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What the Beats is Going on? Thoughts on Apple Acquiring Beats

Apple is reportedly interested in acquiring Beats for $3.2 billion. 

Here’s what I’m thinking:

1) Separate the rumored deal price from the transaction.  It’s a lot of money for Apple and in many ways focusing too much on the money will make it difficult to focus on the underlining acquisition target. 

2) What is Beats?  While everyone seems to have a different answer, to me Beats is a start-up music company that is after one thing: music mind share. Think of music and Beats comes to mind, right? No? Well give it a few more years and the growing popularity of those “obnoxiously large” headphones may change things.  Co-founded by intelligent musicians (and businessmen) who “get” music, Beats knows what it is doing and more importantly what it’s after.  Headphones, stereo equipment, music streaming service, and the list goes on. Beats wants to own music. 

3) Apple is Afraid. I suspect Apple feels threatened as its mind share for music is declining. The iPod died on behalf of its older sibling, the iPhone, and following its death, the grip Apple had on music has started to slip. Think of digital music, and Pandora or Spotify may come to mind. Beats could very well be on the same path of music stardom. This past holiday shopping season, Beats headphones were everywhere (and people were buying them in droves). Walk down the street and you could tell when someone was wearing Beats. For the first time, the white EarPod was being threatened. Who knows what things would look like in a few years. Apple would be looking to change that with this acquisition. I suspect Apple is interested in buying Beats to gain music mind share.  

4) Similar Cultures. Beats and Apple share similar cultures where passion is the ultimate driver. While there would undoubtedly be segments or pieces of Beats that Apple will shutter, Beats could very easily represent a decently sized (fewer than 200 people) division within the Apple system. Sure, this would mark a departure from the way things have been, but judging from Disney’s success, sometimes you have to let the past go and embrace the future. 

5) Let’s go back to price. I think Apple is overpaying for Beats. Recent valuations pegged the music streaming service at around $100 million with the entire company worth a reportedly $1 billion last year. While additional details may come out in the coming days I suspect Apple is overpaying to avoid others from coming in and competing over price. It’s a lot of money for any company, and regardless of how much cash Apple has in its bank account, it’s still a lot of money. To me this means Apple is serious about this bet.  

6) Lots of unanswered questions.

- Will Apple actually promote the Beats brand post acquisition? Such an idea is still hard to grasp, but maybe they would have to in order to maintain a gripe on the music mind share they are acquiring.  Is the reason Beats headphones are popular because they aren’t Apple branded?  If I had to bet I would say Apple walks a thin line introducing new Apple-branded music product, while also keeping the Beats brand around.  Such an idea is still hard to swallow though…

- Will there be a Beats brain drain (employees leave) and does it even matter?

- How will this impact future Apple products? I suspect we are going to see Apple attempt a very significant push at a true music streaming service where I can have any song, when I want it (NOT RADIO), wherever I want it…and it would be free for iOS users signed up for Apple’s new mobile payment system.  

- Will this open the floodgates to additional Apple acquisitions?  If the answer is yes, then we may be entering a new era in tech M&A as the biggest tech company in existence is officially an acquirer (I don’t think this is the case though). 

Acquiring Beats would be a new type of transaction for Apple. While there are similarities to previous acquisitions, there are just as many differences and for the first time we may be seeing Apple “doing what is right” - fighting for its survival. Apple wants to own music

14 hour update: After plenty of Twitter discussions and thought, the only additional comments I have include:

1) Jimmy Iovine may play a big role. If the $3.2 billion price tag holds up, it becomes obvious that Apple is paying for intangibles (branding, music industry relationships) and not current products or services.   In essence, Apple would be buying the music industry - something that Apple would not be able to do organically. Iovine has been critical of iTunes and it’s possible Apple wants him to revamp iTunes and bring the service into a new era (with the full support of the music industry).  

2) Would Apple replace the iTunes brand with Beats? Is it possible for a declining consumer electronics brand (iTunes) to turn around and regain its strength? Maybe the only way for Apple to regain its grip on music is to update its branding from iTunes to Beats (among other things).  In such a case, a $3 billion price tag doesn’t seem as crazy. 

Samsung’s Crisis of Design 2.0

Samsung unveiled its second attempt at wearables, along with its latest flagship phone, earlier this week at MWC. I was not impressed and I am growing more confident that Samsung not only has another “crisis of design”, but will also soon face major headaches from competing Android OEMs.  I think we are on the verge of a new phase in mobile phone hardware: Samsung competitors will finally be able to find a footing and begin to attack the giant.  Meanwhile, I suspect Apple has already placed Samsung in the same drawer as Microsoft; irrelevant. Tim Cook and company is marching to a completely different beat.

1) The Galaxy Fit looks awful. A curved AMOLED touch screen with a huge piece of plastic on its underside attached to a Modern Glam (plastic) watch strap.  I’m having a hard time seeing what is so “beautiful” or “pretty” about Samsung’s new fitness device, to quote a few easily amused tech bloggers. The company’s business model is not dependent on good design and few would suggest otherwise, but I struggle to understand how people can look at the Galaxy Fit and be even mildly impressed by such a horrendous product. One tech blog went so far as to say the Galaxy Fit is a “smartly designed fitness band”.  It’s a piece of curved glass set on top of a bunch of plastic with an extremely awkward user experience and interface.  Smartly designed?

 2) Samsung Galaxy S5.  Samsung’s flagship phone now comes in gold and has a fingerprint scanner. While the joke would typically stop there and many would say “copying a good artist is a pretty good strategy”, Samsung didn’t even copy well.  The gold color is the wrong shade of gold (Modern Glam gold?) and the fingerprint scanner doesn’t work.   I really don’t think I need to say much more about Samsung’s new flagship phone. I suspect Samsung will unveil the real Galaxy S5 this May?  Interestingly, Apple was very quiet this week versus last year’s PR push leading up to the Galaxy S4 launch.  I wonder why…

3) Samsung is a fish out of water without new Apple inspiration.  Samsung is struggling.  The easy smart phone growth achieved by simply shipping an alternative to iPhone (bigger screen) is drying up and with no clear path to additional revenue or earnings growth, the company amusingly jumped into wearables. The Galaxy Gear was downright disgusting, while the Galaxy Fit isn’t far behind. Samsung likes to throw around the “we give consumers what they want” meme and I am left wondering who was asking for something like the Galaxy Gear or Galaxy Fit?   Samsung is throwing a lot of poop against the wall and desperately hoping something sticks. While some may label such a business strategy as acceptable, I have my doubts that consumers are going to stand by a company that is willing to ship products that merely represent different batches of wall poop.

