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Asymmetric Intelligence

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  1. Spaceship

    Research · 60 comments

    To anyone who has visited the current "campus", it's obvious that Apple has outgrown it some time ago. It's also obvious given the increase in headcount and operational expenses over time as can be seen below:

     

    Screen Shot 2013-04-15 at 4-15-12.27.57 PM

    (I added Q1 2013 estimate based on company guidance.)

    One can understand why, from a practical point of view, they want to consolidate what amounts to at least twice as many people back into one place.

    But there is also a more subtle reason and it has to do to a fundamental distinction: Apple is a functional organization. Unlike almost every other large company it's not organized in "divisions" which have responsibility for "a business" in the sense of profit or loss. At Apple most people or teams are assigned a function like "design", "engineering", "sales" etc. When a product is being built, they are assigned to that effort. When the product is complete, they go to another product.

    This is not a matter of hypothesis. Not only have we heard rumors of how one product was delayed (e.g. OS X) because the teams were busy finishing another (iOS), but Adam Lashinsky's work (sanctioned by Apple as it was) revealed the structure almost two years ago.

    This structure may seem obvious to those working in small companies, but it's completely unheard of in large companies. The nearest comparison to this structure is a military organization. There you have Infantry, Armor, Aviation etc. These groups are assigned (in a combined fashion) to a particular effort or battle and then go back to the barracks when done.

    Another example is the way movies are made. Disney famously built his company around the same principle.

    Seen from this perspective, the architecture of their proposed campus makes perfect sense. If it was a divisional structure then each division could live in its own building or campus. In fact, each division would not have much to talk about to any other division. But as a functional organization Apple needs to move people quickly between projects. It needs to re-configure itself frequently. Being in the same building means they can do this much more efficiently.

    This is why there needs to be one building and this is why the shape chosen is probably optimal: each point within can be reached with minimal routing. The fact that it's aesthetically pleasing is a coincidence.

    Or perhaps not. Some say that in beauty there is truth. At least to me, the design looks to be pure logic.

  2. Happy Birthday iPad

    Research · 34 comments

    The latest data on PC shipments from Gartner showed a decline of  11.1% from the first quarter of 2012. As we don't yet have the final data on Apple's Mac shipments, I used my estimate of 4.38 million units (14% growth as per NPD estimate for the US) to obtain an estimate of Windows PC shipments.

    That number is 74.8 million units. In the first quarter of 2012 the corresponding calculation yields 85.1 million units. That makes Windows PC rate of decline -12%.

    The historic shipment data and growth rates are shown below:

    Screen Shot 2013-04-11 at 4-11-6.07.30 AM

     

    Note that tablet data is not yet included in the shipments summary. Windows shipments are shown in shades of Brown and tablets in shades of Blue/Green.

    The decline in PC shipments is persisting and even accelerating.

    Coming only a week after the iPad's launch birthday, it's perhaps a fitting testament to its impact.

  3. Making rain

    Podcast · 72 comments

    The following is a slightly edited transcript of a portion of the Critical Path podcast #79. I am reproducing it here for the sake of brevity and focus of discussion.

    ---

    I'm going to try to put together an analogy together here that maybe will help us think through the Facebook Home and the Google Fiber issue.

    I've been thinking a lot about how to illustrate Google's business model. The problem is that discussion has been polarized: Two camps have formed. One camp suggests that Google is a benevolent entity that does great things and only asks that we indulge their hobby of a business model called advertising. Fundamentally they are about pushing the envelope on technology, making wonderful things happen.

    That is one camp. I call them the utopians. It may not be a nice thing to call them but I frame it as being exceedingly idealistic.

    The anti-utopian camp is one that suggests that Google is an advertising company primarily, and fundamentally and overwhelmingly. And anything they do technologically is in support of that. The implication is that Google is sinister and manipulative, bent on getting away with as much privacy extraction as possible.

    I believe that the anti-utopians dismissing Google as an advertising company sounds a bit incomplete. It's not incorrect. It's not erroneous. It's just not a complete story.

