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.

Deceptively viral Nano

The conventional wisdom is that the iPod is on its way out. Units sales in Apple’s 4th quarter were down 8% YoY, and the fall iPod refresh was disappointing. One could easily conclude that Apple has given up on the product line and was milking it until end of life.

This is certainly evident at both ends of the product family. The classic iPod — hard disk based — is a tiny niche that is going away. The Shuffle is already about as small as it’s going to get, and there are limits as to how many people want a player that offers no control over what you hear.

The iPod Touch is deliberately crippled — if it’s too attractive, it will cannibalize iPhone sales. Perhaps that is why Apple didn’t update the iPT this year — except for larger memory sizes — despite pent up demand for a new model. It could also be (as rumored) there were production delays on a planned new model.

From a strategic standpoint, however, I think the iPT is in a decline. My interpretation is that the main goal of the iPT is to expand the platform installed base to include people who won’t sign up for a carrier (such as AT&T) or won’t switch carriers. (Since almost every sentient human being in the developed world has a cellphone, the latter is a larger category.)

However, Apple now has multiple carriers in Europe and Latin America. This leaves mainly the US as the market for the iPT for the majority of the market that doesn’t or won’t use AT&T. (Apple also has single carriers in Japan and China, but the lukewarm reception for the iPhone does not suggest a lot of pent up demand to shunt to the iPT). So I think over time the pool of people who want the iPhone but won’t/can’t buy them is continuing to shrink.

For the iPod product line, that leaves the iPod Nano. I must admit, I underestimated the potential for the iPod Nano 5G, which seems like an overpriced Shuffle with a screen. In particular, the video camera seems like it offers a ubiquitous recording device for those carrying a music player but not a cellphone.

In short, the product is well-targeted to tweens and young teens from families that will spoil them with a one-time $150 purchase but not an $800/year iPhone service plan that doesn’t even include many text messages. Enough Nanos are out there that (affluent) kids know about it and how fun it is. I’m getting pressure at my house from a 6th grader, pressure we hope to resist.

An additional push is coming from the world’s largest retailer. Starting today, Wal-Mart is selling the $150 Nano for $145 with a $50 iTunes gift card. (The same Nano is $134 at Amazon without a gift card). I can’t tell if this is an aggressive effort to build traffic — and Apple to support iPod sales — or it’s Apple dumping inventory that otherwise wouldn’t be selling.

Given this, I expect most of the iPod sales reported in quarter ending Dec. 26 to be the Nano. Will iPod sales be as good as last year? Certainly not in dollar terms — when more iPod Touch models were sold — and I’m guessing not even matching the 22.7 million iPods sold last Christmas.

Still, as a starter iPod (gateway drug), the iPod Nano will add new young customers to the iTunes Store and iPhone/iPod ecosystem. Building brand and product loyalty among pre-teens is clearly crucial for Apple as iPhone challengers continue to flood the market.

Right and wrong

Steve Jobs announced the new line of Apple iPods today, and my predictions were both right and wrong. (I was in class and then meetings and so only now have been able to catch up with the video broadcast).

Of course, the big news was that Steve Jobs is not dead yet — as he said “I’m vertical” — publicly admitting to the liver transplant from a donor who died in a car accident. He did look haggard, 10 years older than his last public appearance, and was on stage less than 15 minutes.

Before he stepped away from the pdoium, he made a few announcements:

• iPhone: 30 million sold
• iPhone App Store: 75,000 apps, 1.8 billion app downloads (not including updates).
• iTunes 23 countries, 8.5 billion songs, 100 million customers, #1 retailer in the world
• iTunes LP: “Some of us here are old enough that we actually bought LPs. It was great, because you not only got the music but you got great photography, you got liner notes, you got essays. Who could forget some of these classic albums?”

Of my product predictions, the major one was clearly wrong: I’m not buying the new iPod Touch this week because (despite my prediction) there is no new iPod Touch. Rumor has it that a product is planned but has been delayed due to component problems.

One minor prediction was more on target: Users hate the proprietary headphones on the iPod Shuffle so much that there is now an adaptor to allow third party headphones. It sounds like the main plan is to license rights to the proprietary controls to headphone makers (presumably royalty bearing, raising consumer prices), so it’s not clear this really solves the problem. As they say, the devil is in the details.

The next iPod Touch

When it is announced next month, the iPod Touch 3.0 may very well be lost in the tidal wave of interest in the new Apple tablet. If rumors are correct, the iTablet (iPad) is a 10" touch-screen tablet that (as I expected) is based on the iPhone OS — and (more questionably) is being released this fall.

