Yes! Someone finally gets it!

I spend my time investing in handset companies Bento: understanding the industry is my job, and I am quite good at it. So I try to educate my public, point out to them that not all about the iPhone launch is quite as it seems, to let them know it’s OK not to be a fanboy. Expecting adulation I receive instead a deafening silence. No calls, no interviews, just a few comments from enlightened individuals. Unlike Spinoza I have no coterie of supporters to cheer me on, no faithful, like-minded friends. Moreover, Bento, I know you are one of the glazed-eyed pod-people (iPod people).

Of all the articles written about this sodding iPhone in the press, most of which are silly, factually challenged Apple fluffer pieces, I have finally found one, ONE, which gets it. Some of the comments are good too. Never mind the editor chose a photo of the author that makes him look like he has busting for a pee, and has just found a toilet:




Why can’t they just have normal, non-smirky photos? I am sure the guy looks quite normal in real life. But never mind! Smirky or not, this guy understands that the iPhone venture is a risky one for Apple, a venture into shark-infested waters, where two types of sharks swim, jealous operators and frantic handset vendors. He writes:

the iPhone’s new business model is an aggressive attempt to place Apple at the center of the consumer wireless market, increase the company’s competitive power and diminish the role of the wireless carriers.

Given the tough dog-eat-dog dynamics of the telecommunications industry, that is a heck of a big bet that even Steve Jobs might lose.

The operators are the main barrier to greatness:

while Apple talks about “partnerships” with carriers, the carrier really is just a necessary distribution mechanism for the iPhone and the Apple brand. In effect, Apple sees the carrier as a competitor for the customer’s wallet whose power will diminish over time as the iPhone catches on. . .

Apple’s battle with the music labels was like a fistfight with neighborhood punks. Taking on the telecommunications industry is more like nuclear Armageddon.

Me, I think the handset competitors aren’t going to go quietly. Neither does Herr Newmark.

The handset business is ferociously competitive. At the high end, Research in Motion and Nokia. At other price points: Samsung, LG, Motorola, Sony, the new Chinese entrants. Today, Apple’s iPhone may have unbeatable design and functionality. And that may be enough to attract loyal Apple customers and the phone-as-fashion-accessory crowd. But it isn’t enough. Apple must win over the mass-market consumer. Here the going will be tougher. . .

It could get pretty bad. Remember the market for personal computers? Crushing price pressure and rapid commoditization left only a few mass-market competitors, such as Dell, Hewlett-Packard and Lenovo, standing. Along with who else? Apple of course–which survived by playing by its own rules and carving out a profitable niche.

Spot on analysis. I wonder if he read me first, one month ago? It is possible to come to the same conclusion independently. Leibniz and Newton invented calculus at the same time, didn’t they?

UPDATE: actually, Felix looks like he is not drinking the iKool Aid, either. Healthy scepticism levels there. I’d probably still buy one, though. Hey, in the UK, you get one for “free” (OK for 45 squids a month). My lizard brain says “oh me get good deal!”


5 thoughts on “Yes! Someone finally gets it!”

  1. Thanks for the kind words, but I don’t think Newmark gets it at all. Why must Apple win over the mass-market consumer? Why can’t it “carve out a profitable niche” among a large minority of people who will be happy to pay it extra for applications, Mobile Me, iTunes, etc?

  2. If Newmark doesn’t get it, then neither do I.

    The traditional handset model works off SCALE. Offering apps as a sideline is Steve Jobs’ (I hope he is OK BTW) attempt to recreate his failed recurring revenue model. App store is an untried business model. Perhaps it won’t (probably won’t) work, would be a big shift in user behaviour to pay lots of money for stuff to load on their handsets. Some do, to be sure, but is mostly teens downloading fart ringtones, and am not sure this is an aspirational segment for Apple.

    So, unable to depend on that high margin revenue stream, Apple has to keep its margins up by spreading its costs across as many units as possible. Hence mass market. It’s not automatically a disaster, as I (not bloody Newmark, OK) write:

    “. . . it (Apple) has a window to build some scale. At the same price as an HTC, hell, I’d buy a 3G iPhone. I can finally see it taking off. But it’s just a window.”

  3. So if the iPhone is such a gamble for Apple, what’s the alternative? Stay out of the phone business entirely? Doesn’t that put their entire iPod/iTunes strategy at risk? If people increasingly use their phones as their primary music player, then iPod market share may whiter away and with it, the vehicle for iTunes purchased music. (though I assume that Apple makes much more $$ from iPods than from iTunes).

