Twitter Results: Duh!! Challenges Abound

Twitter announced its first results as a public company yesterday, and Wall Street did not respond well. I never get caught up in quarter-to-quarter financial results on their own merits, instead preferring to look at the bigger picture.  In all the conversation about Twitter’s financial results, I think their bigger issues are largely being overlooked. This is coming from someone who was early to note Twitter’s potential emergence as an important platform. <pat self on back; rarely do we analysts get something so right.> In early 2008, I wrote a research note entitled “Twitter: The Most Important Platform You’ve Never Heard Of” [full access to Gartner clients only; ping me if you want my original note on the subject].

I still find Twitter a hugely useful, interesting and fun platform.  However, as a business, they have some significant challenges to both growth and monetization.  So, what are those challenges?

  • The out-of-box experience stinks. The learning curve for Twitter is steep, measured in weeks or even months. Only the most committed individuals are willing to go through that steep curve. Finding relevant client software, building follower lists, and identifying interesting people all take way too much time. The industry is littered with good products that had bad out-of-box experiences, names you’ll never remember because they never achieved the market prominence that Twitter has managed to achieve. Compare this with Facebook, where you have a positive experience from almost the moment you sign up, with news and pictures from your family, friends, colleagues and classmates. Twitter’s steps to address this issue have been woefully inadequate. This is not just a home page redesign.
  • You don’t need to be on Twitter. It would be one thing regarding the learning curve if you absolutely had to be on Twitter but except in narrow circumstances, the ordinary person can find what’s on Twitter elsewhere. News outlets routinely mine Twitter for insights and information and present that information to users in a much more consumable fashion. Not everyone needs to drink from the firehose. Even I, an avid Twitter user, probably get more than half of the information contained in my Twitter feed from other sources (Facebook, news outlets, etc .). If you need the absolute real-time feedback that Twitter provides, it’s a must have. If you don’t, it’s not necessary. For example, I urged my parents to be on Facebook (so they could see pictures of their grandkids). My mother, who’s really technologically savvy from way back, has always asked me “should I be on Twitter.” I’ve told her no each and every time she asks.
  • You can take breaks from Twitter. Facebook is an easy browse, usually containing something that’s interesting to me. That’s often how I begin my day, even before getting out of bed. (And I’m not as strange as you’d think, at least with regards to this behavior.) By contrast, Twitter requires an investment of energy and engagement. You don’t get very much from a two minute perusal of your Twitter feed. It’s just too random, full of noise and a small snapshot of a much bigger picture.
  • You don’t get great engagement on Twitter. 140 characters is easy…except if you want to have a conversation. I’ve had some great conversations on my Facebook wall, with dozens of thoughtful responses. The engagements on Twitter are necessarily much shorter, more random, shorter in real-time duration, and generally lack context and history. I’d argue you get interaction on Twitter, not engagement.
  • Twitter’s a lousy platform for advertising. All this and more makes Twitter a lousy platform for advertisers.
    • As with other social platforms, advertising is an intrusion into a conversation. It’s not a natural adjunct, even value-add, as it is with, say, Google search.
    • Twitter doesn’t know that much about me. Facebook has a rich picture of my likes and behaviors. And with Facebook Connect, its information base extends far beyond Facebook’s own walls. Twitter knows what I tweet and retweet, and little more. It makes it almost impossible for Twitter to deliver high value targeted ads.
    • I find it easier to ignore Twitter’s in-stream sponsored tweets than I do Facebook advertising. Facebook ads, precisely because they’re not just in my news feed, stand out from the feed. Now I’m not holding up Facebook advertising as a model of how it’s done. Quite the contrary. I find my Facebook advertising experience almost laughable. But Twitter’s is even worse.
  • Maybe 250 million Twitter users are enough. Metcalfe’s Law, often applied to social networks, posits that the value of a network expands based on the square of its number of users. I’m not going to argue whether or not it’s relevant to social networks, or whether the square is the right multiplier. But for most social networks (e.g., Facebook, LinkedIn), the more people in the network, the largely better it is for that network’s users. I don’t believe that’s the case with Twitter. After a while, more users just equates to more noise. Tweetchats are great when there are small tens of users, just random noise when you get to 50 or more. How many retweets do I need of the same news story or picture of cats? I follow about 6,000 people on Twitter and even ruthlessly putting them into lists and managing my Tweetdeck columns, I know my stream is ultimately a random mess.