With or without an iPad, next month’s introduction of the new iPod Touch will be an important incremental product for Apple in spreading its platform more broadly. By my estimate, Apple’s iPhone OS has been shipping 60/40 between iPhone models and iPT models.

I’m expecting to buy the iPT 3.0. Why? The main reason is to get a Wi-Fi/Skype (and eventually Google Voice) communications device without the monthly AT&T contract. However, it will also allow access to the wide range of iPhone apps, allow a chance to do iPhone development, provide a handy-dandy PDA and (as a side benefit) replace my long-dead iPod.

What will be in it? I have no inside information, but many of the details are easy to predict.

From the previous iPhone/iPT pairings, the software story is obvious. (Or as we like to say in social science: inductively proved — “1, 2, … n”). The new iPod Touch will include the iPhone 3.1 software, which provides better copy/paste, better email and other tweaks. Most important for iPhone Lite users, the 3.x OS offers better Wi-Fi that will make the iPT a more practical substitute for a smartphone, when carried between home, work and other sources of handy (or free) Wi-Fi hotspots.

What about hardware features? This is educated guesswork:

• Faster CPU? Yes
• Stereo Bluetooth? Probably
• Voice control? Maybe
• Compass? Probably not
• GPS? No
• Camera? A month ago I would have said no way but rumors are that it will.

When will the iPT 3.0 be announced? That part is much clearer: September 9, the day after the old iPT is discontinued. As the Apple ad says:

Buy a Mac for college, and get a free iPod touch.
If you’re a student or a faculty or staff member, purchase an Apple computer and a qualifying iPod from May 27, 2009, through September 8, 2009 and receive a rebate up to $229.

However, like all iPhone (and iPT) users, the big downside will be that my app choices are at the mercy of Apple and its seemingly arbitrary application rejection process.

For example, if the iPT is my main holder of my music library, I’d like to play the music directly from the PDA rather than having to use my laptop or desktop. As it turns out, I own an AirPort Express, Apple’s low-end base station that supports AirTunes, streaming audio to external speakers. Apple allows streaming to AirTunes from a Mac or Windows running iTunes, but nothing else.

However, Rogue Amoeba (as have others) has done a good job of reverse-engineering how to stream arbitrary audio to AirTunes, and sell their Airfoil product is available for Max OS X and Windows. But since the only way to distribute this to iPT users is through the iPhone App Store — where Apple has made controversial decisions to ban key third party apps — I can’t see Apple ever allowing such an app. (Perhaps Apple will sometimes add this feature, but why do we have to wait for Apple?)

The other interesting thing is that the main thing holding back adoption of the iPhone OS jailbreak is the ATT threat of shutting down or otherwise retaliating against these phones. None of this applies to iPT owners, so the incentives for trying jailbreak is much higher for these owners. Would this be enough to create a market for jailbreak-only apps for iPT users?

Proprietary Apple strikes again

Apple has unveiled the latest member of the low end of its iPod family, the iPod Shuffle. As with previous models, it’s the cheapest, lowest capacity, fewest features and smallest.

Not content to have something smaller than a matchbox, Apple has now made the Shuffle smaller than a key. It provides great bragging rights “smallest in the world”, but it has some negative implications — because the buttons have been moved from the Shuffle (to save space) to the headphones.

Dan Moren of Macworld points to problem #1: the controls need a manual:

The fact that Apple has to put up this diagram tells you how much more complicated it is: how would you figure out the controls without this chart? …

Look, even buttons have their place: having discrete controls for discrete functions is not necessarily a design failure. Sometimes it's just the best way to get the job done. There's no inherent, intuitive cognitive connection between double-clicking to go forward or triple-clicking to go back; it requires the forging of a new link in our minds. Where does it end? Will future versions require you to quadruple- or quintuple-click? Will there be a system where you can spell out the name of the song, artist, or album you want in Morse code?

This is of course contrary to all the principles of human factors and user-centered design that Apple has been espousing for 25 years. Didn’t anyone notice?

The second problem is even more serious — the one everyone’s complaining about. Having the controls on Apple earbuds means no third party headphones.

This is a nonstarter for me, as for many users. I’ve never used the earbuds on any of the iPods I’ve owned. I use clip-on headphones for day-to-day use, and over-the-ear noise reducing headphones for long flights. An iPod that doesn’t work with 3rd party headphones doesn’t work.

