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

What happens if Apple's announcements are no longer news?

This was the week of Apple's big iPhone 5 reveal, and it was like many of Apple's press announcements: A packed Yerba Buena Center; Apple executives describing product features using superlatives usually reserved for...well, for Apple product launches; and the usual product videos, including designer Jony Ive talking about how incredible his latest design is. There was also the endless parade of television news trucks lining the streets around Moscone Center, and the ever-increasing number of liveblogs covering the events AS! THEY! HAPPENED! What there wasn't was much actual news, and that could be a problem for future Apple product launches.

As the Columbia Journalism Review pointed out, virtually every detail of the iPhone 5 had been leaked before the event. The iPhone checked all the boxes on the "must have" feature list--bigger screen, faster processor, better camera and LTE--but there wasn't anything groundbreaking about its design or functionality. If you didn't know that the iPhone 5's bigger screen can accommodate an additional row of icons, it would be hard to tell the iPhone 5 apart from the 4 or 4S at a glance. (Update, September 23, 2012: The iPhone 5 is actually fairly easy to tell apart from the 4 and 4S, even when it's not turned on. Apple has done away with all the chrome trim on the phone, and the back is metal, not glass.)

In addition, the presentation was long. There was everything you'd expect in an iPhone rollout, followed by everything you'd expect in an iPod rollout. I suspect that Apple tied the two announcements together in order to get more attention for the new iPods, but if the company is actually planning to launch a smaller iPad next month, it probably wouldn't have hurt anything to announce the iPods at that event.

The CJR picked up on some of the liveblogs' sense of disappointment: They noted that Engadget's coverage reached parody levels, with 78 exclamation points in 122 minutes. The New York Times' coverage was deemed sober, although assigning four reporters to the story was overkill. The Wall Street Journal also avoided getting over-excited.

Some observers say that Apple is most likely going down the same path with the iPhone that it followed with the iMac, MacBook Pro and MacBook Air product lines: It's optimized the physical design of the iPhone, and future changes will be more incremental than revolutionary. That makes sense and may very well be true, but you rarely see the huge press turnout and coverage for Apple's Mac product announcements that you see for the iPhone and iPad.

It's true that customers don't seem to find the iPhone 5 disappointing--it sold out of its first week's allotment in 30 minutes, and that was with pre-ordering starting at 3:01 a.m. Eastern time in the U.S. However, what matters in this case is whether the press sees a lot of news value in Apple's future announcements. If all the major news leaks before the announcements, the story is going to become what Apple was still able to keep secret, not what it announces. Given that Apple has so many production partners, keeping new products under wraps will only get harder.

Apple's had an enormous advantage over its competitors because it could count on at least $100 million in free publicity for each launch from the world's biggest media outlets, processed through news organizations in order to give it an extra level of authority. If Apple's announcements lose their newsworthiness, they'll also lose their impact. Even if Apple's management figures out how to go back to the CIA-like levels of security the company's product launches had in the past, its "reality distortion field" may be gone for good.

The Apple-Samsung Verdict: Ultimately, it's better for everyone (except, perhaps, developers)

Yesterday's overwhelming court victory by Apple over Samsung in U.S. Federal Court is only one of many such cases being tried around the world, but it may be the most important. The jury's decisions may eventually be revised or overturned on appeal, but the results give a blueprint for how other such trials between Apple and Android licensees are likely to play out.

[Update, August 26, 2012: Groklaw reports that the speed of the jury's decision, given the 109 pages of jury instructions and 700 questions that the jury had to answer, and the speed with which the jury reconciled two obvious inconsistencies in its verdict, suggest that the jury raced through the judgment process without the necessary consideration. That conclusion is supported by a quote (albeit hearsay) in the blog The Verge: "The foreman told a court representative that the jurors had reached a decision without needing the (Judge's) instructions." CNET carried another quote, from a jury member, suggesting that the foreman led the jury to make a speedy but insufficiently considered set of judgments against Samsung. For these and other reasons, Groklaw believes that the jury's ruling won't stand.]

If you think back before Apple released the original iPhone, there was enormous diversity in mobile phone design. Motorola shook things up with its Razr; LG had its Chocolate phones, and Danger designed innovative early smartphones. And, of course, there was RIM with its keyboard-based BlackBerry models. Now, at least when they're turned off, there's very little difference between the smartphones from Apple, Samsung, LG, Motorola, Nokia and many other vendors. They're rectangular, fairly thin phones with touchscreens. Even RIM's new BlackBerry 10-based smartphones are going to be keyboard-free.

The Apple-Samsung ruling means that Android licensees are going to have to carefully scrub their smartphones of user interface features similar to those of Apple. Google is going to have to deliver a base version of Android that does the same thing. In addition, the physical designs of smartphones are going to have to become much more diverse. I see that as an opportunity, not a liability. Cars all have the same basic functional elements, but a Fiat 500 looks dramatically different inside and out than a Mercedes E-Class sedan.