4) Samsung’s credibility is taking a hit. Last year I noticed a few of my acquaintances made the switch from iPhone to Samsung.  The usual reason given for such a move involved wanting a change or simply being bored by iPhone.  Interestingly, on follow-up discussions in recent weeks, these switchers are now regretting their move away from iPhone due to Samsung’s plastic and subpar build quality.  More than a few people on Twitter tell me the same thing about friends or family being disappointed with their Samsung phones. The amount of negative feedback caught me by surprise.  Interestingly, only a few hours after introducing the Galaxy S5, Samsung rumor blogs were talking about a new Samsung phone coming out in May that actually wasn’t made of cheap plastic. Have we reached a point where even Samsung realizes the “not an iPhone”  plastic gold Urban Glam option probably isn’t going to do much in terms of winning converts from competing platforms?  Consumers are starting to notice what Samsung is actually shipping and the grumblings are getting louder.

5) Samsung competitors are foaming at the mouth.  The long-standing joke is that the best Android phones available in the market (never a phone made by Samsung) don’t sell well because no one cares about anything other than Apple and Samsung.  I think that may change. After this week, I am becoming confident that consumers are going to stop being passive and begin seeking out alternatives to Samsung in the form of HTC, Sony, Nokia, Lenovo, or countless of other Asian OEMs, all of which are making significant progress in shipping attractive phones at attractive prices (I would include Nexus, but Tony needs to help Google rework distribution). In terms of hardware specs, most of these phones are already at parity and with several Samsung competitors now focusing on hardware design; consumers will simply have fewer reasons to instantly turn to Samsung. Whereas in the past, Samsung might have been the default choice for Android, I suspect that lead will start to slip. In addition, Samsung recently announced that they will reduce their advertising and marketing budget as mobile phone profits decline (not exactly the best timing for such a move). While smaller mobile hardware companies individually lack the ability to compete against Samsung, and just the thought of going up against Samsung can scare many executives into a cold chill, I think each competitor can take a bite out of the giant which can collectively create serious damage. To succeed against Samsung: 1) Focus on branding 2) Save or raise as much capital as you can and throw it into marketing 3) Narrow your distribution focus 4) Figure out why someone should buy your phone. The challenge is significant and Samsung will not stand still, but 2014 is the year. Wait any longer and limited resources may not allow another fight in the future.  

Bonus - iWatch Implications from Galaxy Fit. The iWatch will not look like the Galaxy Fit and the iWatch will certainly not operate like the Galaxy Fit. The best way to think about this would be envisioning a small table in Jony’s design lab with various iWatch prototypes. The Galaxy Fit version (simple rectangular curved piece of glass positioned on a plastic watch strap) would be instantly cast off as a no, if it even would be positioned as a possible prototype in the first place.  I highly doubt the iWatch will include a strap/buckle or a thick piece of bulging glass. The device won’t depend on an awkward user experience where you have to rotate your head and arm just to look at the device. In summary: Look at the Galaxy Fit and you now know what the iWatch won’t be.

My Letter To Apple SVP of Retail Angela Ahrendts

Angela,

I planned on buying a new iMac on Black Friday. In order to make the process smoother, I ordered online at 6am and chose personal pickup.  Approximately one hour after I placed my order I received an email saying that my order was ready. Everything was going well since I would be able to coordinate my Apple store visit with other Black Friday observations at the mall, however my experience with the Apple retail store was very disappointing.  

My first interaction with the Apple store was a greeter assigned to the entrance. After saying that I was picking up an iMac that I ordered online, he told me to go see “the guy with the grey hat”, pointing in the general direction of the rear of the store. Relative to other Apple stores this particular location is small and I would venture a guess that it is one of the smallest out there, a carry-over from the early years of Apple retail.  After a few minutes it became clear that the “guy with the grey hat” wouldn’t be available any time soon, so I was off to find someone else. 

Even though there were plenty of red shirts visible in the store, everyone seemed focused on some task. After finding another worker that actually was not with another customer, I was told to go see another person for personal pickup, who unsurprisingly was with another customer.  A few more minutes go by and I finally get my iMac.  Overall I didn’t find the experience too magical and in fact, compared to other stores during Black Friday including Macy’s, I would classify Apple’s customer service as inferior.

1)   I am not a fan of having to talk with a greeter at the Apple store entrance only to be shuffled to someone who clearly is not free to assist me and repeat why I am in the store. The whole process seems highly inefficient.  Instead, getting my information and then relaying that to another employee who can come forward to help me seems more enjoyable.  This process may actually exist in other Apple stores and I almost remember something like this occurring to me in the past, but it has been a few years.

2)   Apple retail employees have different tasks even though you would never know it because everyone wears the same shirt color. Some workers do not deal with money, others only go around answering questions.  This scenario becomes tricky when trying to buy products or pick up previous orders. Compare this to Macy’s where mostly anyone you find walking around can hop over to the nearby register and take care of your order.

3)   The floor layout is just unnecessarily chaotic as people are standing around for various tasks such as purchasing product or getting tech support.  Generally the front of the store is geared towards selling product with the back dedicated for the Genius Bar, but the middle zone is a very awkward area with people randomly standing around.

In previous years, I recall Apple have a more traditional check-out process for gift cards and other smaller items such as iPods, but such a layout did not exist this time around.  Maybe I’m being a bit unfair and I just timed it wrong?  

Apple retail just isn’t working anymore and you clearly have numerous objectives to accomplish in 2014.

