Friday, 04 March 2011 02:33

Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet - Including The Pretty iPad, With Proof!

Note to Subscribers: New subscriber information available at the bottom of this article.

Apple has announced the release of the iPad 2 and it is an impressive piece of hardware, very nicely packaged and comes with margin boosting accessories (that are actually pretty slick) such as a magnetic cover. With that being said, the RDF (reality distortion field) and FUD (fear, uncertainty & doubt) absorbed and regurgitated by the tech media is simply horrendous and is an example of how difficult it is to get truly unbiased information (not to mention true grit analysis) these days. I truly believe, as in the political and banking rags, many tech sites simply recycle press releases and marketing material from Apple in lieu or performing critical analysis and independent research. Let's debunk some of the myths that I have found on some popular tech sites.

Myth Debunker 1: Apple's incremental upgrade is enough to kill the competition

Most of Apple's competition has shot itself in the foot by taking too long to come to market with a competitive device and appropriate marketing. Why? Who the hell knows, but that is how they run their business. Many of the Android vendors are in a totally different camp, though. They have a markedly superior OS which they bear very little (relatively) development costs for as well as the 2nd largest and fastest growing app market in the industry. In addition, they have the largest global and US reach for said apps. What you do not hear in the tech rags who proclaim how well Apple is doing against Android in the tablet arena is that there has only been ONE official Android tablet running a Google tablet OS released thus far, and that is the Motorola Xoom. It is sold out of every retail outlet that I have been to (and allegedly sold out immediately). The Xoom is acknowledged to be a very capable competitor by most reviews, although it needs some polish. The reason is that it is running BETA software. That is correct! Honeycomb (the Android 3.0 tablet OS) hasn't been released in AOSP (readily manipulable open sourced code) yet because it is still being polished. Motorola (like Samsung did by pushing Eclair 2.1 onto its tablet last year) decided to jump the gun by hacking beta code to get an early release. With this unfinished product it has produced what most consider a real contender (spec wise, it is the most capable tablet device in the retail channel). The finished Honeycomb code is due out in a few weeks, and with it a slew of tablet competitors who didn't want to take the risk of releasing unfinished software. This is why they are all coming out next month, and also why many features of the Xoom won't be ready until next month as well.

Putting all of this into perspective, one should realize that the first tablet either competes with or best the iPad, depending on taste and preference (the Samsung 7" Tab doesn't truly count since it ran cell phone software, again to gain mindshare from Apple, like Motorola is attempting). Looking at how rapid the Android hardware and software development cycle is in conjunction with how rapidly the space is commoditized by Android, it would be foolish not to realize that margins and prices will compress in near real time while tech and capabilities will spike in the same time frame. We are not talking years here, we're not talking a year. Not a quarter either. I mean literally months. Expect no less than two tech refresh cycles on Android before Apple gets to refresh once next year for the iPad 3, along with the commensurate margin compression. To clarify for those who are not getting the point, the iPad 2 is noticeably behind the Xoom in hardware performance and features - the Xoom has already been rooted and overclocked to 1.5 Ghz, which makes it faster than most desktops at mundane tasks. Apple is at least a generation behind in mobile OS capabilities in that the iPad is still just an enlarged version of the iPhone OS with very few differentiating features. I can tell you this from experience after owning several (7) iOS and Android products and thoroughly testing all - which I will demonstrate below.

Myth Debunker 2: The Honeycomb OS is subpar to iOS

This is absolutely nonsense. As stated above, Xoom is running BETA software and can compete easily. The biggest advantage of Android is that it is COMPLETELY customizable AND open. Almost anything that you complain about can inherently be modified, and modified to a great extent. The iOS interface is quite static and confining in relation. I actually have taken the time to prove this by taking a Barnes and Noble Nook ereader and customizing it to run head to head with an Apple iPad. I'll let you judge the results for yourself. This is not pie in the sky rocket science stuff either. My ten year old son helps me in the customization, testing (particularly the games, of which he is an expert) and configuration and has actually decided to start a business selling customized tablets and phones that easily bests anything anywhere NEAR their price range, up to almost double their prices.

