The New Apple Advantage

Friday, 9 September 2011

Peter Bright wrote a good piece earlier this week at Ars Technica, documenting his attempt to buy a MacBook Air-like Windows laptop (he doesn’t want an Air running Windows using Boot Camp because he doesn’t like Apple’s U.K. keyboard) and finds the experience confusing (too many models to choose from) and expensive (comparatively-equipped machines from Dell, HP, and Lenovo cost considerably more than an equivalent MacBook Air).

E.g., here’s Bright on shopping from Dell:

It’s even worse if I just browse without searching. The options I get are just… meaningless. Yes, I want “Everyday Computing,” so I want an Inspiron. But hang on, I also want “Design & Performance,” so I want an XPS. Wait a second, I want “Thin & Powerful,” too. So maybe I want a Z Series? But the only line that apparently matches my broad search criteria — lightweight, 11-14" — I wouldn’t even consider because I don’t want a “gaming” laptop, and so I’m never going to click Alienware!

From HP:

The same odd labels cover everything — I know I don’t want “Mini/Netbook,” but I want both “Everyday Computing” (that term again) and “High performance” (because I don’t want it to be slow, do I?). And who knows what “Envy” means? When I tick my screen size and weight boxes, I get back a crop of lousy netbooks that are almost the complete opposite of what I want.

And Lenovo:

It starts off with the same stupid classifications that must make sense to some guy in marketing — “Powered for productivity” and “Optimized for entertainment” and “No-nonsense features built for versatility”.

Here’s what I wrote back in July, linking to Cory Doctorow’s review of the Samsung Galaxy Tab Some-Size-or-Another:

Cory Doctorow calls the new Samsung Galaxy Tab “meh”:

Ever since the iPad shipped, I’ve been waiting impatiently for a comparable Android device to emerge — something of like shape, size and capacity, but from a more open ecosystem than the one Apple offers.

I love these sort of reviews. I want an Apple-quality product without the Apple, and I’m sure I’ll get one soon.

And don’t forget the Apple-like prices, which is where Bright’s laptop hunt faltered. But so why the dearth of Apple-caliber products from companies other than Apple?

Bright’s analysis regarding why the top PC makers seemingly — if not outright admittedly — can’t compete with the MacBook Air strikes me as pretty good:

The problem is that the PC industry, particularly the large OEMs, just aren’t set up to produce this kind of machine. The PC industry is built around an idea of almost infinite variation: different Wi-Fi adaptors, different Ethernet chipsets, different GPUs, different USB3 controllers. This variety is then reflected in the systems available from manufacturers — and more importantly, it’s reflected in the way the systems are actually built.

Design is largely about making choices. The PC hardware market has historically focused on three factors: low prices, tech specs, and configurability. Configurability is another way of saying that you, the buyer, get a bigger say in the design of your computer. (Bright points out, for example, that Lenovo gives you the option of choosing which Wi-Fi adaptor goes into your laptop.) Apple offers far fewer configurations. Thus MacBooks are, to most minds, subjectively better-designed — but objectively, they’re more designed. Apple makes more of the choices than do PC makers.

This isn’t new. And traditionally, the benefit from Apple’s lesser degree of configurability has been the “it just works” factor — better integration of software and hardware. That with support for fewer components, like, say video cards, the Mac OS needs fewer drivers, and the drivers it does have are less likely to result in unusual conflicts.

But now that Apple’s products are more popular, we’re beginning to see another benefit to Apple’s lesser degree of configurability: greater scalability. Apple needs larger quantities of fewer different components to manufacture the same number of computers as other companies. It’s not just the economies of scale that all companies get when they sell 3 or 4 million laptops in a quarter — it’s greater, because Apple’s 3 or 4 million laptops sold share a larger number of the exact same components.

This advantage is more pronounced with iOS devices. In four years, Apple has gone from not being in the phone business to reaping a majority of the handset industry’s worldwide profits. Yet they make only two phones — the iPhone 4 and 3GS.