Good Luck, Sammy the Walrus IV

P.S. I’m enjoying the iMac

Back up the Truck - Buy Stock in Coldplay

It was an eerily quiet 2013 for Coldplay. Besides one new song for ‘The Hunger Games: Catching Fire’ soundtrack, the band was in hibernation. If Coldplay was a stock, it would have experienced an awful 2012 and 2013.  In reality, this is exactly when all of the heavy lifting is done and new songs run through the imagination, creation, and tinkering stages. Hibernation can be a healthy way of nurturing fan relationships (cravings) and resetting media’s infatuation.

Source: Google Trends

A quick look at Google Trends shows that interest in Coldplay (judged by Google searches) stands at eight-year lows. Of course, interest is largely a product of album releases and concerts (none of which occurred in 2013). Coldplay interest peaked during the very busy 2005, 2008, and 2011. 

Coldplay Albums

2000: Parachutes

2002: A Rush of Blood to the Head

2005: X&Y

2008: Viva la Vida

2011: Mylo Xyloto

2014: ?

People are now wondering if Coldplay has topped, unable to match the sheer momentum experienced in 2011. Doubts over new competition, such as Imagine Dragons, or if people are just tired of Coldplay are getting louder.  The latest rumors say Coldplay’s latest album may be released Summer 2014.  I would bet that the album will be #1, Coldplay interest in Google Trends will once again reach a new relative high, and the Coldplay PR machine will return with a vengeance.  Hibernation is a good thing.  If Coldplay was a stock, I would be buying it hand over fist as 2014 will be a good year for the band. 

Current Tech Musings and 2014 Predictions

Let’s take a step back and see how things look around the world.

Apple is Fine.

Similar to 2012, Tim Cook back-loaded Apple’s 2013. Apple went so far as to release the retina iPad mini pretty much as late as it could and still guarantee that supply would be adequate before the key holiday shopping season.  From all indications, the new hardware is selling well - as one would expect - although many Apple bloggers whiffed when judging 5c popularity.  While the sales gap between the 5s and 5c may shrink going forward, I would be quite surprised if the 5c becomes “the real iPhone” as many predicted. The sheer uproar over 5c pricing appears to have quieted down as well.  Apple’s redesigned iOS 7 doesn’t seem to have created any new “–gate” controversies, with the only complaints coming from design snobs (I say that with genuine respect).  Apple accomplished a lot in 2013, and 2014 looks to be just as jam-packed with what I would expect to be iPhone bifurcation (two distinct iPhone form factors with simultaneous development – a really big deal). An iPad pro (think larger iPad Air with possible dedicated accessories for professionals) would also seem to fit very well in Apple’s 2014 resource timeline.

Tech Industry Hardware Becoming a Snooze.

Take a look around and there really isn’t much in the way of exciting and flashy hardware innovations geared for the masses. Yes, the 5s is forward-thinking, and has the internal composition that will rival next year’s iPhone 6, but it’s hardly something to get people talking at the holiday party.  The iPhone 5s fingerprint scanner is nice (continues to work well for me), but I’m not finding it nearly as much of a salesperson as Siri (those initial demos were unbeatable).  On the tablet front, it has become an even bigger bore.  I use an iPad 2 and have absolutely no desire to upgrade to a newer iPad anytime soon.  Outside of Apple, Google is busy publicly beta testing hardware products with the ultimate intent of controlling our data and attention.  Amazon is busy spending money left and right in an attempt to sell Amazon Prime subscriptions, and Samsung is twiddling its thumbs waiting for Apple to release new products. 

Smartwatches Selling Like Cold Cakes.

The smartwatch appears to have finally hit mainstream in 2013 as Best Buy is now carving out more square footage to the concept.  Sales are, and will probably remain, “okay” for early adopters where massive sales are certainly not on the radar, but mass adoption remains out of reach.  The idea of a smartwatch makes perfect sense as the phone form factor contains numerous inefficiencies, but the smartwatch industry lacks the needed design and fashion acumen to really get things moving.  The technology does appear to be available though. Interestingly, one company has been beefing up their design and fashion human capital resume. 

Mobile Messaging App Fever. Yawn.

I’ll be honest, I get bored with the never-ending updates on how many users certain mobile messaging apps have.  In the U.S., this fascination with mobile messaging apps remains subdued as Facebook, Twitter, iMessage, (and I suppose you can include Snapchat), pretty much represent the bulk of how people communicate with each other – oh and the phone feature on the iPhone as well.  Maybe I’m just naïve (and only friends with Apple users), but I really have no desire to follow which mobile messaging app is selling “stickers” or making a play for the Indonesian mobile app market.  I never have used Whatsapp and don’t know anyone who has either. The mobile space is fast moving and people love stories of how start-ups will displace incumbents, but from my vantage point in the U.S. – Facebook and Twitter will remain important communication channels, while iMessage continues to be the sleeper hit. I still think mobile carriers are the big winner as my monthly bills will continue to rise regardless of which start-up does well. Of course critics will say the U.S. doesn’t matter, or is behind the times (and that I am clueless), to which I respond as long as the Valley remains the focal point of technology and entrepreneurship in the world, the U.S. matters.

Changing of the Tech Review Guard.

Yesterday, The Wall Street Journal announced Walt Mossberg’s replacements – relatively new names that probably will get paid a fraction of Mossberg’s current salary. I actually don’t think the WSJ will miss a beat with such a strategy, which may say more about Mossberg’s inflated salary than anything else.  Nevertheless, WSJ tech reviews still matter and companies will continue to treat them accordingly. The overall tech product review industry continues to morph and traditional sources for the “yea or nay” for a new product are now shifting to bloggers turned journalists where personal trust outshines all else.   As seen with Apple’s latest products, tech specs don’t matter as much these days and this trend will only intensify as fashion bleeds into personal technology.

Other Random Musings.  