    And also the utopian view that they do everything for us out of the goodness of their hearts and that advertising is something that they are reluctant to do, saying in effect, "We only do it because it earns us enough money so that we can do good deeds." That too is not an accurate picture. Google is a business and its business management team is hard nosed and knows what they're doing and they are not purely idealistic in that sense.

    And so the question could be where across this spectrum does Google lie? Possibly it moves around between these points. Where they are becomes a question of motivation and what they want to become.

    But this is only one dimension. It does not help us answer the question of Home, or Fiber or Reader or Blink. Their actions seem contradictory. Holistic or selfless in one case, greedy and capricious in another.

    Let's step out of this spectrum and try to think of different ways which can describe the situation.

    I propose a way to think about it as: Google tries to make a business succeed through having a huge amount of _flow_ in terms of data, traffic, queries and information that is indexed. So think about this idea of them tapping into a vast stream. The more volume that is flowing through the system the more revenue they generate.

    As so given this very rough analogy I try to sharpen it up by saying: imagine it more as a river. And even more than a river, as a watershed, a river basin. Perhaps a giant basin the size of a continent. The business is, let's say, capturing fish at the mouth of the biggest river, before it exits into the ocean at its delta.

    And so your job (as Google) is to catch fish mostly at one point. It's the most efficient way to catch fish because you have the most flow of water at that point and building nets is not trivial.

    But in order for you to improve your business, to create more opportunity, presumably, you want to essentially have more water flowing.

    And so how would you do that? Think of the Mississippi river. If you've got a net down at the bottom of the river, the question is how would you engineer, through civil engineering, or shaping the earth itself, a way of catching more fish.

    The answer I think, in terms of the way Google might be thinking, is that they want to create more sources of water. So they would look to connect tributaries and lakes. "How about having another river join our river?" Let's make sure that we have "everything east of the Rockies" flow into our river system.

    Now, think of it this way: After you've gotten all the tributaries, what are the remaining sources?

    First, you'll want to make sure that no-one can dam or stop the flow of water into your main channels. And so you become extremely anxious about people building dams. That's the number one concern.

    So your strategy becomes one of "how do we avoid dam building"?

    That's one part of your strategy.

    The other thing you could do to improve your business would be to make it rain more. So there's the question in your mind of: If we had more rainfall, then everything will flow more rapidly and we'll get many more tiny rivers forming and joining together into our main river.

    Android and the Fiber business and even Facebook fit into this analogy rather well. In this context more rainfall means more people using the Internet. If you have more people you'll have more rivers and you'll have more water and hopefully more fish. Fiber means the water will flow more rapidly: you're essentially dredging the riverbed.

    But the two are very disconnected (rain, dredging and fish). So your strategy amounts to not really worrying about the ratio. You don't create incentives to people who make rain in the form of fish catch quotas next quarter.

    In other words, your performance as a manager of cloud seeding efforts should not be measured in fish.

    Leadership should instead simply put out the mandate of "Go out and make it rain".

    So that's the notion of Google going out on these projects and doing all these "great things" for us. They make it rain. The Internet expands. There is minimal censorship.

    By the way, censorship is a dam. Being blocked out of a country is a huge dam. It's actually more like building a mountain range that diverts water flow away from your watershed.

    And so they have these notions of how to prevent these things from happening.

    So it sounds like they are doing good things. It sounds like asking for it to rain; they want to make sure that people don't divert resources; they want to make sure that there are no barriers between the raindrop and getting access to the channel to the ocean.

    So it sounds like they're doing all the good things like a good civil engineer. Like the US Army Corps of Engineers who developed the irrigation, flood control, energy generation and waterway transportation of the United States.

    Google seems to be the world's "internet civil engineer". They are building all these things to make sure that we have good water (i.e internet) supply. That we have plenty of navigable channels. That's the analogy.

    But let's not forget that the only reasons those things are happening is because they are catching fish at some point down the Mississippi.

    From that point of view you have to ask yourself: do they deserve this concession? Because they are ultimately affecting the environment to such a degree; and the environment is the internet; and the whole scope is how the world operates.

    That is where people have to step back and ask themselves: Even a group of civil engineers that have all the best intentions may realize that they didn't think of all the consequences of their actions. A lot of the criticisms may come decades later. From people who'll note an effect on the environment. Dams get silted, a lack of floods reduces nutrients to crops which then need fertilizer, which has a whole other set of problems.

