An aging Apple?

Filed under: Apple,Wireless Industry

According to a new report from Nielsen SoundScan, for the first time since 2003, when the iTunes store opened, annual U.S. digital music sales have declined. Digital track sales fell from 1.34 billion units in 2012 to 1.26 billion in 2013, a decline of about six percent.  Digital album sales fell 0.1% while CD sales went into free fall – down nearly 15% last year.

The driving force behind these numbers appears to be the growth of streaming music sites which suggests that creative destruction in the music industry is alive and well.

But that aside, the more interesting tech parlor game is how this change will affect Apple.  After all, no other company has used the music industry’s current business model more effectively and more profitably.  Apple has married innovative hardware and elegant software into first-class (read: expensive, high-margin) products.

This strategy worked because everyone needed personal hardware (iPods, iPhones, Macs) to access entertainment.  The “cloud” was not a viable mass-market option for most of the past decade and Steve Jobs many times dismissed the concept of streaming music services.

But with Spotify, Pandora, Vevo (the web’s #3 video publisher behind YouTube and Facebook) and others offering attractive services to fit changing demands, the concept of buying single songs no longer has the same allure.  Yes, Apple Radio is a good entrant but it was woefully late.

In the past, Apple cannibalized sales in order to create new products.  The iPhone did that with the iPod.  But Apple back then was a different company.  Its near-death experience in 1997 was still recent history when the company began work on the iPhone in 2004, despite protests from the iPod division.

With the music industry seeing the impact of cloud-based services, Apple’s model no longer looks as imposing.  Moreover, a $487 billion company (Apple today) doesn’t necessarily act with the quickness of a $2.3 billion company (Apple in 1997).

The song will not remain the same.  Stay tuned.

The cutest commercial you’ll see this weekend

Filed under: Telecom

Question: How does a Fortune 15 telecommunications company differentiate itself from the competition?

Answer: By creating a really well-done TV commercial that can’t help but create smiles.  Here you go:

Disclosure: Yes, the company has been a client since 1998.

“There is no reason for any individual to have a computer in his home”

Ken OlsenDigital Equipment Corporation (DEC) founder and longtime CEO Ken Olsen died this week at 84.  By all accounts, Olsen was a decent man but his passing is a timely reminder of the problems of lineal thinking with technology.

Olsen missed the PC revolution because he didn’t see oncoming OS improvements that would make the computer a consumer product.  He wasn’t alone.  Around 1980, IBM rejected a young Bill Gates’ offer to sell the forerunner of the Windows OS for about $100,000.  As decisions go, that’s akin to General Pickett telling his troops to take Cemetery Hill.

Olsen lasted as DEC’s CEO for another 15 years after making the above comment in 1977.  But by that time, the company was well into its death roll.

Fast forward to today: The PC era is ending and the OS as we’ve known it for a generation won’t matter because what made it important to us is quickly migrating to racks in a dark data center. Devices are increasingly coming preloaded with the OS on a chip, while apps and data are stored in the cloud.

Meanwhile, our computer gizmos are falling into two groups: mobile devices, including ultralight laptops, and large displays with integrated receivers for entertainment.

DEC’s mainframes lost to minicomputers 20+ years ago because the latter were less than half the cost.  (As an added bonus, they didn’t need a special room cooled to the temperature of Detroit in February.)  By the early 1990s, minicomputers had lost out to PCs because the computing cost of latter was less than half that of a VAX.   Now, look forward to what the cloud means: Companies can slash their IT staff because they won’t need to spend the money when employees have stripped down smart terminals, an small encrypted hard drive and an Ethernet connection.

Welcome to the future!

Ding-Dong, the Paid Ringtone’s Dead

Filed under: Telecom

Ringtones were an $881 million dollar business in 2008. Last year, the business shrunk by $130 million and according to research firm IBIS World, by 2016 paid ringtones will go the way of (take your pick) the DoDo Bird or Palm’s mobile software.

Why? According to Fortune’s Kim Thai, who writes the magazine’s Tech Talk column, the reason is pretty straightforward:

“Cellphones simply don’t ring as much as they used to…. In the past two years the average number of text messages sent by each U.S. cellphone user has more than doubled, to 584 texts per month from 218 per month. In that same period the average number of calls has decreased almost 15%.”

Here’s the larger point: Just as digital music allowed consumers to go around the record companies’ short-sighted business models, so too has the “democratization” of mobile technology allowed consumers to bypass companies peddling ringtones. It’s a lesson the FCC should heed as it considers whether to regulate “neutrality” into the public Internet, VPNs or both.

