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. 

Is Apple becoming a victim of its "reality distortion field?"

Earlier today, Apple announced a new 13" MacBook Pro, refreshed its Mac mini and iMac product lines, and introduced not one, but two new iPads: The 4th Generation 10" iPad, and the long-rumored iPad mini. The biggest news came from the iPads, and the financial markets are already reacting negatively.

The iPad mini has a 7.9" display and an A5 processor, but other than that, it's essentially an iPad 2 in a smaller package. Apple took pains to compare the iPad mini to Google's Nexus 7; Apple said that its tablet's display has 35% more area, and that it offers a "tablet experience" while the Nexus 7 offers a "scaled-up phone experience." Apple left a few things out of its comparison, however: The Nexus 7's display has higher resolution than the iPad mini, 1280 x 800 vs. 1024 x 768, which should be noticeable on the iPad mini's larger display. The Nexus 7's quad-core Tegra 3 processor should be faster than the iPad mini's Apple A5, and most importantly, the 16GB Nexus 7 sells for $199 (U.S.), while the 16GB iPad mini is priced at $329.

The Nexus 7 isn't Apple's only problem: Amazon's 16GB Kindle Fire HD also sells for $199, while Barnes & Noble's 16GB Nook HD is $229. In fact, Amazon's 32GB model is only $249 vs. $429 for the 32GB iPad mini, and the 32GB Nexus 7 is expected to be announced by Google next week for $249. Price isn't everything, of course, but it's very important, especially for 7" tablets. Apple's pricing raises an interesting question: Do people buy 7" tablets because they're seven inches, or because they're cheap? If they buy because they're seven inches, then Apple's in great shape, but if they buy because they're cheap, the iPad mini could spell trouble for the company in two ways.

The first issue is that price-conscious customers need to justify spending $130, almost twice the price, for a tablet with the Apple name on it. I'm far from convinced that the iPad mini is worth the premium that Apple is asking, and the financial community, which expected the 16GB model to be priced at $299, isn't convinced, either. Apple could justify a $100 premium and keep the iPad mini under the psychological $300 threshold with a $299 price. An additional $30 doesn't make a huge difference, but pricing the entry-level model over $300 does. The second issue is that a lot of consumers will look at the iPad mini and realize that it's all they need, for $170 less than a comparable 4th Gen iPad. That will result in the iPad mini cannibalizing sales of the more expensive and more profitable 10" iPad.

And, what about that new 4th Generation iPad? It replaces the 3rd Generation model, which had only been on the market for six months. It has a faster A6X processor, which Apple claims has twice the CPU and graphics speed of the A5 processor in the 3rd Generation model, and it also has a Lightning connector. Other than those two changes, the 3rd and 4th Generation models are essentially identical, which is leading some pundits to call the new model the "iPad 3S." The 4th Generation model, although not a complete surprise, will throw some uncertainty into consumers' future iPad purchase decisions. There's fairly reliably been a year between new iPad and iPhone models, but now we've gotten a new iPad just six months after the release of the previous model. Does this mean that Apple is speeding up its product replacement cycle, or is this a one-time event to get the Lightning connector into wider use?

I suspect that Apple may be believing some of its own hype--it can demand a premium price for the iPad mini just because it's an iPad. However, the 7" segment is by far the most competitive segment in the tablet market, and Apple is a late entrant. Apple will sell lots of iPad minis, but I doubt that they'll sell as many as they or analysts expect

If you buy a Microsoft Surface, it probably won't be because of the price

Earlier today, Microsoft announced the prices for its Surface for Windows RT tablets. The entry-level Surface for Windows RT tablet comes with 32GB of storage and sells for $499 (U.S.); the same model with a black Touch Cover keyboard sells for $599. The 64GB model bundled with a black Touch Cover sells for $699. If your tastes run to a more colorful Touch Cover, those are available separately for $119; if you prefer a more conventional keyboard design, the Type Cover is also available in black only, for $129.

Several months ago, there were some rumors that Microsoft would try to underprice Apple with an entry-level Surface tablet priced as low as $199; those rumors were disproved today. Microsoft has taken pains to point out that it's pricing its 32GB model where Apple prices the 16GB third-generation iPad, and the 64GB bundle is priced the same as Apple's 32GB model without a keyboard. Microsoft's prices are very competitive, but Windows RT will only have a tiny fraction of the apps available for iOS or Android when it and the Surface tablets are released next week.

