Baruch is slowly coming to terms with the ghastly truth. Apple is closing down everyone else in the smartphone market, and it seems that nothing can stop it.
For over 10 years the mainly European giants of wireless, the operators, equipment and handsets makers, touted the bright sunlit uplands of our 3G mobile internet future their products would lead us to. Well, they didn’t. Total fail. Handset makers never got their act together, never worked out how to make it easy to use the interwebs. Meanness, fear and general hopelessness meant operators never spent the capex; making fat margins, no-one wanted to rock the boat. Equipment makers were slow to release the fastest network upgrades. Everyone was culpable in their inaction, and until about 2 years ago it looked like we were never going to get anything like what we had been promised in the powerpoint presentations.
But now we are there; look around you at all the people browsing the web on touch screens, using mobile apps, downloading music and watching video. It took an outsider, the least Spinozist company in the world, and an (overpriced) PC maker to boot to make it happen. We have to face facts: the mobile internet has been created, and is now owned and controlled by, Apple, and we owe them a debt of gratitude. Those who know Baruch will realise how nauseating it is for him to write that.
Now read on to find out why all this is in fact a Bad Thing:
Many might think the extent of ownership Baruch has in mind is an exaggeration. Well, it’s not. Forget the quarter Apple posted last week, that was all about Macs — iPhone sales were supposedly held back by component shortages. You can look, as did the Blodget, at market share statistics. But in mobile these are often misleading, and I still don’t know exactly how to define a smartphone for the purposes of comparison.
No, the best definition of dominance is taking a paddle to the competition. To see this look at the financial results posted by the smartphone makers who aren’t Apple. Despite being in one of the hottest spaces in tech, every single one of them whiffed their numbers:
- Let’s start with RIM, the Blackberry maker, who reported last month; the quarter was OK. Yes, they made their unit numbers, but not by much. The key to these things is guidance, and they lowered theirs under the Street forecast, mainly due to having to lower their prices to compete. Overall subscriber numbers are lower as well. The stock tanked and hasn’t recovered.
- PALM missed their guidance. Their “Pre” smartphone, with its much-hyped OS, only sold in the US through Sprint, the weakest US operator. Despite big queues at launch day (Baruch suspects paid actors), follow up sales were weak. Now some people worry PALM has over-estimated demand, and too many Pres (Prii?) sit forlornly in Best Buy warehouses. PALM cut price twice in an attempt to clear this away, and made up for this disappointment by asking everyone for more money to tide them over until they could make actual cash, rather than terrible losses. They promised this would happen soon because they have a cheaper phone called the “Pixi” coming, which will no doubt be the success Pre was not. A lot of people like PALM and so gave them the money. Baruch is not sure this was a good idea.
- Nokia’s high end has been eviscerated. During Q3 this year Nokia’s gross margin tanked. Their excuse is something to do with “yen hedges rolling off”. In reality high end has always been the key driver of gross margin and having most of that go away, and the remainder heavily discounted to sell, is a much more devastating blow. Once again, competition from Apple is destroying its business in the high and mid ends. The only thing that works for them are cheap handsets sold in emerging markets.
- Finally, High Tech Computer. Poor HTC, they were Baruch’s favourites with their Android-based smartphones, his Great Open Source Hope. The leader of the Android camp with lots of experience in software and hardware integration, if anyone could give Apple a run for their money it was HTC. But no, they missed their numbers too. Not enough people were buying Androids, they told us as they lowered their guidance. There’s a huge branding gap, both for the platform and HTC itself, they said. Most customers didn’t know what an Android operating system was, or what it did. They didn’t know what an HTC was or what it did either, for that matter. Everyone knows what an iPhone is, of course.
Things are going to get worse for these guys. There are lots of new entrants, first of all. Motorola is relaunching as an Android smartphone shop and non-traditional smartphone players like Dell, Huawei, and Asustek-Garmin are all getting into the Android game. Nokia is slowly revamping its lineup, adding a clunky app store, and using a new Linux-based operating system. RIM has its Storm 2 flagship on the way (Storm 1 sucked). The Koreans, LG and Samsung, are starting to put out Androids and are trying to get more software aware. Sony-Ericsson is coming back with gazillion megapixel-cameras and touchscreens. All in all from a competitive perspective Q4 is looking like a train wreck. I can’t wait to see what people are going to come up with in 2010; it’s likely to be a golden age for smartphone hardware. But I don’t think any of the wonderful phones we will see is going to make anyone any money.
This is because Apple still has it sewn up; this marriage of great hardware/software, vast iTunes song and video content and mass market and long tail apps frankly seems unbeatable at this point. Another novel advantage is own distribution, through Apple stores, keeping the hardware margin and the retail markup. Incredibly, Apple is now the scale leader in the handset industry; it makes more EBIT from mobile phones than Nokia. So it has more R&D to spend, more marketing oomph.
