Sorry, Steve

Steve Jobs made a few announcements yesterday, and as usual, probably every man woman and child on the planet has heard the news about new and improved iPods etc. Heck, you can even find a few hundred articles that talk about his decision to ditch the mock turtleneck.

Most of it was the expected better, faster, cheaper. The Nano I bought last month (on a special promo) is now smaller and has a clip. The youngest member of our household is hoping that the iPod Touch will be drop-shipped from the North Pole in late December. (Steve finally admits that the iPT is just an iPhone Lite). The AppleTV is no longer a hackable Unix-based stripped-down Mac, but (if rumors about its use of iPhone OS are to be believed) an iPT without a screen.

However, I think the new iTunes movie policy is crazy: no sales, $1 for renting a TV episode, and $5 for renting a movie. Maybe he’s just greedy or not serious; I don’t know.

Maybe it’s because the studios are fighting him and demanding ridiculous royalties; certainly the decision of CBS and NBC to boycott the effort suggests the studios are not cooperating, although the NBC recalcitrance (even pre-Comcast) is déjà vu all over again.

Movie rentals are a commodity. Right now I rent my movies for $1 from a kiosk at my grocery store. In other cases, I pay $0 to rent movies or TV episodes from the library, or $0 to watch TV episodes on a website.

Meanwhile, Netflix will gladly rent me movies and some downloadable content for $9/month. That includes downloads to a Wii, PS3, Xbox360, iPad or AppleTV.

Why would I want to pay $5 for a single movie rental? If the studios conspire to embargo movies from the discounters for 60 days — and somehow avoid antitrust scrutiny — then it might be possible to charge a premium for hot new releases. Otherwise, it’s hard to see how anyone — save perhaps rich Silicon Valley elites who have more dollars than sense — would pay more than $2-3 for a download that’s available in so many other ways for a heck of a lot cheaper.

iPhone OS everywhere

This week Apple is going to unveil various updated iPod models and probably some other consumer media devices. Around our house, the new iPod Touch is eagerly awaited by someone who is too old to believe in Santa but still thinks he has an account at the Apple Store.

Ryan Kim of the SF Chronicle has a great article summarizing Apple’s shift away from Mac OS X and towards iOS everywhere:

"I think the iOS operating system is so powerful for Apple, it's generating most of their revenues, between the iPod Touch, iPad, iPhone, iTunes and the App Store," said independent mobile analyst Brian Hall. "Clearly, I think Apple realizes that they want to continue down this path."

Some speculate that Macs will eventually run iOS, and Kim quotes Steve Jobs himself:

Steve Jobs has acknowledged the shift, saying the future of Apple is in lighter, non-PC devices, which he likened to cars, comparing computers to old trucks used during the country's agrarian past.

"PCs are going to be like trucks," Jobs said at the D8 conference in June. "They're still going to be around, they're still going to have a lot of value, but they're going to be used by one out of X people."

The article concludes with a quote of Jean-Louis Gasée, the former Apple VP of R&D whose stubbornness (along with John Sculley’s cluelessness) nearly killed the company:

Jean-Louis Gassee, a partner at venture capital firm Allegis Capital and a former Apple executive, said he's doubtful Apple will bring iOS to the Mac because it will add too much complexity, something Apple traditionally avoids. But he said iOS, combined with iTunes, has given the company a system it never had with the Mac.

"It's obvious from Apple's actions they believe in the future of iOS," he said. "They're putting a lot of resources behind it. With iOS and iTunes, Apple has an ecosystem with no equal."

The article is must reading — it’s about as complete a job as you could expect for pre-announcement speculation, and I can’t really add to it.

Another iTunes victory

Apple this week announced same-day download movie sales from 20th Century Fox, Disney, Warner, Paramount and a few other studios. (It’s also possible to buy movies directly from AppleTV, for the few people who own one). The movies cost $15 each. This even includes cooperation from its recent nemesis Universal.
Some speculate that it will help digital downloads by others like Amazon and Netflix. I’m not sure I buy it — should Apple not try to grab market share and create switching costs, for fear it would grow the market and help its competitors. But analysts have to write about something.

The iTunes Store is not invincible: nothing is. But attempts by suppliers to reduce Apple’s buyer power keep failing.

Razors and razor blades

An anonymous commenter on last week’s iPhone posting mentioned Apple’s aggressive price cuts earlier this month on AppleTV, citing an article posted tonight on Gizmodo.

If you allow for distribution margin, Apple can’t be making anything on the 40gb AppleTV sold for $229, if iSuppli’s BOM estimate of $208 is accurate.

There’s nothing wrong with a razor- and razor blade cross subsidy. After all, that’s what videogame console makers have done for years — giving away consoles to make it up with royalties on the game. Once upon a time, you could get an actual razor blade handle free, too.

The problem, of course, is that Apple’s subsidy has historically gone the other way — iPods make money and the iTunes Store does not. So a subsidized AppleTV and break-even store is going to wipe out margins.

I’m guessing that this is a fight to the death for control of the living room: Xbox 360, Sony PS3, Amazon Unbox, the various TV network sites, plus substitution effects for short clips by GooTube. So, like a good Japanese company, Apple is buying long-term market share at the expense of short-term profits.

Nobody’s buying AppleTVs, so it’s not like the subsidy will have a material impact on the bottom line. On the other hand, the old AppleTV made a cheap OS X 10.4 server. Someday they’ll update the hacks so that they can turn the 2008 AppleTV into a cheap 10.5 box.

The new product allows movies, TV shows, YouTube, music and podcasts. I guess I’ll have to buy one to see if it supports the radio stations preloaded in iTunes — like my “hometown” favorite, KSBR. Or I could install the Streamer MP3 radio station hack.

Still, I don’t get the business model. The product still doesn’t do timeshifting, which is the number one usage of a digital settop box.

Killing those Apple bears

I am not an Apple cheerleader. And I have not owned the stock in a decade — every time I've wanted to get in, I’ve considered it overvalued. A P/E of 46 is pretty rich for a 30-year-old growth company.

Nonetheless, looking for an answer to an unrelated question, I was amused to find an Seeking Alpha recommendation (elaborating on one from Piper Jaffray) from last March to short Apple. The stock was at $95; Wednesday it closed at $166.

This reminds me of a friend (now at Apple) who wanted to short eBay in the late 1990s; his wife fortunately talked him out of it. Shorting Microsoft and Cisco in the past decade could have been very smart if you timed it right — but the timing was not about the company’s competitive advantage, but shifts in market demand and growth multiples.

I never did find the answer to my question, which is how many AppleTV units has Apple sold. Projections prior to the March 21, 2007 ranged from 800,000 to 2 million. I would be shocked if they sold 1 million this year. My MBA students, Seth Baron and Richard Burnside, estimated 206,000 units sold in April-June, which implies (absent a model refresh) they’d be lucky to sell 600,000 units this year. But, as Seth & Rich noted, AppleTV is an “extendable software platform,” so who knows? Maybe important functionality will be added down the road.

I was dying to buy the rumored iTV, but then when I saw one in January, I said “what’s the point?” I don’t buy that much from the iTunes Store (10 songs over 3 years), but I would buy a DVR replacement for time-shifting 24.