  1. It is now easier than ever to grab a few of your journalist friends and start a new company focused on delivering news.  Oh, and charge people a lot of money to read what you have to say.  I imagine this trend will only intensify as it is becoming clear that 1-5 person shops are finding a particular niche in online journalism. Some personal bloggers are pulling in more than $500,000 a year, which traditional media companies will have a hard time matching (or even justifying), while start-ups with minimal expenses require only a modest subscription base to break-even. Of course, aggregators will continue to do well in this world as well where expense growth via headcount is one differentiator versus the small shops.  Slideshows put food on the table. One has to start worrying about information overload though, right?  Hopefully?  Yeah, I know, wishful thinking.
  2. A wildcard for 2014 includes Apple’s new retail chief, Angela Ahrendts, which some have already labeled as Apple’s next CEO.  My response would be let’s wait to see how she fits within the Apple culture, then we can start talking. Regardless, Apple retail needs some urgent help, so Angela will be busy.
  3. The tech IPO window is wide open and many signs point to 2014 being another good year.  Housing continues to stabilize and contrary to the perma-bears, I think the housing industry will be fine from here on out.  The theme of rising interest rates (due to a stronger economy) makes sense to me as well.  While I won’t comment on which companies will see an IPO in the coming quarters, I would focus on the quality of these IPOs as one would assume quality will decline as we move past the economic recovery years of 2010-2013.
  4. Angry Birds (and paid iOS app?) fever is over. It was fun while it lasted. I would be interested to see if Rovio can find another “Angry Birds”, although I remain skeptical. In addition, the overall paid app boom appears to be dead (was there ever a boom?). While there will still be winners going forward, companies solely focused on selling apps for money face dwindling prospects of success. App development, as part of a bigger strategy, seems to have a much brighter future

Predictions for 2014.

  • Pundits will say Apple made numerous mistakes, either in terms of product pricing, marketing, or strategy.  The new iPhone will also be classified as marking the end of Apple’s popularity.
  • VCs will continue to pass off personal marketing blogs as independent sources of knowledge and wisdom.
  • Pundits will say Facebook is dead.
  • Mobile messaging app fever will continue.
  • Humans will continue to be inundated with useless information and inconsequential data points. 
AAPL 4Q13 Preview; Expect a Beat

Revenue: $37.6 billion (AAPL guidance: high end of $34-37 billion range/Consensus: $36.8 billion)

  • I expect Apple’s revenue to increase 4% year-over-year.
Gross Margin: 37.1% (AAPL guidance: high end of 36-37% range/Consensus: 36.9%)
  • I expect Apple’s margin to increase sequentially to 37.1% from 36.9% last quarter, reflecting a modest boost from the newest iPhones. Management’s margin guidance is approximately 300-400 basis points less than the 40.0% margin reported in 4Q12.
EPS: $8.20 (Consensus: $7.93)
  • I expect Apple to report a 5% yoy EPS decline. I am including a 908 million share count (implying around $8 billion of buyback).

Product Unit Sales and Commentary

Macs: 4.4 million (10% yoy decline)
  • Mac sales continue to slow as tablets and smart phones satisfy many consumers’ computing needs. I assume 10% declines in both desktops and portables.
iPad: 12.4 million (12% yoy decline)
  • I expect Apple to report weak iPad sales ahead of the iPad refresh in October. With modest channel inventory fill, I expect iPad sell-through to stay somewhat consistent with 3Q13, reflecting some benefit from back to school shopping.

iPod: 3.7 million (30% yoy decline)

iPhone: 34.4 million (28% yoy growth)
  • I ordered my gold iPhone 5s online seven minutes after launch and my phone didn’t ship until September 30, two days after quarter end, so it’s clear that a large number of iPhone 5s launch sales will be pushed into 1Q14. Partially offsetting delayed 5s launch sales was solid 5c supply. My 34.4 million iPhone number assumes 13-14 million units of iPhone 5s and 5c and 20 million units of legacy iPhone (5, 4S and 4) selling at roughly the same weekly sales pace seen in 3Q13 (2.6 million).
I expect Apple to beat consensus EPS on Monday. In terms of 1Q14 guidance, I am expecting approximately $55-58 billion of revenue and 37.5-38.5% margins (which would equate to EPS of approximately $14.50, or a 5% increase from 2012, marking the first quarter with earnings growth since 4Q12). The Street is nearly complete with the Great Apple Expectations Reset of 2013. Heading into 2013, most (including myself) were thinking Apple annual EPS was running around $60. The iPad mini’s lower ASP and margin along with high-end smart phone market saturation resulted in EPS closer to $40. Expectations now appear to be closer to reality as consensus EPS for 2014 now stands at $43. I am around $41-$42, which reflects no China Mobile announcement (I will include the additional $3-$4 when the deal is announced), no change in margins (most likely conservative given the new iPhone lineup), 11% unit growth in iPhone, and 15% unit growth in iPad.

Slo-Mo - iPhone 5s 

Initial Thoughts on iPhone 5s

I’ve been using my new gold iPhone 5s for a few days. Here are my initial impressions:

Size: I like the 5s, not sure I would enjoy a bigger phone. Upgrading from the 4S, it took a little bit of time to get use to the slightly farther thumb reaches required to touch the upper left corner of the 5s.  Even though the extra screen real estate is a positive, I have doubts that I would want a bigger screen than the 5s. I often find myself in one-handed use situations and I simply would not be able to use a bigger screen. If Apple is to go bigger with iPhone 6 (seems like its more than a 50/50 probability at this point), I suspect Apple will also maintain the current iPhone size, which would be noteworthy in that Apple would be maintaining and updating two different iPhone sizes. It may just finally be that time though as the smartphone market continues to mature. 

Slo-Mo: This year’s Siri.  The new slow motion camera mode will be the feature everyone is demoing at the Thanksgiving table or holiday party, just like how Siri was so much fun to show friends and family. I have taken at least 15-20 slo-mo videos so far and still can’t get enough. Of course, this fascination may very well die off in a few weeks, but by then it wouldn’t matter much since everyone I know would have seen the feature. 

Color: White is the new Black.  Up to now, it felt that the black iPhone was the unofficial default iPhone, the color you get to be like everyone else, while the white iPhone was the designated color to stand out from the crowd. I think the 5s changes that dynamic and white (sliver and gold) will become the default color, while the space grey is the color to stand out from the crowd (even though it doesn’t stand out as much as white did in previous years).  Of course, I am not taking into account case usage, which may make this a moot point, but nevertheless I think there will be quite a few gold and silver iPhones in the wild in coming months and momentum will only build. 

