RSS

Advertisement

Cost Shift: Why Google Wins and Apple Has Already Lost

  • Written by Syndicated Publisher No Comments Comments
    December 20, 2012

    One of the inevitable results of cost shifting (see the video below) is not just the compression of margins, but the rapid advancement of adoption by the masses. This rapid adoption causes users producers, and in the tech space – programmers and hardware OEMs to dump significant amounts of resources into the product in the race for revenue and proftis. The end result? A materially superior product, even if that product started off inferior to the competition. This was the case with Windows back in the 80′s and 90′s, where Windows 2.0 was trash, and by the time you got to Windows 95, the application space was ubiquitous.

    Well, the new millenium digital master of cost shifting, has taken its less than free product and imbued it with technology from both a hardware and software perspective that is totally unmatched by ALL of its competiion. reference this article from Bloomberg: HTC Said to Halt Larger Windows Phone on Display Resolution

     HTC Corp. (2498) scrapped plans to produce a large-screen smartphone using Microsoft Corp. (MSFT)’s operating system because the screen would have had lower resolution than competing models, a person familiar with the project said. The Windows software doesn’t support resolutions as high as that on Google Inc. (GOOG)’s Android platform, said the person, who asked not to be identified because the information isn’t public.

    It should be noted that Apple’s iOS can’t support anything near the 1080p resolution as well. Microsoft does have the Windows RT and Pro OS lines. I’m typing this on a Windows 8 convertible tablet/notbeook (the Lenovo Yoga 13, a truly wonderful device that should make Apple iPad purchases seem daft in retrospect), but I feel it may be too little to late to make any inroads into the mobile space that will truly dent Google’s prominence.

    Chief Executive Officer Peter Chou’s decision to halt the project using Windows Phone 8 software leaves HTC with only Android for phones measuring larger than 5 inches diagonally, dealing a blow to Microsoft in its efforts to win share from Google and Apple Inc. (AAPL) Taoyuan, Taiwan-based HTC had planned to introduce the device next year to claw back share from Samsung Electronics Co., which offers Galaxy Note devices with larger screens using Android. Android snared 72 percent of the market in the third quarter, while Apple’s iOS software had 14 percent, according to Gartner Inc.

    Microsoft isn’t the only casualty here, for Bloomberg reports: First China Mobile, Now Russia’s MTS Drops iPhone. Basically, the largest of the foreign carriers are either dropping Apple are demanding larger concessions from the company before they decide to carry the phone. This results in two things, unrestricted reign for Google’s Android to proliferate (first indicated by BoomBustBlog nearly three years ago, Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance), and margn compression in Apple – a thesis presented nearly three years ago again - Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space, and perfected within a week or two of Apple’s all time high and consequent fall from grace:  (see Right On Time, My Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!! I went into detail with Deconstructing The Most Accurate Apple Analysis Ever Made – Share Price, Market Share, Strategy and All).

    The call to short Research in Motion two years ago () was born from the same logic. We all know how that story turned out - BoomBustBlog Research Performs a RIM Job! and Another RIMM Job? It’s Amazing How Many Institutions Don’t Read  Margin will not be available to companies using last millenium’s software model, and fat margined hardware is dead. The hardware is quickly becoming a commodity, see Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers and Computer Hardware Vendors Are Dead, Part 2). ALL of the hardware vendors need to do what the (use to be) pre-eminent software vendor is doing now, reference Microsoft Is Doing What The “Has Been Giants Of Yesteryear” Were Afraid To Do, Make A Radical Change BEFORE ITS TOO LATE! All of these “emergencies” are borne from Google and thier extremely dangerous cost shifting business model.

    Google’s cost shifting business model, explained…

    Google’s last three mobile phone software incarnations (Android 4.0, 4.11/2, & 4.2) are so materially superior to all of the competition in nearly everyway as to be nearly incomparable. Now, thanks to massive adoption by hundreds of OEMs around the world and the extreme rate of R&D expansion into this space, the hardware pushing the software is incomparable as well, with 8 core CPU chips and full 1080p unbreakable screens breaking the horizon next quarter, all with battery lives that can pierce the 36 hour mark. This is fascinating for smart phone shipments now handily outpace traditional PC shipments (I say traditional because smartphones are essentially ultra mobile PCs now). The company that controls the smartphone platform becomes the new age Microsoft of the last millenium. It amazing, since the old age Microsoft was the one best suited (at least it appeared) to be the new age Microsoft, but big company mentality, mixed with hubris and execution errors allowed Google to reinvent the software business model.

