Fallacy of volume and revenue: The iPhone difference

From Microsoft to Dell to Motorola, 2008 has been a very burdensome year for number-chasers. For those who find value in and thus only pay attention to market share, units shipped and revenue, the argument for volume is becoming increasingly more difficult to justify.

In What Sony Ericsson Must Do To Stage a Comeback, Jose Fermoso includes an interesting table:

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In any argument advanced to show why, for instance, Nokia is trailing Apple in the smartphone market, some will always counter by pointing to Nokia’s volume dominance in units shipped, which dwarfs Apple’s by a factor of 25X. Nokia’s revenue is about 1.5X higher than Apple’s as well. What’s more interesting for shareholders, however, is the fact that Apple’s profit is more than 2X over Nokia’s.

Indeed, for every phone sold in this scenario, Apple makes over 55X in profits compared to Nokia:

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Make it up in volume?

The corollary to units shipped is often the notion of a platform: the larger it is, the more lucrative it usually gets. Once a product gains network effect, it often dominates a market and thus is able to siphon off most of the revenue in that market. Revenue without profit, unfortunately, is not very meaningful.

Motorola, for instance, has shipped an awful lot of RAZRs but its mobile division has been at the brink of going under. In the table above, Sony Ericsson is shown to lose over $10 for each phone sold. No wonder Sony is slated to become one of the casualties of the contraction in the cellphone market. Nokia is the volume leader, but its per-phone profit is a meager $6.64, versus Apple’s $369.27.

Surely, products without significant market share will fail to create an ecosystem necessary to garner mind share, developer interest and, ultimately, users. Android is not yet a significant threat to iPhone because it doesn’t nearly have a comparable ecosystem and because it doesn’t have a significant ecosystem it hasn’t been able to attract enough developers to create one. Google may be able to fund Android’s growing pains, but a company like Palm cannot do the same for its upcoming Pre.

Profits matter

Pre has to compete directly against the iPhone. But while Palm continues to spiral downward financially quarter-by-quarter, its competitor Apple is very profitable, likely to have about $30 billion in cash by the time the first Pre is sold.

The most amazing trick Apple has performed over the last six years has been the unflinching fiscal discipline to introduce new products into new markets to establish new platforms while maintaining remarkably profitable margins. Apple hasn’t carved out 3/4 of the digital music market by inundating it with cheap devices. Neither has it elected to chase after market share by peddling $49 “iPhone nanos” at Radio Shack. As can be seen above, the iPhone is an extremely profitable product which fuels its own R&D that keeps it a generation ahead of its potential rivals. In iPhone charts, third parties see not just the number of units sold but more importantly, a competently managed, profitable, growing ecosystem with which they can reliably associate, whereas any discussion of Pre’s prospects must necessarily include Palm’s dismal financial outlook.

Therein lies the magic of the iPhone numbers.

Checklists: Why doesn’t everyone do it?

Some years ago, just before going into surgery, a loved one asked me to place a sticky note on one of her knees so that the surgeon wouldn’t mistakenly operate on the other. I thought it was a bit too aggressive and didn’t. But I made sure to remind the surgeon and the lead nurse in person, looking into their eyes, that it was the right knee, not the left one, in half-jest.

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Apparently, we weren’t the only ones who should worry about this, as The Independent reports:

Surgeons in England and Wales will be ordered today to carry out a safety checklist before every operation they perform, after a study showed it cut surgical deaths and complications by a third.

Described as the biggest clinical innovation in 30 years, the checklist is based on a set of seemingly banal questions but is set to become as essential to daily medicine as the stethoscope. In Britain alone, the new procedure could save hundreds of lives a year and 80,000 complications.

Estimated operations around the world approaching 250,000 per year, the stakes are enormous:

Atul Gawande, an American surgeon and associate professor at the Harvard School of Public Health, who led the study, said work was under way on further checklists for maternity and childbirth (to be published this year), heart disease, pneumonia, HIV and mental health. “It is one of those simple, unbelievably powerful ideas that will have an impact across medicine. Surgeons had assumed that doing well for patients was mostly about their skill. But there is now too much technology and too many patients for one person to deal with.”