I know Apple has been a systems company for 30 years, they design end-to-end solutions, and they take advantage of the control in a way that many of their competitors do not. On the other hand, they also have an inclination (not always indulged) to lock in their customers by locking out a choice of third party solutions. (I made hundreds of thousands of dollars from the entry barriers Apple created for 3rd party printers).

Perhaps Apple will license the technology for a third-party adaptor product, analogous to the the SmartTalk adaptor from Griffin turns ordinary headphones into iPhone mike/headphones. Even so, that raises the price of the iPod Shuffle from $80 to $100.

Or perhaps Apple has sold iPods to everyone who needs a small, cheap portable iPod and now is trying to peddle an impractical fashion statement to impractical fashion-conscious teens.

So for now, I’m glad that my daughter and I have our existing Shuffles (1G and 2G respectively). As a 25-year Apple customer, I’m trying to expose her to better quality products, but if her red Shuffle broke tomorrow, then if I couldn’t buy a closeout 2G model I’d probably get a Sansa.

What is an iPod Touch?

Forbes is running a feature article by a former iPod user, in which the reviewer argues a 120gb Zune is like an iPod Classic with a big screen, or an iPod Touch with 15x the capacity. (It would be 8x or 4x the capacity if you have the larger models).

This raises the question: what is an iPod Touch? Is it an MP3 player, as the reviewer argues? Or an iPhone Lite, as I claimed when it was released 15 months ago?

Perhaps a year ago, it might have been an open question. Today, with more than 10,000 applications in the app store — most also available for the iPod Touch — the question is now moot. The iPod Touch is a grown-up’s competitor to the PSP, except that it does more than games. I suppose you could say it’s like the N-Gage — except that it has many popular applications.

Where's my free iPod?

The not dead yet Steve Jobs introduced new iPod models Tuesday in San Francisco. Most of the attention was devoted to the new iPod Nano — shaped like the old iPod Mini — with a bigger video screen and more capacity in two models from $149-$199. It did nothing with its iPod Shuffle line, priced at $49-$69.

It’s interesting to compare how far Apple has come since it introduced the first iPod back in 2001.

Model	Original iPod	iPod Nano (4th generation)
Introduction date	Oct. 2001	Sept. 2008
Mass storage	Hard disc	Flash RAM
Capacity	5 gb	8 gb
Height	102 mm	90.7 mm
Width	61.8 mm	38.7 mm
Depth	19.9 mm	6.2 mm
Weight	185 g	36.8 mm
Screen	160x128 b/w	320x240 color
Content	Sideloaded music	Sideloaded music, purchased music and video, rented video, podcasts
Price	$399	$149

This is certainly a good, clear trend line for the pace of electronics miniaturization over those seven years.

However, it does raise the question: when will iPods be free? If Apple is pursuing a razor and razor blade model, why not give away the iPods (or at least an entry-level model)?

A preview article Monday in Forbes noted the declining importance of iPod sales

Apple's thriving digital content business gives Steve Jobs & Co. plenty of room to slash the price of the iPod to keep digital music and movie sales growing, and to use the company's increasingly powerful digital content business as a way to segue into sales of tablet computers and other gizmos, as it has with the iPhone.

"With iPod price cuts, Apple is choosing revenue over unit cannibalization," Credit Suisse analyst Bill Shope wrote in a research note Monday.

To be sure, Apple's lineup of digital music players could use a boost. IPod sales are up just 7% from the year-ago period. In part, that's just the law of large numbers at work. However, fresh designs, coupled with a price cut, could reignite demand for the stylish gadgets and keep customers rolling into Apple's increasingly lucrative iTunes store.

That's a business with a strong future ahead of it, even as the hardware business that launched it slows. Apple reported that sales of "other music-related products and services"--chiefly iTunes content--jumped 34.7% to $819 million for the quarter ending in June from $608 million during the year-ago period.

So if the trend of iPods is cheaper and a smaller portion of the company’s revenue stream, why not give one away?

As a practical matter, it will probably never happen, because the cross-subsidy is imperfect. The closest thing we have to a perfect cross-subsidy is the videogame console, where Sony or Microsoft or Nintendo capture royalties on every videogame to pay back the subsidized console. Even so, a few hackers figure out how to use an Xbox as a Linux box rather than a royalty stream for Redmond.

