Horace Dediu

The iPad launched in April (i.e. Q2) 2010. Since then the PC industry (excluding Macs) has seen a decline in growth. The following graph illustrates global shipments as reported by Gartner:

Note that the growth rate has been negative for 4 out of the eight quarters since. The latest data shows a decline in shipments of over 9% bringing yearly growth to negative territory for the first time since the recession of 11 years ago.

There's not much I can say that hasn't been said every quarter since 2010. The industry analysis as provided by Gartner suggests a different cause for the decline, becoming more creative each quarter. This time it's "challenging economic environment" and "lack of appeal and innovation", "delays due to tax incentives", "lack of new models", "conservatism", "clearing out inventory" and "softness".

The primary challenge to these ascribed causes has to be that all these factors also affect the tablet industry and yet it's growing at phenomenal rates. The rate of new product introductions is not faster for the iPad than for PC vendors. The public and private sector buying conditions are the same. The "conservatism" on the part of institutional buyers should affect the newcomer more than the established.

The notion that an outside challenger with a new platform, an unproven set of features and missing "security" should grow in the face of difficult macro conditions that are slowing the established platform makes no sense.

My hypothesis is that the new products are solving new jobs for the users and those new solutions are trumping any "softness" in demand. In other words, an upgrade to an over-serving product will be deferred at the slightest excuse while an installation of an under-serving product that attacks an unsolved problem will be rationalized no matter the circumstances.

One product will be met with "Why should we buy it?" and the other by "Why shouldn't we buy it?"

These are the decisions made by millions every day and yet it seems that some analysts don't see any pattern forming. Such is the dilemma of disruption.

My talk at the TOC Frankfurt is available as a free Perspective download.

What are books hired to do?

[Originally presented October 9th, 2012 in Frankfurt Germany.]

I spoke about what books and other media are really hired to do. The basic needs of users are met by story tellers but the products of commerce often chase user attributes rather than their needs.

My talk at the Tribute to Pike Powers is available as a free Perspective download.

Manufacturing Miracles.

[Originally presented October 8th, 2012 in Austin Texas.]

I present a short history of manufacturing ramps during World War II and the effects on the outcome of the war. A comparison is also made of value created vs. modern smartphone production.

My Swipe keynote presentation is available as a free Perspective download.

Swipe Conference 2012 Keynote.

[Originally presented September 5th, 2012 in Sydney Australia.]

In it I present the history of personal computing and the shift to new platforms that foreshadows the dawn of a new era.

It takes money to make money. That's a cliché. But it's also true. The interesting question is how much can be gained from how little.

In previous articles I explained how Apple's expenditures of capital for equipment used in manufacturing affects their output of products. The relationship between capital in and product out should stand to reason.

The more surprising aspect of that analysis is that we get to know in advance how much Apple spends (since they tell us their budget a year before it's spent.) and therefore it becomes possible to get a rough idea of how much they will produce. And since demand has generally been higher than supply we can get an estimate of how much Apple will sell.

The only missing piece to this logic chain is to estimate how much will shareholders benefit from the capital expenditure. I'll try to establish the relationship through a build-out of graphs.

The first graph shows Apple's share price at weekly resolution.

The time frame stretches back six fiscal years. The time span includes some dramatic periods including the financial crisis and the launch of the iPhone and iPad.

To illustrate the effect of the iPhone and iPad on this share price appreciation, I've overlaid a quarterly resolution graph showing revenues over the same time period with each product line shown separately.

 

Note that I've indexed the vertical scale to match approximately the highest peaks of both graphs. The two axes scales are shown separately on the left.

The relationship between growing sales and growing share price is plain to see. Note that the iPhone and iPad account for the vast bulk of  sales growth and hence they are mostly responsible for the share price appreciation. Again, this should not be surprising. The scale gives an approximation of the relationship where $50 billion in quarterly revenue roughly yields a share price in the $700 to $800 range.

As I've shown in the last post on forecasting production using CapEx (focus on the last chart) iOS device shipments (mostly iPhone and iPad) correlate with capital expenditures in the previous quarter. Using the historic relationship, the next two quarters could see a significant increase in iOS unit production. The sum of the low end of the range implies about 163 million units.

If the relationship is therefore CapEx -> Production and Production -> Share price appreciation, then the transitive implication is that CapEx -> Share price appreciation.

That relationship would be illustrated as follows:

The CapEx data shows the offset to the right due to the relationship with production being time shifted by one quarter. Recall that expenditures are booked ahead of output and therefore we have this apparent view into the future.

The fourth fiscal quarter's spending has just ended and the output will be produced during October-December period.

The obvious question is whether production will increase in response to spending (as it has in the past), or, put another way, will the stacked bar areas follow the beige bars and, furthermore, will share prices follow production (as they have in the past) and thus the red line will follow the beige bar.

It takes money to make money. The relationship seems to be that $1.5 billion of CapEx per quarter yields a share price of $800. With spending reaching $3 billion per quarter will the share price reflect a similar ratio?