Microsoft seems to be at a loss to describe exactly what the Surface is--according to Windows business unit president Steve Sinofsky, it's neither a tablet nor a notebook computer. Microsoft's new television ads don't help--they show people dancing around with Surface tablets as they connect and disconnect keyboards, but they don't actually show anyone doing anything useful with the devices. That's the trap that tablets like the Motorola Xoom and BlackBerry Playbook fell into--Motorola and RIM showed their tablets playing videos and games, but not doing anything useful.

There's not going to be a lot that consumers will be able to do with Surface tablets when they first ship, at least in comparison to iPads and Android tablets. It will take time for developers to build up a competitive catalog of apps, and developers won't bother until they see Windows RT gaining market momentum. By themselves, Microsoft's prices will do little to stimulate sales.

In addition, I believe that we're going into the Christmas of 7" tablets: Apple said that it plans to make an announcement, most likely of a 7" iPad (among other products,) on October 23rd. The focus this holiday season will be on tablets selling for $199 to $299, not $500 or up. Consumers will be comparing the small iPad to the big iPad, or the small iPad to Amazon's Kindle Fire HD, Barnes & Noble's Nook HD and Google's Nexus 7. They're unlikely to be comparing anything to the Surface for Windows RT.

Microsoft may believe that Android, on tablets at least, is highly vulnerable to being displaced. Under this scenario, Microsoft's goal would be to make Windows RT the credible alternative to iOS, and then wait for Apple to make a serious mistake, just as the Xbox 360 capitalized on Sony's mistakes with the PlayStation 3 to become the video game console market leader. (It's the "I don't have to outrun the bear, I only have to outrun you" idea.) If that's Microsoft's approach, all they have to do is beat Android, not take away a significant number of iPad sales. If Microsoft fails, however, people will be comparing the Surface not to the Xbox, but rather, to the Zune.

Amazon & Apple: Is their proxy war getting hotter?

Earlier today, according to Reuters, Walmart notified its store managers that the company would no longer carry Amazon's Kindle eReaders and tablets once its existing inventory and committed purchases run out. Walmart confirmed its decision with Reuters, but didn't specify the reason(s). In May, Target announced that it would no longer carry Kindles, and like Walmart, it never made an official public statement about the reason. However, CNN noted that Target had just been authorized by Apple to begin selling iPads, and that it planned to add Apple "mini-stores" within 25 of its locations.

There are two reasons being cited by observers as to why Walmart might have decided to drop Kindles:

1. Amazon may not have offered Walmart a sufficient discount, or
2. Walmart may see Amazon as an increasingly large competitor for general merchandise sales, and doesn't want to support a competitor any longer.

Both of these reasons make sense, and either one of them may be true, but let's sideline that discussion for a bit.

At Publishers Lunch Deluxe, Michael Cader reported on Apple's efforts to get evidence from Amazon for its defense in the government's eBook price-fixing case. According to Cader, Apple has been trying to compel the Justice Department to turn over the transcripts of interviews with 14 Amazon managers and executives. Those interviews weren't taken under oath. The Justice Department argued that the interviews are protected work product, and aren't subject to release. However, Justice has given Apple the names of everyone at Amazon who was interviewed, and said that Apple could take depositions directly from those people. In addition, the Justice Department has released all of its email communications with Amazon and all of the documents and data it received from Amazon during its investigation.

Apparently, Apple took up the Justice Department on its idea, and filed subpoenas to force the 14 Amazon employees to give depositions. Then, last Friday, September 14th, Amazon filed a motion in Seattle Federal court to quash the subpoenas, on the grounds that Amazon isn't a party to the litigation. This week, Apple filed a motion with Judge Denise Cote, who's in charge of all of the U.S. cases related to eBook price-fixing, to move Amazon's motion from Seattle to her court. Judge Cote is now considering Apple's motion.

I don't know that much about the law regarding who can and can't be compelled to provide depositions and discovery documents. What I do know is that if Apple does eventually get the right to enforce its subpoenas, Amazon is going to want to put strict limits in place to prevent any confidential information that's not directly related to the price-fixing case from being revealed to Apple.

That brings me back to the title of this post, and to my first point. Clearly, Apple and Amazon are competing in more areas, and in the U.S., Amazon is currently the only serious competitor to Apple in tablets, based on sales. Apple is widely rumored to be planning to announce a smaller iPad next month. Target dropped Amazon shortly after signing a deal to carry Apple's iPads, and now, a month before the smaller iPad's expected release, Walmart has also dropped Amazon's Kindles. Does that mean that Apple might have made Walmart's getting the small iPad conditional on dropping Amazon? It's certainly possible, but rather than getting into legally murky waters, Apple could have required Walmart to give its products a certain amount and type of display space--a very common condition in retail distribution deals. Walmart would have to get that space from somewhere, and "independently decided" (wink, wink, nudge, nudge) to take it from Amazon. Another perfectly legal option would be if Apple offered Walmart co-op funds if it did certain things (for example, PC manufacturers get reimbursed for part of their advertising costs by Intel if they include that four-note musical theme at the end of their commercials.) These payments amount to a discount--and if Target is already getting them, Walmart would be at a competitive disadvantage if it didn't get them as well.