Likewise with the iPad. Your only choices:

• White or black
• GSM, CDMA, Wi-Fi-only
• 16/32/64 GB of storage

The iPad is the best-selling portable computer in the world and those are the only configurable options. One CPU, one display, one amount of RAM.

The new MacBook Airs are iPad-like. I’ve called my 11-inch Air an “iPad Pro”, and the more I use it, the more that feels true.¹ Apple is selling more MacBooks than ever before, but their range of models is shrinking, not expanding. As SSD prices fall, I expect Apple to drop the “Air” and “Pro” distinctions and simply offer four Air-like MacBooks: 11, 13, 15, and 17 inches.

So let’s be lazy for a second here, and attribute all of Apple’s success over the past 15 years to two men: Steve Jobs and Tim Cook. We’ll give Jobs the credit for the adjectives beautiful, elegant, innovative, and fun. We’ll give Cook the credit for the adjectives affordable, reliable, available, and profitable. Jobs designs them, Cook makes them and sells them.

It’s the Jobs side of the equation that Apple’s rivals — phone, tablet, laptop, whatever — are able to copy. Thus the patents and the lawsuits. Design is copyable. But the Cook side of things — Apple’s economy of scale advantage — cannot be copied by any company with a complex product lineup. How could Dell, for example, possibly copy Apple’s operations when they currently classify “Design & Performance” and “Thin & Powerful” as separate laptop categories?

This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.

1. Which is not to say we won’t get a real iPad “pro” next year when the iPad expands into a family of two or even three devices, good/better- or good/better/best-style. ↩

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Compromise

If Pandora is any indication, the recent Groupon stock offering has unleashed a wave of enthusiasm about the technology IPO market: The social music-filtering service has just boosted the price on its own initial public offering, which is expected next week. The company was planning to offer shares at $7 to $9 each, but it is now expected to offer them at between $10 and $12, which would give it a market value of $2 billion after the IPO. But is the rising tide of enthusiasm for Pandora one that will lift all boats, or one that threatens to swamp them instead?

That a company like Pandora might want to take advantage of the growing desire for technology stock offerings is hardly surprising. As we’ve written before, there has been so much pent-up demand for tech IPOs over the past several years that there was bound to be a rush when the dam finally broke with LinkedIn’s share issue. The increasing private-market valuations of companies such as Facebook and Twitter — both of which have managed to avoid the public markets while still raising billions of dollars from private investors — have only added fuel to that fire.

Groupon has been criticized, both before and after its initial offering, for being what some have called a “Ponzi scheme,” in which the company has to spend more and more money just to keep its revenues growing — something critics such as David Heinemeier Hansson of 37signals have argued is a fundamentally unsustainable business model. And Pandora has had its share of critics as well, for similar reasons.

While the music-filtering service has seen dramatic growth in revenues and number of subscribers over the past year, it has also seen a similarly sharp increase in costs — since it has to pay licensing fees to the major record labels for the content it streams. The more music streamed, the higher the costs. In the first quarter of this year, revenue climbed by more than 135 percent and the number of users rose by 77 percent, but the company’s losses also ballooned by 124 percent compared with a year earlier.

One prominent analyst issued a recent note to investors advising them not to participate in the Pandora offering at the new higher price. Richard Greenfield of BTIG warned that while the service has become a big hit with consumers, and the rapid growth of revenues over the past year or so makes it appear attractive, the corresponding rise in costs makes the company’s business less appealing than the proposed stock price would suggest. Greenfield stated:

Put simply, the revenue/earnings leverage from growing users/usage is simply not enough to scale earnings relative to the IPOʼs proposed valuation.

Greenfield’s projections have Pandora becoming cash-flow positive sometime in 2014 if its business continues to evolve along the lines that he expects. Groupon, meanwhile, may not ever become profitable — even in an operating sense — according to some of the analysis of the company’s balance sheet. And yet, investors seem willing to pay the equivalent of $30 billion or so for the company’s shares.