    Could anyone have seen this coming? Of course they could have, at least they could have if they read BoomBustBlog…

    Two and a half years ago, on Thursday, 05 August 2010 I penned: Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space. Let’s traipse through it to see how accurate these near three year predictions in this volatile space have been:

    Many commenters are lamenting on the fact that Google is not making money on Android sales since the OS is given away for close to free while Apple is making $250 per handset sold. Those who are looking at it from this perspective are missing the forest due to that big fat tree that is in their way! Yes, Apple is making a killing on its iPhone sales, and it would be difficult to attempt to catch them with a fat margined product. They have managed to produce both margin and volume and have wrapped it up with extreme customer loyalty. What the armchair pundits are missing is the power of reach. Google is developing massive reach, and developing it ridiculously quickly. A byproduct of this reach is the commoditization of the smart phone platform which will probably cut the fat margined business model off at its knees. That is not to say that Apple will be cut off at the knees, but they will have to alter their business model for the competitor-less margin that they enjoyed for the last three years will no longer be a given. It also means that anyone else reaching for the crown (including Apple) will have to spend more upfront to gain less per unit sold. This actually benefits Google, for they are not in the hardware race, yet they benefit from each and every handset, tablet, desktop and automotive unit sold. Google is trying to become the new Microsoft!

    As clearly anticipated, Apple’s margins have dropped, and are expected to drop even more and at a faster rate. Bingo! Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money!

    In the meantime, Google ramps up the potential to push software as a cloud service, downloadable software and interactive, activity/context sensitive rich media ads and services to hundreds of millions of new users. This opens up a phenomenal opportunity for Google, and it appears as if many are missing the point because Google (wisely) decided not monetize it immediately, but to let it gestate and grow. Do you remember 15 years ago when many felt the same about search and the fact that Google wasn’t making any money providing search (pre-advertising)? Now this is not to say that Google is going to win the Smart Phone Wars, although at this point Google looks like the number one contender (IMO, Apple, Google and Microsoft are the ones to look out for). Apple has a very different and unique approach that is executing quite well from a profit and market share approach. Google has very strong momentum, and Microsoft has, by far, the strongest infrastructure. The only definite that I see is that this is a very exciting time to be a consumer of these products, for the competition is forcing everybody to push out the best that they have to offer – very much unlike the time when MSFT ran everything and which produced Windows Vista. Don’t believe me? Well, if you haven’t had a chance to yet, check out the features packed into the new Windows Mobile 7 OS - After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play.

    Other perks from the Smart Phone Wars competition:

    • You can bet your left ass cheek that the iPhone 5 will have an Evo-sized screen with resolution to match today’s LCD flat screens, accompanied by the opening up of the iPhone to standards-based peripherals, ex. HDMI plugs and USB. The screen size increase is a definite, but peripherals is a maybe. Die hard Apple fans won’t mind that they have to jump through hoops to connect their device, but the rest of the world will lean towards an Android device if they can’t easily use their phone/tablet with existing hardware. Apple sees this as well as I do. I’m sure they’ll find a way to gimp the standard somewhat, but more open is better than less open.

    The iPhone 5 did come out with a larger screen, albeit just now quiet large enough. For power users and those who are on their phone a lot  or consume significant multi-media, this is a deal breaker. Apple also went deeper into the proprietary field versus more standards based. This will give a temporary blip upwards in profits and lock-in, then ultimately cause #FAIL as Android ubiquity seeps in. This was a major error on the part of management.

    • You will probably see Nokia adopt Android or Windows Mobile on some of its devices, or you will see continued market share decline. Nokia makes some kick-ass hardware, and will challenge HTC if they had the OS to go along with it.

     As predicted, Nokia did adopt the Windows platform, and it did so en masse – reference The Nokia/Microsoft Alliance & Android’s Commoditization Of the Mobile OS Platform. While many believe this to have been a foolish move on the part of Nokia, I believe it was their better bet. Now, they need to work on pushing the hardware boundaries like Samsung, HTC, et. al. This is not to say they will win, but it makes losing marginally less likely.

    • Microsoft is guaranteed to extend their hegemony on the desktop and enterprise server space to the handset, as well as their reach into the consumer living room via the Xbox. The result? More functionality, more usability, and better overall products.

    Another accurate prediction as Microsoft goes full tilt into the hardware business (not peripherals, but actual computers with their Surface intiative). This was a very risky move on Microsoft’s part, but something had to be done and the move is applauded by this author, as is the switch to the Windows 8 touch paradigm. Again, reference reference Microsoft Is Doing What The “Has Been Giants Of Yesteryear” Were Afraid To Do, Make A Radical Change BEFORE ITS TOO LATE!