All of this adds up to "shadows on the wall" suggesting a proxy war between Apple and Amazon:

• Amazon is using the Justice Department as a proxy against Apple to get agency terms and Most Favored Nation clauses terminated, and
• Apple is using Target and Walmart as proxies to hinder Amazon's ability to sell Kindles in stores.

If this "proxy war" model is correct, I'd expect Best Buy to be the next retailer to drop Kindles. Apple has dedicated sales space in most Best Buy stores, and a lot of leverage over the retailer. In addition, Amazon is a strong competitor to Best Buy, so there's plenty of reasons for Best Buy to stop selling Kindles.

You may say that this is all paranoia, and you may be right, but I've spent enough time in high tech to know that everything that's happened so far is right out of the Silicon Valley playbook. 

Amazon focuses on Apple with its new Kindle Fires

Earlier today, Amazon announced a refresh of its entire line of Kindle eReaders and tablets. The company announced a new eReader, a lower price for its entry-level eReader, an improved version of the Kindle Fire, and a new Kindle Fire HD line with three models. Perhaps even more interesting than the devices themselves is that Amazon said that it's services, not "gadgets", that are important, and it's explicitly positioning its devices as the delivery mechanism for its services. Amazon's metric for success is how many goods and services it sells through its devices, not how many devices it sells.

Here are the details:

• The Kindle Paperwhite is the new eReader. It's got a sharper, front-lit display with 25% more contrast and 212 ppi resolution (62% more pixels than before,) with a capacitive touch screen. Amazon claims that the display and lighting systems are both proprietary. The lighting system took four years of R&D and uses a flattened-out optical fiber for even illumination, instead of the discreet LEDs that B&N uses. Amazon claims 8 weeks of battery life. The eReader is 9.1mm thick. The Wi-Fi version is priced at $119, pre-orders begin today and it ships October 1st. The 3G version is priced at $179, same availability.
• The "$69 Kindle"--that's what they're calling it--appears to be the current $79 ad-supported model, just marked down $10. Pre-orders begin today, ships September 14th.
• The updated Kindle Fire has a faster processor, 1GB of RAM (vs. 512KB in the original model,) 40% better performance, a front-facing camera and longer battery life. Price is $159 (down from $199), and it ships September 14th.
• The Kindle Fire HD line is entirely new, and it comes in three models that will ship on November 20th:
• A 7" model for $199
• An 8.9" model for $299
• The same 8.9" model with 4G LTE and twice as much memory for $499, compared to $729 for the roughly comparable new iPad
• All three models use the same basic hardware: The touch screen is laminated directly to the display for 25% less glare and better contrast. They use TI OMAP 4400 series processors--4460 in the 7" tablet, 4470 in the 8.9" model (Jeff Bezos claims that they're better than the Tegra 3, but they only have dual cores vs. the Nexus 7's Tegra 3 with quad cores.) They have built-in stereo speakers with Dolby Digital Plus, and also have Bluetooth and HDMI out, along with front-facing HD cameras and Skype. The tablets have both 2.4 GHz and 5GHz 802.11n, with dual antennas for better reception and speed--Amazon claims that the tablet's Wi-Fi speed is 41% faster than that of the new iPad. 
• The new 7" Kindle Fire HD has 1280x800 resolution, while the 8.9" models have 1920x1200 resolution, 254 ppi IPS displays. By comparison, the new iPad's Retina display is 9.7", 2048x1536, 264 ppi resolution. Given the slightly smaller screen on the Kindle Fire HD, most users won't be able to tell the difference in resolution. The screen of the 8.9" model is big enough for two-page magazine (and, presumably, eBook) displays.
• The 7" and base 8.9" models ship with 16GB of memory; the Kindle Fire HD with 4G LTE ships with 32GB of memory.
• Buyers of the 4G LTE model can sign up 250MB/month of data usage, 20GB of cloud storage and a $10 Appstore credit, for $49.99/year. (Given that Amazon is encouraging customers to keep all their eBooks and media in the cloud, that 250MB is likely to run out pretty quickly.)
• The updated Kindle Fire and Kindle Fire HD models run a customized version of Android 4.0.3 (Ice Cream Sandwich.) The original Kindle Fire apparently will not be able to upgrade to the new version of the operating system.
• According to Engadget, the physical design and build quality of all the new Kindle Fire models is far better than that of the original Kindle Fire.
• The user interface has been updated, and some elements, like the "wood bookcase", are gone. The Kindle's "X-Ray" feature for books has been extended to movies (via IMDB, which Amazon owns), audiobooks and eTextbooks..There's now built-in Facebook and Twitter support, and many improvements to email. A new FreeTime feature offers much more extensive parental controls--parents can specify when and how long their kids can read books, play games, watch video, etc. And, parents can set different limits for each child. The screen's background turns blue when the tablet's in FreeTime mode.
• Audible's 100K audiobooks have been added to Amazon eBookstore. Whispersync for Voice allows audiobooks on multiple devices to be synchronized--stop listening on one device, open the audiobook on another device and start listening right where you left off. The Audible audiobooks will display their text at the same time on Kindle tablets, with the text synchronized with the narration, and with real-time highlighting (called Immersion Reading.) Amazon is also launching Whispersync for games--synchronizes game levels between multiple devices.
• Amazon is launching a collection of serialized eBooks as Kindle Serials. Customers can buy a Serial once and get all the installments. Each new installment is automatically appended to the existing portion, and there's support for reader discussion. The product line is launching with eight titles. $1.99 each, and Amazon is making Dickens' Pickwick Club and Oliver Twist available for free.