There's a lot of room for creativity in smartphone design, and it's time for Apple's competitors to exercise that creativity. Phones could have displays that are designed to be used in landscape, rather than portrait, mode. They could fold up and have a top and bottom display. They could have displays on the front and back. There's a lot of creativity in Japanese phone designs, and that could become a model for the rest of the world.

The biggest problem facing smartphone designers is maintaining a consistent environment for app developers. Android developers are already confronted with a bewildering combination of screen sizes and versions of the operating system. There are over 1,000 different devices that developers could write for, but the reality is that they target a few popular devices and hope for the best. The problem will only get worse with more screen sizes and Android user interface customizations, and Google and its licensees are going to have to make it easier for developers to accommodate those variations.

It's time for someone to think outside the box and design a smartphone that makes the iPhone look outdated.

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!

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.

7" to 8" iPad coming in October?

Bloomberg is reporting that according to two unnamed sources, Apple plans to launch a 7 to 8 inch version of the iPad this year, possibly by October. One of the sources said that the new iPad wouldn't have a Retina Display. Analyst Shaw Wu of Sterne Agee & Leach Inc. said that such a new iPad, priced around $199, would be "competitors' worst nightmare." The low-cost iPad would be targeted at the Kindle Fire (or whatever 7" model Amazon has at that time) and the Google Nexus 7, and would be intended to help keep those (and similar) tablets from eroding Apple's market from below. It's widely expected that the new iPhone will be released in September, so if the new iPad is real, it's likely to be announced at the same time.

Microsoft just made all Windows Phone 7.X smartphones obsolete

Earlier today, Microsoft gave a technical preview of Windows Phone 8, the new version of its phone operating system. There were two big pieces of news, one good for developers and future Windows Phone buyers, the other very bad for current Windows Phone owners.

The good news is that Windows Phone 8 will be based on the same kernel, and many of the same drivers, as Windows 8. That means that it will be much easier for developers to move apps from Windows Phone 8 to Windows 8 and vice versa. I suspect that it won't be quite as smooth as Apple's iOS environment, where the iPhone and iPad run the same operating system, but it'll be much better than Windows' current situation, where there's virtually no commonality between Windows 7 and Windows Phone 7.X.

The bad (really bad) news is that owners of Windows Phone 7.X devices will not be able to upgrade to Windows Phone 8. All those folks that bought Nokia Lumia 900s, 800s, 600s and any other Windows Phone 7.X device are out of luck--no Windows Phone 8 for you. Microsoft will offer them a consolation prize, Windows Phone 7.8, with some of Windows Phone 8's user interface improvements, but with no way to run Windows Phone 8 apps.

Apple's had this "make your new operating system compatible with your old devices" thing down for a few years now, and I marvel at why neither Google nor now Microsoft can do it. Microsoft will undoubtedly argue that smartphones need new hardware to take advantage of Windows Phone 8, but that doesn't explain why the company didn't anticipate the problem when drawing up the specifications for Windows Phone 7.X devices. Did the Windows and Windows Phone teams not start talking to each other until a few weeks ago?

When Nokia launched the Lumia 900, it ran commercials in the U.S. with a spokesperson telling people that the "beta test is over"--they could buy the first "production" smartphone, the Lumia 900. Unfortunately, Nokia and Microsoft customers who bought that line now know that they were merely participating in yet another beta test.

"This American Life" and the Daisey affair

You may have heard that the public radio program "This American Life" retracted an entire episode that it aired last January based on portions of Mike Daisey's one-man show "The Agony and Ecstasy of Steve Jobs". The radio program focused on a visit by Daisey to Chinese plants that manufacture Apple's iPhone and iPad, and the allegedly bad work conditions he found. I won't rehash the entire story, but Daisey lied about a number of key events that he either witnessed or participated in during his trip to China.

After the "This American Life" episode aired, Rob Schmitz, the China correspondent for the public radio show "Marketplace", became suspicious about the story. He tracked down and interviewed Daisey's interpreter, who said that many of the things that Daisey told "This American Life" and said in his one-man show were partial or complete fabrications. For his part, Daisey lied to the host and a producer at "This American Life" about the name of the translator, and said that he could no longer reach her mobile phone number.

Here's an incomplete list of Daisey's alleged or acknowledged fabrications:

• Daisey said that the guards at the entrance to the Foxconn plant were armed; both Schmitz and Daisey's interpreter said that only the military and police are allowed to carry guns in China, not security guards. Daisey's interpreter said that the guards were unarmed.
• Daisey claimed that he spoke with a Foxconn worker who admitted that she was underage--13 years old--and that other workers he spoke to at the same time were 12 years old. The interpreter said that some of the workers who Daisey interviewed might have looked young, but that none of them were underage or admitted that they were underage. For his part, Daisey sticks by his story, but in his defense, he said that one or more of the workers spoke fluent English to him, a statement that his translator denies and that Rob Schmitz found to be extremely unlikely.
• Daisey claimed that he spoke with a group of workers who had been exposed to n-hexane, and that every person in the group was shaking from nerve damage. His interpreter said that the meeting never happened, and Daisey admitted under questioning that he fabricated the entire incident.
• Daisey said that he spoke with a man who was so injured by repetitive work building iPads that his hand had become claw-like. His interpreter said that Daisey met the man, but the man had never worked building iPads, and the entire episode where Daisey showed him a working iPad for the first time never happened.
• Daisey said that he visited Foxconn worker dormitories and saw bunk beds stacked nearly to the ceiling and security cameras inside dormitory rooms. His interpreter says that Daisey never visited dormitory rooms. Daisey claims that he did visit the dorms without his interpreter, but that the security cameras were in the halls, not in the dormitory rooms. Given that Daisey doesn't speak Chinese and, as discussed above, it's extremely unlikely that the workers Daisey encountered spoke English, how could Daisey have visited the dormitories without his interpreter?
• Daisey claimed that he was told by a group of workers protesting working conditions at Foxconn that they met at Starbucks to discuss their strategy; Schmitz said that was as likely as a group of United Auto Workers organizers in Detroit meeting at a Chinese tea room.
• Daisey also said that he was shown a government "blacklist" of people who would not be hired by Shenzhen manufacturers because they had protested working conditions; his interpreter said that the document didn't have any government stamps or seals, and was most likely a fake.

No one denies the work conditions at Foxconn and other manufacturers--they've been widely reported and have been documented by Apple's own audits. However, the most interesting parts of Daisey's allegations--that he actually spoke to underage workers, to workers injured by exposure to n-hexane, and with a man so injured by repetitive work building iPads that his hand had become claw-like--were all acknowledged or likely fabrications.

Ira Glass, the host of "This American Life", has repeately said that when Daisey told him and his producer that his interpreter could not be found, he should have killed the story. However, so much of the story checked out that they believed Daisey. When the story aired, Glass went out of his way to say that the story had been extensively fact-checked by "This American Life" before it was aired, which raises the question: Why did Glass stand behind the story when the interpreter, the only independent witness to everything that Daisey claimed happened, had "disappeared"?

Rob Schmitz of "Marketplace" said that it was very easy to find Daisey's interpreter--he simply entered the name that Daisey used for the interpreter during the radio show (Cathy Lee), and the words "interpreter" and "Shenzhen", into Google, and she came up as the first link. Couldn't the "This American Life" team have done the same thing? Finally, the authenticity of some of Daisey's monologues has been questioned in the past, including by the New York Times. Shouldn't that have raised "red flags" with the "This American Life" team?

Even though the theater where he's performing his one-man show says that the show will continue, Mike Daisey's credibility has been destroyed. The question now is, given how many errors got into this "This American Life" story, how many other bogus stories have gotten on the air?

Is Apple moving to an incremental product release strategy?

Yesterday's announcement of the iPhone 4S disappointed a lot of people, not just because of Tim Cook's low-key presentation. Many observers were expecting an all-new iPhone 5 with a larger display and a case design similar to the iPad 2. Instead, they got an iPhone 4 with a faster processor and better camera. As a practical matter, the functional difference between what was generally expected in the "iPhone 5" and what Apple actually delivered in the iPhone 4S isn't great. Apple is also going to sell a ton of iPhone 4S phones, regardless of what the pundits think.

The question is whether the iPhone 4S is an interim product designed to buy time in order to get a true 4G LTE model ready, or whether it represents an overall slowdown in product revisions by Apple. On the desktop, the iMac design hasn't changed much in years; the big changes have been internal, with minor cosmetic external revisions. The Mac Pro's external design has barely changed since it was introduced in 2006. There's an excellent chance that the next iPad will combine the iPad 2's physical design with a faster processor, higher-resolution display, and perhaps, a better camera.

Does it mean that Apple will slow down its product development cycles? Will Apple start releasing entirely new iPhones and iPads every 24 to 36 months? Longer product lives would certainly give Apple an opportunity to amortize tooling costs over far more units. It would also give Apple more time to develop completely new designs. After all, Apple will still be selling the iPhone 3GS when it ships the 4S, more than two years after it was first introduced. The 3GS is still a viable entry-level smartphone.

So, don't be surprised if the next iPad looks very much like the iPad 2, and if future iPad and iPhone exterior designs are changed less often. Apple may see no reason to issue an entirely new model every year, until competitors catch up.

Consumer electronics' U.S. renaissance

There was a time, before World War II, when the U.S. was the undisputed world leader in consumer electronics. U.S. manufacturers, led by RCA, dominated world markets. However, U.S. manufacturers' operations in Japan and most of Europe were nationalized at the start of WWII. More importantly, RCA discounted the value of transistors in consumer electronic design after the war. Japanese manufacturers licensed transistor technology from Bell Labs and used it to build smaller, less expensive and more reliable products. That spelled the beginning of the end for the U.S. consumer electronics business.