I love Twitter and have averaged almost 10 tweets a day for six years. Yeah, I know that’s ridiculous. But therein lies Twitter’s problem. Maybe this is what it is and for all of us, except investors, that’s enough. But will that sustain a business? Maybe, maybe not.

Why Did Google Buy Nest? More Importantly, Why Didn’t Apple?

Google announced yesterday that it’s buying Nest for $3.2 billion. Almost exactly a year ago, I suggested that home automation perfectly fit the Apple mold, especially given its connection with Nest’s founder and CEO Tony Fadell. So, why did Google end up with Nest and not Apple? Clearly Apple was involved in negotiations yet Fadell ended up going with Google. What can we surmise from that?

At the risk of a gross generalization, I think what we see here is several issues with regards to Apple:

  • Despite conversations about the Apple ecosystem, at its core, Apple is a devices company that builds elegant software to run on those devices. Less elegant, though, are the services that connect the devices. iTunes is stale. (There, I said it.) Its cloud offerings are not really competitive and it struggles with broad-scale integrative software.
  • Apple doesn’t partner well. The music industry still resents Apple’s control over digital music distribution, Apple has been found guilty of collusion in the book selling market, it has met considerable resistance in trying to do to TV what it did with music, and it exerts iron-clad control over its app distribution market.

On the flip side, Google, for all its flaws (and they are many), has a different vision.

  • It sells devices only to force change in markets it wants to see changed (phones, tablets, Cable TV). Instead, it uses its economic largesse to force changes in closed markets.
  • Google partners better. Carriers are delighted to have a free software platform with which to counter Apple’s ecosystem control. I’m not going to go into the anti-competitive things Google does here — that’s a subject for another day — but in the end, companies have a more open playing field in the Google sandbox than in the Apple one.

Why is this important? Well, the marketplace into which Nest is playing is not dissimilar to the cell phone marketplace.  If you’re thinking of Nest as merely a “smart thermostat,” you’re missing the real strategy behind the company and the reason why Google paid so much for a company who has only sold tens of thousands of devices. More interesting about Nest is the relationships it has with power companies.

This is a hugely disruptive play. Think of all the talk about the “smart grid.” To use a computer analogy, the smart grid has been developed to date with a mainframe-like point of view.  Sure, we’ll build intelligence into the network but the intelligence will be centrally oriented, dominated by the utility companies. Nest has a vision of a world where the intelligence is much more distributed and in fact begins with a bottoms-up approach to the market. Begin with adding intelligence to end points in the network and only then can you begin to effectively manage and distribute efficient power solutions so that thinking goes.

That’s what Google’s betting on and that’s why Google was a better fit for Nest.  At the end of the day, Apple wants to sell intelligent devices connected by Apple software solutions. Google, by contrast, wants to build intelligent data-creating ecosystems, selling services around the software and data it collects. And what does Nest represent if not the potential for monetization of the home utility equation. Heck, the thermostat may one day not only be free but the power company will give you, or builders, incentives to include it in homes and offices because the economic value of the information and connectivity dwarfs that of the price you could get by selling the device…to a small subset of the market.

I really thought Nest was going to end up with Apple.  The fact that Google showed the vision to make the acquisition is the most damning thing you can say about Apple’s future prospects and a strong positive for Google. Years from now, we may look back at this moment as a big tipping point.