To give away an iPod, it would have to be useless except for playing iTunes content, and that’s not likely to happen. The company could sell an iPod for $100 with a $100 iTunes store gift card, but if it wasn’t locked to that iPod then the buyer would just sell the card on the open market. And there’s always the problem of multiple freebies per person, which seems to be why razor blade handles are no longer free.

There’s also the fact that Apple sees itself as a premium brand, and you never cheapen the brand. The closest they’ve come is to give away nearly stale iPods (i.e. a month before they become obsolete) with back-to-school laptop sales, which is more of a bundle than “free.”

Instead, Apple is holding its price points while the rest of the industry commoditizes, and is intent on proving what a good price discriminator it is, squeezing the maximum revenue out of every sale. Moving up from 8gb to 16gb will cost you $50 for an iPod Nano but $70 for an iPod Touch. Is the memory more expensive? No, people will pay more.

Still, the $400 price point became $150 after about 5 years, and I suspect it won't be long that there will be an under $100 device that plays video. So for most teenagers and their parents, under $100 is closed to an impulse buy.

I can’t tell you why

This morning’s Wall Street Journal says that Dell is readying a new MP3 player to compete with the iPod. Unlike its failed effort in 2003, this would also include a client application and download service for both music and video. As CNET notes, the Page B1 article makes a nice trial balloon.

It seems like Michael Dell dreams of surpassing Steve Ballmer’s success with the Zune. In the US, Apple has 70+% and Microsoft has 4% (Both Apple and Dell are much less influential overseas, so Dell has to hope that he can first gain US market share.)

To make this work, Dell would have to move from assembling products from standard parts to being able to do its own systems integration. Of course, that is why they bought Zing last year (presumably for something close to $50 million).

It’s not completely clear, but providing its own service would appear to shift to a differentiation strategy — away from its historic strength as a low-cost, commodity producer with low R&D. It certainly is part of an ongoing (and mostly unsuccessful) effort to achieve a consumer market share comparable to what it has with big business.

Why is Dell doing this? The story brings to mind a song by my favorite band: I Can’t Tell You Why.

Information economics on Bloomberg radio

Over the summer, I missed an important new part of Google’s strategy for total world domination. They hired one of the world’s leading information economists: Hal Varian, who spent 8 years as dean of the UC Berkeley information school. The general public knows Varian for his NYT monthly column, but my MBA students know him as the co-author of the Information Rules — the definitive MBA text on information economics.

Over the summer, Varian took leave from his chaired professorship at Cal to become the first “chief economist” at Google. Starting with a sabbatical at Google in 2001-2002, he has worked hard to help Google get even better at data mining:

I had a great time working with them on a number of projects, primarily involving quantitative analysis of one sort or another. For example, I’ve studied the Google ad auction quite a bit and that turned out to be very interesting from an economic point of view. …


During my time at Google we have built up a world-class group of quantitative analysts, and the economics team will complement these existing resources. Google has a great infrastructure for data analysis, and a management team that is very receptive to quantitative methods and willing to invest in this area. So what more could you ask for?

In addition to working on analytics, I’ve also worked on various business strategy and public policy issues, and will continue to do so as the occasion arises. This set of issues will only get more important to Google as time goes on, so I expect that this will also involve a fair amount of my time.

I learned of Varian’s new title when a PR person from Bloomberg Radio sent me notice of its interview with Varian, part of its interview series “Bloomberg on the Economy.” Tuesday’s podcast talks about the economics of data storage (improving faster than Moore’s Law), his new job, Google’s perchance for data experimentation, general macroeconomics. In general, he sounds aligned with Google’s party line (e.g. China censorship, its laissez-faire attitude towards copyrighted material).

The series also had two interviews Thursday following up on Varian’s June 28 column on the allocation of the value from the iPod, based on recent research done by Jason Dedrick, Ken Kraemer and Greg Lindenat the Sloan Foundation’s Personal Computing Industry Center.

One interview was with my good friend Jason Dedrick of UC Irvine, who talked about the allocation of the $150 wholesale price of the iPod to the trade deficit: the money is recorded to the China bilateral deficit, but most of the money gets passed to component suppliers to Korea, Japan, Taiwan. A related interview with Greg Linden of UC Berkeley compared the value flow of the iPod with that for laptops.

Technorati Tags: Google, iPod, UC Irvine

Apple’s glass is half empty, too

In standing in a room full of (student) Windows users Saturday, I was reminded of how much of a pro-Apple cheerleader I’ve become. Yes, I prefer to see the glass as half full — Apple’s strategies are partly open like Microsoft, Symbian, Red Hat, Real Networks, IBM, etc. etc. And certainly in some markets (PCs, cellphones) Apple is trying to get single-digit market share that, by its nature, is likely to increase rather than decrease competition.

