Asymco

Asymmetric Intelligence

Research

  1. Perspective and Context in Personal Computing

    Research · 49 comments

    The Mac grew at the extremely low rate of 1.8% over last year's second quarter. Although it grew faster than the Windows PC market, the gap has narrowed quite a bit. The following graph shows the growth of the two members of the computing Ancien Régime.

    We have to wait a few more quarters before we can decide whether the Mac will enter a new phase of diminished expectations. Although it's not immune from the impact of the iPad, the effect can take a long time to be evident and in either case, growth can come from conversion of Windows users which vastly outnumber loyal Mac users who might upgrade.

    If we see the computing market as the superset of keyboard+mouse input and touch-based input then new computing consumption becomes easier to spot:

    Seen this way, rather than there being a crisis in personal computing, we have a renaissance. And as in the actual Renaissance, it's a volatile and unsettling period.

    Nowhere more so than in the changing of bases of power. Consider the following data:

    A change in perspective leads one to conclude that Apple is the new leader in selling personal computers. Maybe this charting is putting too fine a point on it, but the data is beginning to make evident that which has been perceived subjectively by only a few.

  2. Asymmetric Competition

    Research · 55 comments

    Thanks to Angel Lamuno for sending me to a dry and boring lecture by Dr. Israel Kirzner from Feburary 1988. It got me thinking again about competition and how confusing it can be.

    The lecture was in part about how the word "competition" is used by economists with directly opposing meaning from that of the layman and how that leads to confusion about the role of free markets.

    I won't dwell on that, but instead I want to explain how this word can also be contradictory in meaning when applied in everyday usage in business analysis. Nowhere is this more evident than when we argue whether Apple competes with X or Y or Z.

    Does Apple compete with Android or Google or Samsung? How could Apple compete with Google and yet cause it to be the default search engine in Safari thus enriching their competitors? How could Apple compete with Samsung and yet select their semiconductors for the heart of its most important and profitable product? And how could the people across the table from Apple agree to terms on these deals while being sued by them?

    Some have tried to characterize this situation as "coopetition" or the co-habitation of conflicting strategies for a balanced optimum. I find this characterization uncomfortable and unsatisfying. The balance sought will be very fragile and change daily and no optimization is practically possible. It seems contrived.

    Rather, I think about these situations as examples of asymmetric competition. This is competition where companies are rivals but they have different definitions of the basis of competition. In a way, they are like gladiators who have weapons which cannot be brought to bear or wielded effectively to counter the opponent's.

    Consider the following question: does the iPhone compete with the Galaxy SIII? Well, obviously it does. The products have similar attributes. If we define competition as rivalry in a market for similar products then, by default, they compete.

    But what about non-consumption? What if there aren't enough of either product to go around and people cannot actually face a purchase decision where both products are in front of them at the same time, under identical terms and conditions, waiting for a purchase to be made.

    It gets worse. What if there are network effects related to each product such as brand loyalty, platform switching costs, media and data tied to either one that make them impossible to switch? What if advertising spending is skewing the buyer's knowledge of competing products?

    If a product is unavailable, invisible or requires burdensome switching, does it really compete? When these exceptions are raised, you'll hear people say that Apple (or Samsung) don't compete with X or Y. They compete with themselves or with products outside the category. There may be many ways of rationalizing that  what appear to be similar products don't compete because of "differentiation" or "positioning".

    In fact, jobs-to-be-done theory suggests that the only successful competition is against non-consumption, especially if you're an entrant. Non-consumption is easy to beat (because the alternative is no solution to the job) while an entrenched incumbent is very difficult to beat, and it's often inefficient to even try even if you have the resources. This is what I describe in talks as the "David vs. Goliath" approach vis-à-vis the "Charge of the Light Brigade" approach.

    So the theory that competition exists on the de-facto basis of a similar feature set fails a whole series of tests in the real world. Consumers decide based on complex criteria and businesses actually conspire to make the choices as complex as possible reducing the decision to a single option.