Stamford Startup Weekend: Random Thoughts

I spent almost all of my waking hours this past weekend at the Stamford Innovation Center serving as a mentor during their Startup Weekend.  The concept was started by a non-profit in Seattle and last year, over 400 weekends were held in over 100 countries.  Here’s how they describe the idea:

Anyone is welcome to pitch their startup idea and receive feedback from their peers. Teams organically form around the top ideas (as determined by popular vote) and then it’s a 54 hour frenzy of business model creation, coding, designing, and market validation. The weekends culminate with presentations in front of local entrepreneurial leaders with another opportunity for critical feedback.

I’m guessing around 25 people presented Friday night, 10 ideas were selected for work over the weekend and four winners were selected Sunday night.  I’ve now done this a few time and after spending all this time with these entrepreneurs  budding entrepreneurs and entrepreneur wannabes, I walked away from the weekend with a variety of random observations.  I’m not going to so much opine on the idea presented — some were really great, some were pedestrian and some were just strange — but rather hopefully I’ll provide some insights to help the next roster of weekend participants. For me, I know it’s politically correct to talk about giving back to the community and mentoring the next generation but the truth of the matter is that no matter why you’re here, you’ll get more than you give.  I came away with new ideas, new energy and new friends.

If you’re wondering whether this is something you should do, my answer is an unequivocal and enthusiastic YES.  Seeing the progress in 54 hours from loosely formed idea to final presentation to the judges shows just how much you can get done in a short time when you focus.  Where else in a weekend can you get:

  • A team of people to help you build your company,
  • Test an idea with a diverse set of experts and fellow entrepreneurs,
  • Build a prototype or even start coding,
  • Iterate, pivot, change, enhance, improve, and improve some more,
  • Get a logo (from the wonderful father and son team of Alex and Ryan Virvo of the Gorilla Agency),
  • Find your calling (some people came not to present ideas but to find a team to work on), and
  • Make new friends.

While inspired by the Startup Weekend, the insights below are really relevant to everyone, startup to Fortune 10.  Herewith some observations:

  • Presentation skills matter.  Back in my Gartner days, we asked attendees to rate presenters on quality of presentation skills vs. quality of content.  With extremely rare exceptions, if you presented well, clients thought your ideas were great.  If you presented poorly, even using the exact same material, clients thought your ideas were poor.  It’s clearly not my issue but presenters throughout the weekend had problems with volume.  If I can’t even hear you, you’re already out of the running.  Don’t read your speech.  Unless you’re Presidential candidate good, reading is devoid of passion, spontaneity and confidence.  If you’re not confident in your message, I’m not going to be.  Almost as bad, don’t read your PowerPoint.  Your audience is capable of reading; complement your PowerPoint slides. But don’t put so many words on your PowerPoint slides that I’m reading the slide and not listening to you.  There are teams that I still don’t know what they do, not because they have complicated ideas but because, even with a microphone, I couldn’t hear their words.
  • Tell a story.  Entrepreneurs love talking about features and functions.  To the rest of the world, that’s dreadfully boring. Instead, imagine you’re a story teller.  What are the elements of a good story:  an antagonist, a protagonist, a problem and a solution. The good guy wins. Capture my attention with a problem before you go into a solution.  It’s not good if you’re trying to solve a problem no one has. I always adhere to a simple rule:  no matter how good you are, the audience is only going to take away three things from your presentation.  Make sure you’re always bridging back to those three points.  What’s the problem you’re solving, how big is that problem and what makes someone believe you’re the one who can solve that problem. And when it comes to Q&A, it sounds funny but don’t answer the question.  Understand the questioner’s real objective — to throw you off course — and use each and every question as an opportunity to bridge back to one of your key points.  Imagine that one of  your key points is “we’ve got a seasoned team.” Someone asks you “can’t Google put you out of business tomorrow?”  If you actually answer the question, your two choices are bad.  “Yes” isn’t actually awe-inspiring and if you believe “no,” you’re kidding yourself (and showing yourself as out of touch to the questioner).  Instead, what if you went “for a lot of people, that would be a real challenge but we’ve got a seasoned management team who has been through this before and we successfully navigated those waters with one IPO and two acquisitions.”  Notice, I never answered the question.  Instead, I bridged back to my talking point.  I spent some amount of teams trying to focus their pitches.  They were down in the weeds – way down in the weeds — and the challenge was to elevate features and functions to a story.
  • Listening skills. There’s an old maxim, “no one ever learned anything while their lips were moving.”  There are probably some ideas out there that are so good that they don’t need any further insights.  I’ve never heard any of them.  Instead, once someone understands your idea, stop convincing and start listening.  You want to encourage feedback, not challenge observations.  Sure, if someone has something way wrong, you should figure out how to address that issue (and how it is you led them to this wrong conclusion) but for the most part, there are credible alternative positions and you’ll be better if you intimately understand the objections of your target customers and partners, rather than trying to stifle and silence them.  I was in one three-person conversation and the entrepreneur spoke approximately 18 of the 20 minutes we “talked.” Not surprisingly, his project didn’t make it to the weekend round.  And if it had, you can get his would not have been one of the teams I sought out to help…if indeed he could have maintained the team through the weekend.  (Teams do suffer departures, defections to other teams and even occasionally they spawn other takes on the original business problem.)
  • Understand your business. The winning entry, ArtGoGo is not an art marketplace but rather an initiative that is aiming to ease the path to market of starting artists, better democratize the art acquisition process and address some real market inequities.  Do you realize that gallery commissions for many artists are 60% or more of the purchase price of the artwork?  The person in the $2,000 suit gets 60% of the selling price.  The person in the $30 jeans who spent three months actually making the art gets 40%.  Understanding your real business will help inform your business and open up natural extensions to your original idea.  Another winner, Secure Your Own Device, doesn’t offer security software.  Instead, they make it easy for you and your kids to remain safe from real threats. Some of this goes back to the storytelling point.  You’re not just a product or a service. Instead, you’re solving a real customer problem.  That’s the objective of your business.  The product or service is merely a vehicle for accomplishing that objective…and in the future, you may discover you have more ways to do that.  My favorite example of this is Hallmark greeting cards. Over five years ago, I had a meeting with them and they revealed that their market kept shrinking (duh!) and the average age of a card buyer kept going up (then around 62).  Following that trend line, their last customer will die some time in 2023.  I asked a simple question, or so we all thought.  “What business are you in?” Their (wrong) answer was “greeting cards.” I said “you’re actually in the gift conveyance or milestone celebration event.”  Hallmark’s revenue last year was right around $4 billion.  The total affiliate marketing industry last year was right around $4 billion.  Guess whose number is growing and whose is declining.  And how much bigger might that number have been if Hallmark had gotten behind it instead of leaving it to a series of companies most of you have never heard of. The fourth place winner of the Weekend was a team called CartWheel whose whole idea was to enable companies to collect a portion of the affiliate fees generated by employees who shop via their corporate networks.
  • Horse vs. Jockey. It’s an age-old issue:  in a competition like this (or when seeking a funding round), are people betting on the horse (your idea) or the jockey (you and your team).  No idea is so good that a bad team can’t screw it up. Yes, you want your idea to be as compelling as possible but if you’re not thinking about how you convince your audience (here, a judge, sometimes a VC, a potential customer, supplier or partner) that you’re someone I want to do business with/bet on, you haven’t completed the job.
  • Make Your Market Sound Big. I actually talked with one guy who said his total market size was $1 million (small) and that $800,000 of the market was already spoken for (saturated). I was waiting for the “here’s how, why and when the market’s going to grow” but it never came.  Needless to say, he didn’t make it to Saturday.  The ArtGoGo people started talking about how 90% of all artists basically sell nothing.  Not helping your case!  Instead, talk about how many people buy art (millions), the size of the high end market ($billions) and now I’m starting to see dollar signs.  Give people confidence you’re addressing a large market and that you understand the parameters of that market.  “My friend the starving artist thought this was a good idea” is not a market-validating input.
  • CompetitionAll too often people answer that one with “none.” This is not a good answer!  If no one else sees the opportunity you’re seeing, it’s possible that you’ve identified an untapped market.  It’s much more likely, however, that seven people have tried to do what you’re doing and have failed miserably and that there are three others who are doing exactly what you’re doing and you’d better relentlessly out-execute them.  You do have competition.  Even if it’s just inertia behind an existing approach.  Make sure you understand it. Related to this is the notion of the first-mover advantage. I’m still waiting for someone to give me a compelling example of that.  Microsoft was in tablets and smartphones before Apple.  How’s that working out?  More often it’s a first mover disadvantage. The fast follower can learn from your mistakes, better time the market and capitalize on your first move.  Competition is good. Show how you’ve learned from it and how you can win the competition.