At one time, companies like RCA, Westinghouse, Zenith, Philco, Magnavox, Sylvania and Motorola were household names. Now, only Motorola is still in consumer electronics, with its mobile phones. RCA, Westinghouse and Sylvania are nothing more than trademarks licensed to other companies, Zenith was acquired by South Korea's LG Electronics, and Philco & Magnavox were acquired by Philips. Until the late 1990s, the U.S. consumer electronics business was effectively dead. Today, however, there's a resurgence in U.S. consumer electronics.

The leader of this renaissance is Apple, which has dominated the personal media player market for almost a decade with its iPods. Foreign manufacturers have tried to wrestle market share away from Apple's iPods, without success. As of last quarter, Apple became the world's largest seller of smartphones, and it's been the leader in tablets since the launch of the iPad. Apple also dominates music sales through iTunes. Apple TV is Apple's only consumer electronics product that's struggling in the marketplace (although no one in the over-the-top set-top box market has yet found a winning formula.)

Apple doesn't manufacture any of its hardware products; it designs the products and farms out manufacture to Chinese and Taiwanese manufacturers. Vizio has applied the same formula to HDTVs, and either leads the market for LCD HDTVs or is close to the top every quarter. Vizio's aggressive pricing strategy has helped to force Sony out of the TV manufacturing business, and is pushing other Japanese and South Korean manufacturers to rethink their HDTV market strategies.

Sonos came from nowhere to become the leader in wireless networked home audio systems. Sonos applies an Apple-like design philosophy to its products, and has steadily expanded its product line both up and down to cover a variety of price points. Roku licensed a streaming media player originally developed in-house at Netflix and has become the leader in the market for those devices, at very aggressive price points: When Logitech launched its Google TV-based Revue set-top box at $299, the least expensive Roku player was $59.99. Now, the price of the Revue has been cut to $99 (the same price as Roku's top-of-the-line model) in order to clear out an apparently massive inventory of the devices.

It's true that U.S. companies are nowhere near recapturing the share of the consumer electronics market that they had before the 1970s, but if anyone had predicted any resurgence of U.S. consumer electronics companies even ten years ago, they'd have been laughed out of the room. The ability to anticipate (and drive) consumer desires, together with leveraging Chinese and Taiwanese manufacturing resources, is allowing U.S. companies to compete on equal footing with companies that could have crushed them only a few years ago.

The (second) rise and fall of walled gardens

Those of us who have been around for long enough remember the era of proprietary online services. In the U.S., the leaders were America Online, CompuServe, Prodigy and GEnie. Canada and several European countries had teletext services. All of these services were what came to be known as "walled gardens": Each service had its own collection of content, its own email service, and its own client software. Subscribers could use the content and services from one vendor, but couldn't get to the content or services from other vendors without subscriptions to their services. You could easily send email and messages to subscribers of the same service, but it was very difficult to send email from one service to another. Content providers had to use the publishing tools provided by each online services, and needed contracts with each service to reach their subscribers.

The Internet, and in particular the web, changed all that. Anyone with a web server on the public Internet could reach anyone with a web browser. Thanks to HTML and HTTP, browsers, servers and authoring tools were standardized, so that proprietary software and tools weren't needed. It only took a few years for the open Internet to displace the proprietary online services. Of the four U.S. leaders, only America Online survives, with web-based services and content. CompuServe is now a brand name of America Online, GEnie closed down at the end of 1999, and Prodigy closed down in 2001.

We're now living in the second era of walled gardens, thanks to smartphones. Apple's iOS, Google's Android, RIM's BlackBerry, Microsoft's Windows Phone 7 and HP's WebOS all support web content, but they have their own proprietary standards for apps, their own app stores, and their own rules for which apps will or won't be allowed to run on their devices. Apps written for one platform won't work on a different platform without recompiling and significant recoding.

As with the proprietary online services, the web (especially the combination of HTML5, CSS and JavaScript) may lead us out of the walled garden era of mobile operating systems. PBS's MediaShift recently published an excellent video interview with Tom Peeters, the multimedia manager for Mediafin, the Belgian-based publisher of newspapers De Tijd and L'Echo.

Mediafin has been working on an HTML5 version of its newspapers for the iPad for some time, even though it already has native iOS apps in the App Store. The Financial Times' decision to release an excellent HTML5-based web app for iOS, and to commit to eventually replace its existing iOS app with a web app, is bringing a lot of other publishers with similar plans (especially European publishers) out of the woodwork. The FT's actions are also serving as an existence proof--publishers can deliver usable web apps with a high degree of interactivity without going through Apple. FT's decision also gives momentum to HTML5 publishing toolkits from companies such as OnSwipe and pugpig.

One point that you'll hear in the interview is that there's a definite marketing advantage to being in the App Store, but if you already have a way of reaching customers directly, as Mediafin does with its newspapers, you can gain much more control over the development process and save the 30% commission (closer to 40% for Mediafin, due to VAT) that would go to Apple.

It may be wishful thinking, but ten years from now, I expect that we'll look back at today's mobile walled gardens and wonder how they ever existed.