Despite the expensive make-good on the iPhone price cut, Apple has had some good iPhone news recently. It sold 1 million iPhones in its first 74 days. That is consistent with Apple being the top-selling smartphone in the US in July — even though that was only 1.8% market share. And apparently the 3G iPhone is going on sale in Germany in November.

Nonetheless, Apple’s glass is also half empty, i.e. partly (significantly) closed. Sometimes — even trying to put the best possible face on things — its actions are undeniably to increase lock-in and protect the proprietary (i.e. closed) aspects of their business model. I found two examples Saturday in catching up on the iPhone news.

First, last Wednesday Apple announced a new version of iTunes that allows you buy a ringtone version of your songs for 99¢. Clever hackers found out there’s an easy technical approach to converting an existing MP3 file into an iPhone ringtone. So Apple updated its iTunes software to 7.4.1 to block this, and others are trying to find a work-around to that block.

Now it may be that Apple is obliged by contract to share some of the incremental cost of the ringtone with its music suppliers. If challenged, one would expect they will, indeed, point the finger. Which brings us to the second criticism, also tied to last week’s announcements, in this case of the iPod Touch.

Chris Soghoian, a Kling-on from Indiana, reminds us of a previous excuse Steve Jobs used for selling a closed iPhone:

Conjuring up the 40-year-old ghost of AT&T, Apple CEO Steve Jobs claimed that the reason for this was because they didn't want poorly coded apps to damage AT&T/Cingular's fragile wireless network. He told Newsweek, "You don't want your phone to be an open platform," meaning that anyone can write applications for it and potentially gum up the provider's network, says Jobs. "You need it to work when you need it to work. Cingular doesn't want to see their West Coast network go down because some application messed up." …

Apple announced the new iPod Touch today, essentially an iPhone without the phone. …

If Apple's main excuse in locking down the iPhone platform was a desire to protect the wireless carriers' networks, that reason would seemingly not be an issue anymore. After all, the new device doesn't have the hardware to connect to those oh-so-fragile cellular networks. As Cory Doctorow has repeatedly noted, one of Jobs' gifts is being able to lock in his customers and blame it on others. Apple blamed the record labels for the DRM lock-in on the iTunes Store, and then passed the buck to AT&T for locking developers out of the iPhone platform.

Unfortunately, the odds are that Jobs will come up with another reason for keeping developers locked out of the iPod Touch, although who he'll pass the buck to is anyone's guess.

Soghoian’s criticism is not only fair, it’s unassailable. It reminds me of the advice I’m sure all of us parents have given to our kids at one point or another: it’s better to tell the truth, because otherwise you won’t be able to keep your stories straight and someone will eventually catch you in a lie.

Technorati Tags: Apple, business models, iPhone, iPod, Steve Jobs

Best price discriminators around?

Apple loves to do price discrimination (ala Hal Varian’s advice in his book. They’ve been doing it for years, crippling low-end products to avoid stealing sales from the high end ones, setting prices that maximize yield per customer.

However, sometimes companies that try to squeeze their customers for every penny piss off their squeezed customers. Or, those that worry about cannibalizing themselves let competitors do it instead.

Posting late after class last night, I missed a couple of important points about the iPod Touch vs. iPhone price discrimination. Both have the same screen, form factor, virtual keyboard, operating system and roughly the same memory.

A point that I knew but didn't emphasize is that (although the iPhone is $200 cheaper and pissing off the innovators), Apple does not have a $399 8Gb iPhone. What they have is an iPhone which you can get for $399 down plus $1400 over 24 months (with voice and data plans thrown in). So the $299 8Gb iPod Touch is quite a bit cheaper than the "$399" Cingular-subsidized iPhone.

So thus Apple went ahead and really crippled the iPod Touch: the similarities are only skin deep. Yes, both can download music at Starbucks over WiFi. (So what?)

But the iPod Touch is not a phone because it has no microphone (unless Griffin or Belkin add one). It has no Bluetooth (which presumably could connect a Bluetooth headset), although hackers suspect it’s on the motherboard and can be enabled. Clearly many potential iPT buyers (not just me) want to find a way to add a mike or headset to their phone.