    Roughly 3 years ago in my “mobile computing wars” series, I foretold of The Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars! In particular, I warned of the benefits to the consumer and pitfalls to the potential losers of the battle between Apple, Microsoft and Google, reference There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All. By the way, by Q1 2010, it was already evident to BoomBustBloggers that Research In Motion was a goner - ). While the bulk of my opinion and analysis was directed between the upcoming heated battle between Apple and Google (The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift and An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught) which was accurately called, I also appeared to be the lone gunman in warning that Microsoft is not even close to being out of the race just yet - . This was early 2010. Well, nearly 3 years later, we have MSFT doing what IBM, LOTUS, HP, DELL, and a wide variety of other tech companies simply didn’t have the balls to do. What is that, you ask? They risked cannibalizing their cash cow revenues and kicking their lazy, unmotivated (despite declining margins and market share, via ass whoopin’s from Google and Apple) OEM’s in the nuts, forcing either an exponential growth via a pheonix-like rebirth style wake-up call or a collapse from atrophy. Either way, Microsoft is attempting to position itself to benefit. The previous world tech rulers simply got too comfortable in their make money by doing nothing, cash cow, monopolistic business lines and sat around while more innovative and nimble competitors literally ate their lunch then came bombarding in demanding dinner as well (say Apple).

    • The Android clan (which is nearly everybody who is not RIM, Apple and MSFT, and maybe Nokia) will try their best to pump their R&D departments to their limits, and you will be getting bleeding edge products pushed to your door step on a quarterly basis until a clear winner is selected – which will probably be sometime from now.


    Again, another very prescient call, as can be referenced through the public release of our latest report on Apple, :

    Like the Galaxy Note 2 clearly makes the iPhone appear to be a toy rather than a useful device, the Surface does the same to the iPad.

    Apple -Competition and Cost Structure - unlocked Page 09

    Currently, the best phone on the market (feature-wise) also happens to be the cheapest phone on the market, and also happens to be a Chinese phone… Sold by a Chinese Company.

    The-OPPO-Finders-Different-Views

    This phone is one of the thinnest phones ever sold at 6.99 millimeters thick.

    It has a 5 inch, FULL HD 1080p screen resolution with 441dpi density. This is approaching twice the resolution of the iPhone 5 and a full 1/3 greater pixels more than the “retina’ screen.

    The phone has the fastest chip on the market, the new quad-core Snapdgragon, materially faster than the chip inside the iPhone, and not just spec-wise but actual real world performance as well.

    It has a 2.1 mega-pixel front facing camera that can do full HD video conferencing and a 12 mega-pixel rear facing camera with dual xenon flash (one of the highest resolutions in the market).

    This cell phone will outrun and outperform a Macbook air laptop in many instances!

    It is not a cheap Chinese knock-off. If anything, the iPhone 5 is a cheap American designed, Chinese made knock-off. Try doing this with your iPhone 5….

    Oh yeah! A two year old already tried it, not with a grown man via hammer and nails, but just with her mommy’s keys (may I add that iFixit is a well respected outfit):

    Long story short, if anything, the iPhone 5 is the cheap knock off in terms of speed, durabilty or functionality!

    This phone retails, unsubsidized and fully unlocked for just over $500 USD, as compared to the iPhone 5 which starts at $649. As I have been saying for quite some time, Apple is WAAAAYYYY behind the curve in terms of functionality, specs and quality and the only way they can catch up to the Android clan (that is if they even can catch up) is through share price destroying #MarginCompression, as told throughout this blog’s Apple research history (see, again, Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money).

    Must read Smart Phone Wars commentary from 3 years ago becomes true in real time:

      1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
      2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
      3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
    Google’s “less than free” business model has successfully put it on track to becoming the next Microsoft. Once it has 90+% market share in mobile OSs (it’s currently knocking on 89%’s door), it will have the door opened to lead as the de facto provider of cloud services, basically acting as the Windows operating system (remember the importance of this OS in the 1990s) of the Web. We’re not even broaching the topic of Google being the shepherd of global data and information throughout the web and the Internet connected world!

    I have lamented several times before the anti-Apple rhetoric hit the MSM, Which Is The More Sustainable Business Model – Selling The World’s Information or Selling Shiny New Things??? as Apple Bias In The Media Has Simply Gone Too Far, Potentially Hoodwinking Investors Into Believing Apple Has Not Reached Its Zenith!

    Related BoomBustBlog Subscription-only Research:

    Apple 4Q2012 update professional & institutional

    Apple 4Q2012 update – retail

     

    Apple -Competition and Cost Structure - unlocked Page 03

    Apple -Competition and Cost Structure - unlocked Page 04

    Apple -Competition and Cost Structure - unlocked Page 05

    Apple -Competition and Cost Structure - unlocked Page 06

    Apple -Competition and Cost Structure - unlocked Page 08

    All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade.

    Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

    file iconGoogle Q1-2012 Valuation Summmary 04/20/2012

    file iconGoogle Final Report 10/08/2010

    A couple of bits from our archives…


    There are currently 7 Google reports available. Select the “Google Final Report” and click the “Download” button. You will receive a 63 page analysis that looks like this on the cover…

    The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

    Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

    Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record

Advertisement