Apple's control advantage, and what Google needs to do with Android

Earlier this week, Apple announced the iPad 2, a solid, if incremental, next step for the iPad design. When the iPad 2 goes on sale on March 11th, nine days after it was announced, it will be launched with two important media creation apps, iMovie and GarageBand, and a new version of iOS, 4.3. For its part, iOS 4.3 will be deployed at no cost onto all iPads and most iPhones and iPod touches starting the same day. (Update, March 10, 2011: Apple made iOS 4.3 available for download starting yesterday.)

Apple controls its own hardware, software and distribution infrastructure. That level of control causes a lot of consternation on the part of consumers and developers who'd like the freedom to run what they want, when they want, on Apple's devices. However, Apple's control gives it a significant ongoing advantage over Android.

The existing and forthcoming collection of Android tablets demonstrates the disadvantages of Google's approach. Last fall, Samsung introduced its Galaxy Tab tablet, which launched with Android 2.2. It was officially endorsed by Google, meaning that it got access to the Android Market and could run Google's own Android apps, although Google's own executives cautioned that Android 2.2 was designed for smartphones, not tablets. Galaxy Tab purchasers reported that the product functioned more like a big smartphone than a tablet, and as reported by a number of sources, sales have been disappointing.

Google's hardware and mobile carrier partners are under no obligation to upgrade smartphones and tablets in the field to the most recent version of Android. They're not even obligated to release new devices with the latest version of Android. Google itself released Google TV with an earlier version of Android. Google keeps track of the versions of Android in use by monitoring Android Market app downloads, and according to its own statistics, more than 10% of Android devices actively in use are still using Android 1.5 or 1.6. (Google's statistics don't track the "unauthorized" Android devices that don't have access to the Android Market.)

Update, March 6, 2011: Here's an excellent example of Google's dilemma: According to Engadget, Olivetti in Italy just announced its OliPad Android tablet. It has all the hardware features it needs to support Android 3.0: Tegra 2 processor, 10" 1024 x 600 display, WiFi and 3G, yet it's being released with Android 2.2 rather than Android 3 as its operating system.

Many developers have complained about the variety of Android versions in use, but Google's management says that it's a "non-issue". Nevertheless, buyers of Android devices have no guarantee that their smartphone or tablet will ever be upgraded to a newer version of Android. Apple developers can largely target the newest version of iOS, with assurance that it will quickly spread to most iOS devices, but Android developers have no such assurances.

That brings us to the current wave of tablets running on Android 3.0, also known as Honeycomb. First out was Motorola's Xoom, which launched with less than 20 tablet-aware apps, a price very near Apple's top-of-the-line iPad, and future compatibility with LTE that will require the tablets to be sent back to Motorola for free upgrades. Early reports indicate that the Xoom is selling much more slowly than Motorola or Verizon, its sole carrier partner in the U.S., expected. Next up will most likely be LG's G-Slate, with similar specifications and a carrier partnership with T-Mobile, followed by Samsung's Galaxy Tab 10.1.

Google could have taken control of the process and required hardware vendors and mobile operators to agree to upgrade their devices to the latest version of Android within a reasonable period of time after they're released, but it chose not to do so. It could also have compelled vendors to hold back their tablets until a critical mass of tablet-aware apps was available, but again, it chose not to do so. If you buy a Motorola Xoom today or a G-Slate or Galaxy Tab 10.1 tomorrow, do you have any assurance that it will run Android 3.1, or 3.5, or 4.0, or that the manufacturer or carrier will allow you to upgrade? The answer is no.

Google could have orchestrated a huge day-long event in April or May to introduce the Xoom, G-Slate and Galaxy Tab 10.1 together, each with its carriers, along with perhaps 1,000 tablet-aware apps. Each vendor could separately announce their products, along with ship dates, prices and carrier partnerships, at the event. A separate Developer Showcase at the event could have shown off the best of the new apps. But, none of that is going to happen. All three tablets, along with their apps, will trickle out over the next few months.

Google needs to start exercising more control over its hardware partners, carrier partners, and the Android Market (see this week's malware breakout). Android is now important enough to its partners that Google has the power to coordinate product launches and updates, if it chooses to do so. Google can still have open source and an open development process, but it needs to act a bit more like Microsoft used to when it coordinated hardware partner launches with new versions of Windows.

Is there a hidden reason for Apple's in-app payment policy changes?

Apple's announcements about its in-app purchasing policies have ignited a firestorm of criticism from booksellers, publishers and app developers. First, a little more than two weeks ago, Apple announced that apps for eBooks and similar products had to have in-app purchasing. They could continue to link to an external website and price products on those sites however they wished, but they had to enable and pay Apple 30% of in-app transactions. Also, they couldn't disable all purchasing capabilities in the app in order to avoid the 30% fee. These rules were to go into effect on March 31st.