    That is when you have to reflect more deeply on what is right and what is wrong. So saying, as the City Council of Austin might: thank you for coming and paying for installing broadband for us. Fine, but we just don't know what the unintended consequences might be. It all _sounds_ good but we don't know if it _is_ good.

    And similarly, in the case of Facebook, there is a subtle hijacking going on where Android creates more rain, and Facebook and Amazon are essentially putting down nets and catching fish upstream. They're not damming the tributaries. They're not putting up mountain ranges and saying they'll make sure the water flows away from the Mississippi. But rather they are putting nets and saying "Thanks for the rain". They took advantage of what amounts to a public resource. Here the failure of anticipating consequences falls on Google. But they could not have possibly foreseen all that? Or could they?

    Then there is the question of measuring success. It's complicated and hard to measure performance. Even Google's own performance. We don't really know if the cloud projects work. We don't get to run this as an experiment that can be tweaked as data comes in.

    Google does not report performance. When they go off on these rain making projects, it's natural to ask how many fish were caught as a result. Is that incremental new rainfall causing more fish to get caught. And Google won't say anything about the profitability of rain making. They will never give you a profit and loss statement for all these projects: the dam eradication project, the project dredge a channel, the project to seed clouds. They will say that these are projects that will result in only one thing, which we do measure, which is the number of fish we catch in the delta of the Mississippi down by New Orleans. But so far although rainfall seems to be increasing exponentially there are not that many new fish.

    So that's where we struggle as analysts: is rainmaking good? Is the dam destruction process working? We can't answer these question. And we don't even know if Google themselves can. They might think of it as a strategic thing: it's always better to have more rain than less and more water flowing. End of discussion.

    To borrow a phrase from Zuckerberg, it's above my pay grade to know what all the consequences are. I have opinions as environmentalists have opinions and sometimes they have some data to back up those opinions. For instance whether a dam project is a good thing on balance. But they are bound to have partial answers because the cost/benefit analysis is definitely missing a lot of the costs and missing a lot of the benefits as well. You can't put a number on a lot of these things.

    That's where we are today. Google and Android are forces which are are very powerful but which are, to a large degree, uncontrolled, even by their own managers.

     

  4. Samsung vs. Google: an Interview with Rafael Barbosa Barifouse of Redacao Epoca

    Research · 59 comments

    On Mar 18, 2013, Rafael Barbosa Barifouse - Redacao Epoca - Editora Globo asked (and I answered):

    Q: Why is Samsung creating Tizen?

    A: I believe they are collaborating on Tizen development because they want an alternative to Android and because Bada was not good enough to meet that goal. Tizen's roots include contributions from Intel, Nokia and several Japanese companies so it's not Samsung's OS per se. Historically it was the "open" alternative operating system for embedded and mobile systems. See https://github.com/kumadasu/tizen-history/blob/master/tizen-history.pdf for a historic perspective.

    In some ways Tizen seems to be a blend of several pieces of code including proprietary Samsung user interfaces. Samsung is presumably interested in having a unique, differentiated experience. This is something every device maker seeks. Put another way, if they did not seek this then it's unlikely that they would be profitable which would also imply that they would not invest in marketing and development of products. As Samsung invests both in marketing and development it can be concluded that they seek to offer a unique value proposition and, in today's market, that means a unique experience.

    Does it make sense to create a new mobile OS when it has had so much success with Android?

    Samsung would argue that the success it's had is not due to Android but to its products. Arguably they are right because if Android were the valuable component in a phone then buyers would buy the absolute cheapest device that runs Android regardless of brand. That is not the case. People still seek out a particular brand of phone because of the promise it offers. Consumers have been buying more Galaxies than no-name Android phones.

    Why is Samsung the most successful company between the Android devices makers?