What I found particularly lame, however, was the plan to cripple the iPT software. OK, some think it’s idiotic to have a WiFi tablet without e-mail. It doesn’t bother me leave the e-mail out — I want a real keyboard and a real machine to do e-mail, not a portable device.

The one I can’t understand (or necessarily believe) is the statement that the iPT left out “Google maps”. What does this mean? Both machines have a web browser, so can’t you just go to maps.google.com like anyone else? If the experience is different, did Google cripple it? Did Apple remove something that enables AJAX-style Google applications? (The iPT does have WebKit, the underlying engine behind the Safari browser).

Maybe the application difference will be minor, either because Apple includes the apps or 3rd parties find a way to provide a work around.

Still, given the crippling of the iPod Touch, I think Apple’s made a big mistake for the Christmas sales season. The two products together could have provided a blowout, but now the uncertainty and confusion about the iPT threaten to limit it to people who want a video iPod with a large screen that has an undersized disk drive (and doesn’t play SciFi channel shows).

Other firms are not so clever in their price discrimination, and thus will take sales that Apple doesn’t want to make. The Nokia N800 isn’t intentionally crippled: Nokia made the best possible Internet tablet (but without a GSM radio), and so people who notice the iPT limitations will give it a second look. The Intel Moblin devices that the Taiwanese will ship in 2008 will also be designed to be the best possible product, rather than to protect an existing high-end product.

Once upon a time Apple wanted to win markets. Now they seem to be hung up on controlling their ecosystem, maximizing customer yield, or protecting their lock-in with the iPod and iTunes store — rather than aggressively fighting for new customers and to vanquish rivals. In other words, they’ve gotten too clever by half.

Technorati Tags: Apple, iPhone, iPod

Reach out and Touch someone

Apple made some big product announcements today. Three observations:

1. Except for the entry-level product, Apple now has video in all its product line: Nano, iPod, iPod Touch and the iPhone.
2. Given the new product line, Apple picked an interesting time to send NBC (and the Sci-Fi channel) packing off to Amazon.
3. The iPod Touch — an iPhone without the GSM capabilities — is either brilliant or foolish (but given the leverage off the iPhone R&D, it was probably a relatively inexpensive experiment.)

Cutting the price of the 8Gb iPhone by $200 to $399 is either a sign of weakness (the old one wasn’t selling) or an aggressive attempt to steal share against high-end smartphones. Meanwhile, at iPhone Touch (slightly smaller and $100 cheaper) will cannibalize the iPhone — keeping business with Apple but shifting it away from AT&T. It certainly is a way to cater to people who hate Cingular’s network without violating the promise of an exclusive.

Personally, I find the iPhone Touch most intriguing (although the name is terrible — it’s really an iPhone Lite). It is Apple’s take on the product category of the Nokia N800 WiFi tablet introduced by Nokia in January — a category also being promoted by Intel.

Interestingly, the N800 comes with Skype (unless of course it’s disabled by a carrier). How am I going to make VoIP calls on my iPhone Lite? With Skype via one of the two web-based solutions? With iChat? (Without a microphone, it will need a 3rd party adapter to work with a standard headset).

I wonder if Palm (headed by a former Apple exec) got wind of the iPod Touch and that contributed to canceling the Foleo. Both products are positioned between a smartphone and laptop, but the iPhone Lite is able to leverage off the iPhone’s enthusiastic reviews. Now Palm gets to watch Nokia, Apple and Intel try to establish the new category, and then decide whether it’s worth releasing the rumored Foleo 2 (or just use the new Linux OS for their phones).

iPhone DevCamp notwithstanding, the iPhone and iPhone Lite still badly trail the Nokia (and Intel and promised Palm) products in the ability to add native 3rd party apps. Moving more iPhones to more users (and developers) will either make this weakness so painfully obvious that Apple has to address it, or bring out the ingenuity of developers to deliver useful apps using WebKit.

Apple keeps on rollin’

This morning’s Washington Post brings further evidence that in the battle between Apple and Microsoft for total world domination, that Apple at least continues to own the music industry.

Reporter Mike Musgrove writes:

Microsoft says it is on track to sell its millionth Zune music player, the software company's would-be challenger to Apple's enormously popular iPod.

Microsoft expects the player to hit the sales milestone by the end of its fiscal year in June, almost eight months after the product made its debut. Apple, which launched its iPod music player in October 2001, has sold 100 million of the music players.

Several competing music devices from hardware makers have aimed to become "iPod killers," but there has not been much change in the MP3 player market in recent years, even with Microsoft's highly publicized entry.