If you’re a budding entrepreneur (of any age), a startup weekend is a great vehicle to take a fledgling idea from concept to concrete in a weekend.  So many of these things languish as “in my spare time” or “maybe next year” projects.  Most I’m sure never go anywhere.  Getting this much value and making this much progress in a single weekend is an incredible experience.  One of these days maybe I’ll propose an idea.  In the interim, being a mentor was a great experience.  I met some really interesting people, helped a few, learned a lot, had some fun and had some beer.  And best of all, when I went up afterwards to congratulate the winner, she asked me “could I hug you?” That’s better than any money I could have gotten over the weekend.  Sort of.

Social Media Week: The Perversion of Social Media

The 5th Annual Social Media Week concludes today in New York and around the world.  This should be a celebration of the power and the breadth of all that we call social media but instead, the marketers have taken over.  It really should have been called New Ways of Selling You Something Week.  Not that there weren’t sessions reflecting the breadth and beauty of social media — there largely were — but if social media is about connecting people to people and people to information, the dominant thread was connecting people to products.  Selling them something.  How can we divine their intention? How we can we measure how much of their intention we’ve captured?  The marketers have moved in.

We’ve seen this loss of innocence before.  The early Internet was a people’s playground.  Remember a world before there were banner ads, where search engines, well, helped you search instead of were vehicles to compile a huge dossier on your preferences, locations and intentions.  I’m not here to suggest that the way the Internet has evolved is a bad thing.  Quite the contrary.  It’s a rather amazing place and it’s hard to remember how we lived without it.  Clearly this is in large measure because of the economic potential that was realized through marketers.  Their economic windfall has enabled us to continue to have this open playground.

Thus, my fault is not with the marketers, not even with the Social Media Week organizers who are actually sincere and profoundly well-motivated.  Rather, I see this as a call to arms.  A time to declare the emperor has no clothes.  Social media is not just about looking for selling cues and divining that next insightful piece of information about a customer or a series of customers.  In many ways, I actually view that as a fool’s chase.  It’s the old story about people in a dark room trying to figure out what’s there by touching it.

elephant_in_a_dark_room_card-p137431120892433401bh2r3_400

Sometimes the best approach is the simplest one:  why don’t you just ask it?  That doesn’t work so well when it comes to elephants but it works much better when it comes to humans.  You perhaps know that I’ve been enamored for a long time of VRM, Vendor Relationship Management, the concept  that we’ll flip CRM on its head and put users at the center of the marketing relationship.  It’s perhaps no coincidence that VRM was first espoused by Doc Searls, the creator of the Cluetrain Mainfesto, that first generation Internet call to arms that was so powerful…before the marketers moved in.  So I think this focus by Social Media Week, and social media in general, on selling is just a short-term perversion of the concept by marketers.  They’ll derive value, sure, but the real impact will be much more transformational than helping them sell and the monetization of social media.

More than this, too.  Social media isn’t just about commerce, whether buying or selling.  It is, and will only be more so, transformational in the way we work and play.  The way we connect with each other as people, not as commercial entities.  The way we create, find and share information.