Touch ID: Awkward at first, but still cool.  It took me two days to get use to Touch ID, or should I say, break my habit of simply pressing the home button and then typing my passcode.  My issue dealt with pressing the home button and not leaving my finger on the button long enough for the fingerprint scanner to do its job. I also tried to show the feature to another 4S user and they had to be walked through the installation steps and even then they had trouble, so clearly Touch ID is not the easiest feature to demo to normal non-tech users, but nevertheless it’s pretty cool.  

Weight: Wow.  After a few days of using iPhone 5s, my iPhone 4S feels like a brick. It’s remarkable and incredible. Not sure much more has to be said. 

Battery: An improvement.  I’m able to get through a day of pretty constant 5s use (a few tasks per hour, all day) without a trip to find the power cord.  I wouldn’t be able to say the same with my iPhone 4S. 

Speed: Hard to see a difference with LTE; iOS 7 feels faster with 5s. LTE was one of those features Android fans mocked the 4S for not supporting. I don’t see the big deal. I often find myself on Wi-Fi with fast enough speeds to make any differences with LTE negligible. I do see a difference in terms of iOS 7, especially animations. Even though my 4S was feeling a tad sluggish with iOS 7, I don’t find myself complaining with 5s.

Free iPhoto & iMovie: Useful and fun. A few seconds after launch I was asked if I wanted to download a slew of free Apple apps, including iWork, iPhoto, and iMovie.  While many users may just play around with these apps here and there, I think they are plenty capable and will put a dent in third-party paid photo and video editing apps.  

Big Picture: Refinement is king with 5s.  When I upgraded to 4S from 3GS, the speed blew me away. Not only was the phone’s improved performance noticeable, but Siri was a pretty darn cool feature.  The 5s doesn’t have that same wow factor surrounding speed improvement, but instead the subtle refinements in terms of battery, camera, apps, and color, add up. I would have a difficult time moving back to the 4S, which is the easiest way to know that the 5s is a winner and another step forward in Apple’s iPhone refinement journey.

Twitter’s Problem; Not Connecting with Mainstream Users

Twitter is going public. If you are an employee, investor, or simply a tech IPO lover, this is a very exciting time. While there is much to like about Twitter, I’m noticing a trend that is somewhat concerning; Twitter isn’t connecting with mainstream users.

Twitter had 215 million monthly active users (MAUs) as of June 30, 2013, a 44% increase from 2012. In today’s mobile world, an ecosystem with 215 million users is a very respectable number, but a 44% user growth rate isn’t superb.  In the U.S., Twitter saw only 32% year-over-year user growth to 49 million MAUs, adding just 1 million users in the second quarter. For a well established ecosystem, these numbers aren’t exactly thrilling. 

Earlier this week, one of my Facebook “friends” posted a question on her timeline, “What’s the deal with Twitter? Should I do it?” Within one hour, five people answered - all with a “no”.  Surveying my non-tech social circle, Twitter usage is abysmal.  A quick check with my high school teacher acquaintance led to an expected answer, no one at school talks about or uses Twitter.  At a recent state fair that saw upwards of 160,000 visitors on a Saturday, tweets mentioning the event numbered in the dozens. The list of anecdotal data points showing Twitter’s lack of connection with mainstream users goes on and on. 

While Twitter is proving valuable to a select group of users, the platform is not exactly hitting mainstream usage similar to how Facebook (1.1 billion users) conquered the world, or even messaging apps such as WhatsApp (300 million users) are trending.

What is going on? I suspect Twitter is not appealing to the masses in a world where Facebook made it socially acceptable to share and more intimate social apps, like Snapchat, are using their “coolness” and “ease” to flourish.  Many are confused with the concept of Twitter since the company really isn’t a classic social network, but instead an information aggregator. When a user joins, they are bombarded with suggested follows. If a user bypasses the suggested follows page, it is somewhat unclear what is the next step, especially if their current social circle is not well represented on Twitter. It takes time to find interesting channels (people, companies, concepts) worth following. Rather than being a social network where people use Twitter to update friends with actions and ideas (that’s more for Instagram and Snapchat), I think of Twitter more like an improved form of television, where a user creates a list of channels to watch or follow. Corporations, brands, and news organizations desperately want a Twitter presence to reach potential customers, further highlighting the television metaphor. The big question is if such a concept can appeal to mainstream users.

Heading into Twitter’s IPO, I suspect user growth will remain a key topic and concern among investors. While management will be judged on revenue and profit growth, including user utilization rates, I think the company faces an uphill battle with user growth as competing services continue to fight for mindshare in the maturing mobile computing era.  I see the value in Twitter, but I’m concerned that mainstream users will never give the service a chance.  

Apple’s Marketing Missile - iPhone 5c 
I like getting reactions from normal people about technology. On Tuesday evening, after the Apple keynote, the first reaction I received was “I like these color iPhones. They come with the cases right?” After a bit of prodding, I discovered iPhone 5c cases were actually receiving more positive reactions than I initially assumed. 
I suspect iPhone 5c colors and cases are serving as a marketing missile aimed at the few price layers situated below the iPhone 5s.  While it may be easy to assume that colorful iPhones appeal to specific demographics, I think it is appropriate to take a step back to get a clearer picture.
In a few months it will be much easier to see iPhones in the wild thanks to these hard to miss 5c colors.  Throw in wacky 5c cases and the phones will be impossible to ignore. Up to now, many iPhones were covered by generic cases that made them largely indistinguishable from Android phones. The iPhone 5c, and corresponding cases, may be a very elaborate, yet subtle, marketing campaign aimed at the subconscious. Seeing everyone use a particular phone may go a long way in helping to sway one’s purchase towards that product.

Add in this evening’s announcement of Apple partnering with Burberry for the iPhone 5s and I suspect we may be on the verge of a revamped iPhone marketing strategy focused on positioning iPhone as the premier phone brand, worthy of aspirational goals. 

Apple’s Marketing Missile - iPhone 5c 

I like getting reactions from normal people about technology. On Tuesday evening, after the Apple keynote, the first reaction I received was “I like these color iPhones. They come with the cases right?” After a bit of prodding, I discovered iPhone 5c cases were actually receiving more positive reactions than I initially assumed. 