Here's the spec sheet below, followed by a few videos that put these specs into real life, real people experiences. To enlarge to print quality, click the graphic to open in a new page, then click again to enlarge.

Note: It actually appears as if my Nook has 1 GB of RAM memory, in lieu of the listed 512k!

Myth Debunker #3: Apple owns the supply chain so no other manufacturer can match them in pricing

This is total bulls1t! If that is the case then why are so many Android phones surpassing the iPhone in features and capabities (both hardware & software wise) for not only the same price but significantly less. Anybody who truly believes Myth # 3 needs to spend some time around the HTC Android phones - subsidized at around $99, they run circles around the latest iPhone. After that, see the BoomBustBlog customized Nookie vs. the Apple iPad videos below. Hardware starting at $200, complete package is put together by my 10 year old (and he just turned 10, may I add) son for sale for under $300 retail. Own the supply chain my ass...

When such nonsensical rumors start making rounds in what I thought were respectable rags in the face of obvious and ample evidence to the contrary, that is when you know the Apple RDF (reality distortion field) is truly pumping at full throttle. Those that are really in the know know that looking towards the future, Apple is not the real threat. The CEO of the hardware side of the recent Microsoft/Nokia alliance (Elop) put it most accurately - recognizing what I have been saying for about a year now, and that is Google/Android is at the forefront of the mobile computing wars – according to Nokia's Elop: "Our first priority is beating Android!".

How is Elop going to address this by using Windows OS? He has to do more than just charge more, he has to produce better product at competitive prices, which keep getting lower. Elop will have to license the Widows OS, which is an expense, one that he would bear to nowhere near the same extent if he used Android. I feel he mistakenly looks at this as Google commoditizing the Android platform, in lieu of the more reasonable perspective of Google commoditizing the entire portable computer space. This is where most pundits are missing Apples Achilles' heel as well. Google can commoditize all day and night because they benefit regardless, as long as the masses are moved to the cloud - and they have willing partners (minions?) to assist in this process with the likes of Motorola, Samsung, LG, HTC, Sony, Acer, Asus, Dell, and about 120 other hardware vendors. Yes, I know Apple can design the hell out of its products from an aesthetic prospective. Yes, I do believe they hit the ball out of the park with the iPad when it was launched. Yes, Apple has very capable management. The fact still remains, they are not immune to the basic laws of economics, and Google's Android business model strikes Apple at its very weakest point - commoditization. Due to Apple's prominent position, this may not be evident to all, but it is more than foolish to deny it when the evidence is ascendant. Androids rise from last to first in a matter of a year and change should be more than enough to out more than just Nokia's management on alert. See some real world examples of the margin busting capabilities of the smart application of Android below. For the record, one of the videos below was actually edited and published on that $295 tablet shown in the video using Google's cloud services via Youtube.

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Cnet's Eric Franklin has put together a list of soldiers looking to fight on the front lines of the Tablet Commoditization wars. Remain aware that only one tablet running Google's Tablet OS has been released, just a few days ago, and it is already be touted as a viable competitor. Just imagine when things get rolling with the release of hundreds of tablets, all running arguably a superior OS to that of Apple's. Be aware that not only do I and my team of analysts crunch numbers regularly, not only do I spend nearly all of my workday on these products, I actually own and use BOTH platforms regularly. I talk to everyday people, everyday - inquiring into their preferences, perceptions and desires. Many pundits and analysts fail to do this.