Are these signs of a bubble? Not everyone is convinced. Marc Andreessen of the investment fund Andreessen Horowitz — which has arguably helped contribute to such fears by investing large sums in companies like Groupon and Twitter — said recently that he doesn’t think there is a bubble, but he’s happy others think so, because that means there’s less competition for him when it comes to investments. Others argue there isn’t a true bubble until average investors are borrowing money to buy tech stocks.

To skeptics, however, the prices being assigned to Groupon and Pandora seem fairly bubble-like, as does the increasing inflation of those values due to demand. Whether this turns into a full-fledged bubble remains to be seen — but if hotly anticipated share issues by money-losing companies is on your personal check-list of bubble phenomena, you can definitely check that one off and move on to the next one.

Here’s a video interview that Om did with Pandora founder Tim Westergren in November:

Post and thumbnail photos courtesy of Flickr user Mike Baird

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Mountains stand beyond solar modules at the Southern California Edison (SCE) solar array in Porterville, California. Photographer: Ken James/Bloomberg

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April 6 (Bloomberg) -- Katrina Landis, chief executive officer of BP Plc's alternative-energy unit, discusses the outlook for the London-based company's investments in clean energy. Landis spoke yesterday with Erik Schatzker at the 2011 Bloomberg New Energy Finance Summit. (Source: Bloomberg)

Solar panel installations may surge in the next two years as the cost of generating electricity from the sun rivals coal-fueled plants, industry executives and analysts said.

Large photovoltaic projects will cost $1.45 a watt to build by 2020, half the current price, Bloomberg New Energy Finance estimated today. The London-based research company says solar is viable against fossil fuels on the electric grid in the most sunny regions such as the Middle East.

“We are already in this phase change and are very close to grid parity,” Shawn Qu, chief executive officer of Canadian Solar Inc. (CSIQ), said in an interview. “In many markets, solar is already competitive with peak electricity prices, such as in California and Japan.”

Chinese companies such as JA Solar Holdings Ltd., Canadian Solar and Yingli Green Energy Holding Co. are making panels cheaper, fueled by better cell technology and more streamlined manufacturing processes. That’s making solar economical in more places and will put it in competition with coal, without subsidies, in the coming years, New Energy Finance said.

“The most powerful driver in our industry is the relentless reduction of cost,” Michael Liebreich, chief executive officer of New Energy Finance, said at the company’s annual conference in New York yesterday. “In a decade the cost of solar projects is going to halve again.”

Installation Boom

Installation of solar PV systems will almost double to 32.6 gigawatts by 2013 from 18.6 gigawatts last year, New Energy Finance estimates. Manufacturing capacity worldwide has almost quadrupled since 2008 to 27.5 gigawatts, and 12 gigawatts of production will be added this year. Canadian Solar has about 1.3 gigawatts of capacity and expects to reach 2 gigawatts next year, Qu said.

“You have to get better at it as well,” said Bill Gallo, CEO of Areva SA (CEI)’s solar unit. The French company could shave another 20 percent from the cost of making its concentrating solar thermal technology, and the same proportion from building and deploying plants, he said.

Electricity from coal costs about 7 cents a kilowatt hour compared with 6 cents for natural gas and 22.3 cents for solar photovoltaic energy in the final quarter of last year, according to New Energy Finance estimates.

Comparisons often overstate the costs of solar because they may take into account the prices paid by consumers and small businesses who install roof-top power systems, instead of the rates utilities charge each other, said Qu of Canadian Solar.

“Solar isn’t expensive,” he said “In many areas of the solar industry you’re competing with retail power, not wholesale power.”

Rooftop solar installations also will become cheaper, the executives said.

“System costs have declined 5 percent to 8 percent (a year), and we will continue to see that,” SolarCity Inc. CEO Lyndon Rive said in an interview. The Foster City, California- based company is a closely held installer and owner of rooftop power systems.

To contact the reporter on this story: Ehren Goossens at the BNEF Summit in New York at egoossens1@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net