Lies, Damned Lies and…

(New York) Two articles this morning show the fun to be had with number-tossing.

First, there’s a new mobile phone survey from ChangeWave Research that touts a “250 percent increase” in mobile users’ opting for Google’s Android OS. Of those planning on buying a smartphone, 21 percent said they expected to purchase one using Android compared with 6 percent in September. It’s a solid gain but not nearly as impressive as ChangeWave hype:

“Monstrous… [The] change rivals anything that we’ve seen in the last three years of the smartphone market,” said Paul Carton, ChangeWave’s director of research, adding that the sudden surge in consumer interest in Android had “roiled” the market.

By “last three years,” Carton presumably means “since the iPhone.” Anyway, what’s so amusing – coming from a “director of research,” no less – is the way he spins a decent-but-expected growth rate. The company’s survey comes on the heels of the estimated $100 million that Verizon and Motorola spent promoting the Droid. So going from a small base of 6 percent to 21 percent hardly seems “monstrous.” Moreover, the “250 percent” figure is what happens when you begin with such a small number.

And “roiled” the market? Note to ChangeWave’s PR Department: Stop the hyperventilating. No one who understands the industry believes you.

This brings back memories of the Internet’s biggest sham from the late 1990s – that data traffic was supposedly doubling every quarter. It happened once or twice around 1996 when AOL had 1+M subscribers and was ramping up quickly. But after that, the ability to doubling off of a large base became a fantasy.

Next up is Suzanne Vranica’s article in the Wall Street Journal, “Dr Pepper Buys Its First Super Bowl Spot,” which begins, “In an effort to drum up more interest in its recently launched Dr Pepper Cherry, Dr Pepper Snapple Group Inc. has bought advertising time during Super Bowl XLIV.” The purchase marks the first time in the company’s 125-year history that Dr Pepper will advertise during the National Football League championship, which will be broadcast by CBS Corp. on Feb 7.

First time in 125 years? Nice, except that the NFL didn’t come into existence until about 1920. Anyway, here’s the commercial, which is pretty funny.

What 2010 Will Bring

As Yogi Berra once said, It’s hard to make predictions, especially about the future. A few predictions from the 2010 crystal ball:

Google’s pride goeth before its fall. Not content to be the big kahuna in technology, Google soon becomes a consumer products company with the Nexus One. Big mistake. This requires a totally different competency – oh yes, and means lower margins. Google has no experience in consumer marketing and brand loyalty is unproven at best. There’s a big difference between convincing ISPs or OEMs to default to your search engine and convincing millions of consumers to choose an unsubsidized phone.

Also, sales will lag without subsidies which further depresses margins. Remember that iPhone sales didn’t soar until AT&T’s subsidies brought the price below $200.

And speaking of Apple products….

Apple’s tablet will produce a migraine. Let’s assume that the iSlate is introduced in January and costs around $800 . The Mac Air isn’t much more expensive and probably does a lot more. Moreover, if you’re going to work on the LIRR or leaving on a business trip, you’re already carrying your laptop. So why carry another expensive gadget which becomes yet another thing to break, leave in the hotel room, or lose in the airport. Not to mention that the AppleCare will likely be another $250.

In this economy? Not gonna happen.

Clearwire’s troubles will mount. “You got real trouble comin’,” said Jackie Gleason in a memorable 1976 movie line and this will probably be Clearwire’s mantra in 2010. Even though the WiMax technology is decent, the idea that consumers on a mass market scale will opt for an unbundled service sufficient to cover capital outlays is fanciful. The company’s recent promo will not be enough to spark sufficient growth. Meanwhile, Google’s decision to turn off the investment spigot looks increasing prescient.

Verizon still doesn’t get an iPhone – unless it does. This is my Hail Mary. Conventional wisdom has it that Verizon gets a CDMA iPhone by 3Q10. I still doubt it. That’s when the company will be rolling out its 4G service. So why would Apple want to tie down its iPhone with a CDMA technology that Verizon itself will be calling outdated? Sure, Apple will sell a few million more iPhones but it’s still faced with the task of adapting 4G technology to the iPhone OS. Not a very appealing long-term strategy from a company that prides itself on always being at the cutting edge.

Odds are that I’ll be wrong on the last one. But as Eli Manning and David Tyree could tell you, sometimes it pays to throw long.