To make things worse, Apple managed this with exclusive operator relationships, which are set to expire. When they do we are likely to see a further step change in market share for Apple. In France this year, the first non exclusive big market, Apple immediately became the top-selling handset vendor in the country, number one by revenue. With only one handset on sale, that’s unheard of. Nokia runs about 30 models at any one time. Replicate that in the UK, Germany, Italy and Spain, and eventually the USA, and that’s a problem. With all these gifts, if by the middle of next year Apple can’t put together a portfolio of devices, including a cheapo one for poor people, take massive share and put one or other of these rivals out of business completely, then it will be surprising.
Of course, for any right-thinking person, this level of dominance is appalling. As things stand, mobile computing will not be a free medium rich in dynamism, competition and innovation, it will be a controlled environment, a “walled garden”, in the argot, one where Apple decides what apps you run. Apple will have massive influence on mainstream content. If you’re not distributed by iTunes, you will be nowhere. Sure you can read what you want on the Safari web browser, for now, but that’s the only thing Apple won’t have pre-approved on your behalf.
Now, Apple’s prime goal is to make money, and has no, if any, moral or political axe to grind; despite the touchy-feely rhetoric, they’d likely sell their iGrandmothers if they could. They’re no Murdoch. They are extremely unlikely to censor an innovative app or service if there’s the slightest chance they’ll make money off it, or if it makes their customers “stickier” to the platform. There’s no editorial slant. Or is there?
Apple is “clean”; it’s “cool”. It’s progressive. Quality that works. It’s the future, all clean lines, with a preponderance of pure white and blacks, with burnished metal bits. It has brand values; it’s a corporation. And like all corporations operating in a competitive space its function is to hegemonise, to grab as much money and power to make more money as it can. In 99.9% of cases competition from other corporations doing the exact same thing constrains that power and creates a succession of temporary and unstable equilibria, and in the transitions between those equilibria innovation happens. And that benefits all of us; it’s the theory behind capitalism. But when those constraints are removed and a company grows and grows and grows it is like a cancer, necessitating intervention from antitrust authorities. And once you get to that stage you’re in an innovation-free zone.
I posted a few months ago my thoughts on Jason Calacanis’ suggestion that Apple be investigated by the DoJ; since then, I see that Apple’s dominance has increased in a step function, and is set to increase further still. Are we doomed to become iSlaves? Will Apple rule the mobile interwebs for hundreds of years, a disembodied Steve Jobs head attached to a cyborg body still making product presentations to groups of pre-approved applauding sycophants?
My fear is that Apple will make wireless computing sterile, neutral, edgeless. Corporate. Take pornography; most communication innovation has been adopted first by pornographers this century, from videotape to the DVD to the internet. What are the chances of an iPorn app being onsale in iTunes, or one leveraging the GPS function that lets you see the nearest prostitutes, hey never mind that, the consenting adults, specialising in your particular fetish? Or an app for devil worshippers who want to sacrifice a virtual goat (or child). What about a Stalinist social networking app? Or one for Nazis? Even something as harmless as iGaydar was blocked; I don’t know if it has been de-un-blocked again.
Of course, Apple doesn’t hate gays. And probably doesn’t have much of a view on goat sacrifice. But it knows it will suffer negative publicity from any large, paying segment of the population should they be seen to facilitate the groups they don’t like. Apple will be willing enforcers of the tyranny of the mainstream and the majority. And that’s definitely not the way to have a creative or even an interesting mobile computing industry.
Apple is still a tech company and the only constant in technology is change. No dominance endures for long, walled gardens especially, and product cycles are shrinking fast. As the Jeff Goldblum character in Jurassic Park puts it, life will find a way. Some future version of Android running on totally commoditised hardware seems to be the most likely rival candidate right now, but to Baruch at least it seems too obvious, and Google too distracted with so many different projects that it might end up priotising everything and succeeding at nothing but search and Adwords. Another possibility is the Intel camp, the X86 world catching up with the mobile world in terms of energy consumption and form factor constraints. Intel’s strategy is to make future versions of its Atom processor, which currently drives netbooks, become leaner and meaner so that they can fit into and run proper mobile handsets. Unleashing the PC/Wintel programming horde on commoditized hardware could ultimately swamp the Apple ecosystem, break into the walled garden and cover it with the computing equivalent of kudzu or virginia creeper.
The other thing that could happen is that smartphones get substituted by something else we haven’t yet thought of, and Apple misses the transtion. This is what typically happens to tech companies, from IBM in mainframes, to PDA makers like Psion or Palm version 1, to videotape, to cathode ray tubes, punch card computing, circuit switched copper telco networks, etc etc. But given where it looks like we are in smartphone adoption, this will take an awfully long time. Maybe the Calacanis, government intervention version will have to happen after all. But that will be a risky strategy for the regulator, who is likely not to bother as 1), they only tend to recognise dominance in well-established markets like rubber, steel and I don’t know, wigs — not things like mobile computing, and 2) politically there will probably prove no group of voters as motivated, financially muscled and just downright hissy as Apple fanboys when roused.