Yesterday, Apple announced its subscription processing system, and announced a new, more restrictive set of rules. There cannot be any links within an app for purchasing subscription content from outside the app--only in-app purchases are allowed, for which Apple gets 30% of each transaction. Further, the price charged inside the app must be as low or lower than the price charged for the same subscriptions sold anywhere else (for example, a publisher's own website.) The subscription rules go into effect June 30th.

There's considerable confusion as to whether the new subscription rules supersede Apple's earlier statements about eBooks, or if there will be separate policies for content sold one time, such as eBooks, and content sold on a subscription basis. If the former is true, Apple has closed the loopholes and made it impossible to sell content on an iOS device without paying Apple 30%.

Apple had to know that these policies would result in charges of price-fixing and anti-competitive behavior. The company is very profitable and is sitting on one of the biggest cash reserves in U.S. business, so it doesn't need the money from transactions. So, why is it pursuing policies that are guaranteed to cause friction?

One possibility is that Apple is trying to get Amazon to stop its "most favored nation" pricing policy, which requires that any publisher or author who sells through Amazon insure that Amazon's prices are as low or lower than any other reseller. Apple's argument could be that if its pricing policy is anti-competitive, so is Amazon's, and conversely, if Amazon's policy is legal, so is Apple's.

Another possibility is that Apple is planning to make some pricing changes that will lower the profit margins on its iPads and iPhones. There have been a flurry of rumors recently about an "iPhone nano" that would sell at a significantly lower price than the existing iPhone 4. This new, less-expensive iPhone will make less money per unit and could cannibalize some sales of the iPhone 4 and forthcoming next-generation iPhone. In addition, Apple may be planning to bring out the iPad 2 at a lower price, with commensurately lower margins. By increasing its transaction revenues, Apple can subsidize these lower prices and maintain its overall margins.

It makes sense for Apple to announce its new in-app sale pricing policy before the next wave of iPads and iPhones is launched, and to give vendors (and the market) more than four months of notice. If Apple doesn't need to launch its new products with lower margins (which is looking increasingly likely on the tablet side), it can rescind or modify the in-app pricing policies. Or, if antitrust litigation pressure from the U.S. or E.U. gets too great, Apple can change its policies before announcing prices for its new products.

In any case, I wouldn't be surprised if Apple modifies its new policies before they go into effect, but neither would I assume that Apple will change its mind.

eBooks on iOS: Apple slits its own throat, shoots self in foot

Yesterday, Sony reported that an eBook reader app that it submitted to Apple for inclusion in the iOS App Store was rejected because it didn't sell eBooks through the app. There was a great deal of discussion and confusion about the situation--some people thought that Sony had simply misinterpreted Apple's existing rules, while others thought that Apple had changed the rules.

Ars Technica is now reporting that Apple has indeed changed the rules, in a way that makes it effectively impossible for anyone except Apple to make any money selling eBooks for the iPhone and iPad. Update: The Wall Street Journal has reported that Apple will enforce the new rules described below effective March 31st. No new eBook or eMagazine apps will be accepted without an in-app purchasing capability, and presumably, any update of an existing app that doesn't include this feature will be rejected.

Here are the new rules as I understand them:

• If you sell content from outside an iOS app to be used in that app, you must enable purchases from within the app. That means that Apple gets 30% of any sale.
• If you sell content from your website that you then distribute to an iOS device to be used within an app, that app must also allow in-app purchases.

Let's take Amazon's Kindle Store and app as examples. Today, you can select a title to purchase from within the Kindle app, but the app opens a Safari browser window and takes you to the Amazon website to complete the purchase. That approach would only be allowed if Amazon also allows users to purchase the title directly within the Kindle app. However, Apple would take 30% of the sale price for the in-app purchase. You can also go to the Amazon website on your PC, select a title from the Kindle Store and tell Amazon to send it directly to your iPad or iPhone. Under Apple's new rules, that would be prohibited unless the Kindle iOS app allows in-app purchases.

There are still ways around this; eBook vendors could price titles 30% higher in their iOS apps, and offer a link to their websites that would price them normally. However, many consumers could end up spending 30% more than they should, and every eBook vendor will have to rewrite their iOS apps.

This is an anti-consumer and anti-competitive move by Apple, to say the least. It's equivalent to Microsoft saying that every Windows eCommerce application that downloads content or software has to be processed through Microsoft's own order processing system, and that Microsoft will get 30% of every transaction.

In addition, Apple is killing the viability of its iPhone and iPad as eBook readers at exactly the same time that Android is outselling iOS smartphones and Android 3.0-based tablets are coming to market. If I'm interpreting Apple's move properly, it's a greedy, stupid decision that will once again open the company to antitrust investigation. It won't cause any more eBooks to be sold through Apple's failed iBookstore; instead, it will merely clear the path for Android 3.0 and additional Kindle sales.

If this is an example of Tim Cook's decision-making capabilities, Apple is in much worse shape post-Jobs than I (or many people) thought.

The first Feldman File videoblog is live!