Musgrove cites NPD Group data that gives Microsoft 4th place (at 2.3%), after Apple (70%), SanDisk (11.7%) and Creative (4%). (Presumably these are US figures, given that Apple is not that dominant worldwide and NPD only studies the US). While SanDisk is the most credible challenger, clearly it’s not much of a fight.

It seems in the best interests of consumers and the IT industry (if not the record industry) to have different segments dominated by different firms. Once upon a time, there were no credible challengers to IBM in any segment. Now, in the computer industry alone, we have IBM dominant in mainframes, Sun in workstations, HP and Dell in PCs, various players in PDAs, and Nokia in computers-pretending-to-be-mobile-phones. That Apple owns music seems healthier than if IBM or Microsoft or HP owned it all — if, for no other reason, that Apple can credibly challenge PC leadership (on profits if not revenues) while others can challenge music leadership.

It’s also interesting that all of these firms are pursuing some variation of proprietary strategies. Yes, perhaps IBM mainframes and Sun workstations will mostly be running Linux someday, but right now they are really all updates and variations of the IBM 360 proprietary platform strategy of 40 years ago.

Two other music tidbits.

• Today is the first day of Apple’s DRM-free iTunes Plus service, with content from EMI. Who says you can’t get no satisfaction? (And whatever his critics might say, Steve Jobs is clearly driving innovation and change in the music industry).
• As the Post alluded to, Steve & Bill are doing a rare joint press conference at the Wall Street Journal’s annual Davos-in-Carlsbad IT summit. I remember the first one (only a few miles from where I then lived) seemed overpriced and pretentious, but the Journal has done an enviable job of using the D conference to make news rather than just be yet another schmoozefest.

Technorati Tags: Apple, iPod, Microsoft, music industry, Zune

IP this ’n that

This morning’s newspaper had a lot of IPR business news. While I realize by now most of it is 24 hours old, still the juxtaposition was very interesting:

• The Qualcomm-Nokia patent license witching hour came Tuesday and went without any news. I analyze the fight on the Qualcomm blog.

• Apple’s iPod brand, market position and business model have yet another challenger.
  • This time it’s a new $250 model of Sansa player (from the #2 MP3 player maker Sandisk holding a 9% share) that connects wirelessly to the Yahoo music service. The Yahoo service is interesting because it’s a monthly (unlimited) rental revenue model rather than the buy-to-own of the better established iTunes Store.
    
  
  • Also interesting (unmentioned in all the breathless coverage of the next “iPod killer”) is that Sandisk is offering a similar product partnering with Rhapsody, Yahoo’s most direct competitor for unlimited downloads.
  • Meanwhile, Apple Monday announced that is has sold 100 million iPods since November 2001: good for an MP3 player, but Nokia sells 3x that many cell phones every year (increasingly with embedded MP3 players).
• Google’s China IPR problem. Google admitted it used the Pinyin front-end processor (FEP) character entry technology belonging to rival Sohu, and Sohu is ready to sue. Finally Google has an IPR problem not related to GooTube.
• US complaining about Chinese “piracy,” now in a formal complaint to the WTO. Predictably, the US Trade Representative is wringing her hands while the Chinese threatened (implicitly) US access to Chinese markets if the US seeks to enforce its IPR rights.

Somehow I find the last one the most amusing. I wonder if it’s in the USTR job description to issue press releases about trade deficits being caused by “unfair trade,” specifically our Asian trading partners not following Anglo-American law. Other than Hong Kong before 1997 or (maybe) Singapore, did any of them ever promise to follow Anglo-American law?

I liked it better when USTR Charlene Barshefsky was kvetching about Japan, on the assumption that at least she recognized Grand Kabuki when she saw it.

Technorati Tags: business models, China, Google, intellectual property, iPod

Who Invented the MP3 Player?

Who invented the modern MP3 player? One claim is Remote Solutions, although the earliest product that had a major impact was the Nomad from Creative Labs. It was Apple’s October 2001 introduction of the iPod that really caused the category to take off, although today there is plenty of competition from Sandisk, Samsung, or even Microsoft.

This morning my friend and co-author Rudi Bekkers forwarded a funny story. (Maybe not as funny as Sunday’s story, but certainly less likely to attract flames). As reported by Endgadget and TechDirt, a new company called “Texas MP3 Technologies” claims that the big players are infringing the MP3 chip technology it bought from SigmaTel.

Whether or not the earlier Alcatel $1.5 billion MP3 royalty award counts as a patent troll, this certainly does.