One Apple announcement or two? It doesn't matter

It's Friday in late August and everybody is a little punchy, so now there's a controversy about whether Apple will have one announcement in September for both the new iPhone and smaller iPad, or one in September for the iPhone and a second one in October for the iPad. The "one announcement" theory was dominant until   yesterday, when both John Gruber and Jim Dalrymple wrote in their blogs that two announcements are more likely. Panic ensued. (Why am I writing about this? It's a Friday in late August and I'm punchy.)

The truth is, it doesn't matter. One rumor is that Apple only recently began production of the smaller iPad and won't be able to deliver product until October anyway, so why announce it a month early, build up an order backlog and potentially disappoint people? If Apple only announces an iPhone at the September event, the obvious expectation will be that the small iPad is coming in October--thanks to Gruber and Dalrymple. Of course, if the small iPad doesn't show up in October, Amazon, Google, Microsoft, Samsung and who knows who else will breathe a sigh of relief.

So, don't worry about whether it'll be one announcement or two. Take a deep breath and relax. It's Friday in late August and you're punchy. Have a good weekend!

The $199 Surface for Windows RT tablet--why the rumors might need to be true

There are legions of reports, starting with Engadget, that Microsoft may price its entry-level Surface for Windows RT tablet at $199. The reports tend to fall into three categories:

1. Microsoft would never do that to its licensees, 
2. It would be awful for its licensees if Microsoft did it, and
3. Microsoft can afford to do it.

In a sense, all three are true: Under normal circumstances, the last thing that Microsoft would want to do is to compete with its hardware licensees. If Microsoft did it, its (four, count 'em, four) Windows RT licensees would undoubtedly be hurt--there's no way that Asus, Dell, Lenovo and Samsung could, or would, match that price. And yes, Microsoft can afford it--and it has a history of deficit-spending its way into markets. It's estimated that the company lost several billion dollars on its Xbox game console business before it became profitable, and the company recently took a $6 billion write-off on its acquisition of online advertising company aQuantive. The company has also lost billions of dollars on its online business, although it's still nowhere near profitability after years of investments.

I fall into a fourth camp: Microsoft has to do it, for the same reason that the company rushed out its Surface tablets with a last-minute, under-rehearsed announcement that didn't include any price or availability details. My premise is that developers simply aren't showing much interest in creating apps for the tablet user interface formerly called Metro. Microsoft knows better than anyone else whether developers are showing interest in Metro--they know how many developers are using Visual Studio to create apps, and at least roughly, how many apps are under development.

Microsoft also knows that the biggest strength of the iOS platform is its enormous collection of apps, and that Android struggled as a tablet platform because of a lack of apps. Without a strong assortment of apps, and with no price advantage over the iPad and Android, Windows RT will be "dead on arrival." Microsoft has probably already resigned itself to having a big "app gap" when Windows RT ships, so it has to come up with another motivation to get consumers to buy Windows RT tablets, and thus build an attractive market for app developers. That motivation is price.