A conversation with Philip Elmer-DeWitt on Apple's relationship with the media. How did the relationship evolve, is it changing and how is Apple addressing different media channels. Philip brings 30 years of experience to Apple journalism and provides some poignant anecdotes about Steve Jobs, the folklore of Apple and the disruption of journalism itself.

via 5by5 | The Critical Path #57: There Were Too Many Newspapers in New York.

[The following was originally published on LinkedIn.]

The US is in the forefront of smartphone usage. This has not always been the case. Five years ago only 3 percent of US phone users were using a smartphone, lower than the global average. At the time Palm and BlackBerry were the prominent devices in the US while in Europe Nokia's push with Symbian and Microsoft's licensing of Windows Mobile led to a smartphone adoption rate of about 7%.

All that changed with the iPhone. After 2007 the US began to rapidly catch up and eventually overtook all other regions in terms of smartphone adoption. The latest data from comScore Mobilens shows that the US is now effectively 50% penetrated. The following chart shows just how quickly this happened.

Image (media01.linkedin.com)

In December 2009 only 17% of Americans used a smartphone as their primary phone. As of August the total reached 49.8%. By today the US is effectively a majority smartphone usage country and it looks like there is no slowing. We might very well see the US reach saturation with 80% smartphone usage in another two years.

Of course, the US is not the first country to reach this threshold. Some northern European countries were there earlier, but North America is the first major region to get there. That means over 115 million smartphone users in one market. As a result, the US has become the crucible of the whole smartphone market. It's where platforms are most concentrated in use and therefore the most sensitive to the effects of that usage. That leads to more innovation, more discovery of new use cases and more ecosystem growth. Quite simply, it's where competition is most heated.

This prominent position implies that the US could now be seen as a leading indicator of global trends. It might allow a keen observer to predict what will happen from US data. So what does the mobile platform rivalry look like in the US?  We are fortunate because the data is finely grained in the US. We have montly updates from comScore and we get specific platform penetration data. The following graph shows the shares of the major platforms since late 2009.

Image (media01.linkedin.com)

It becomes immediately evident that BlackBerry has lost a huge part of its user base to Android and iOS. In 2.5 years share when from about 42% to 8%. In raw numbers that's 11 million users that switched to another smartphone.

Looking closer you can also see a consistent growth in share for the iPhone since mid 2010 with a slightly higher rate of increase of share than Android in the last few months. The problem is that this pattern of rapid decline in RIM and moderating growth in Android is not necessarily mirrored globally.

RIM just reported an increase in total users during the last quarter (from 78 to 80 million subscribers.) Google also recently reported 500 million Android activations globally with no apparently letup in growth.

So there seems to once again be a disparity between the US and global platforms. Do we take the US market to be anomalous or is it a pre-cursor to global trends?

Certainly the US market is in many ways unique with a very low rate of pre-paid usage and a relatively high ARPU and average device pricing due to subsidies. However, the global trend has been to increasingly mirror the US not vice-versa. The iPhone has radiated out of the US in terms of usage and so has Android. Attempts by other platforms to make inroads in the US have been unsuccessful. Symbian failed to gain a foothold and it seems Windows Phone is stumbling as well. Both of these platforms have had more success outside the US. The US operator subsidy model has also been "exported" more than pre-paid has been "imported". By 2007 Europe was moving away from subsidies as prices of feature phones were coming down and 3G was still in its infancy. That was reversed as the large screen smartphones became the device of choice. In addition to device and operator trends, most apps originate in the US and the major social media platforms are all American-based. In other words, the modes of usage are being conceived in the US.

On the other hand, the US is still a tiny percent of total consumption. It represents only about 6% of all phone users. Chances are that prices for devices in the US (especially the iPhone) can't be sustained for 5 billion consumers. Then there are "cultural" considerations where regions cling to their own usage habits and perceptions of value.

So it's still an open question of whether the US is the leading indicator for how platforms might change globally but I would watch this data very carefully. When it comes to mobile platforms, it might be that if it plays in the US it will play globally.

This is a quick note to mention that I'll be speaking at the Tools of Change (TOC) Frankfurt Conference this October on the eve of the Frankfurt Book Fair. Conference details:

• Tuesday, 9 Oct. 2012, 8:30 a.m. to 6 p.m.
• Frankfurt Marriott Hotel
• Hamburger Allee 2
• +49 (0) 69-7955-0
• Directions

You can get a 20% discount if you use the following code when registering:

TOCPartner20TSpeaker

I'll be speaking about the jobs publishers are hired to do. Without giving too much away, here is my synopsis of the talk:

We're inclined to "categorize" or "segment" media according to its attributes. We think of visual, auditory or written forms as distinct. Within each of these definitions of media we further sub-segment according to the way they are packaged. As in books, periodicals, or TV vs. film and albums and singles. These definitions are convenient because they describe the product and the product has evolved into a distribution chain and a therefore a market. It becomes therefore analogous to think of a book market and a TV market and a periodicals market as if these are what people actually desire.