He added: “When I talk to clinicians, they say: ‘we already do this stuff.’ The answer is: we are good at doing it most of the time, but we are not good at doing it all the time. We found some members of the team felt they were such low agents, they only felt responsible for their corner. Being allowed to say who they were [one item on the checklist] and hear the surgeon say what he expected made them feel part of the team. When you are not given a voice you turn your brain off.”

Over the years, I have trained and mentored many designers, developers and analysts. I’ve found it quite difficult to get them to first create and then methodically follow checklists. Some of the most egregious and preventable mistakes often result from failing to follow just a few checkable items. Not all mistakes harm people but end up wasting a lot of time, like when a developer was nearly in tears after spending an entire afternoon trying to debug an XML-to-PDF-to-print utility. The printer wasn’t on.

I have nearly given up on homo sapiens reliably executing checklists. So my design and management practice has moved on to analytics/rules driven system design where such failure is assumed and thus automated out of existence, without hopefully making the system too brittle. It’s of course harder to design that way up-front, but the pay-off is undeniably worth it, time after time .

Agora phone exposes Android’s Achilles Heel

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Thus came the promise of the second Android-based cellphone, from a company you’ve never heard of, whose slogan happens to be “The best value LCD TVs in Australia.”

About a week before the Agora was to ship, however, Kogan Technologies founder Ruslan Kogan announced that it was to be “delayed indefinitely.”

The Agora story is all the more interesting because it underlines the best and the worst of what Android promises: any company can adopt the open source OS to get into the cellphone market and, thus, the Android ecosystem will consist of many disparate and incompatible interests. Ruslan Kogan explains:

This delay comes due to potential future interoperability issues.

The Agora did reach a very late stage of development. Manufacturing had commenced and it was a matter of days from being shipped to you. However, it now seems certain the Agora in it’s current form will limit its compatibility and interoperability in the near future.

One of the potential issues is the screen size and resolution. It seems developers will be creating applications that are a higher resolution than the Agora is currently capable of handling.

How can a company come within days of shipping a crucial product and just happen to discover such a crippling issue? As mind boggling as that question may be, the more troubling concern for the Android world is, can anything be done about it?

Triumph of options

Potentially, most aspects of what makes a phone is an unknown variable in the Android world: screen size/resolution, CPU speed, memory, storage, battery life, and myriad interface options like trackballs, buttons, stylus, touch, multi-touch, physical and virtual keyboards…and any permutation thereof.

To open source advocates this, of course, is a triumph of options. The Wintel world was anchored around the notion that a user could get its OS from Microsoft; PCs from many different manufacturers; video, audio or network cards from yet other sources; and pretty much each app came with its own UI and print driver. While this wild competition expanded markets and drove prices down, it also increased complexity dramatically. So much so that even Microsoft and Intel had to get into the business of reigning in manufacturers with reference designs and compatibility requirements.

And the cacophony

The bankruptcy of this aggregation approach was finally exposed in the sad saga of Microsoft’s Zune. Microsoft, the principal promoter of horizontally aggregated product design, finally admitted the vertically integrated model of tightly coupling hardware, software and service long championed by Apple was inevitable for product innovation. Microsoft dumped its hardware “partners” and went solo with integrated Zune hardware, software, DRM and online store. Here’s how Steve Ballmer explained Microsoft’s recent shift a few months ago in an internal memo:

In the competition between PCs and Macs, we outsell Apple 30-to-1. But there is no doubt that Apple is thriving. Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience. Today, we’re changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We’ll do the same with phones—providing choice as we work to create great end-to-end experiences.

Homogenizing competition

For its own business rationale of securing unfettered and increasing access to its online advertising and services, Google is trying to organize what is clearly a disjointed cellphone market under an open source umbrella. From an architectural perspective this is a desirable approach, after all the iPhone has demonstrated the value of integrating hardware, software and services into one coherent offering that is easy to acquire, use and extend.

Unfortunately for Android, this coherence will prove to be difficult to achieve in an open source market. At every step, Android has to worry about accommodating disparate interests, and in turn, participants in the Android ecosystem have to worry about the complexity and variability of the platform. Such variability is necessary to attract diversity of participants but each participant dilutes the coherency of the platform.