Yes, this was all there at Social Media Week if you looked. There was a discussion with Rachel Haot, the passionate Chief Digital Officer of New York City, who has the support of a visionary Mayor and herself has the passion to enhance and maybe even change the relationship a city has with its citizens.  There was a discussion with Dale Dougherty, the founder of Make Magazine and, one could argue, the champion of a “maker revolution” that threatens to change the way we, well, make things.

I would, if I could, eliminate all those marketing sessions from Social Media Week.  There are plenty of venues for that kind of information. The marketers will always find their outlet.  Let us not forget that social media is not (just) about selling or buying.  It’s not just about measuring and monetizing.  It’s not just about more big data. (You know how I feel about that one.) At one point during the week, I observed on Twitter how almost ironically Social Media Week had become very unsocial. I was in a room full of people and they were all heads down, staring at their small screens and tweeting.

Is this what social media has become??  I don’t think so.  As has always been the case with technological advances, we go through some ebbs and flows when it comes to adoption and disruption.  We often first enhance existing processes and approaches with the new capabilities.  Only then do we realize there are new and better and different, and disruptive, approaches to what we’re trying to do.  We’ll get there.  There is not a shred of doubt in my mind.  But the state of social media today, as demonstrated by this Social Media Week, isn’t there yet. I appreciate what you marketers are trying to do.  I really do. But I hope this is the beginning of the end for your perversion of Social Media Week, and social media.  Social media is so much more than selling and buying.  Change is coming.  And your time of defining the landscape is coming to an end.

IBM Connect Trip Report: Moving Up the Organization, Uneasily

IBM has celebrated its 20th anniversary of Lotusphere…by renaming it. Nearly 10,000 people are in Orlando this week at the newly-renamed IBM Connect to hear IBM’s social story.   It’s a fascinating story and Lotusphere…er, Connect…demonstrates that opportunity and tension beautifully.

I find the agenda this year to actually be fascinating.  Loutsphere used to really be a geek-fest.  All of the sessions were deeply technical and dressed up attendees wore t-shirts without holes in them.  Now, those people are still here but there’s a significant presence of people in business functions, often wearing blazers and even ties.  This clearly reflects the evolution of technology from something for geeks to something that solves business problems.  IBM has obviously embraced this with their Smarter Everything mantra.  This speaks directly to the CxO level and very little if at all to the deep technology person.

So, have they been able to pull this “social biz” thing off?  Well, first, let’s just say they’re no Salesforce.  Dreamforce was part technology conference, part evangelical fervor (http://www.hfsresearch.com/Social-Business-Goes-Mainstream).  IBM Connect is, well, IBM.   IBM’s actually in a fascinating position.  On the one hand, I love the vision.  IBM is promising and, to a large extent, delivering a solution that only IBM could deliver.  Their product portfolio is comprehensive, second to none, and surrounded by a complete set of services.  On the other hand, this is a market that’s still building bottoms up, where IBM is very, very weak.  They talk about how they have no problems getting into to talk to the C-suite but I’m not sure that that’s delivering commensurate business results.  This Smarter Everything approach requires buy-in at very high levels and that surely lengthens their deal time.  There are others who raise legitimate questions about whether IBM’s getting the return on its software investments so far. http://www.businessweek.com/articles/2013-01-22/ibm-makes-more-money-selling-less-of-what-people-want  Basically, IBM is making a big bet that the future of technology is a huge, high level business solution, which clearly moves it far afield from its traditional Lotus customer, and brand.

It has been interesting to note this week that IBM is making a big play with its Kenexa acquisition.  Kenexa and Smarter Workforce mentions have been ubiquitous.  It was so over the top that I asked a senior IBM person if this was part of the corporate-mandated talking points for everyone.  He actually found it an interesting observation, noting that while it was not a corporate mandate, Kenexa was the “new shiny thing” and that therefore, it naturally got a lot of attention, especially at that billion dollar price point.  Kenexa is certainly a noteworthy acquisition for IBM but the attention it got this week was overstated.  We can expect to find more normal positioning for Kenexa as the bloom comes off the flower…or when IBM makes its next big acquisition.