I've posted the first episode of the Feldman File videoblog to YouTube! Let's put it this way: It can only get better from here. I should have taken that scholarship to the Columbia School of Broadcasting when it was offered to me.

This week's episode covers the following news:

• Barnes & Noble's NOOKcolor eBook reader (and Android tablet wannabe)
• Sprint, T-Mobile and Verizon have all set prices and availability dates for their versions of Samsung's Galaxy Tab Android tablet
• News from Adobe's MAX Developers' Conference
• Sencha Animator, a timeline tool for animation using HTML and CSS3, goes into beta
• Roku licenses the hardware and software behind its Internet set-top boxes to consumer electronics companies
• IDC reports that Apple has become the world's fourth-largest mobile phone manufacturer, passing Research in Motion

Microsoft introduces Windows Phone 7 and partners' smartphones

Earlier today, Microsoft formally introduced Windows Phone 7 in New York, along with ten new compatible smartphones (nine at launch, the tenth in early 2011) to be offered by sixty carriers in more than thirty countries. Each carrier will sell a different set of phones; AT&T, for example, will offer three models, one each from HTC, Samsung and LG, all priced at $199, while T-Mobile USA will offer one model each from Dell and HTC. (Engadget has a complete list of carriers and the phones they'll offer, and Gizmodo has pictures of all the phones.)

The early reviews for Windows Phone 7 have been very positive. The operating system is a clean break from Windows Mobile and has more in common with the Zune UI than it does with Windows. The phones vary considerably in price and features, but they all seem to perform well, even though Windows Phone 7 uses a lot of animation in its user interface.

Update: Well, some of the reviews aren't quite so good after all: PC Magazine reports that the LG Quantum's slide-out keyboard has a "bizarre" keyboard layout and a balky sliding mechanism. Of more concern is that Windows Phone 7 doesn't want to reconfigure its display properly when the phone is moved to landscape format. The LG Quantum's keyboard forces the phone to be used in landscape format, so unless Microsoft fixes the problem soon, the Quantum and similar phones will be virtually unusable.

As you might expect, there's already a fair amount of "too little, too late" sentiment about Windows Phone 7. Those feelings may ultimately be justified, but Microsoft has done an excellent job of bringing top-notch smartphone manufacturers on board. The big question remains third-party developers. Apple and Google both have tremendous support for their smartphone operating systems, and RIM's BlackBerry, while not as well accepted by the developer community, has an entrenched customer base. The third-party app announcements and demonstrations at the launch event today were nice but far from overwhelming.

Windows Phone 7 smartphones will ship so late this year that they probably won't make much market headway until next year. Developers that are already struggling to keep up with updates on the iOS and Android platform are likely to take a "wait and see" attitude on developing Windows Phone 7 apps; developers of the most popular iOS and Android games may be offered financial incentives by Microsoft to port their applications. There's no rush for them to staff up in advance if they can get Microsoft to pay for the effort.

In the long run, Windows Phone 7 is likely to have more impact on HP and Nokia than it does on Apple or Google. Most developers, given the choice between supporting Windows Phone 7 that runs on smartphones from four manufacturers, or supporting WebOS that runs only on HP's smartphones, are likely to prefer Microsoft's platform. And, at least in the U.S., Windows Phone 7 will be one more nail in Nokia's smartphone coffin.

There were two puzzling aspects of today's announcements: The first was Microsoft's statement that based on feedback from developers and early users, it would release a version of Windows Phone 7 that supports cut and paste in early 2011. You would think that Microsoft would have learned from Apple's experiences with the iPhone and would have incorporate cut and paste from day one.

The second was that Verizon, the largest mobile operator in the U.S., was completely absent from today's announcement. You may recall that Verizon was Microsoft's exclusive carrier partner for the Kin, its feature phone that was a complete marketing and business disaster for both companies. Kin's failure may explain why Verizon won't be selling Windows Phone 7 smartphones any time soon. However, Verizon may also be gearing up to carry the iPhone, as has been rumored by the Wall Street Journal and other sources, in which case it really doesn't need Windows Phone 7.

Apple's announcements: iOS News, All-New iPods, New iTunes and Updated Apple TV

Apple made a series of new product announcements in San Francisco earlier today; I'll summarize the ones that are most relevant to regular readers of this blog:

iOS Announcements

Apple's iOS 4.1, which has been in beta test since the release of the iPhone 4, will ship to customers next week. The most important media-related feature is support for High Dynamic Range (HDR) photos, a capability that has been provided by some third-party apps. iOS devices with cameras will be able to take three pictures in quick succession, one underexposed, one properly exposed and one overexposed, and then digitally merge the three pictures together to bring out additional highlight and shadow details. Both the "properly exposed" and HDR images will be saved.

iOS 4.2, to be released to customers in November, will be the first version of iOS 4 that will run on iPads. It will bring all the functionality of iOS 4.1 to the iPad, and will also introduce two new capabilities for iOS devices:

• Wireless printing: Printers can be selected and documents can be wirelessly printed from iOS devices.
• AirPlay (the next generation of AirTunes) will enable audio, video and photos to be streamed between devices over WiFi. For example, content can be streamed from a Mac to an iPad for viewing.