I suspect iPhone 5c colors and cases are serving as a marketing missile aimed at the few price layers situated below the iPhone 5s.  While it may be easy to assume that colorful iPhones appeal to specific demographics, I think it is appropriate to take a step back to get a clearer picture.

In a few months it will be much easier to see iPhones in the wild thanks to these hard to miss 5c colors.  Throw in wacky 5c cases and the phones will be impossible to ignore. Up to now, many iPhones were covered by generic cases that made them largely indistinguishable from Android phones. The iPhone 5c, and corresponding cases, may be a very elaborate, yet subtle, marketing campaign aimed at the subconscious. Seeing everyone use a particular phone may go a long way in helping to sway one’s purchase towards that product.

Add in this evening’s announcement of Apple partnering with Burberry for the iPhone 5s and I suspect we may be on the verge of a revamped iPhone marketing strategy focused on positioning iPhone as the premier phone brand, worthy of aspirational goals. 

I Like Apple’s iPhone Strategy

I felt Apple did a good job today. For the first time Apple will be selling two brand new phones, including one for under $100 in the U.S. A brand new iPhone for under $100. I wouldn’t underestimate the impact of such a feat. 

While there were some interesting technologies introduced, including a fingerprint scanner and a motion coprocessor, I have learned to control my long-term predictions on what such technologies may mean for Apple’s product line. Time will tell if such innovations become major cornerstones in future Apple products. 

The most controversial aspect of today’s event was iPhone pricing. I see a schism developing among the tech punditry. On one hand, there is the belief that market share is king and Apple must address the bottom of the market because developers will begin to focus on Android’s sheer numbers instead of iOS. On the other side, where I stand, market share is not created equal. It is okay if Apple doesn’t address the lower end of the market since five consumers who don’t buy mobile apps or content is not equal to one who does. Looking at today’s events, I think Apple is doing the right thing gradually moving down market (iPhone 4 and 4S have not been discontinued). This strategy will only expand in coming years. With approximately 400M-500M (and growing) active iOS users with credit cards, I view the iOS ecosystem as now self-sustaining, capable of app innovation as long as the hardware and software back developers up.  If I changed sides and instead only looked at market share, I’m sure I would have been championing Symbian, then Blackberry, and now Android. Market share is not everything. 

Moving to more minor topics, Apple is still addicted to case money, now selling iPhone 5s and 5c cases. Selling cases is a good and easy business decision and judging from the popularity of iPhone cases, Apple will make a decent amount of profit (and margin) from going down that road.  Apple also announced it will give away $40 of software with new iPhone and iPad purchases. While I am not a big user of Apple’s mobile productivity apps, quite a few people are and I suspect there will be many happy iOS users. 

There are still plenty of questions remaining about Apple and strategy. 

Did Apple’s keynote contain a bit too much of tech jargon? Maybe. 

Will mainstream consumers accept iOS 7 without any major complaints? Maybe. 

Will Apple’s margin actually benefit from the new iPhone line? Maybe. 

Nevertheless, with a new flagship phone that has enough differentiation to stand out from competitors, a more value-oriented option for consumers with slightly different priorities, and the desire to maintain older iPhone models in order to address the mid-tier phone market, I like where Apple is sitting and the outlook for the iPhone business over the next 6-12 months. 

iPhone Keynote Expectations

Apple’s 2013 iPhone event is here. At the end of the day, everything comes down to expectations. If reality is unable to meet expectations, disappointment is not far behind. If expectations are kept measured, reality may still be able to deliver a positive surprise. Taking into account weeks of rumor, speculation, discussion, and simply “educated” guessing, here are my expectations:

Subsidy Land (Countries where phones are subsidized by mobile carriers)

$199 – iPhone 5S with a 128GB option, “gold” color option, fingerprint scanner, improved camera, faster processor. (95% confidence)

$99 - iPhone 5C available in various colors. (75% confidence)

$0 - iPhone 4S (51% confidence)

Non-Subsidy Land (Countries where phones are not subsidized by mobile carriers. Pre-paid option in subsidy land. For simplicity, I’m not considering various taxes/international fees.)

$650 – iPhone 5S with a 128GB option, “gold” color option, fingerprint scanner, improved camera, faster processor. (95% confidence)

$499 – iPhone 5C available in various colors. (75% confidence)

$399 - iPhone 4S (51% confidence)

$349 – iPhone 4 (50.1% confidence)

Summary

1) The “cheap” iPhone won’t be cheap. Consensus seems to have settled around the $399-$499 range, therefore I suspect $499 is the floor. For the first time, Apple will be selling a brand new iPhone for under $100 in the U.S.

2) I think the iPhone 4S and 4 will stick around (in somewhat limited capacity). I have received the most push-back on this point, but I still see a large market need being met by the 4S and 4 (having an iPhone at a sub-$400 price point is important).

3) The iPhone 5 will see end-of-life, to be replaced by the very capable iPhone 5C.

4) Notice the subtle differences in subsidy and non-subsidy wholesale pricing. Apple may be willing to sacrifice $50 or so in non-subsidy land for more aggressive iPhone 5C pricing (coinciding with China Mobile launch).

5) I think an iPhone 5S fingerprint scanner could be a pretty big talking point during the keynote (think this year’s Siri). Expect very limited functionality, but a ton on security and privacy.

6) Other topics such as a refreshed Apple TV (not a TV set), updated iPods, and a few more new iOS 7 features are probably more likely than not at this point.

Other Random Musings

As usual with Apple keynotes, the safe bet is to collect all rumors and divide by half to get closer to reality. There will likely be disappointment around iPhone 5C pricing and chatter that the iPhone 5S isn’t different enough from previous models. Let’s not even begin to discuss iOS 7 reactions.

Here’s My Platform. Vote for Me.