We analysts love situations where what vendors are saying drifts very far from what they’re really selling, and what the customer is buying.  IBM is dangerously close to that situation.  But I understand, and support, what they’re trying to do.  This market is undergoing a long-term evolution and it’s hard to turn battleships, both IBM’s and its customers’.  IBM is going to have to keep telling this story over and over until it sticks.  It will lead in the short term to situations like this conference, where there’s an uneasy connection between the past and the future, between the legacy technologists and the new business approach.  Each year, though, it will get a little easier and a little more cohesive.

IBM and Microsoft: Random Interesting Observation

I am down at IBM Connect (formerly Lotusphere) and was having lunch with four gentlemen from Sogeti, the global consulting company. We were talking about the evolution of IBM ‘s business.

I’ve been following IBM and Microsoft professionally for 25-1/2 years now. It dawned on me during this conversation that IBM had undergone an almost complete transformation while Microsoft has done none. Microsoft, then and now, is a Windows and Office company. They’ve increasingly become a provider of enterprise solutions, but still, it’s Windows and Office. Ironic, isn’t it, that the historic champion of the user, has become slow moving and enterprise-focused even while the market has embraced the consumerization of IT.

Meanwhile, the IBM I first knew was… well, at least the mainstream is a constant. But they’ve moved from hardware to services and software. From big enterprise systems (e.g., DB2) to a vast array of tools, middleware and platforms. (As an aside, it delights me that my spell checker accepts “middleware,” as I was in the room at Gartner when that term was coined.) And even the things they’ve always done have been refreshed and repositioned, although they might argue that the more things change, the more they remain the same.

Anyhow, it’s interesting to think that the company we think of as the innovative upstart — Microsoft — is actually the stagnant one, while the one we think of as the stodgy old company –IBM — it’s probably the best example of a big company transforming and continually reinventing itself. Master narratives are slow to change. Maybe it’s time to rewrite this one.

Apple: Missing the Bigger Issues

As is so often the case, the Wall Street conversation about Apple’s “miss” generally misses the bigger issues.  You know I have issues with Apple’s general approach to business and you might think therefore that I’m going to gloat about a 10% drop in their stock price.  If you thought that, you’d be wrong.  Not being an investor in Apple, the stock price doesn’t terribly impact me, probably you and really, the way they do business.  Apple’s stock price doesn’t really impact its business.  Sure, some employees might go work elsewhere if the stock doesn’t continue growing robustly though Apple has always been more of a “let’s change the world” kind of place.  It can influence their ability to buy other companies but really, with over $137 billion cash on hand — that’s greater than Vietnam’s GDP — financing acquisitions is the least of their problems.

So, what do I think is interesting here?