    In my opinion it's due to three reasons:

    1. Distribution. Success in the phone business depends in having a relationship with a large number of operators. Samsung had these relationships prior to becoming a smartphone vendor [because it sold all other kinds of phones]. Few alternative Android vendors have the level of distribution Samsung has. For comparison Apple has less than half the distribution level of Samsung and most other vendors have less than Apple.
    2. Marketing and promotion. Samsung Electronics spent nearly $12 billion in 2012 on marketing expenses of which $4 billion (est.) was on advertising. Few Android vendors (or any other company) has the resources to match this level of marketing. For comparison, Apple's 2012 advertising spending was one quarter of Samsung's.
    3. Supply chain. Samsung can supply the market in large quantities. This is partly due to having their own semiconductor production facilities. Those facilities were in a large part built using Apple contract revenues over the years they supplied iPhone, iPad and iPod components. No Android competitors (except for LG perhaps) had either the capacity to produce components or the signal well in advance to enter the market in volume as Samsung did by being an iPhone supplier.

    Tizen was being treated as an OS for low and mid level devices, but recently Samsung said that it will launch a high-end device with Tizen on Q3, an area where it's very successful with Android. What has changed? What does this announcement mean?

    Planning for these product launches is done a few years prior to launch. I believe alternatives to the Android line (i.e. Galaxy) have been planned for a long time. Note that Samsung also has a line of Windows Phones and historically has supported Bada, Windows Mobile, Symbian, PalmOS and LiMo smartphone platforms. Samsung's involvement with Android is only about three years old, and arguably only enjoyed two years of prominent growth. That's less than one product launch cycle and far less than a platform or OS development cycle.

    I believe the company has a long term perspective and that includes a time span beyond the likely lifetime of Android [Note that platforms do have finite lives]. Keep in mind that phones last less than two years. If users are not loyal to a platform then they will very quickly move on. The "stickyness" of a platform depends on media or software consumption by the user. That level of consumption is not particularly high for most Android users. The same phenomenon happened with Symbian and BlackBerry and Windows Mobile users. Hundreds of millions switched or will switch out of those platforms. This happens far less with iOS, Mac OS X and Windows because of the significant investments users make in the ecosystems above the OS.

    Is Google dependent on Samsung's sucess with Android? Or Samsung is more dependent on Android since its the most popular mobile OS nowadays?

    Google is not dependent on Samsung because it's not dependent on Android. Samsung is not dependent on Google because Samsung is not dependent on Android. Android is valuable in theory but in practice its value is hard to identify. Historically it was planned as a defense against the hegemony of Windows, BlackBerry and iOS. In that respect it has succeeded. But playing defense is not enough to win a game. For Google to truly succeed in mobile it needs to define a better business model.

    So far its profitability from mobile is very weak and has not shown up in the bottom line. Furthermore, it's probable that Google has 'control' over only about 40% of Android devices in use. Control here means a guarantee that users will use those devices for the benefit of Google, and, more importantly, not for the benefit of its competitors.

    You can also think of it this way: If they "divorced" there would be minimal to no impact to their fortunes in the foreseeable future. Buyers of Samsung phones will still buy Samsung phones because they will look and feel very similar and Google services will still be available through browsers or apps (e.g. Google maps on iOS). Conversely, users of Google services will continue to use them because they will be available on Samsung devices, no matter what OS is running. The services Google offers are independent of Android and are cross-platform. They will make sure they are available on all major platforms (as they were before and during Android). Google is far more loyal to Search and Maps and Gmail and YouTube than they are to Android.

    Do you think Google is going to merge Android with Chrome OS?

    Google's chairman said they would so I assume they will.

    If so, how this could make an impact on Samsung?

    It depends on how the new OS would enforce licensing terms. If the result would be a restriction on Samsung services like S Pen, AdHub, Samsung Wallet, SmartTV, ChatON etc. then Samsung might reject the OS and either fork Android or move to Tizen more broadly.

  5. Reasons for iOS outperformance in the US

    Research · 145 comments

    The comScore mobiLens survey for the US ending February 2013 shows continuing rapid expansion of smartphone usage in the US. Even though the 50% penetration threshold was passed seven months earlier, the rate of new smartphone users was second highest ever recorded with over 1 million new-to-smartphones users every week during February.

    Screen Shot 2013-04-05 at 4-5-4.15.52 PM

    Overall penetration increased to 57% with nearly 2% of the population switching in one month. Using the average growth rate for the last six periods, the US could see 80% penetration in another 19 months or by Q3/Q4 2014.