    But I want to step back and think about the situation from the competitors' point of view. In other words, how should management think about competition? Is it possible to develop a competitive strategy or should one even bother with competitive response?

    Let's take a basic question: Does Apple think of Samsung as a competitor? When did it begin to think about it as such? What can it do to win?

    Let me answer this by asking another hypothetical question. Assume it's 2008 and Apple is in the process of planning its product roadmap. Whom would they decide to count as competitors? Android devices have not yet shipped and the gorilla in the space is the BlackBerry with Symbian still overhanging the market with a huge volume lead. Should they then build products to compete with RIM and Nokia?

    Assume further that their decision will define how developers will build apps and content makers will target your product. They have to account for the time scales that developers think about and they have to match hardware innovation to the rate of OS innovation and API innovation and toolchain innovation, etc.

    So did Apple consider Samsung a competitor in 2008? A time when Samsung did not actually make smartphones? It seems hard to believe they did. Now you may answer that things have changed since 2008 and they have. But the decisions made in 2008 regarding the platform remain in place today.

    Furthermore if you happen to look at the dozens of hardware designs that are making the rounds today (as evidence for a trial with Samsung) you'll see familiar designs first penned in 2004 or 2006. You quickly realize that the product design process is lengthy and largely isolated from the froth of main street (or mall) sales fistfights.

    Few people appreciate the disconnect between the design process and competition. This because few people have spent time in an organization building mass market consumer phones. The time scales are staggering. If your product is a platform product you make decisions six years in advance. If you are a "fast follower" you can make decisions six months in advance. This is maddening, asymmetric competition.

    One competitor sees one basis of competition and another sees it completely differently or sees a completely different basis. They are competing with each other but more as a guerrilla fighter competes with a nuclear missile.

    Which brings me to another discipline. In military circles asymmetry has been noted as a valid form of warfare for some time. At least since 1975. It was in use long before it was recognized or studied, (e.g. in the American Revolution.) But the situation now exists where it's taken for granted that modern conflicts are almost always asymmetric. Drones vs. insurgents and citizens vs. armor and, the most sinister of all, unarmed-but-tightly-integrated-through-communication protest against established regimes. The impact of this realization is affecting governments around the world.

    So it's time to elevate our thinking about business competition along the same lines. Yes, Apple competes with Samsung but it does so asymmetrically (as it does against Google and dozens of others). It's a multi-dimensional rivalry and one which requires a different form of analysis. It is something which I do instinctively but it's not something that is easily explained. Disruption theory helps. It turns out that asymmetric competition is the only form of competition that matters in a rapidly disrupting industry.

    It is also why this site is called Asymco.

  3. Estimating third and fourth quarter iOS shipments

    Research · 42 comments

    In the 2011 Annual Report(10K) published October 26th Apple states:

    The Company anticipates utilizing approximately $8.0 billion for capital expenditures during 2012, including approximately $900 million for retail store facilities and approximately $7.1 billion for product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.

    The history of these expenditures is shown below (the blue bars are statements from 10K reports including the one above shown as the right-most bar):

    Three 10Q reports so far this fiscal year have given us updates on asset values and the change in these values are shown as the right-most yellow bar. The asset value change suggests $3.9 billion has been spent so far of the $7.1 billion budgeted. Thus we can estimate that about $3.2 billion remains to be spent in the fourth fiscal quarter (thus bringing the yellow bar to parity with the blue bar in the chart above--a parity that was achieved or exceeded for five out of the last six years).

    Assuming $200 million of the fourth fiscal quarter budget will be for land and buildings[1] results in an estimated $3 billion remaining for product tooling and manufacturing process equipment and data centers.

    The history of spending for various cost centers is shown below.[2]

    Note again the forecast for the fourth quarter based on budget given last October. Also shown below is the spending on machinery and equipment by quarter for the fiscal years 2011 and 2012 including the estimate for FQ4 2012. (Blue bars represent 2011 quarters and green represent 2012.)