    Look at music players. There’s only one reason that I own an iPod: iTunes. Not the store, the application (I’m a strong believer in stealing my music). The other options for managing my music on a PC suck so much that I’d rather overpay for iPods rather than buy something from Sony or Creative. The fact that iPods are pretty cool helps.

    Look, I loathe Steve Jobs and Mac fanboys as much as the next guy but you’ve got to admit that Apple has wrapped its head around the device/application integration space in a way that makes everyone else look like a bunch of drooling toddlers. My recent experience picking up a Nokia N95 ($650 without a contract…Jeebus!) and trying (and failing) to surf the web doesn’t cast Nokia as much of an application genius, regardless of their handset juggernaut ways.

    With the iPhones, Apple extends their ap-fu into web surfing, GPS navigation, etc. That’s going to be enticing to a pretty decent sized niche…which leads to the question of scale that you mention. It strikes me that when a few hundred million handsets are being sold per year, a niche market can still hit numbers that would be considered mass market in any other space (e.g. 10s of millions of units/yr).

  4. Baruch — I hesitate to wade into this argument (but when has that stopped an investment banker?), but I do not see that you have sent Felix and his “profitable niche” argument off the pitch just yet.

    I cannot disagree with your characterization that the current handset market is one of scale, and current downloads are a crappy business. But Steve Jobs and Apple seem to take delight (and have a fairly impressive record of success) in taking on established markets and changing the game. This is what makes him and his company so disruptive and dangerous to entrenched market participants.

    My sense is that Jobs believes there is substantial unmet demand for more sophisticated products and services in the mobile market (convergence with mobile computing, superior human factors, etc.) than the current giants with their slash and burn scale model have not been able to satisfy.

    Also, referring to your more recent post, I do not necessarily agree that ramster’s comparison of Nokia with its giant R&D spend to General Motors is unsound. In contrast, I rather think the mobile phone/computing device/doohickey market could very well develop into one that looks much more like the automobile market, which is highly differentiated and which sustains a great number of differentiated, highly profitable niche companies. In fact, it is the GMs of that world, which focus on the mass market, which seem to have most of the problems now.

    Finally, I cannot disagree with your better-educated opinion of Nokia’s R&D prowess and effectiveness, but I would caution you with the example of big pharma. There you have a record of vast companies spending gajillions of dollars/euros/simoleons on R&D with dramatically decreasing effectiveness over time. It seems that in that market, at least, there may be strongly diminishing returns to scale in R&D spending. Could that not also be the case in parts of the mobile device market?

    Anyhoo, I just thought I’d give you and your commenters fresh material to rip into, if you are so inclined.

  5. TED, greetings. Glad to see you back engaging with the blog-o-verse, but of course as it probably means business is slow my commiserations, too.

    Your comment goes to the heart of what makes a good company, and the natural cycle of hubris, defeat, and redemption that is just well, life, but which is felt more intensely in tech markets.

    re Apple. “Steve Jobs and Apple seem to take delight (and have a fairly impressive record of success) in taking on established markets and changing the game,” you write. Agreed, that is the established narrative. But as someone who followed them closely during their years in the desert, the 1990s, I don’t think is altogether true.

    What markets have they done this to? I would say 2 only — the personal software and micro-computer industry (where they ended up losing to MSFT in the end) and the music industry thru iPod. That’s it. They’ve been around for 30 years and managed what you say their modus operandi is just twice, or only really one and a bit times. The only reason they didn’t go the way of Commodore was blind luck, fanboy devotion, and MSFT being under antitrust attack.

    Remember PowerPC? Newton? That iTV box?As many projects have caved as have done well. They also tend to swing for the fences, to try and take control over entire tech ecosystems, and NOT to license technology, which works great if it works, but means disaster when it does not. They are incapable of collaborating. iPod was like a Black Swan product, whose effect was intensified with a music industry ripe for disaggregation. They were thus also lucky in their enemies.

    iPhone v 1 was a swing for the fences, which failed. They suddenly got a bit more humble, involuntarily, with iPhone v 2. This gives them a chance to do well.

    They are not lucky in their enemies this time round, rather they are going up against entrenched big pocketed bastard companies who revel in kicking everyone on the goolies while they are down, like Nokia and Samsung. If they don’t spend R&D efficiently they will goddam make sure they spend enough of it inefficiently to get the job done. Ask Taiwanese DRAM players what they think about Samsung. With RIMM they face someone as clever and innovative as AAPL is. They can still make it but lets not get gaga about their chances here.

    What I think they should do is get out of phone HW altogether. License their OS to anyone who wants it. They would then totally clean up. But they won’t it is too “nice” an approach.

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