Microsoft's big lesson may be HP's experience with the webOS TouchPad. At $399, TouchPads gathered dust at Best Buy stores around the U.S. However, when HP dropped the price to $99, hundreds of thousands of the tablets flew off the shelves, even though they were discontinued and HP's commitment to further webOS development was in serious doubt. Demand was so great that HP built more of the tablets, and those that are still available sell at prices close to the original retail price.

Microsoft has to get a lot of Windows RT tablets into consumers' hands in order to encourage developers to write for the platform. If the company believed that the tablets under development by its licensees wouldn't be popular enough to make much of a difference, it had to act--first with the Surface pre-announcement, and now, with a $199 price that will be too good for a lot of people to pass up.

I go back to my point above--Microsoft isn't afraid of taking big losses in order to buy its way into a market. It's also not afraid to lose money on hardware--estimates of Microsoft's costs for replacing Xbox 360 game consoles with the "Red Ring of Death" problem range as high as $2.5 billion. So, while selling the Surface for Windows RT below cost would certainly be an act of desperation, it's already in Microsoft's play book.

Kno moves into K-12 market: Expansion or act of desperation?

AllThingsD reports that Kno, a college eTextbook rental company, has struck a deal with Houghton Mifflin Harcourt to distribute its eTextbooks to the K-12 market. The titles will be rented for a one-year period for $9.99 or less, and will work on iPads and the web. Kno plans to release eReaders for Android and Microsoft Windows 7 (and presumably 8) later this year. The company is negotiating with McGraw-Hill and Pearson to distribute their K-12 eTextbooks.

The obvious hole in this strategy is that most K-12 schools directly supply textbooks to students (either at no cost or in exchange for a small activity fee,) so convincing parents to rent eTextbooks, and school districts to switch to renting eTextbooks instead of buying print, is going to take a lot of work. In addition, moving into the K-12 market indicates some desperation on Kno's part. It suggests that Kno isn't meeting its sales objectives, and needs to find new sources of revenue.

Update, August 8, 2012: Kno has launched its K-12 eTextbook rental program on its website. The biggest reason why parents should rent eTextbooks when they get them for free from their school is...wait for it...print textbooks are too heavy! Why, did you know that carrying a 12-pound backpack during a school year puts a cumulative load of over 20,000 pounds on your child's body--the equivalent of six mid-sized cars? And, given the epidemic of obese children and Type 2 diabetes starting in childhood, along with cutbacks in physical education programs, there's absolutely no reason for children to get exercise. Let's protect their delicate backs.

Print textbooks are too heavy? Seriously? 

comScore surveys tablet buyer demographics and reasons for buying

comScore has released its first comScore TabLens report, a monthly survey covering U.S. tablet ownership and usage. The survey consists of a three-month rolling sample of 6,000 U.S. tablet owners. The first report covers tablet buyer demographics and reasons for purchasing. Here's a summary of the findings:

• Overall, tablet ownership is split exactly 50% men/50% women, with heaviest ownership in the 25-34 year old age group and with respondents whose household income is $100K/year or more.
• iPad owners are more heavily male (52.9% male/$47.1% female).
• Kindle Fire owners are more heavily female (56.6% female/43.4% male).
• Owners of other Android tablets are slightly more male than female (50.9% male/49.1% female).
• Owners of all three kinds of tablets have a similar distribution of age groups and household income, except that the iPad has more owners with $100K or greater household income than the other two tablets (46.3% for the iPad, vs. 33.3% for the Kindle Fire and 32.5% for other Android tablets.)
• The most important factors for buyers of the iPad are 1) Selection of apps, 2) Brand name of the tablet, and 3) The tablet's operating system.
• For Kindle Fire buyers, the three most popular factors are 1) The price of the tablet, 2) Selection of apps, and 3) Brand name of the tablet, and music and video capabilities (tie).
• For other Android tablet buyers, the three most popular factors are 1) The price of the tablet, 2) The tablet's operating system, and 3) Selection of apps.
• The iPad had the highest overall device satisfaction (8.8 out of 10), followed by the Kindle Fire (8.7) and other Android tablets (8.2).

FlatWorld Knowledge: A bargain, if they have the eTextbook you need

On The Textbook Guru website, Jeff Cohen has posted a review of the FlatWorld Knowledge college eTextbook platform. FlatWorld Knowledge offers basic versions of all its textbooks for free, and gives faculty the right to make their own derivative works from its textbooks, through a Creative Commons license. The advantage is that students don't have to pay for a complete textbook when their professor only covers content from part of the book. FlatWorld Knowledge allows teachers to post versions of textbooks that their students (or anyone) can access.