    It remains to be seen if the consistency of growth which was preserved from 20% to 60% is maintained between 60% and 80%, but all indications so far are that it will be.

    The growth in smartphones has been driven by the two dominant platforms: iPhone (iOS) and Android. Together they now make up 91% of the user base with about 40% for iPhone and 51% for Android.

    Screen Shot 2013-04-05 at 4-5-4.19.14 PM

    Android alone gained 17 million users in the last 12 months while iPhone gained 21 million users.

    Screen Shot 2013-04-05 at 4-5-4.20.02 PM

    iOS user gains have out-paced Android for the last four periods which resulted in a decrease in Android share of users. A reduction in Android share was also visible in the spring of last year but the current decline is not only longer but more pronounced.

    Screen Shot 2013-04-05 at 4-5-4.22.13 PM

    The reason iOS is growing more rapidly may be due to three factors:

    1. Broader distribution with three out of four major operators carrying the phone
    2. Availability of three product variants with $0 starting prices.
    3. Increasing awareness and use of apps and content ecosystems due to network effects.

    As distribution is about to increase with T-Mobile being added to the carrier list the growth in iOS share is likely to continue even as the market expands.

  6. The cost of building Galaxies (and iPhones)

    Research · 33 comments

    Although Samsung and Apple are acclaimed as the leaders in profit capture for smart (and otherwise) phones, what is not lauded is how much they spend on capital equipment used in the making of these phones.

    In 2012 Samsung spent around $20 billion while Apple spent about $10 billion (excluding leasehold improvements or Apple stores but including real estate).

    Compare these figures with Intel at $11 billion, Google at $3.2 billion, Microsoft about $2.8 billion and Amazon $3.8 billion (including presumably new distribution centers.)

    Screen Shot 2013-04-04 at 4-4-5.51.15 PM

    What each company spends on differs depending on its business model, but as the graph above shows it's easy to see that there is a class of "big spenders" who spend so much that it makes it hard to imagine just what $10 billion/yr could actually buy.

    To get an idea of just how big that figure is consider that a Nimitz class aircraft carrier costs about $4.5 billion to build and it takes several years to do it. Or consider that the largest data center in the world probably costs about $1 billion or that the largest office building will cost between $4 and $5 billion. Either of these infrastructure projects are massive multi-year projects. Apple, Intel and Samsung spend well more than this every six months.

    So it's a special class of equipment which falls in the multi-billion dollar range: semiconductor process equipment.

    Whereas in the case of Intel it's the obvious target for the funds, how can we assume it's the case for Apple and Samsung.

    We don't have proof but there is a remarkable correlation between CapEx and Semiconductors in Samsung's divisional financial reports:

    Screen Shot 2013-04-04 at 4-4-5.58.22 PM

    We also have the historically reported allocation of CapEx as reported prior to 2008:

    Screen Shot 2013-04-04 at 4-4-6.00.26 PM

     

    Therefore I consider it safe to assume that the bulk of Samsung's Capital Expenditures are in support of semiconductor production (note that this does not include display panels).

    Note however that in the first graph, Samsung's expenditures seem to be declining. Measured in Won, the level in Q4 '12 was about the same as that in Q1 2010 and down 30% y/y. Apple's spending also dropped sequentially in Q4 but was up 75% y/y. It's also nearly ten times higher than what Apple spent in Q1 2010.

    So the question I would ask is whether Samsung's reduction CapEx (which is safely assumed to be supporting semiconductor production, and which, in turn, is, to a large degree, supporting Apple) is being picked up by Apple.

    If so then then this would be evidence of the re-alignment of role and control in the value chain of a terribly important industry.

  7. The cost of selling Galaxies, updated

    Research · 63 comments

    Thanks to @jtk0621 via twitter I was able to obtain a quarterly view into Samsung's SG&A expenditures by cost category.

    The value of this data is in being able to understand why Samsung SG&A as a percent of sales remains fairly constant. To recap, the discrepancy with Samsung's SG&A is that it has grown in proportion to rapidly rising sales. Normally, when sales grow, SG&A grows but when sales grow very rapidly, SG&A grows a bit more slowly since it's primarily a function of headcount and hiring is necessarily organic and hence slower as a process.