  • Apple has always been a new hit kind of company.  Back in the late 80’s, my then-boss Doug Cayne, when talking about Apple, would talk about how much of their revenue was generated by products introduced in the last year.  (How quaint it seems that vendors actually generated considerable revenue from products that were over a year old.  Not in today’s world.) Thinking of it this way shows the problem starkly.  The iPhone was introduced in 2007, the iPad was introduced in 2010.  That’s an easy sequence to figure out.  Is there a new product coming in 2013 to reinvigorate growth.  (More on this in a bit.) In the absence of this new product, it’s somehow not surprising that slowing momentum in older products is impacting Apple’s results.
  • Older products + greater competition = lower margins.  Even a “success” like the iPad Mini came at a hit to margins as at least some of those sales cannibalized higher margin big iPad sales.  This is not yet an Apple strategy but rather just a result of aging product mix.  If Apple introduces lower-priced iPhones, then we’ll know they’re pursuing a lower margin strategy.  Until then, I view this as just a product mix and age issue.
  • Those who are against a lower margin strategy miss an important point.  Apple’s revenues and margins are not exclusively from their hardware sales.  Not remotely.  Via the iPhone Store, Apple gains considerable, and highly profitable, follow-on revenue for every device sold.  The whole ecosystem produces one of those virtuous cycles for which this industry is legendary.  If I have one regret, as an Android user, it’s that application developers for the most part favor the Apple platform first with Android typically a second, and sometimes distant second, platform.  Given the fact that Android unit volumes are greater than iOS, why is this?  It’s because iPhone users are much more likely to buy applications and services than Android users, who are overall at the lower end of the economic spectrum.  If Apple doesn’t play at lower ends, at some point Android’s growing market share will result in a shift in application developer priorities and thus it’s prudent for Apple to move downmarket.
  • An interesting way for Apple to play in this space would be for it to start supporting non-Apple devices.  Apple today offers certain software products for Windows (e.g., iTunes).  At what point to they consider it lucrative and important to support Android? Increasing the urgency for this are the inroads Google’s making onto the iOS platform.  I don’t need to point out the whole maps disaster and YouTube on iOS is a major player.  (Psy’s Gangnam Style video alone generated $8 million in revenue for Google.)  Thus, from a defensive and offensive position, I think we’ll see Apple begin to embrace Android to bound the competitive threat.
  • More importantly, the telecom industry has talked for some years now about “the next billion.”  Growth in this industry is going to come from emerging markets which have two important characteristics:  with lower GDPs, they’re much more price-sensitive and they’re often going to be users whose only computing device is their phone, unlike the Western world, where we typically have at least one computer to go along with our phone (and MP3 player and camera).  Despite my recent note about the single converged device, this new market may not have the money for multiple devices and thus the phone is it.  Growth is coming in this market.  It’s prudent for Apple to play in it to cement leadership in a post-PC world.
  • Overlooked in Apple’s financials is the fact that they as much as anyone are being impacted by this post-PC world.  Mac sales were down over 20%.  That Innovator’s Dilemma is a tough mistress.
  • Back to the new product question, this is a fascinating topic on which to ruminate.  It’s also difficult. Who before the iPhone and iPad predicted that Apple was going to revolutionize those categories?  So what’s next?  Conventional wisdom for some time has said an Apple TV is next.  Not the existing Apple TV small box.  I have a Samsung SmartTV, a Tivo and a Roku and all of those demonstrate both the opportunity and challenge for Apple.  The existing Apple TV box is not materially different than any of those, not enough to be the ground-breaker that saves the company.  And merely building those into the TV box itself is not the answer either.  Here’s actually where Apple may miss Steve Jobs.    Jobs had a great record in beating industry executives into submission around the iPod (music labels), iPhone (carriers, starting with AT&T) and, to a lesser extent, iPad (content providers).  The video (TV and movie) industry saw what happened to those others and was ready, willing and, so far, able to resist Apple.  To redefine the viewing experience, Apple needs their cooperation and so far that hasn’t been forthcoming.  Could Jobs have convinced some operator, network and/or studio to capitulate?  I guess we’ll never know.
  • So, if Apple TV isn’t the 2013 savior for growth and increased power, what’s left?  If Apple’s going to surprise us, I would expect it would relate to something around the living room.  The TV is just one part of a broader home ecosystem that includes entertainment, environmentals, games and more.  Existing systems right now are insanely expensive and massively compromised.  Apple alumni are already showing what’s possible in the space — the NEST thermostat, which Apple is already selling.  Apple has the vision, the human factors, the gadgets and the resources to nail this one.  If I were advising Apple, I’d say own the home before you go about redefining the TV.  It’s the classic market for Apple.  Lots of people have been dabbling in it for years, with terrible implementations.  Apple can swoop in and everyone will laud them for inventing yet another market. </end sarcasm>  But seriously, doesn’t this scream Apple?  No more talk of the Xbox being Microsoft’s trojan horse in the home.  It’s Apple’s market to own.

There you have it.  Ignore the stock market reaction.  Apple had an amazing quarter by the standards of anything other than Apple’s previous quarters.  But there are big questions for Apple going forward.

  • What’s its “next billion” strategy?  Apple on Android?
  • What’s its next big idea? Not the TV. The home.