But what people desire are more basic things. They desire to feel good or to be comfortable or to escape into fantasy or to be aroused. They have thirsts for knowledge or flights of fancy or needs for belonging. Authors and story tellers have sought to serve these needs for as long as we've been humans, regardless of the medium. When you step back and ask what the real "markets" are you realize that we've categorized according to technical and business means of delivering these needs.

Business theorists have a word to describe this categorization: segmentation according to product attributes. It's a common practice to define markets according to products rather than what these products are hired to do. The great Harvard marketing professor Theodore Levitt used to tell his students, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” The idea that you can categorize by what consumers want to get done rather than what you are selling them is not new but it's still a very hard thing to get your head around. It's become known as "Job to be done" segmentation and has changed product planning for many firms. If you apply this method to your industry you realize that the products you sell are in competition not with other products like them but with completely new products. A newspaper may be in competition with Angry Birds and a TV show with FaceBook and a Movie with a cinematic themed video game.

If you take the history of story telling and job to be done analysis into consideration you realize that technology has always played a part in how stories are told and re-told. This technological progress is accelerating and we are now in an era where apps are the new medium which can encompass much of any of the previous story telling mediums. Apps are so flexible and so easily distributed and consumed that they threaten to converge multiple media types. I'll explain how app economics are affecting not just games, but all forms of publishing.

Image (pixxa.com)

This is a talk I gave today at Aalto University. It's a wide ranging talk and Q&A session lasting about 2 hours.

You can listen and see the visuals using the Perspective app on your iPad. Download the app (free from the App Store if you don't already have it) and open the link below using the iPad.

How Did the Mobile Industry Get Disrupted.

On October 5th, 2011 I asked Why is there no iPhone 5? The question was prompted by the pervasive media surprise that the 2011 iPhone launch was the "4S" and not a completely new design.

I answered this question with the conclusion that an iPhone "5" in 2011 would over-serve the market by offering more than most buyers would be looking for. That was because there could only be three groups of users the iPhone 4S would need to target: existing iPhone users, smartphone non-consumers and non-iPhone smartphone users. The majority of iPhone users in late 2011 who would be willing to upgrade were iPhone 3 or 3GS users and for them the 4S would be a huge improvement. Non-consumers would find the 4S attractive, as they would any iPhone; and existing smartphone users (mainly Android) would still be in their first contract and not likely to be looking to upgrade. Given the conditions at the time, the 4S was an adequate fit with customer expectations.

I wrote "The question will be very different a year from now when most early Android buyers will be looking for a new phone and when most iPhone 4 users (all 70 million of them) will be looking for a new iPhone. That would seem like a good time to introduce a new iPhone '5'."

It is now a year hence and we can consider how these same three targeted user groups see the new iPhone:

Read the rest of the post here: Why iPhone 5? | LinkedIn.

(Note: you can also follow me on LinkedIn now).

Quarterly financial data is often a lagging indicator of strategic success. RIM's vital signs were exceptionally strong up until early 2011. Consider the following graph showing RIM's device growth.

Using language commonly heard among analysts, one would say that the company was "reverting to the mean" and growing nearly in-line with the market. In other words, exceptional growth was over but continuing growth was likely. The company was returning to something "normal."

However, keen observers of the market would have been hard pressed to find any reason for justifying that performance. Seen through a disruptive lens, it was evident as early as 2008 that RIM's strategy was not sustainable. The company had a very weak smartphone product relative to emergent iOS and Android ecosystems. And yet, the company continued to prosper for nearly three years, through 2008, 2009 and 2010. Those shorting the stock during this period would have been unrewarded.

But then in early 2011 it fell off a cliff.

There was no reversion to the mean but an acceleration toward oblivion. The share price dropped to book value or below liquidation.

This pattern was very similar for Nokia. It too looked fairly strong on paper until early 2011 when it found it necessary to fling itself off a platform.

This pattern of disproportionate decline is a mirror image of the disproportionate ascent of Apple.

It might sound like a spectacular story; an anomaly, a once-in-a-lifetime reversal of fortunes. However, the moral of this story is that this is not an exceptional phenomenon. Disruption happens. It happens quickly and perhaps most quickly in this industry, and looking at trailing indicators like revenues and profits is of no help. I've only witnessed sharp expansions and sharp declines. I've never witnessed steady state, quiescent markets in technology. The history of platforms is always virtuous cycles followed by vicious declines. Whatever amplifies success seems to also amplify failure.

Rather than assuming that businesses are in a state of average growth or in some anomalous state above or below that average (from which they'll recover) we need to think of them being either growing or failing. Going straight up or straight down.

If this is the case, how can anyone expect to manage this? Orthodox management theory assumes continuity but the world seems discontinuous.

In a discontinuous framework it's important to look for unfair, unsustainable advantages that can be capitalized. Once exploited the advantage often disappears. The victim assumes it becomes sustainable. The survivor looks for another advantage. Resting is not an option and the mean is only an illusion.