Tyranny of choice

The iPhone has climbed to the top of the most popular smartphones in the U.S. with a single model. Except for a very small list of obvious hardware differences between the iPhone and iPod touch, Apple’s mobile platform by now offers a uniform market of 20+ million users, all carrying an identically configured device. Same industrial design, same OS, same multi-touch UI, same iTunes multimedia content, same DRM, same peripherals, same purchasing process, and same coherency that has already resulted in 10,000+ apps and half a billion downloads at the App Store.

iPhone developers do not have to worry about differing UIs or device configurations. They don’t have to accommodate all kinds of input devices from trackballs to multi-touch to stylus. They don’t have to invent their own syncing or notification systems. They don’t have to negotiate for different app stores. And as Kogan found out too late, they don’t have to worry about “compatibility and interoperability in the near future” in the form of varying screen sizes and resolutions.

A delicate balance

This coherence is regarded by many open source advocates as “lock-in.” The open source community seems to value openness more than innovation. In the post-iPhone era, for example, Android (while open source and backed by the largest Internet company) isn’t leading the innovation charge. That honor belongs to Palm (another propriatery, vertically-integrated platform) with its upcoming Pre.

Similarly, Win32 API was proprietary but resulted in the largest app platform ever. Apple’s FairPlay DRM is proprietary but created the largest legal media ecosystem to date. So while the power of proprietary platforms to create large markets has been demonstrated, the ability of open source to create large and lucrative markets coherent enough to attract commercial developers in the consumer markets is yet to be proven.

Ironically, if the iPhone platform can fail to dominate the smartphone market because it’s too closed, the Android platform may fail because it’s too open.

Daily question: Credentialism

Paul Graham in After Credentials:

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What cram schools are, in effect, is leaks in a seal. The use of credentials was an attempt to seal off the direct transmission of power between generations, and cram schools represent that power finding holes in the seal. Cram schools turn wealth in one generation into credentials in the next.

Think about where credentialism first appeared: in selecting candidates for large organizations. Individual performance is hard to measure in large organizations, and the harder performance is to measure, the more important it is to predict it. If an organization could immediately and cheaply measure the performance of recruits, they wouldn’t need to examine their credentials. They could take everyone and keep just the good ones.

Large organizations can’t do this. But a bunch of small organizations in a market can come close. A market takes every organization and keeps just the good ones. As organizations get smaller, this approaches taking every person and keeping just the good ones. So all other things being equal, a society consisting of more, smaller organizations will care less about credentials.

The era of credentials began to end when the power of large organizations peaked in the late twentieth century. Now we seem to be entering a new era based on measurement. The reason the new model has advanced so rapidly is that it works so much better.

Unlike innovation the notion of credentialism as the “currency of mediocrity” doesn’t get covered as much on the internets. It’s not new. James Fallows’ “The Case Against Credentialism” in the Atlantic, for example, was published 23 years ago. But recently, the availability of affordable educational loans and the marginal utility of college degrees with respect to their escalating price have come into question.

Do you think credentials are unavoidable and/or efficacious?

Daily question: Foot. Bullet. Trigger.

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From The Crystal Reports® Underground, SAP resurrects the “screenshots” issue:

Business Objects claims that no one can use a Crystal Reports screenshot in a book without their approval. They sent letters to courseware vendors (including me) telling use that we need to get permission to use screenshots in our books. Most vendors ignored those letters and nothing more was said in the three years since. Now it appears that more letters are going out from SAP (who now owns Business Objects). I read one of the letters this past week and it talks about screenshots and adds a new warning about using SAP trademarks like the term “Crystal Reports”. The letter was very impressive, with majestic references to various sections of US copyright and trademark law. Sprinkled throughout the letter was the Latin incantation “inter alia” to make it seem almost pontifical. It sounded so ominous that it brought to mind the blustering Wizard of Oz (“ignore the little man behind the curtain”).

Large-scale enterprise vendors like IBM, Oracle, SAP and Microsoft sell complexity and arbitrage general IT cluelessness, fear and risk adversity. It’s good business if you can get it.

Does anyone still wonder why they go out of their way to not make their products less user-hostile when the obligatory training, support and maintenance taxes are integral profit channels without which some of these products may not even be viable?