Name OS Price Release date Screen size 4G?
Acer Iconia Tab A100 Android 3.0 Unannounced April 7-inch Unannounced
Acer Iconia Tab A500 Android 3.0 Unannounced April 10-inch Unannounced
Apple iPad iOS $400-$830 Available now 9.7-inch No
Apple iPad 2 iOS $500-$830 March 11, 2011 9.7-inch No
Archos 70 Android 2.2 $325-$380 Available now 7-inch No
Archos 101 Android 2.2 $350 Available now 10.1-inch No
Asus Slider Android 3.0 $500-$800 May 10.1-inch Unannounced
Asus Transformer Android 3.0 $400-$700 April 10.1-inch Unannounced
Asus MeMO Android 3.0 $500-$700 September 7-inch Unannounced
Dell Streak 5 Android 2.2 $300-550 April 5-inch No
Dell Streak 7 Android 2.2 $200-$450 April 7-inch Yes
HP TouchPad WebOS 3.0 Unannounced Summer 2011 9.7-inch Yes
HTC Flyer Android 2.3 Unannounced June 7-inch Yes
Maylong Universe M-150 Android 2.2 $100 April 7-inch No
Motorola Xoom Android 3.0 $600-$800 Available now 10.1-inch Yes
RIM Blackberry Playbook QNX OS $500 (16GB) April 7-inch Yes
Samsung Galaxy Tab Android 2.2 $300-$600 Available now 7-inch No
Samsung Galaxy Tab 10.1 Android 3.0 Unannounced Spring 10.1-inch Yes
T-Mobile G-Slate Android 3.0 Unannounced Spring 8.9-inch Yes
Toshiba Tablet Android 3.0 Unannounced June 10.1-inch Unannounced
Viewsonic Viewpad 7 Android 2.2 $415-470 April 7-inch No
Viewsonic ViewPad G Tablet Android 2.2 $580 April 10.1-inch No
Vizio Tablet Android 3.0 Unannounced April 8-inch Unannounced

Myth Debunker #3: The PC era is gone

The PC era is not gone, it is most definitely here to stay. It is just being shrunk to fit in both hands. Tablets are PCs, simply ask the inventor of the category, Microsoft - the PC software king. This would be obvious to all who think independently and objectively. What is soon to be gone and gone for good is the expensive, high margin PC. Yes, that includes expensive tablet PCs as well. When putting the Xoom through its initial paces, I thought to myself, "This is a fast, slick, and flexible tablet. It's just not worth $800 of my dollars. It is also not worth $600, nor $500, particularly considering what will soon be available for a lot less that can do as much or more." The same goes for the Apple iPad, and most of the other >$600 competition. Google's cloud computing for the masses, coupled with its disruptive open sourced Android business model has and will continue for the near future, to collapse margins at a spectacular rate while increasing the rate of technology adoption and innovation that will make Moore's law look like an understatement. As a matter of fact, it already has. Check out the computing power of the Nvidia quad core, 3d capable chip to the high and laptop of just 6 or 7 years ago. Over 1,000% increase in power at a fraction of the price and power consumption. The videos above corroborate my personal feelings that cute, pretty slates, beefy powerhouse slabs and competition crushing marketing prowess are cool, but most prefer strong performance at rock bottom prices. This sounds more and more like Android, unless Apple and Microsoft shift gears and do so quickly.

Apple has always thrived as a niche company, and entering a space that is being rapidly commoditized by Android is dangerous and at the very least guarantees margin compression. It is not as if money can’t be made in the space, but it is much easier to make money in the commoditized space when you don’t have to pay for the OS development, you know like the Android adopters. Witness the success of my historically favorite (at least for now) handset maker, HTC after they invested full on into Android and benefited from the commoditization of the high end smartphone…

The margins will shrink even further, even as revenues skyrocket. R&D costs will be massive. There were many who argued with this perspective throughout all of last year. Apple is the best, Android will never outsell Apple, etc. Well, come first quarter of 2011, Android has went from near zero to the market leader in all major markets. The argument that Android will not take over is now mute, it has already done so. Here is the complete analysis of smartphone and vendor handset growth up until Q3 2010. I will parse the numbers and release the most recent quarter soon, and make it available to subscribers. Be sure to scroll through the entire spreadsheet model below using the "<" and  ">" buttons in the lower area of the window. The model is very, very extensive!

[iframe https://spreadsheets.google.com/pub?key=0Ai5WJsM3KjltdGJKRkVRbGdod05pNnlxRW14SU9tTXc&hl=en&output=html&widget=true 620 450]

Benefiting from the mobile computing wars, regardless of the prospective winner!