Cohen likes the ease of the signup process for students, and the pricing model: The eTextbook itself is available for free and is accessed online via a browser-based eReader. The "Study Pass" version (priced at $19.95 in the example given in the article) includes an enhanced online eReader with note taking and highlighting, as well as interactive study aids and a "study view" of the eTextbook that consolidates key information from each chapter. The "All Access Pass" version (priced at $34.95 in the example) includes all the features of the other versions, as well as a downloadable PDF version of the eTextbook, and a version that works on the iPad and on Nook and Kindle eReaders. (There are also black & white and color print versions of the textbook available at higher prices.)

Cohen confined his test to the free version, and he liked the online eReader; most of the things he complained about are features missing from the free version but included in one of the paid versions. However, the biggest problem is the small variety of titles available. The textbooks don't come from major publishers, so FlatWorld Knowledge has to convince educators to write the textbooks in the first place, with no promise of financial compensation. The company has a good selection of business and economics titles (69 eTextbooks), and a fair selection in the humanities and social sciences (32 titles), but its selection in other areas is very light. It currently has only 115 eTextbooks in total.

28% of all library patrons want to download eBooks from their library; Kindles are the most popular devices for reading library eBooks

Digital Book World has a summary of a new Patron Profiles report from Library Journal and Bowker. Their survey found that 28% of all library patrons want to download eBooks from their public library, and almost two-thirds of patrons who already read eBooks want to be able to get them from their local library. Here are some other findings:

• eBooks are the most popular downloadable media for all respondents, followed by music and audiobooks. Video downloads are the fourth-most-popular media with everyone except existing eBook users, who prefer enhanced eBooks by a small margin.
• As far as eReading devices are concerned, Kindle eReaders are the most popular with both "power" media users and regular library patrons, by a significant margin. The next most popular device is the Kindle Fire, followed by the iPad, and then the Nook Color eReader and Nook black & white eReader, both of which were preferred by less than 10% of patrons.
• "Digital" patrons--those that own a smartphone, eReader or tablet--are more active library users than any other group, across all activities. 28% of library patrons own a smartphone, 16% own an eReader and 12% own a tablet.
• Only 3% of library patrons have used a dedicated app for their library, although many patrons would like to be able to access their library's online content via a mobile app.
• Library patrons that visit their library's website an average of once a week are generally dissatisfied with the quality of their library's website.

BISG survey says that eBook buyers are more willing to buy print

The Book Industry Study Group has just released the third part of Volume Three of its Consumer Attitudes Toward E-Book Reading research report. Here's a summary:

• The percentage of eBook buyers that exclusively or primarily purchase eBooks has dropped from nearly 70% last August to 60% in May 2012.
• The percentage of survey respondents with no preference for eBook or print formats, or who buy some genres in eBook format and others in print, has increased from 25% last August to 34% in May.
• Amazon's Kindle Fire has overtaken the iPad as the tablet of preference among eBook consumers. 7% of survey respondents owned a Kindle Fire last December vs. 20% in May 2012, while iPad ownership remained flat at 17% in both surveys. By comparison, 5% of respondents owned a Barnes & Noble Nook Tablet in May, and 8% owned another Android-based tablet.
• While overall use of tablets as primary eReading devices is increasing, the changes aren't uniform across devices:
• 35% of respondents cited Amazon's Kindle eReaders as their primary device for reading eBooks, down from 48% last August.
• Apple's iPad was cited as the primary device for reading eBooks by 9% of respondents in May, down from 10% in February.
• Respondents who cited Barnes & Noble's Nook tablets and eReaders as their primary device for reading eBooks declined from 17% last August to 13% in May.

eReaders are great for casual readers, not so great for highlighting and notes

The Atlantic has an essay about the state of eReaders written by Alan Jacobs, an English professor at Wheaton College. Here's a summary:

• Both eReaders and tablets are making it easier to read at night, with front lights (eReaders) and dimmable backlights (tablets). 
• E Ink displays on eReaders are still far superior to LCD displays on tablets when it comes to glare. 
• The contrast of eReader displays has improved considerably. 
• eReaders have limited typeface options and do a poor job of handling kerning and spacing. (A large part of the problem is EPUB, which emphasizes dynamic page flow to the detriment of just about everything else.) 
• Highlighting and annotation, which are very important for literature studies, are all but impossible with eReaders. The trend to replace dedicated keyboards with on-screen keyboards has made annotation even more difficult. On the other hand, tablets handle highlighting and annotation much better, although they still have some quirks. For example, it's impossible to extend a highlight across a page break on the iPad (although it can easily be done on Nook and Kindle eReaders.) 