A new iPod touch

The entire iPod line has been refreshed, except for the "classic" hard disk-based iPods, which remain in the product line. The most important announcement was the next-generation iPod touch, which keeps the same iPhone 3-based design but is thinner. It has a number of major improvements:

• A Retina Display with the same resoultion as the iPhone 4
• The same Apple A4 chip as the iPhone 4
• A three-axis accelerometer
• A front-facing camera and support for FaceTime over WiFi
• A rear-facing camera with HD video recording

You're probably figured out that the new iPod touch is essentially an iPhone 4 without a phone, in a package that looks like a slimmer iPhone 3GS. The iPod touch will ship next week (as will all the new iPods.) Here are the prices (U.S.):

• 8GB: $229
• 32GB: $299
• 64GB: $399

iTunes 10 and Ping

Apple also announced the next version of iTunes, Version 10, available for immediate download. The most important new feature in iTunes is called Ping. It's a social network built into iTunes that works on PCs, Macs, iPhones and iPod touches (and presumably will work on the iPad once iOS 4.2 ships.) Ping allows performers and individual users to share song lists, videos and notes.

Apple TV, Take 2

As widely expected, Apple introduced its next-generation Apple, one-quarter the size of the existing Apple TV. The new Apple TV, which will ship in four weeks at a price of $99 (U.S.) streams content for viewing on demand, rather than downloading it to an internal hard drive. It has minimal connections: Power, HDMI out (720P, not 1080I or 1080P,) a Toslink optical connector for 5.1 audio out and a wired Ethernet connection. (It also has 802.11N WiFi wireless Ethernet.) The component and composite video outputs on the existing Apple TV have been dropped.

Apple's business model for the Apple TV is content rental only, not purchases. HD movies that are released day-and-date with their DVD versions will be priced at $4.99 per play, and prices for older movies will be lower. HD television shows will be available for rental at $0.99 per episode. In addition to video, music and images can be streamed to Apple TV from iTunes 10-equipped computers, as well as iPhones, iPod touches, and iPads, using AirPlay (and iOS 4.2.) Apple TV owners will also be able to stream content from Netflix, YouTube, Flickr and Apple's mobileMe. The user interface has been enhanced to include reviews from Rotten Tomatoes and related content.

There were a few serious disappointments:

• Apple has only been able to come to agreements with Disney/ABC and Fox to make their movies and television shows available for rental. Warner Bros., CBS, Viacom (Paramount, MTV, Comedy Central, etc.), Sony and NBC Universal have all refused to participate.
• Contrary to some rumors, it's not an iOS device and it's not open to developers. iOS apps can't be run on the new Apple TV, and it's unclear whether or not it can be hacked to run Boxee or other third-party media management apps.
• The lack of a component video interface means that owners of older HDTVs and audio receivers won't be able to use the new Apple TV.

The new Apple TV is a refinement of the original vision of the Apple TV, not an entirely new concept. It doesn't bring the world of iOS apps to the big screen, and it's not a platform for developers. Apple deliberately opted for usability over expandability, so there's going to be room for products like Boxee, Roku and Google TV for more sophisticated customers.

Is Google's Chrome Web Store a precursor to Chrome tablets?

The rumors are flying that Google plans to release a Chrome OS-based tablet built by HTC in partnership with Verizon, and put it on sale on Black Friday (the day after Thanksgiving and the heaviest shopping day in the U.S.) Google is also preparing the Chrome Web Store--no rumor, since it was announced at the I/O Conference earlier this year. Details on the Store are now up on Google's web site; here are a few highlights:

• Developers will be able to create and offer installable web apps based on HTML5 and Ajax, themes that change the look of the Chrome browser/OS, and Chrome browser extensions that change or add to the functionality of Chrome itself.
• Apps can be given away or sold. The minimum price for sold apps is $1.99 (vs $0.99 in the iPhone app store), and Google will charge a processing fee of 5% of the sale price plus $0.30 per transaction (vs. Apple's 30% of the sale price.) For a $1.99 sale price, the developer would retain $1.59 from Google and $1.39 from Apple.
• The Chrome Web Store also supports one-time payments as well as monthly or yearly subscriptions, free trial options, and what they call "custom payment solutions".

Google is clearly working to have a good population of apps, themes and extensions ready for this Fall, which is when the first Chrome OS tablet is rumored to be hitting the market. This may also explain in part why Google has refused to allow any tablet vendors to license Google's Android applications or access the Android Marketplace. If Google is positioning Android for phones and Chrome OS for tablets, it would be in its interest to discourage usage of Android for tablets. On the other hand, we hear of new Android tablets under development almost every day, and that Gingerbread, the next major release of Android, will have explicit support of tablets. So who knows, and more to the point, what are consumers to think if tablets running on two completely different Google operating systems come out at about the same time?