Long list candidates

We have performed a scan to identify long opportunities in the electronics & semiconductors space that stand to benefit from the mobile computing wars. The scan was essentially searched for companies that are proxy play for the battle between Apple, Google and Microsoft. Our initial list included a set of 125 companies across the US, Europe and Asia, mostly in the following sectors - Semiconductor, Consumer Electronics, Communications Equipment, Integrated Circuits and Computer Hardware.

We performed value and growth analysis assigning rank to each company on various metrics bucketed into like categories (as below) and arrived at a final score for each company based on weighted average rank. The bucks and ranks were as follows -Valuation (20%) (Price-to-sales (3%), EV/EBIDTA (5%), one year fwd PE (6%), two year fwd PE (6%), Growth (15%) (EPS growth), Value & Growth (20%) (PEG ratio), Value (35%) (Net Cash / EV (17.5%) and Net Cash / Market Cap (17.5%)) and Profitability (5%) (Margin). We then excluded 55 companies which did not have ADR / direct listing in US. Of the remaining 70 candidates, we came down to a list of 29 companies based on the attractiveness of their business model, expected growth rate, valuation metrics, price performance, and profitability. We later performed a detailed historic analysis for each of these 29 companies to look into the past performance and see how these companies had performed over the last two downturns (2002-03 and 2008-09) by analysing revenue growth, gross margin and operating margin trends for these companies. After concluding the final analysis we have come down to a list of five candidates that we believe are in a sweet spot to play on the growing smart phone industry. Of the five stocks that we have listed,there are actually a couple that are recommended by the sell side as well - one of the few instances where we agree.

Subscribers should download - File Icon Long candidate #1 - Hardware: The Mobile Computing Wars. Click here to subscribe. There will be 4 more notes to follow over the next 48 hours, and potentially a full forensic report on our prime candidate. For those of you who have not followed me in the past, here is a description of who I am and what my accomplishments are - Who is Reggie Middleton!

Interested parties should also read "The Potential Equity Investments Most Likely To Prosper From the Google/Apple/Microsoft Mobile Computing Battle".

More Reggie Middleton on Google:

  1. The Complete, 63 pg Google Forensic Valuation is Available for Download

  2. Navigating BoomBustBlog Subscription Material To Find The Google Valuation Drilldown

  3. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours

  4. Google 4th Quarter Performance: Strong Performance, & Better Yet Healthy Investment Into The Business

For more realistic, objective contrarian views on the Google/Apple battle for the mobile computing space, see:

  1. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  2. Android is gaining preference as the long-term choice of application developers
  3. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  4. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  5. Apple on the Margin
  6. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
Last modified on Friday, 04 March 2011 10:17

14 comments

  • Comment Link H.Kwint Monday, 07 March 2011 13:51 posted by H.Kwint

    It's important to note ALL six area's mentioned will be suffering from margin compression. The iPad1 was the only player in town, and such were the area's accompanying the iPad1. But not anymore!

    1) Hardware - The iPad1 is lowered in price to $379 it seems, the new iPad2 is the price of the old iPad. Many people expected the iPad2 would be more expensive than the iPad1, but it isn't. Proofs margin compression.

    2) Warranty / maintenance / service
    These are dependent on number of sales. Back when Android didn't ship on phones, of course Apple earned more on warranty / maintenance than HTC / Samsung did. But if HTC / Samsung make less profit on warranty / maintenance (and they probably will because of heavy competition), then so will Apple do. For example, as far as I remember Apple didn't charge money for the rubber casings (related to the 'deathgrip'). If they were the "only player in town", they might have charged for the casings adding some blabla about how the casings "added value". But they didn't! Because there were other phones which didn't suffer from death grip (at least such was public perception), so they couldn't market the casings as an improvement, and couldn't charge for it. Again, I'd say competition leads to margin compression.

    3) Developer Services

    Currently, I think more people are willing to develop for Android than for iPhone. Why? Because Android has a far higher number of users. Compare to MacOSX / Windows: Far more people and companies have been developing for Windows. Even while on Windows it's easier to pirate software, and even while MacOSX software might be more profitable 'per user'. Microsoft cashed in on this, they didn't milk their developers (that much). Visual Studio Express and such were free. It seems Android is following the Windows model. Google doesn't earn from milking developers, but they earn because the low threshold for new developers to start developing enlarges the market share of the platform in general - as Microsoft did.