    As discussed previously, spending on machinery and equipment has shown a strong correlation with the output of iOS devices in the following quarters. The following chart shows the superposition of M&E spending in a given quarter and iOS output in the following quarter.

    Note that due to the time-shifting the Expenditure for FQ3 does not have a corresponding output--expected in FQ4--and that FQ4 expenditure is estimated based on budget.

    With this data in place, we can now begin to answer the question of what are the total iOS device shipments expected in the current (ending September)  and the following (ending December) quarters.

    Our eyes are pretty good at seeing patterns in data so perhaps it would suffice to know the scale to the graph above and thus fill in the colored output bars to match the spending. But to make it a bit more precise, I drew the following chart:

    It shows the same data but as an X-Y scatter plot where the X axis is quarterly spending and the Y axis is iOS unit shipments. Note that the actual data points are in the lower left area delineated with a dashed red rectangle.

    I drew the blue line corresponding to an assumed linear relationship between the two variables to project the iOS output based on additional expenditures for FQ3 and FQ4.

    I used error bars of -20% to show a possible conservative range.[3]

    This yields an iOS output of approximately between 65 and 80 million units in the current quarter and 100 to 125 million in the fourth calendar quarter. The sum of the low ends of this estimate is 165 million units.

    My current forecast is  53 million units in CQ3 and 110 million units in CQ4 which, together, add up 163 million. Close enough.

    Stay tuned for a padcast report with more details on this approach.

    ---

    Notes:

    1. The company spent $31 million, $66 million and $159 million for the first three quarters on Land and buildings. $200 million in the fourth quarter seems reasonable unless there is a pending large land deal closing in the next two months.
    2. I added leasehold improvements as a proxy for store openings and R&D expense as a proxy for overall product development. These are in contrast to expenditures for product production and support which are represented by Machinery and Capital Equipment.
    3. Note the other data points' error bars
  4. Apple's growth scorecard for the third fiscal quarter 2012

    Research · 23 comments

    As the following revenue growth table shows, the second calendar quarter of 2012 was not like the recent past.

    The bottom line growth (earnings) is the slowest since Q309 which had a difficult comparison with Q308 when the iPhone 3G launched and saw 800% iPhone growth. This past quarter also had a difficult comparison with 150% iPhone growth a year earlier and 122% earnings growth.

    This is shown in a different way in the following graph:

    Growth is sometimes victim to difficult comparisons and sometimes the launch of products comes late or early in a particular cycle. This quarter was a mix of multiple factors that went the wrong way:

    1. iPhone did not get expanded distribution and was stale late in its cycle. Emerging market traction outside of China still elusive.
    2. iPad is not getting volume purchasing from institutions and spring is not an ideal launch quarter for consumers
    3. Mac portables missed a few weeks of sales due to lack of Intel components
    4. Some signs of macroeconomic slowing especially in Europe and countries dependent on commodities exports.

    The silver lining is the return of higher growth to iTunes store and peripherals. These are "hobbies" for Apple but they might form a foundation for significant new opportunities in the years to come.

  5. Scoring my performance on the third fiscal quarter forecast

    Research · 16 comments

    Did I get anything right in last forecast?

    The table below shows the scores for my various estimates[1]

    Last quarter I managed a B+ overall but this quarter was a C+. The iPad estimate was a complete failure mitigated slightly by a, directionally at least, correct call on the iPhone. The failure on iPad dragged down revenue and EPS while the accuracy on iPhone improved the gross margin. iPod and Mac estimates were consistent with recent performance.

    The error on iPad is a harsh lesson which shows how the category is still unpredictable. With only four quarters where we could measure y/y growth, and with those quarters showing 183%, 166%, 111% and 151% growth, I assumed that the 150% growth was sustainable.