The bottom line is that eReaders and tablets are generally improving for general reading, but for engaged reading, there's been little improvement, and in some ways eReaders' capabilities are moving backwards.

September 12th is the likely date for Apple's announcement of the new iPhone

iMore is reporting that Apple plans to introduce its next iPhone, as well as an 8" iPad and updated iPod nano, at an event on September 12th. Bloomberg's sources confirm the date and that the next iPhone will be announced, but said nothing about other devices. iMore's sources say that the iPhone will go on sale in stores on Friday, September 21st; the website's sources haven't provided any specific information on release dates for other devices.

AllThingsD has also come close to confirming the September 12th announcement date for Apple's next iPhone. They haven't quite confirmed IMore's report, but they say that they've confirmed with their own sources that the announcement will be held the week of September 9th, with the 12th being the most likely date.

AllThingsD also points to a massive ramp-up in Apple's prepayments for components, as reported both by Wells Fargo Securities and Apple's own 10-Q filing. Apple's prepayments rose $1.15 billion in the June quarter to their highest level in four years--12.6% of Apple's total sales, according to Wells Fargo's Maynard Um. In a note to clients, Um said that these increases have been followed by ramp-ups in revenue in the following two to three quarters. AllThingsD also notes that the increase in component prepayments is so high that it suggests that multiple products are being readied for launch.

Apple's U.S. margins for iPad about half those of iPhone

As part of the myriad lawsuits between Apple and Samsung, Reuters reports that a statement from an Apple expert witness in a case going to trial in San Jose reveals Apple's margins on the iPhone and iPad. According to the statement, between April 2010 and the end of March 2012, Apple's gross margins on U.S. iPhone sales were 49% to 58%, generating revenues of more than $33 billion, while gross margins on iPad sales were 23% to 32%, generating revenues of more than $13 billion. The numbers reflect the fact that iPhone prices are heavily subsidized by mobile carriers, while most iPads are sold without broadband connectivity and are thus unsubsidized. Apple has chosen to accept lower margins on iPads in order to avoid creating a price umbrella for competitors.

iPad's market share increased in Q2, Android's share flat on higher shipments

TechCrunch reports on Strategy Analytics' Q2 tablet shipment report. iPad shipments increased to 17 million units in Q2 2012 from 9.3 million units in Q2 2011, while Android tablet shipments were 7.3 million units in Q2 2012 vs. 4.4 million in Q2 2011. Microsoft-based tablet shipments fell from 600,000 units in Q2 2011 to 300,000 in Q2 2012, as did "Others" (primarily the RIM PlayBook,) which fell from 700,000 in Q2 2011 to 300,000 in Q2 2012.

In terms of market share, Apple's share increased from 62% to 68.3%, while Android's share stayed flat at 29.3% despite the increase in units shipped. Microsoft's share dropped from 4% to 1.2%, and "Others" dropped from 4.7% to 1.2% Total tablet shipments grew 68.8% year-over-year.

Business Insider iPad usage survey

Business Insider has done a survey of more than 2,200 iPad users to find out how they use their tablets. Here's a summary of the findings:

• Most respondents (almost 47%) use their iPads two to five hours a day on average. 
• 64% of respondents say that their iPad usage has increased since they first got their tablets. 
• iPads are quickly becoming users' primary computers. In the November 2010 survey, almost 71% of respondents said that a laptop or desktop was their primary computer, vs. 29% who said that their iPad was their primary computer. However, in the new survey, only 53% say that they use a laptop or desktop computer most often, vs. 47% who use their iPads most often. 
• Respondents said that they spend 41% of their personal computing time using an iPad, vs. 25% for a laptop computer and 17% for a desktop. (They also said that they spend 17% of their time using a smartphone.) 
• 71% of respondents say that they read eBooks on their iPads. 
• Apple's iBooks format has become the most popular eBook format for survey respondents, with 51.3% preferring it, vs. 36.5% for Kindle format and 12.2% for other formats. (In the November 2010 survey, the Kindle format was most popular, by 50% to 42.4% for iBooks and 7.6% for other formats.)
• iPad owners have little interest in tablets from competitors; only 10.4% are interested in the Google Nexus 7, and 5.5% are interested in the Kindle Fire. 
• Only 30.2% of current iPad owners have any interest in a smaller iPad. 