    So, if you're a game developer or such, and it's cheaper to develop for Android then for iPad, here's some math, assuming Android tablet market share will be as high as for smartphone market share:
    -Sell 1 iPad app for $10,
    -Sell 2 Android apps for $5 and 2 more are pirated,

    then you earn the same, but it's cheaper to develop for Android. Windows has clearly shown most developers are happy to develop for low-margin platforms like Windows, as long as there's enough volume!

    4) Media store

    Maybe iTunes is better at the moment, but that's not the point. The point is, if songs on iTunes are $1 and songs on Google's music service are $.8, than Apple will have to lower their prices. If 'right owners' on Google get 50% or such and at Apple only 40%, then they will complain at Apple. Again, margin compression!

    5) AdMob - if iAds are chaeper then AdMob, then Google will have to lower their prices I think, because they're no longer a monopoly. Again, margin compression, but this time in advantage of Apple.

    6) AppStore
    "More then 50% of Android users have never downloaded a paid app"
    Hey, you know what? That shows unwillingness of lots of consumers to pay for apps! Back in the time when the iPad1 was the only tablet out there, people thought it was a normal thing to do to pay for software.

    Just like before OpenOffice arrived. But as many people got to know OpenOffice, it became harder for Microsoft to keep the margins for MS Office high. People got used to the idea they could get 80% of the functionality for free. MS only was able to keep the high margins for MS Office because of a lock-in and anti-competetive behaviour. Now, apart from iTunes, I don't think there's any reason for people "not to leave" the iPad platform. Apple doesn't have 'dominant' standards (such as .doc, .xls etc.) and tons of VBA-macro's which doesn't allow their customers to switch to a competing and _cheaper_ platform. So if Apple doesn't have a fence, they can't stop the sheep running away.

    Basically, I think Zerohedge's post shows an underestimation of how margin compression applies to _all_ six area's mentioned!

    Report
  • Comment Link Reggie Middleton Monday, 07 March 2011 06:37 posted by Reggie Middleton

    I tried the Xoom out, it is built like a tank. Very solid, but not very trendy, though. As for the Android equivalent of Apple TV, you have Google TV which is a much, much more capable device. See http://www.google.com/tv/

    Since Android is open, you can simply download FREE apps that allow you to stream content on and off you phone and tablet. See twonky server and twonky mobile. Again, I think Apple's management has run circles around the competition in terms of implementing and execution over the last 6 or 7 years. So much so that I really wonder what the problem was in the other camps. They are squarely outdone in the execution camp here though, primarily due to being a victim of their own success. Google's business model in the proliferate Open source model is striking Apple in a fashion that will be very difficult to defend against while maintaining a high margin business model. Something's got to give.

    As for how well Apple hardware runs... Well the video above shows that the iPad still lags significantly behind the $249 Nook. Maybe you should give the competitors a try before you get too comfortable in believing that Apple products perform better than the competition. Make sure you are saying this out of personal experience, and not our of persuasion from Apple marketing.

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  • Comment Link Kweksma Monday, 07 March 2011 06:08 posted by Kweksma

    I agree with Owen. I am a 20+ years MS/Windows professional, and design datacentre solutions for large customers.
    I got an iPod Touch (a gift from a retialstore when buying a bunch of jeans) , a year and a half ago and this had truly opened my eyes. I used to own a Dell Axim X51V, a very capable windows Mobile PDA in its day. I was flabbergasted : browsing that actually works, an App-store that is so rediculously cheap that i actually bought software for the first time in my life and a gorgeous design.

    Since that moment I have bought an iPad an apple TV and an airport Express. I hardly ever touch my PC when at home, PC's are old school corporate devices for me now.

    Android may be free, it may be open, it may run on better hardware (does that push button in the video clips actually bend the front of the Xoom inward or is that a compression artifact?) but it is just not relevant anymore.