    The contrast is shown in the following comparison between Apple's SG&A and Samsung's SG&A as a percent of sales. [For more detail on Samsung revenue composition see: The Cost of Selling Galaxies].

    Screen Shot 2013-04-02 at 4-2-3.09.39 PM

    Apple's SG&A has declined as a percent of sales, as one would expect, but Samsung's hasn't.

    I have hypothesized that the reason for this might be in the practice of "outsourcing" many marketing functions. As Samsung expands promotional efforts, it does so partially by hiring people but even more so by farming out a lot more work. In this way, if and when sales subside, it can pare costs. This practice ensures that it's not exposed to a huge cost structure that is hard to control. The downside to this approach might be obtaining "quality" marketing as oversight is still depending on inside teams who still have limited resources.

    To test this hypothesis, I looked at the types of costs it reports and divided them into two categories:

    Category 1 are what might be considered "internal" costs which are in function of employees or operations. These costs are:

    • Salaries
    • Retirement Benefits
    • Commissions
    • Depreciation
    • Amortization
    • Freight

    I graphed these costs over time below:

    Screen Shot 2013-04-02 at 4-2-3.12.09 PM

    Category 2 costs are those which can be "outsourced" and are in function of budget items. These are:

    • Advertising
    • Sales Promotion/Marketing
    • After Service Expense
    • Public Relations
    • Other

    I graphed Category 2 costs below:

    Screen Shot 2013-04-02 at 4-2-3.12.58 PM

    In both cases I created year-sized buckets summarizing these expenditure categories.

    It becomes apparent at first glance that through the period shown (2009 through 2012) Category 2 costs grew much more rapidly than Category 1. In 2009 Category 2 were less than 1 but the order was reversed in 2012. On a yearly basis Category 2 nearly doubled while Category 1 grew by about 40%.

    When seen in this context, the hypothesis is proven. The growth in Samsung SG&A has been driven by a vast expansion of primarily Advertising and Sales Promotions.

    It's hard to get an appreciation of the scale involved due to the lack of comparable SG&A category reporting from other companies.  What we do have however is that US companies typically report their advertising spending on a yearly basis.

    So taking only the Advertising figure from Samsung Electronics, we can get the following comparison with Apple, HP, Dell, Microsoft and Coca Cola.

    Screen Shot 2013-04-02 at 4-2-3.20.48 PM

    In this context we can see that while both Apple and Samsung grew their  advertising almost at the same rate, doubling their budgets during the last four years, Samsung Electronics has a far higher ad budget. More than four times higher, actually.

    Regarding Sales Promotions however, the comparison is far harder to make. I haven't any way to guess how much Apple spends relative to the $5.3 billion Samsung spent.

     

  8. How many iPhones will T-Mobile USA sell?

    Research · 54 comments

    From the initial product launch until the end of 2012, AT&T has activated 72 million iPhones. Verizon began selling iPhones four years after AT&T and managed to activate 26 million since. Sprint began nine months after Verizon and has activated 8.5 million.

    In proportion of their subscriber bases, the activations are shown in the following graph.

    Screen Shot 2013-03-28 at 3-28-12.50.06 PM

     

    I identified the reported iPhone activations with blue areas while the sum of green and blue areas represent total subs at the end a the given year.

    I also took the liberty of forecasting 2013 data in order to try to estimate T-Mobile's contribution.

    The method used was to look at the percent of total subs that each operator has been activating. Accounting for the limited sales period for Sprint in 2011, the sales patterns are consistent across the carriers. The longer the product is available, the higher the activation rate.

    Screen Shot 2013-03-28 at 3-28-1.01.35 PM

    Therefore I estimated that in 2013 T-Mobile USA will sell about 10% of its subs base an iPhone. That would make its contribution to iPhone sales about 3.4 million.

    It would also imply US sales among the top operators of 53 million iPhones in 2013.

    That itself is 17% of 320 million subs.

    Screen Shot 2013-03-28 at 3-28-1.02.25 PM

    So perhaps it's time for Apple to celebrate. This year, after six years, Apple will have completed entry into its first major phone market. The rest of the world will not be as quick.