    That turned out not to be the case. The iPad slowed to 84% unit growth and 51% revenue growth. It's perhaps unrealistic to expect 150% growth for more than one year. This is the main learning for the quarter and I will adjust my expectations accordingly. Overall, the product has sold 84 million units since launching in early 2010. I now expect it will sell approximately 80 million this year and 150 million units in 2013.

    ---

    Note: Grading algorithm is based on this table:

  6. Padcast: Reviewing Apple's Third Fiscal Quarter 2012

    Research · 56 comments

    Here is the second Perspective "padcast" where I discuss:

    1. Top and bottom line growth
    2. iPhone, iPad, iPod and Mac revenue growth
    3. iPad vs. Mac
    4. iOS product mix
    5. Other product line growth
    6. Gross Margins by product
    7. Pricing and revenue per unit by product
    8. Cash and cash growth
    9. Guidance and whether results were a surprise to management

    The discussion is an audio presentation with animated, interactive motion charts which can be manipulated by the user.

    It's available as an in-app purchase for $0.99 on the iTunes app store via the Perspective iPad app.

  7. A preview of Apple's performance in Q2

    Research · 54 comments

    In anticipation of the earnings release tomorrow, I prepared a iPad-enabled audio-visual chart-based discussion of my expectation for product-level performance.

    I discuss six topics in a historic context and the reasoning behind my expectations for the just-ended June quarter:

    1. Units by product line
    2. Unit growth
    3. Gross Margin percent (profitability) by product
    4. Pricing power in terms of revenue per unit sold
    5. Contribution to revenues for each product
    6. Contribution to margin for each product (i.e. profitability)

    The discussion is packaged as a "padcast" which means you need to have an iPad and the Perspective App available on the iTunes App store in order to view the content.

    It's available for $0.99 here.

     

  8. How many Lumia phones were shipped in the US?

    Research · 41 comments

    The US is a crucial market for both Nokia and Microsoft's strategies. This importance was highlighted during the launch at CES in January when not one but three CEOs (Microsoft's Steve Ballmer, Nokia's  Stephen Elop, and AT&T's Ralph de la Vega) were on stage to launch the Lumia. Knowing how well this strategy is working would be very useful to understanding how this market behaves.

    My first take on this was when I asked the question How many Lumia phones were sold in the US? The answer suggested through the combination of survey data from Nielsen and comScore[1] was 330,000. The figure is quite small compared to expectations. As it's so extraordinary, it should be supported by good evidence. Unfortunately the methodology used is weak. The figure itself is probably close to the margin of error of such sampling techniques. It would be nice to have another way to calculate this.

    Today Nokia offered another set of data which might help determine how many Lumia phones were shipped in the US. (Note the shipped versus sold distinction. Companies report shipments while surveys nominally measure consumption or usage.)

    Unfortunately, Nokia did not offer specific data on US shipments. What they did offer was:

    • Global Lumia shipments were 4 million in the last quarter
    • Global average selling price was €186 for a Lumia phone
    • North American[2] phone shipments were 600k. This includes all phone types and all operating systems.
    • North American sales were €128 million.

    That's all we have. So how can this help with the question of US shipments?

    As often happens, it helps to look at the data historically. The following charts show North American shipments and sales with the Lumia launch date highlighted.

    While unit shipments were flat, revenues increased significantly. This suggests that we could plot the average selling price of phones in North America (NA) specifically. I did that in the following chart:

    Here the effect of Lumia is clear. The average revenue per phone in the US (blue line) jumped dramatically after the launch. So much so that it actually overtook the average global ASP for Lumia.

    What we need therefore is a way to estimate the "mix" or percent of smart and non-smart phones sold into North America and derive perhaps the US portion of that and then finally try to separate the Lumia from all the smart volumes.

    To help, I plotted the historic ASP for Smart and non-Smart devices as provided by the company.

    Using a simple formula[3] it's possible to derive the mix which is shown as Green and Blue lines in the following chart.

    Getting estimates for smartphone shipments (blue line) is pretty close to Lumia shipments, but we still have to correct for US/Canada split (estimated at 90:10) and Symbian/WP split among smartphones (estimated 50:50 in Q1 and 20:80 in Q2).