The first half of 2013 felt weird.  Even though plenty of phones and tablets were sold, as well as several laptops, the excitement level seemed less inflated compared to last year.  Consumers are content with their gadgets and remain busy uploading personal information to a dozen or so social and messaging networks.  Nevertheless, there were some stories in the first half of 2013 primed for riveting Twitter debates. To sum up my stance on these issues, I came up with an easy to remember platform, akin to a politician. I am pro-iWatch, pro-expensive cheap iPhone, anti-Glass, and pro-Schiller.

Pro-iWatch.  Wearable gadgets interest me and I think there is something there.  Back in February, former Apple designer Bruce Tognazzini began what turned into a multi-month parade of chatter related to Apple developing its own smartwatch. I still think Bruce’s piece is the best words on the device and I have a feeling that a few years from now most of his post will have become reality. My conspiracy theory is that Bruce was frustrated with iWatch progress and released some of the work Apple had already done as a bribe to get Apple to finally decide to give the project the green light. In reality, Apple probably has been working on a gadget for the wrist for years (yes, that would make it a Steve project) and there was enough chatter floating around for Bruce to collect into a post. 

I suspect Apple did give the iWatch a green light as seen by numerous talent acquisitions and other signs including industry and management chatter. I think consensus is unsurprisingly naive, if not downright clueless, when it comes to thinking of how an iWatch would look and function. People need to stop picturing a classic watch when rethinking the watch.  I am not a fan of today’s smartwatch as the genre fails to answer many questions that the 21st century has placed on the classic watch; primarily purpose and functionality. The current smartwatch market isn’t seeing massive adoption and the industry lacks a cash-rich leader. Samsung and other giants are quickly rushing to market with their own smartwatch, but I am not optimistic that much will come from these early efforts. Instead, I would look more towards Nike’s Fuelband for signs of reinventing the watch. Add in device independency and fashion conscientiousness, and we start to peel the skin to iWatch’s core. 

Pro-Expensive Cheap iPhone. Apple continued to show healthy iPhone sales last quarter with 20% unit growth. Average selling price (ASP) fell as consumers continued to buy the discounted iPhone 4 and iPhone 4S. It seems fairly certain that Apple will release two new iPhone models next month; a “5S”, or the latest iteration to the iPhone 5, and a less expensive iPhone (think iPhone 5 only with a plastic casing and I suspect lacking the ability to support iOS 7 features exclusive to the iPhone 5S). Price points remain a controversial topic, boiling down to two schools of thought; the cheap iPhone will be priced closer to $200 in order to gain traction in emerging markets where phone subsidies don’t exist versus priced closer to $399-$499 as Apple continues to gradually move downmarket, attempting to create demand in the $399-$499 no-man’s land of new phone pricing.  Even though Apple may be able to manufacture a phone for $200 and still make an “ok” profit, I suspect Apple’s larger strategy is to make sure that all profit layers are captured as the iPhone moves downmarket. If the strategy backfires, Apple can discount the one-year old iPhone 5C for $299 next year and give it another try.

I also think a new $399-$499 iPhone fits well within a possible pro-forma iPhone lineup of iPhone 5S for $650, iPhone 5C in various colors for $450, and iPhone 4S for $350. Such a line-up could be sold across the world, including subsidy land. While a $450 “cheap” iPhone does not address the army of Android phones selling for $99, I wonder if that target is something Apple needs to even shoot for in the near-term. 

Anti-Glass. I summed up my Google Glass angst in a prior AAPL Orchard post, largely questioning the product on poor industrial design. Having a product on my face, during both usage and non-usage, strikes me as terribly inefficient and ineffective, not to mention obtrusive. Regardless of design, I also suspect the widespread popularity of contact lenses represent a strong case that glasses aren’t exactly a desirable body modifier. Sure, Google Glass represents something new, but new is not the same as good. Many pundits are hedging bets with assertions that Google Glass may find its niche audience. In retrospective, such a statement can be said about any new product as long as the company making that product remains committed to funding the project. Instead, I think Google Glass will largely be ignored once wrist devices flood the market.  

Pro-Schiller. This is the pro-freedom part of my platform, the idea that probably isn’t too controversial yet often goes unnoticed. I consider Apple SVP of Marketing, Phil Schiller, as the embodiment of Apple’s culture. Yes, Jony is Apple’s soul, but Schiller represents the hard work that occurs at Apple HQ, along with the fun, jokes, and general love for the journey taken. Any quick YouTube search would reveal plenty of clips showing wacky Schiller during Apple keynotes. Earlier this year, Schiller made headlines for pumping a bit of Apple PR before Samsung’s keynote unveiling the latest version of its flagship phone. In retrospective, Schiller didn’t need to say anything as Samsung relied on racist and sexist undertones to unveil a phone that didn’t live up to Apple-like expectations.  Looking ahead, Schiller’s input on product pricing placement and marketing will continue to take the spotlight. 

AAPL 2Q13 Preview; Expect Ugly Guidance

Revenue: $41.1 billion (AAPL guidance: $41-43 billion/Consensus: $42.5 billion) 

  • I expect Apple’s revenue to increase 5% year-over-year.

GM: 38.1% (AAPL guidance: 37.5-38.5%/Consensus: 38.5%)

  • Apple continues to feel margin pressure from its current product lineup. Management’s margin guidance is approximately 940 basis points less than the 47.4% margin reported in 2Q12. 

EPS: $9.55 (Consensus: $10.07) 

  • I expect Apple to report a 22% yoy EPS decline. My $9.55 estimate is less than the Street’s $10.07 average.

Product Unit Sales and Commentary

Macs: 3.7 million (8% yoy decline)

  • Mac sales continue to slow as tablets and smartphones satisfy many consumers’ computing needs. I assume declines in both desktops and portables.

iPad: 15.5 million (31% yoy growth)

  • I expect Apple to report solid iPad sales for 2Q13. My iPad estimate assumes approximately 8-10 million iPad mini sales and approximately 1-2 million units added to channel inventory in order to meet management’s target range. 

iPod: 6.1 million (20% yoy decline)

iPhone: 36.5 million (4% yoy growth)

  • With iPhone channel inventory already within management’s target range, I expect Apple to report a significant slowdown in iPhone unit growth (30-90% unit growth over the past four quarters vs. 4% in 2Q13) as the smartphone market matures. Verizon activated 4 million iPhones in 2Q13 and if Verizon represents a similar share of total iPhone sales during the quarter, my 36.5 million unit estimate may be too optimistic on the order of 20%. If iPhone sales are trending closer to 30 million units, I think Apple may resort to stuffing the channel by at least 1-2 million units, resulting in a bear case of approximately 31-32 million iPhones (resulting in EPS around $8.60).