Farewell & Adieu, MMIX

Before bidding 2009 a bon voyage, it’s worth noting two recent media commentaries. First, Francis Wilkinson has a warm and wonderful portrayal of the great Jody Powell in today’s New York Times. His portrayal brought back the usual flood of Powell memories (for more, click here and here) as well as reconfirming that while Washington hosts more than its share of phonies, it also catapults to success some truly outstanding, wonderful people.

Next up is Andy Kessler’s oped in Saturday’s Wall Street Journal. Kessler’s usually pretty sharp on technology and telecom which is why this column is so disappointing. For starters, his idea of setting up a nationwide wireless system by linking transmitters to street lights is fanciful. AT&T tried it in St. Louis and backed out in 2007 because the technology just didn’t work.

Moreover, Kessler’s comment about the telecos and employment is just plain absurd. AT&T is the nation’s largest private sector employer of union workers. While Google has a larger market cap than AT&T it employs 10 times fewer people and has a capex budget less than one-eighth as large. So which one seems more likely to start hiring?

That’s it for 2009. Thanks for reading and feel free to sign up for my RSS feed. See you in 2010!

From the Sublime To…

(Washington) … the ridiculous:

“This notion that customers must now curb their Internet usage or pay up is not only unfair to consumers, it puts up a roadblock to wireless innovation,” says Craig Aaron, senior program director at Free Press, a nonprofit group that advocates for unfettered access to communications.

The year has three more weeks but it’s safe to say that the competition for the most incomprehensible, illogical statement is over.
Beyond the absurdity in Aaron’s statement, the irony is that Free Press styles itself as a consumer advocacy group. But what sort of consumer advocate could possibly support a uniform pricing system in which serial filesharers are subsidized by senior citizens who use their connection to check email twice a day?

Logic would say that Free Press and a consumer advocate like Craig Aaron should support a lower-priced option for occasional users, instead of deriding it. Wonder why they don’t…

LA Confidential

(Las Vegas) The award for the year’s most puzzling headline goes to the Los Angeles Times for this doozy on David Sarno’s story about iPhone usage: “AT&T may penalize iPhone users who hog data.”

It’s a great headline, at least to the extent that “penalize” is a shorthand way of saying, “Those who consume a lot of a product should pay more than those who only use a little.” Actually, Sarno’s article is fairly straightforward and is one more example of how the current uniform data pricing structure among wireless carriers is increasingly untenable.

According to the head of AT&T’s wireless division, three percent of iPhone users are chewing up 40+ percent of the company’s bandwidth. Credit the proliferation of mobile video options. But this imbalance should hardly come as a surprise since a similar imbalance has existed on wired broadband for years.

Japan, which led the world in wired broadband, faced a similar issue well before America did. Thanks mostly to P2P, fewer than five percent of subscribers consumed almost half the country’s bandwidth. For a good resource on this, here’s the 2007 report on net neutrality from Japan’s Ministry of Internal Affairs and Communications.

Specifically, look at the usage charts on pages 17-19 and the conclusions on pages 59-66.

Mobile Agonistes

(New York) LA Times columnist David Lazarus writes in his column today:

All [wireless] phones should work on all compatible networks — particularly in light of the fact that all wireless companies are building state-of-the-art networks to accommodate increasingly snazzy smart phones.

Figure it like this: If you buy a TV at Best Buy, it’ll work with any cable or satellite provider you pick, anywhere in the country. Mobile phones should work the exact same way.

Well now.

Lazarus is a bright guy and ought to know the obvious problems with this ridiculous comment. First, the four main U.S. carriers (AT&T, Verizon, Sprint and T-Mobile) use incompatible technologies. Second, these technologies operate on different frequencies.

In technical terms, unless your carrier’s cell tower technology and emitting frequencies match the radio in your mobile phone, your call won’t go through. That’s why European 3G handsets have difficulty with the U.S. 3G standard. Even though the technology is basically the same, Europe’s standard for 3G is 2100 MHz, while AT&T operates 3G at 850 and 1900 MHz.

That means that while Lazarus’ dream of a mobile phones that are technology- and frequency-agnostic can be achieved, it won’t be cheap. Nor does he acknowledge that there is the cost. Maybe an additional $60 per handset? Maybe $80.

That said, the market is converging, as the 4G/LTE standard should bring greater technological harmony to the mobile industry. But don’t hold your breath, as it won’t be truly mass-market until 2011.