Sunday, January 27, 2013

Apple-plexy, or the irrational fear of reality

You probably know that Apple released its Q1 FY 2013 financial results last week, and even though the company had its best sales quarter ever, including the highest number of iPhones sold in a quarter by a fairly wide margin, Apple's stock price lost more than 10% immediately and, as of this writing, is priced around $440 per share. Some analysts were expecting Apple to sell 50 million or more iPhones in the quarter, but the company actually sold 47.8 million. In the real world, that's not all that big of a difference, but in the world of financial analysts and institutional shareholders, a less than 5% miss on optimistic forecasts is a big deal indeed. Analysts and investors also took note of a significant year-over-year decline in Apple's profit margins, from 45% in Q1 2012 to 38.6% in Q1 2013.

Apple's iPhone sales miss and profit margin declines are causes for concern, but in my opinion, they're totally expected. There are several reasons why:
  • Apple's competitors for both the iPhone and iPad are a lot better than they've ever been. If you haven't already bought into Apple's iOS infrastructure and have a big investment in apps and content, there are many more devices to choose from, including some with bigger displays and faster processors. Apple's competitors aren't locked into a once-a-year update model, so it's increasingly common for competitors to have newer, better devices available when mobile customers come off their contracts.
  • More competition ends up driving everyone's gross margins down. It's going to be increasingly hard for Apple to maintain its margins as both the functional and perceptual differences between Apple's devices and those of its competitors decline.
  • The U.S. smartphone market is reaching saturation, and the best growth opportunities are now in developing countries, where customers simply can't afford to pay as much for smartphones--and carriers can't subsidize as much of the cost of devices.
  • Apple's cannibalizing its own products--the iPad mini is taking away sales from the full-sized iPad, and both iPads are cutting into Mac sales, which missed estimates for the quarter by almost 20%. Tim Cook says that's he's happy to cannibalize sales from his own product line instead of losing those sales to competitors, but the cannibalization will inevitably result in lower revenues per sale and lower profit margins.
Yes, there are reasons for concern in Apple's financial results, but most of them are them are the result of a healthy, evolving market and improving competition--overall positive signs, not negative ones. 
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Monday, January 21, 2013

Movies to look forward to

It's January, which in the U.S. means that it's time for all the movies that are too lame to get much of an audience, but too expensive to put on the shelf, to be released. Here are some of the movies that you can expect to see between now and Spring:
  • Brokeback City: The heartbreaking story of the mayor of New York and the gay police detective who secretly loves him. Starring George Clooney as Mike Bloomberg and Jake Gyllenhaal.
  • Zero Dallas Forty: The true story of George W. Bush's plan to send the Dallas Cowboys to Tora Bora to capture Osama bin Laden. Starring Tony Romo and Nick Nolte as President Bush.
  • The Master-Bator: That scene in "The Master" where Amy Adams "assists" Philip Seymour Hoffman, played over and over again for two hours.
  • One Flew Over the Shall We Dance?: Two disturbed people in a Philadelphia mental hospital learn to dance in order to be released. Starring Jack Nicholson and Robert De Niro, with a cameo from Zachary Quinto as Dr. Thredson. Dubbed from the original Japanese.
  • The Lincoln Motor Company: The untold story of Abraham Lincoln's attempt to build luxury buggies in Springfield, IL. Starring Daniel Day-Lewis as Lincoln and Jerry Lewis as his mechanic, Irving.
  • The Miserables: The entire score of "Les Miserables", as performed by the cast of "Glee" on stage in front of a live audience in Paramus, NJ. Musical arrangements by Jonathan Coulton (uncredited.)
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Wednesday, January 09, 2013

Teradek and Ustream do Livestream one (or 2.7Mbps) better

This week has primarily been reserved for consumer electronics news from CES, but video pros got something to smile about yesterday when Teradek and Ustream jointly announced a new portable video encoder, the VidiU. Physically, the VidiU is very similar to Livestream's Broadcaster, which pioneered the low-cost portable video encoder market, and by all accounts has been very successful at bringing new customers to Livestream. The Broadcaster is small enough to fit on top or beneath a camcorder, compresses 1080i or 720p video over HDMI into H.264 video at up to 2.3Mbps, and sells for $495. There's a new version of the Broadcaster in the works that adds a built-in 4G modem for Verizon's LTE, but Livestream hasn't yet announced the price or release date.

Teradek's VidiU looks a lot like the Broadcaster--about the same size, similar display and controls, and similar connectivity options (wired Ethernet, Wi-Fi and 3G/4G broadband via USB modem)--but it's black instead of the Broadcaster's red. However, unlike the Broadcaster, which can only be used with Livestream's streaming video service, the VidiU comes configured out of the box to support both Livestream and Ustream. In addition, the VidiU has a generic RTMP interface that works with a variety of other streaming services, including Brightcove and Ooyala.