Reviews of six eTextbook platforms

On The Textbook Guru blog, Jeff Cohen has reviewed six eTextbook platforms: Chegg, CourseSmart, iBooks, Inkling, Kindle and Kno. Cohen doesn't pick a "winner," but he does a good job of reviewing the pros and cons of each platform as they relate to eTextbooks. Here's a brief summary:

• Chegg: Based on HTML5, has a built-in "Ask a Question" feature for getting more information from experts, and its purchase and usage models are based on how students actually use textbooks. It's biggest downside is that it's online only and requires an Internet connection at all times. 
• CourseSmart: It allows both online and offline access to eTextbooks. Individual pages, along with highlights and notes, can be shared with classmates and instructors. Up to ten pages from any title can be printed. However, CourseSmart only rents eTextbooks, and they're disabled at the end of the rental period. It only has one level of zoom and no multimedia features.
• iBooks: It brings Apple's ease-of-use and user interface design to eBooks. eTextbooks can include 3D models, embedded video and interactive quizzes. There are also virtual study cards that contain chapter-specific glossary terms. iBooks eTextbooks work both online and offline. The biggest downside is the still-limited number of eTextbooks available for the platform. 
• Inkling: Works on the iPad and in some HTML5-compatible browsers. Allows students to purchase eTextbooks by the chapter or by the entire book. Supports online and offline reading. Video, audio, interactive and 3D content can be incorporated into the eTextbooks. Notes can be shared with other students. The biggest drawback is a strict returns policy. 
• Kindle: Has the most flexible rental and returns policy--eTextbooks can be rented for 30 days and extended as needed, or returned within the first seven days for a full refund. The "X-Ray" feature gives the definitions of important words, phrases and names, and visual diagrams of where they're used in the text. The biggest drawback is that most eTextbooks don't use Kindle Format 8, so they're black & white only, with no 3D, animations or video, and very limited audio support. 
• Kno: Supports iPads and HTML5 browsers, but not all titles work in both eReaders.  eTextbooks can be returned within 15 days, so long as the user hasn't gone past the first 20% of the book. Notes, bookmarks and annotations can't be transferred between platforms--for example, notes made in the HTML5 version can't be accessed when the eTextbook is opened in the iPad eReader. Cohen found that Kno's beta "Quiz Me" feature, which turns sections of the eTextbook into fill-in-the-blanks quizzes, didn't work properly. Some images were left out due to copyright restrictions. 

New Blurb plug-in for InDesign creates eBooks

Blurb, which specializes in self-published photo books, has updated its plug-in for Adobe InDesign to support creating fixed-format eBooks for the iPad. The plug-in creates layout templates for any of Blurb's supported print sizes, as well as the iPad. However, eBooks created by the Blurb plug-in are sold through Blurb, not Apple's iBookstore, which means that they don't use Apple's iBooks format (EPUB 2.X with proprietary extensions.)

A race to the top, or to the bottom?

In the last few weeks, announcements and rumors have been flying about technology leaders launching new mobile computing products:

• Microsoft jumped into the tablet business with its Surface tablets for Windows RT and Windows 8.
• Google announced its Nexus 7 tablet, built by Asus.
• Amazon is rumored to be announcing a replacement for the current Kindle Fire in late July or early August.
• That was followed a couple of days ago by rumors from reliable sources that Apple plans to announce  a 7" to 8" iPad in September or October.
• Yesterday, Bloomberg broke a story that Amazon is working on a smartphone to be built by Foxconn, and is trying to acquire patents in order to protect itself from the widespread litigation between smartphone and software vendors.

Assuming that all the rumors are true, it means that Amazon, Apple, Google and Microsoft will be competing directly against each other with tablets and (with the exception of Microsoft) smartphones. The margins on mobile devices are very low--only Apple has figured out how to make solid margins on its hardware. Samsung is making money because it manufactures so much of its own products, and it sells so many of them. No one other than Apple and Samsung makes money on smartphones. As for tablets, Apple makes excellent margins, but according to the latest hardware cost breakdowns, Google is just about breaking even on the Nexus 7, while Amazon is making a small gross margin on its Kindle Fire.

If Apple jumps into the 7" tablet market, will it compete with Amazon and Google on price, or will it add features that they don't have, such as 4G support, in order to command a higher price? How does Amazon expect to differentiate its smartphones from the pack of Android models? When Microsoft's Surface tablets make it to market, will they be competitive?

With everyone cloning everyone else and making incremental improvements, are we nearing the point where there are no clear lines of differentiation for anyone? If:

• Everyone has access to the same components, 
• Everyone's trying take advantage of whatever gaps have been left by their competitors until they get filled, and
• Android Jelly Bean's user experience is finally competitive with iOS and Windows RT,

Doesn't that mean that competition will inevitably come down to the number of apps available, customers' investments in libraries of apps (which affects switching costs) and price? That's a market that looks very much like personal computers.