 

Unless earnings estimates come down drastically in the coming days, I expect Apple to miss consensus EPS on Tuesday.  

In terms of 3Q13 guidance, I am expecting revenues of approximately $30-32 billion and 38-39% margins (which would equate to EPS of approximately $6.20-$6.40, or a 30% decline from 2012). The prospect of no new product launches until CY3Q13 (i.e. after June 30) will pressure iPad and iPhone sales. 

Apple is currently in somewhat of a financial funk as the company battles Wall Street’s expectations game. The high-end smartphone market is becoming saturated, while the booming success of the tablet market is resulting in difficult yoy unit sale numbers. Heading into 1Q13 earnings, I thought the market was already expecting bad news, including weak guidance. I was wrong.  Heading into 2Q13 earnings, consensus is for an EPS decline, but I am not convinced the Street is being realistic with 3Q13  and 4Q13 expectations as consensus numbers still look aggressive.

Quick Note on Capital Management

Some observers are predicting Apple management may try to shift attention away from weak guidance on Tuesday by announcing its latest thoughts on capital management.  While anything is possible, I’m not convinced of that tactic’s effectiveness. Instead, Apple may be better suited to let the dust settle from the current earnings cycle before acting on its updated capital plan.  At the current trajectory, Apple may be in a position to announce a multi-year share buyback authorization representing up to 20% of outstanding shares. More importantly, management will probably have to address its $94 billion of offshore cash as Apple has “only” $43 billion of cash currently available for capital management.  A growing number of industry observers think raising debt is part of Apple’s solution to its offshore cash “problem”.  While there may be financial merit in raising debt in the current environment, such an action would mark a significant new chapter in Apple’s history. 

Conceptual Concerns with Google Glass

Google continues to expand its public R&D effort for Project Glass, recently announcing a call for developers to become part of the early program.  While many tech adopters are becoming downright giddy towards Google Glass, I have a number of reservations about the product, but more importantly the larger implications of how technology evolution will impact society. 

In a Google+ post advertising the Glass developer program, Google wrote, "[w]e’re developing new technology that is designed to be unobtrusive and liberating, and so far we’ve only scratched the surface of the true potential of Glass.

On its surface, that brief description sounds promising. Who wouldn’t want to be liberated by additional technology, all the while still feeling secure and in a weird way; human?  Of course, in its current form, Google Glass doesn’t come close to those accolades as wearing a computer on one’s face doesn’t exactly seem like an advancement for less obtrusive technology. 

As smartphone and tablet proliferation continues, the limitations surrounding tech gadgets is becoming clear. With iPhone in hand, potential is unlimited as the ability to capture the surrounding world, all the while harnessing the web through curated user interfaces (apps), proves to be quite an attractive proposition.  However, once a user is away from their phone (or tablet), the gadget’s usefulness is hard to measure.  The preceding situation demonstrates a major inefficiency in hardware; physical dependency, which time will eventually dissolve as society moves towards a gadgetless world (don’t worry there’s still time to enjoy phones and tablets). 

There are tangible signs that the world is already entering a new phase of mobile computing; wearable technology.  At what may come as a surprise, Nike (via Nike+ FuelBand) and Disney (via MagicBand) seem to be leading the wearable technology army having announced inexpensive (or in Disney’s situation, free) wearable computing products. Of course, one could argue that such focused applications don’t go beyond niche needs or uses, but for that matter, wearable technology, like any disruptive force, will begin with niche uses. Add in Google Glass, and circulating iWatch/iBand rumors, and it becomes clear that the mobile computing industry may be ready to move. 

In its current concept, Google Glass represents the key risk to the next phase of computing; letting technology control society while reducing user optionality. While the ability to take a picture or video of anything, at any time, through a camera near my eye may sound appealing, society can do exactly that now with a phone, which could then be easily put away and ignored. If the resulting argument is “just take off the Google Glasses then”, the added benefit of having such a device is then questioned. Early supporters of the device reiterate that Project Glass is just getting started and the possibilities are endless. While that statement may be true, it lacks the justification for why the initial product should deserve endless praise simply for being introduced. I’m sure other companies could release products that seem cool for a few hours only to discover major conceptual concerns. 

Google isn’t shy in portraying Google Glass as a way to improve one’s quality of life through access to information. Having to wear a computer on one’s face doesn’t ring as some kind of industrial design breakthrough, especially compared to a simple bracelet or watch which could serve many functions by just being casually worn; hidden away under clothing. Technology can then truly melt away into the background. Having an endless amount of information at one’s disposable is not guaranteed to be a benefit and if handled incorrectly, which many companies are doing now, negative consequences are born. 

Where is Project Glass headed? Judging from Google’s videos, the Project Glass team will initially try to find niche uses for Google Glass, including recreational airplane pilots, skydiving schools, taxi drivers, and circus acts.  Of course, each one of those niches raises serious concerns if glasses would even be practical (and safe) in those scenarios, but that’s besides the point. Google has plenty of talent dedicated to Project Glass, which may very well open future doors for the initiative. Criticisms surrounding price and practicality for visually impaired users are somewhat misplaced as those two criteria could probably be solved somewhat easily and quickly. More importantly, Project Glass will give Google data about mobile and wearable computing; data that Nike has already been collecting, and which Disney will soon be. (It’s debatable how valuable such data is to a company. Wall Street loves it, but that’s hardly a ringing endorsement.)

While some are in a rush to applaud Google for publicly airing its R&D and introducing new products for the sake of introducing new products, it’s important to remember that tech companies don’t just sell products, but also values. For wearable computing to become a formidable force, a company’s values and beliefs will prove to be more important than the device itself. Technology has the ability to ruin society through excess noise and information. While some companies hold that fear close to heart, others seem content to usher in that doomsday scenario.