The VidiU also supports 1080p or 720p at up to 5Mbps. So, it's faster and more flexible than Livestream's Broadcaster, but what's the downside? The VidiU will sell for $699 when it ships next month, so it'll cost $204 more. But why the buzz about Ustream if the VidiU can work with multiple streaming services? Ustream clearly needs something comparable to the Broadcaster to compete with Livestream, so it's partnered with Teradek to make Ustream the standard, out-of-the-box streaming connection for the VidiU. In addition, it appears that free Ustream service for a limited period will be bundled with the VidiU.

If I were deciding between the Broadcaster and the VidiU, I'd probably buy the VidiU, even for using it with Livestream, because of its added flexibility and performance. I give Teradek a lot of credit for not locking the VidiU to a single streaming vendor.
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Friday, January 04, 2013

Intel's "virtual cable" service: A "cable killer" one week, on life support the next

Two weeks ago, news about a new "virtual cable" service developed by Intel leaked to several outlets. The service was said to use Intel-designed set-top boxes and software to deliver broadcast and cable networks, along with video-on-demand, to televisions and mobile devices via consumers' existing high-speed Internet connections. It would also feature something called "perceptual computing," which would use face and voice recognition as part of the system's user interface. (One possibility is that the system would use a camera to identify the family members in front of the television or mobile device, and automatically select their favorite channels.) The Intel system was to be announced as early as next week's Consumer Electronics Show, and was to be rolled out on a city-by-city basis.

Blogs and websites published breathless stories about how Intel was going to "destroy the cable industry." However, the cablepocalypse lasted only until The Wall Street Journal reported that Intel is delaying the announcement of its virtual cable service for several months, if not indefinitely, because it can't get access to sufficient content. No one should be shocked or surprised that Intel can't get the content it needs; after all, it was widely reported last year that Apple was working on a very similar service, which it too had to rein back because it couldn't get enough content to make it a viable competitor to cable, satellite and IPTV services.

From one perspective, Intel's proposed system is very similar to satellite TV--it would eventually cover the entire country, and I assume that Intel plans to offer local broadcast stations, as Dish and DirecTV do in the U.S. However, there's no legal requirement that broadcasters, cable networks or movie studios do business with Intel. Comcast owns NBC, several cable networks and Universal Studios; it's required to offer its content on reasonable terms to other cable, satellite and IPTV operators, but it has no such requirement to do business with Intel. Cable and satellite operators have made equity investments in some other cable networks over the years; they can influence who the networks license their content to (or don't license it to, as the case may be.) The remaining cable networks and studios have to weigh the revenues they could get from Intel with how Intel might impact their revenues from other distributors. In addition, we don't know what financial terms Intel wants. For example, Intel may want to pay for content as it adds subscribers, while content providers may want Intel to pay a base fee covering millions of subscribers, even if the company might not be able get that many subscribers for years.

In any event, Intel's "cable killer" is apparently on life support, at least for now. Eventually, someone is going to figure out how to get enough content to make an over-the-top Internet video service competitive with cable and satellite. It might be Intel, Apple, Aereo, FilmOn, or a company that doesn't even exist yet. It might require Federal legislation. But, it will happen eventually.
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Thursday, January 03, 2013

If eBook sales are slowing, is it good news or bad?

Not long ago, it was common for eBook sales to increase by 100% or more year over year. Those days are behind us--last year, the rate of eBook sales growth fell into the 20%-25% range. Barnes & Noble released its holiday 2013 sales figures today, and eBook sales increased 13.1% year-over-year.

Some industry observers are saying that eBook sales growth has reached an inflection point, which means that sales growth has hit zero or gone negative. In reality, eBook sales growth is slowing but still positive, and will most likely remain positive for a while. In addition, both consultants and reporters have been overly quick to minimize the effect of the Justice Department's settlement with Hachette, HarperCollins, Simon & Schuster, and most recently, Penguin. (Random House will join the settlement if and when its merger with Penguin is completed.) The settlements are still being phased in, and unless price has little or no effect on demand, we should see the rate of eBook sales increase in 2013.

However, let's say that even with the price-fixing settlements in the U.S. and Europe, eBook sales increases level off or turn negative. Is that good news for the publishing business, or bad?
  • Some observers believe that it's good news, because they think that those customers will buy print books instead of eBooks. However, there's no evidence that a slowdown in eBook sales will mean an increase in print sales. In fact, print sales continue to decline, even as eBook sales growth slows down. (Update, January 4, 2014: According to Nielsen BookScan, U.S. print book sales (in units) fell 9.3% for all of 2012. Print book sales fell just under 16% between 2010 and 2012. In the U.K., print book sales (in units) fell 3.4% in 2012.)
  • eBooks are the only source of growth for the book publishing business. If eBooks stop growing, we'll see even more consolidation and shutdown of publishers, since cost control will be the primary way to improve publishers' bottom lines.
I don't believe that eBooks' sales growth is going to go to zero, but 20%-30% annual growth may well be the ceiling for the next couple of years. Let's be clear--eBooks (and, to a lesser extent, audiobooks) are the only parts of the book publishing and retailing business that are growing. Everything else is stagnant or declining. If eBooks become stagnant, that's bad news for everyone.
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