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.

“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!

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!

Twitter’s Follies

(Las Vegas) There’s something risibly ironic about Twitter CEO Evan Williams co-signing a letter to the FCC that calls on the Commission to “begin a process to adopt rules that preserve an open Internet.” Leaving aside the irony of a federal agency drafting “openness” regulations, what’s amusing is how Williams seems to have forgotten how easily his own company leapt to an unwarranted conclusion two years ago on precisely this issue. Back in 2007, some T-Mobile customers began having difficulty twittering. On December 14, co-founder Biz Stone blogged: “Hey folks. T-Mobile has definitely turned us off without notification.” Oops! A few days later, the company was forced to admit that it had botched its investigation. There was no blocking at all, but “purely a technical issue between T-Mobile and Ericsson, the folks who serve our SMS traffic.” Stone acknowledged that earlier comments had been made on the basis of “limited information.” (Memo to CorpCom departments: Never let your press releases get in front of the facts!)

A similar incident happened in 2006 when some Cox customers could not access At least give Craig Newmark credit for admitting that the issue was “a genuine bug.” However many of his Net neutrality supporters weren’t as dependent on the facts for their conclusions.

Alas eBay CEO and Dartmouth grad John Donahoe also signed the letter. You’re doing a great job at eBay, John, but avoid the temptation of diving into federal regulation. You wouldn’t be the first tech CEO to get burned by a federal policy fight. Remember how Steve Case began lobbying for open access on cable — right around the time AOL was negotiating its merger with TimeWarner?

Net Neutrality Follies

The New York Times’ recent editorial on Net neutrality sets a new standard for dismaying ignorance about how the Net actually works. It posits that the Verizon-NARAL texting snafu is a reason to support Net neutrality. But that two-year-old issue involved Verizon’s refusal to grant NARAL a short code, which has nothing to do with network operations!

The Times’ editorial also suggests that without federal neutrality regulation, “Businesses could slow down or block their competitors’ Web content.” But as Hogan & Hartson’s Christopher Wolf, one of the nation’s premier Internet attorneys, demonstrated in a detailed analysis more than three years ago:

“If the hypothetical fears of those calling for regulated ‘net neutrality’ actually do come to pass in some fashion, there are legal remedies already available under existing laws and legal doctrine.”

These options include unfair competition law, antitrust law, and common law tort theories. Moreover, as the Supreme Court confirmed in its Brand X decision, Title I of the Communications Act of 1934 gives the FCC power to take regulatory action if presented with unfair business tactics by broadband providers.

The Times’ editorial on Net neutrality shows a gross misunderstanding of the law, network operations, and the precarious dynamic of funding for Internet deployment. Other than that, it’s tolerable.

Google’s On2 Something

(Washington, DC) Tech guru Mark Stephens, who writes under the nomme de guerre Robert X. Cringley, just posted a great analysis of Google’s recent purchase of On2, a maker of audio and video compression software. The real issue with Google isn’t hard to figure out. Its server farms stretch from Oregon to North Carolina and form the basis of the company’s move into content delivery. Witness YouTube’s increasing attempts to monetize itself through program ads a la Hulu.

That’s also why the company has kept up the drumbeat in Washington for Net neutrality, which undercuts the development of tomorrow’s Internet and – what a coincidence! – helps to freeze in place Google’s advantage in content delivery networks.

Funny how self-interest can seem so high-minded at times..