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Interesting exchange from Zerohedge:
by Myzery
on Fri, 03/04/2011 - 14:50
#1019893

Reggie,

When comparing margins & revenue of tablets, you have to look at the entire spectrum of offerings from each ecosystem.

The tablet is not just a piece of hardware, even moreso then a PC. Traditional product analysis focuses on the MSRP and seems to forget these complimentary products and services that have a big impact to overall profitability (not to mention the user experience, lets ignore that for now).



I focus on profitability in six areas:

Hardware (both MSRP & carrier sharing agreements)

Warranty/maintenance services

Developer Services (Developer tools & support systems: i.e. App Store, Developer programs)

Cloud Services

Software sales (Apps)

Media store (e.g. iTunes)



You take a holistic view at these six areas and you get quite a different picture then if you just look at hardware sales. Reggie, as a mobile product developer and financial hobbyist, I'd love to work with your team to expose a more complete view of tablet profitability.



At the iPad 2 annoucement, Steve mentioned they've written checks for $2bln to iOS Application developers. At Apple's 30%, thats $600mm high-margin SAAS revenue not included in any iPad/iPhone margin analysis.



I don't have accurate figures for Apple's MobileMe service, but in 2010 they had around 2million subscribers giving $100 a year, another $200mm in high-margin SAAS revenue for Apple.



Apple gets $99 per developer from thier developer program. I don't have recent figures, but I know Apple has at least 25,000 registered developers (another ~$2.5mm for Apple). I know Android has at least 4,000 registered developers ($0 for Google/HTC/Motorola). Worth mentioning but it's probably an insignficant amount to extrapolate to the number of iPads & iPhones sold.



Apple sells its own apps, many of which are very compelling: Pages, Keynote, Numbers, Remote, iMovie, Garage Band, etc. They sell millions of copies. I wish I had more numbers on App sales. All indicators point to a big advantage for Apple in Application sales.



Media store. The easy of use, selection, and availability of iTunes has huge revenue implications for the iPad. HTC/Google/Motorola music store? Big Advantage Apple.



AdMob. Wow, what a story. Clearly destroys iAds in revenue, impressions, ecosystem. Talk about disgusting profits-- puts prop trading to shame. Big Advantage Google. Ironically, more of AdMob Google Inc's profits come from iOS then Android. It remains to be seen how important Advertisment revenue will be relative to hardware/services. Reggie, do you see advertisment being a significant portion of revenue for these products? Could we see ad-subsidized hardware in the future?



AppleCare has a huge attach rate. I've heard rumors around 40% for iPads. Again, huge additional revenue stream. I need more information on the Android warranty programs and sell throughs but I suspect its still a big advantage Apple.



Perhaps from a technological & infrastructure standpoint Apple is behind Google's cloud services. But from a montization standpoint, I don't think Apple is playing catchup. Apple is very selective in the services they role out, they focus on core services that enhance thier products, and (mostly) charge for them. Google's approach is quite different: they role out any service that's cool, check adoption, then move to monetize.



Advantage Google, but only because of volume and reach. In the long run, their approach will probably win. Today, if you subtract advertising, Apple makes more money on mobile-centric cloud services then Google.



Please compare App sales on iOS vs. App sales on Android. Look at gross revenue, gross volume, but also look at per user app downloads & sales. Compare paid apps vs free apps. More then 50% of Android users have never downloaded a paid app. ~34% of Android apps are paid vs 66% of iOS Apps are paid, AND Apple commands a higher margin (and volume!).



BTW Reggie, I love your analysis (especially on the banks!), but there's a bit of a dissonance as to if you are evaluating the companies (stocks) involved, or the products themselves.

What's good for the product (end user), may not be good for the stock (investor).

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by Reggie Middleton
on Fri, 03/04/2011 - 16:23
#1020312

BTW Reggie, I love your analysis (especially on the banks!), but there's a bit of a dissonance as to if you are evaluating the companies (stocks) involved, or the products themselves.

I'm evaluating the companies and thier products. I believe the equity markets have been detached from the underlying fundamentals for some time, which is what investors need to look for. Many investors believe the markets are always right, which is far from the trutruth.

You take a holistic view at these six areas and you get quite a different picture then if you just look at hardware sales. Reggie, as a mobile product developer and financial hobbyist, I'd love to work with your team to expose a more complete view of tablet profitability.

I'll be tackling Apple in detail in a couple of months, so would appreciate any worthwhile input. I have not overlooked anything you mentioned, but objective analysis is always helpful. For instance, comparing SaaS for Apple to include in margins brings the same for Google. the advantage of Android is that nearly all services on the OS drive Google revenues - email, ads, enterprise, video, etc. Many of these businesses are literally startups or nascent and most have been built into billion dollar plus businesses (run rate) with a year. Google's biggest promise is cloud services, IMO.



AdMob. Wow, what a story. Clearly destroys iAds in revenue, impressions, ecosystem. Talk about disgusting profits-- puts prop trading to shame. Big Advantage Google. Ironically, more of AdMob Google Inc's profits come from iOS then Android. It remains to be seen how important Advertisment revenue will be relative to hardware/services. Reggie, do you see advertisment being a significant portion of revenue for these products? Could we see ad-subsidized hardware in the future?

Apple will not be able to compete with Google in Ads, but it will have to gain as much share as possible. The reason is simple. Hardware is going to be commoditized to thin margins regardless, but it is probable that Google can push the software market to that of an ad model if they gain enough momentum and reach. This is something that Apple cannot allow if they don't have superior reach for they will be priced out of the general market, save of few niche or vertical segments. Think towards the future, not the present. 12 years ago, no one would have ever thought anyone would be offering the web services that we take for granted now for free, but here we are. Google's ad driven model is both powerful and disruptively destructive at the same time.

If, or once, Google commoditizes the hardware and pushes software into a free, ad driven model, it would be very difficult for anyone to compete without government intervention. Think Microsoft style monopoly. That is what makes Google very, very dangerous. Unfortunately (or fortunately if you got stock or LEAPS inexpensively - depending on your perspective), most people cannot see the long term prospects as a venture capitalist or long term strategist would and look for quarerly results and cash now.

Think how much Google would have given up if it was looking for immediate cash in the youtube acquisition, or even worse, the Android acquisition. Android is more valuable than iTunes, by far but many don't look at it that way because they are looking for cash profits now versus the NPV of potential future cash streams. The same goes for Youtube, which is when combined with Google TV can literally change video consumption on the web. Think the disintermediation of network TV, which would be huge. I am also quite sure that both Apple and Google are planning on disintermediating the carriers as well. Google has already tried with the original Nexus One distribution model, and will try again. The fact that almost every carrier and hardware vendor besides Apple, RIM and MSFT/Nokia are trapped by Google due to reliance on Android, it won't be as difficult as many believe. Apple is currently building in dual GSM/CDMA chips. You know what the means.

I'm not even going to mention cloud services, wherein Google is one of the biggest competitors to Microsoft in large municipal accounts wherein they win more often then many would assume, ex. LA county with over 20,000 installed seats (#'s are approximate from memory).