    I am completly happy to pay a bit more for devices that work as expected, are beatifully engineerd like a tank. I don't see Android getting to a level of digital live integration that Apple has already achieved (what are the android equivalents of the Airport Express and the Apple TV?).

    And regarding the open source : who is worried about apps costing dollars and cents? I mean, Garage Band? Come on, kids are going to buy the iPad just for that App. Who cares that there will be an open source version for free if Apples version costs just 4,99?

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  • Comment Link frank Monday, 07 March 2011 05:27 posted by frank

    Another Jobs distortion debunked. Contrary to his claims that none can match iPad price, Moto XOOM will launch here in UK as lower or same price as the iPad - but with much better features mind you !!.

    Motorola should not let Jobs get off with terrible lies.

    Read link below for more.

    http://www.metro.co.uk/tech/857368-motorola-xoom-3g-uk-price-matches-apple-ipad-at-carphone-warehouse

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  • Comment Link owen Saturday, 05 March 2011 14:01 posted by owen

    I personally believe the market for these devices is not the current pro or even committed amateur PC user. It's regular people, who don't know what RSS is (for example).

    These people couldn't give a monkeys stuff what the hardware components of a tablet are. They just want to know what it does. The App Store makes Apple an OBSCENE amount of money. Hardware profit margins will fall like you say. Hardware makers will churn out Android tablets, and some will be abysmal and some will be amazing.

    But the first question nost normal people ask is: what can. I do on it?

    And the answer to that lies in apps. So whole hardware makers struggle to make profits because their hardware profit margins are razor thin, who will be making money, and how?

    Developers, publishers, and owners of successful application stores.

    Report
  • Comment Link Jay Hughes Saturday, 05 March 2011 10:07 posted by Jay Hughes

    Thanks for the table comparing pads, very handy and about the second one of I know of except yours is current date.

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  • Comment Link Reggie Middleton Friday, 04 March 2011 16:25 posted by Reggie Middleton

    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).

    * reply
    * flag as junk (0)

    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).

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  • Comment Link Reggie Middleton Friday, 04 March 2011 11:33 posted by Reggie Middleton

    That article deserves some discussion here:
    ""First dual core tablet to ship in volume." That's funny, I tested a Dell (DELL) Streak 7, which had a dual core Nvidia Tegra 2 chip in January. They've been shipping ever since on T-Mobile.

    In volume.

    Of course, the Motorola (MMI) XOOM also has this same dual core processor and is certainly shipping in volume as well. In fact, I've been using an Android phone (the Atrix) with a dual core chip for weeks and it wasn't the first to ship in volume. As for Apple (AAPL), they haven't shipped one iPad 2 yet -- iPad 2's hit shelves on March 11.

    Perhaps this has to do with Jobs' subjective view of 'Volume' which may start at whatever numbers iPads are currently selling? And 'ship'? Well, I don't know.

    That was just the beginning. He next pulled out a thoroughly debunked, mis-translated quote from a Samsung VP:"

    At least the entire pool of media professionals don't simply regurgitate Jobs Speak as gospel. It gets better though. In responding to Job's saying that the Samsung Tab was not shipping very well...

    "Some people only hear what they want to hear, but that quote should have ended with "quite smooth." That translation was officially corrected a long time ago. Here's the recording. Shame on Apple Keynote fact-checkers, if such a role even exists."

    And here goes a funny one..
    "">90% market share". OMG Math.

    Both Apple and Samsung measure sales the same way -- into the channel. Apple has just as many points of sale for the iPad as Samsung has for the Tab and likely many more. So Samsung sold 2 million (in the last quarter) in 2010. Apple sold 14.8 million (in three quarters). That seems like a pretty fair comparison.

    Apple would have needed to sell 3.2 million more to reach 90% of 2010's tablet market share against just Samsung alone (in triple the time). That's not including all of the Android-powered Nooks out there, those cheap $100 Androids you can buy at Walgreens or Amazon and even Windows-powered Tablet PCs (which are mentioned two bullet points above!). If you choose to include the Kindle, Apple may not have even reached 50% of the market.