Technorati Tags: iPod, MP3, patent infringement, patent troll, Samsung

iPod & Windows: Tail Wagging the Dog?

I don’t know if anyone saw this blurb [registration required] on the stock pages of the Wall Street Journal this morning:

The Dow Jones Industrial Average crept higher, helped by Hewlett-Packard but hampered by Microsoft. … Microsoft shares slid 1.9% after Apple warned that iPod users might experience compatibility problems with Microsoft's new Vista operating system.

The story didn’t say it, but Apple shares also fell 0.96% on Monday to 83.94.

The implication is that Microsoft Window Vista (henceforward Windows V) needs the iPod more than the iPod needs Windows V. Music playing is an important part of the reason that teenagers and young adults use a PC, and several hundred million iPods hold a majority of the U.S. market. It must really hurt Steve Ballmer’s feelings to know that this key part of his consumer ecosystem is controlled his OS rival, who’s using the iPod to raise (if ever so slightly) Macintosh market share.

To add insult to injury, during Christmas season the Zune earned barely 3% of the US market (less than that, actually, since it’s not counting Wal-Mart or Apple stores). Bryan Lee fell on his sword but that doesn’t solve the problem.

Apple and Microsoft have different roll-out strategies, however. Apple’s PR-driven strategy depends on making a big splash the first time, while Microsoft has enough money to pay for as big a roll-out as it wants. Apple (at least under Jobs) tries to come up with something “insanely great” to build momentum. Microsoft has released a few duds over the years (think Windows 1.0, 3.0), but uses its wealth and market power to keep making it better until it’s pretty good. Windows 95 nearly put Apple out of business, so it would be foolish to assume that there won’t be a much better Zune every 6 months or so for the next few years.

Technorati Tags: Apple, iPod, Microsoft, Windows

Is it Fair to Force Open FairPlay?

The news keeps getting worse for Apple on the DRM front, with the Dutch and Germans joining the French, Danes, Finns, Swedes and Norwegians in kvetching about Apple quasi-locking iTunes downloads to work only on the iPod.

The press coverage has been a little misleading. When the head of the Consumentenbond tells Dutch consumers they should subscribe to eMusic instead of iTunes, that’s like Ralph Nader speaking, not a government minister. In any country there are activists who attack business decisions (some deservedly, some not). Also, in France and Netherlands (if not Germany) the proposed changes would help domestic consumer electronics companies that compete with Apple.

Here are a few questions about the “fairness” of Apple’s decision to restrict FairPlay-encrypted downloads to Apple players:

• Is the iTunes Music Store open? No, it’s pretty much a vertically integrated distribution and platform system.
• Is Apple misleading people on their openness? No.
• Is Apple trying to create lock-in like other proprietary platforms before it? Of course.
• Do they provide a switching option? Sorta.
• The payoff pitch: Did Apple gain its dominant market position in music players through illegal means, such as tying? No. How could Apple use the market power of its 3% PC market share to force anyone to buy anything?

Apple got their music market share by making a system that works better end to end. The whole business model rests on a cross-subsidy from the iPod to the music store. Apple makes good margins selling new iPods (as long as people are willing to buy them), but (according to a Oct. 9, 2003 estimate in the Wall Street Journal), pays 2/3 of all revenues to record companies and makes a single-digit gross profit off the downloads. If you kill the IP model, then effectively Apple is being asked to run its music store so its competitors can compete away the profit margins that keep the store open.

The U.S. government said Apple’s system is legal, because consumers can choose between competing systems from Microsoft, Sony and others. The case certainly highlights the risk (particularly for American firms) of pursuing IP-based business models, for several reasons.

As the Microsoft case illustrated, European antitrust standards are different than the U.S. ones — in the U.S. you have to demonstrate consumer harm, whereas in Europe harm to competitors is a legitimate criterion. Secondly, outside the Anglo-American rule of law, the division between law-making and law-creating (or interpreting) is not as clearly defined. (To be fair, last summer’s changes in French policy were enacted through the legislative process).

The textbook definition of political risk is a change of government policy that reduces or eliminates the value of a company’s property held in a foreign country. While OECD countries don’t go around confiscating physical property like some Latin American strongman, the rules regarding intellectual property remain far less predictable. Whether or not Apple’s system is ultimately determined to be legal across the EU, as with open source licenses, legal predictability would be good for industry.

Technorati Tags: Apple, business models, intellectual property, iPod, DRM