Apple laptops they see at conferences. This is a company making 14% net profits on revenues growing 40%+ a year, while competitors like HP and Dell are living on single-digit profit margins and much flatter growth. I predict we'll see Apple report fiscal Q1 earnings of more than $1.3 billion on $9.6 billion in revenues. And with a strong new product pipeline ahead, including a 3G iPhone, new Macs, and a host of new media services, 2008 is going to be a very good year for Apple -- regardless of what its market share numbers look like.

Full disclosure: the author is long Apple at the time of writing.

Technorati Tags: Apple, Forecast, Marketing, Market share myth

Could Microsoft's Office 2003 update strategy be any more user hostile? Office update disables MS files | The Register

Microsoft cleverly disabled old file compatibility in Microsoft Office 2003 because it claims, "...these formats are less secure. They may pose a risk to you."

The funny part: Microsoft is blaming the file formats, but those files don't actually contain executable code. What Microsoft is actually saying is that they didn't fix the vulnerabilities in its own Office software that occur when it reads these file formats, but to live up to its security claims, it is prohibiting users who paid for their software from opening up their own files. Ironically, this includes some files created by the Office 2003 suite itself. I think that makes this service pack a trifecta: bad software practices, bad marketing, and bad customer experience, all rolled into one.

Yes, Microsoft has published a workaround, provided you are comfortable editing your registry. But here's a better one: download a copy of OpenOffice and continue to compute normally. Sheesh.



UPDATE: Scott Gilbertson has a similar article at Wired.com noting the big problems that this update poses for corporate customers. Notable among them: there's no way to identify which files won't open without trying and failing to open them. Perhaps user-hostile was too kind a description.

Technorati Tags: Microsoft, Office 2003, Security

CES madness begins with a multitouch puzzle

As I perused Techmeme over the last few days, I noticed that Consumer Electronics Show announcements are already coming fast and furious. Nearly every consumer electronics company on the planet is announcing a new GPS navigator, Panasonic is prepping a new 150-inch plasma display (because the 103-inch one it introduced last year wasn't big enough), and so on. And gadget gurus like Wired.com, Engadget, and Gizmodo have already started their CES coverage.

But two products that really caught my eye were the new 52- and 84-inch multi-touch LCD displays that LG is introducing. These are liquid crystal displays with infrared detectors built into them, allowing them to be used in nearly any place or orientation that a traditional monitor might be used. LG notes that the displays are largely targeted at commercial applications. And that poses a question in my mind about another product that was much touted in 2007 but hasn't actually been deployed yet:

With multi-touch flat panels on the market, why would any commercial customer want to deploy a multi-touch system that only works horizontally, is more than a foot deep, and comes from a vendor with no track record in displays or commercial hardware products?

All I can say is that it's going to be a very interesting year for display products incorporating new user interaction ideas.

Technorati Tags: CES, Consumer Electronics Show, Microsoft, Surface computing