    The result is the red line showing US Lumia shipments. The sum of the two quarters then comes to 630k.

    This is nearly twice the estimate from consumer survey data however I would not draw too many conclusions from this. Mainly because there are many assumptions place in both estimates, but also because there is the distinction between shipments and usage.

    However, it might be safe to say that US install base is somewhere between 400k and 1 million users. Is this good or bad?

    It's good because it's progress and there is some growth. It's bad because it's frightfully small relative to the competition. Nokia itself acknowledges the challenge and states that "We believe the Windows Phone 8 launch will be an important catalyst for Lumia."

    It seems that what Nokia needs most today is time. That is a very expensive asset. Perhaps infinitely so.

    ---

    Notes:

    1. A practice neither company would condone, principally because they are competitors, but also because they use different sampling methods.
    2. North America I take to mean US and Canada. Although geographically, Mexico is part of North America it's usually grouped as part of Latin America as a category. I'd like to get this confirmed.
    3. There are a few implicit and explicit assumptions: (a) Global ASPs are roughly comparable with NA ASPs but (b) smartphone ASPs are higher in NA by about 30%
  9. From bad to worse and from good to great

    Research · 122 comments

    A year ago I noted that Apple could buy most of the mobile phone industry with cash on hand (excluding Samsung's operations).

    Since then Apple's cash has grown significantly and the value of all phone vendors except Samsung has gone down significantly. The following chart shows the year ago and present day estimated market value of the industry participants.

    Phone brands other than Samsung and iPhone have seen a reduction in market value of a combined 47%. That's actually being quite generous since I'm valuing Motorola and Sony's businesses at their acquisition prices. The operations of both those companies have continued to stagnate.

    Based on the same multiple of estimated earnings Samsung grew its value by 157% and iPhone by 114% (note this excludes iPad).

    In absolute terms the iPhone franchise created $244 billion in value while Samsung created $83 billion. The others destroyed $37 billion.

    The good news is that the industry has had net value creation--always a healthy sign that innovation is being valued and absorbed.

    The bad news is that there is vast income inequality. The rich are getting richer and the poor are getting destitute. This is an unhealthy sign. The concentration of power and wealth may indicate a peaking of experimentation and discovery of new opportunities.

    Also noteworthy is that almost all the value from the Android ecosystem is concentrated in Samsung. I did not include Google in this analysis since its mobile is so small as to be not visible in its accounting. A separate analysis of Android economics shows that Google's benefit from the platform is modest. In contrast, Samsung, and Samsung alone, is benefitting greatly. It could even be said that today Samsung is the only Android profit engine.

  10. How many Lumia phones were sold in the US?

    Research · 156 comments

    Nielsen and comScore survey US consumers through different methodologies, however they both try to paint a picture of the smartphone patterns of ownership and consumption.

    I regularly report on comScore's data as it's published on a monthly basis. Nielsen offers updates on a quarterly basis but there is more detail.

    The latest report (for Q2) shows smartphone shares by both platform and vendor. The following graph is a treemap built with the Nielsen data:

     

    The same data is also plotted below as a pie chart:

    I also added the latest comScore mobiLens data in the pie chart to the right.

    Note that both surveys agree in the main on the largest platforms. The difference seems to be within a reasonable margin of error. The details available in the Nielsen data are perhaps also interesting. The various Android OEM shares as well as the division between Windows Mobile base and Windows Phone (7) base could provide some insight. Nielsen's total Windows base adds up to 4.5% while comScore reckons on 4%. Within that total, Nielsen breaks out 3.2% for Windows Mobile and 1.3% for Windows Phone. Within the Windows Phone total, HTC and Samsung are shown as having 0.5% and Nokia 0.3%.

    If we then use comScore's figure for total smartphone users (110 million) then the data would suggest that there are 330k Lumias in use in the US. This would have been accummulated over a sales period of about four months.