    Perhaps Jobs meant market share of tablets that start with the letter "I.""

    And he makes my point on pricing as well...
    "As for pricing, Jobs compared the most expensive Android tablet -- the XOOM --against the iPad. While specs don't matter to the typical consumer, components do largely affect the price of a device. The XOOM's are simply better. It has (expandable) 32GB of storage built in and 3G built in (upgradable through a painful mail-in process to 4G). So, on that alone, it compares with the $729 iPad.

    But then consider that the XOOM has a much better, bigger 720P+ screen compared to the iPad's 1024x768 job (it has less Retina™). Then, add far superior cameras (w/flash), stereo speakers (iPad 2 has one), 4G and a micro-USB/SD Card reader. Apple won't say how much RAM the iPad has, but I'm willing to bet it is about half of the XOOM's 1GB.

    You see, Apple loves to talk about specs when it is in its best interest (speeds and feeds). There are plenty of specs on size and weight that were repeated over and over:"8.8mm thin", "1.3 lbs". Tech Specs? Lots: "Retina display has 326PPI", "1GHz Dual Core Processor", "64GB of storage", "Fingerprint-resistant oleophobic coating", "Back camera: Video recording, HD (720p) up to 30 frames per second with audio; still camera with 5x digital zoom", etc. etc. But ask them how much RAM the iPad has and they'll tell you it doesn't matter.

    Perhaps Jobs could have also compared the iPad 2 to other Android tablets' prices? Samsung's Galaxy Tab and Dell's Streak both now start at $499 and have better cameras, 3G radios and GPS, which seem to compete well with Apple's $499 Wifi-only offering. Reality distorted.

    I have a lot of respect for Steve Jobs and Apple's products. It's just a shame that all the truth-bending destroys the keynotes."

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  • Comment Link frank Friday, 04 March 2011 11:16 posted by frank

    Trust me, I've learnt a big lesson from you guys today.

    My son is now 3 and keen to learn about everything. I wont leave his education to the teachers / formal education. Charity begins at home and so does education IMHO.

    Mark twain was dead right with the ff quote - "I have never let my schooling interfere with my education".

    I am in the UK and its not much different here. I just read a chilling article about the future of the West. Please read it and if possible write up an article on the need for more home education.

    http://www.guardian.co.uk/commentisfree/2011/feb/28/education-jobs-middle-class-decline

    Thanks a lot.

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  • Comment Link Reggie Middleton Friday, 04 March 2011 10:42 posted by Reggie Middleton

    Amen, brother!

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  • Comment Link Kwame Friday, 04 March 2011 10:35 posted by Kwame

    That's what a good parent does, so I must congratulate you on giving your kids the foundation to be job producers instead of consumers. I also give my 3 children lessons on macro economic and history (Afrikan and world, and science. Most of all I want them to acquire critical thinking skills. Those who think critically will have an advantage in a world with a collapsed economy.

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  • Comment Link Kwame Friday, 04 March 2011 10:32 posted by Kwame

    That's what a good parent does, so I must congratulate you on giving your kids the foundation to be job producers instead of consumers. I also give my 3 lessons on macro economic and history (Afrikan and world, and science. Most of all I want them to acquire critical thinking skills. Those who think critically will have an advantage in a world with collapsed economy.

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  • Comment Link Reggie Middleton Friday, 04 March 2011 10:10 posted by Reggie Middleton

    I am truly disgusted with education in this country, particularly in the schools with large minority concentrations. While everybody else is busy helping their kids study for standardized state tests, I teach my three kids (oldes is 18) business models, strategies, margin analysis, economics and human behavior as it relates to marketing socio-economic stratification.

    This starts in Kindergarten.

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  • Comment Link frank Friday, 04 March 2011 06:30 posted by frank

    10 year old tablet entepreneur ?. Could your son be the next Michael Dell ? Dell started at 18 so 10 is off the hook. Good luck to the whizz kid.


    Of all the bloggers, Only you and Seth W of fortune can see thru Jobs distortion. See tech.fortune.cnn.com/2011/03/03/steve-jobs-reality-distortion-takes-its-toll-on-truth/

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