GLG News by Joe Weingarten

Implications: iPod sales have been falling in the USA or at least even f=with last year in some markets. The iPhone price drop has also impacted the iPod sales.

Analysis: Over the last several weeks resellers have been told not to order iPods and Apple even made an offer to provide a discount with any iPod order. This clearly shows the iPod is going in for a much needed overhaul. It is an old product line by now.

Then you have the iPhone pricing effecting the sales of the iPod Touch. Why buy a Touch when an iPhone is less, don't activate you iPhone and use it as a Touch for much less.

Rumors have been around for 2-3 months on the update of the iPod line. So this is it. Now the other question is will Apple also release new computers at the same time. I would wait if I were Apple, even if only a few weeks, as the press will give them free time twice instead of just a lot at once.

Implications: The problem has been found the solution developed but it does not solve the problem right away and may never.

Analysis: It's in the software and the latest revision solved the problem, except it only solves the problem if everyone using the iPhone in an area connecting to a cell tower has upgraded the software in their iPhone. So the problem may be around for a while, until almost or everyone upgrades their software.

But this shows a continuing problem at Apple of shipping unfinished products, too many problems keep popping up in a lot of their products. Part of the problem is the high degree of secret development, which stops any type of broad based testing. Also as stated before the lack of engineering depth within the company to insure proper development is once again showing its ugly head.

Implications: Apple's revamp of it's product lines along with marketing changes in the iPhone can result in a massive holiday season for them.

Analysis: Once again it looks like Apple is going to have a massive holiday season in spite of the economy. Sales of the iPods have been steady to weak over the last several months. They badly have needed an overhaul of the entire product line and it appears this is coming just in time for the holidays. On top of teh new line comes word that NAND memory is dropping in price again (NAND flash contract prices expected to drop over 10% in late August
http://www.digitimes.com/bits_chips/a20080821PD210.html) and this of course will help the bottom line for both iPods and iPhones.

Two other factors that are also going to help make this a great quarter. The first is the revamp and introduction of the iPhone, (Apple to make 45m iPhone 3Gs in one year
http://www.macnn.com/articles/08/08/22/apple.45m.iphone.3g.target/) The new 3g iPhone is only a small part, overlooked is the marketing. The change in marketing and opening up worldwide is going to accerate the sales of this product.
Last comes the rumor of new computers. Sales of computers have been growing and a revamp of this product line will also bring a happy bottom line. (Apple may report unprecedented 3 million Mac quarter
http://www.appleinsider.com/articles/08/08/21/apple_may_report_unprecedented_3_million_mac_quarter.html).

Implications: Mr. Jobs says it would not be used except in extreme conditions. But what if he changes his mind, what if the next CEO of Apple wants to use this to keep developers in line or increase the charges to have your app sold via the iTunes store.

Analysis: We have all heard the term it's a slippery slope you don't want to get on. Well, the kill switch could be one of those slippery slopes. While Mr. Jobs says right now he would not use it, then why even brother to develop the switch and then why place it in the iPhone OS.

or

Is Apple going to use it as a method of monopoly to control the iPhone software development and sales. They current charge a 30% fee to sell an app via their store, who is saying they can't raise that to 90% and with a kill switch they can.

Will others start to follow their lead and develop kill switches for computers and other products that only allow their own products to work with the host. Game consols, computers, maybe even washing machines that only can use one kind of soap.

Keep doing this type of design and watch the government move into protection of the consumer.

Implications: Cloud computing is putting your entire company in the hands of someone else, can you trust them? What if something happens to your cloud?

Analysis: In World War I the enemy fighters would hide in clouds and come at you with the sun behind them to attack. The clouds were also a good place to go hide.

Cloud computing has many hidden dangers that may be overlooked by many seeking to save some money by letting someone else do the work. Are you sure in the long run this is safe or will the users find out the hard way about the pitfalls.
The basic concept is that that the software you use is rented and on someone's computer, not yours, as could be your data and therefore your entire business.
The manager of any business needs to ask a few very important questions before moving to a cloud for support, what if the software guys living in that cloud change something and your entire system goes haywire. Look at some of the problems airlines have had with software changes. Look at the mess Apple Computer had with Mobile Me which is a cloud concept.
What if the company running your cloud goes belly up, the odds are you will be out of business in a matter of days. If a thunderstorm knocks out the power to your computer center and the back up power fails, what does it do to your current business, you would not be too happy.

Be very careful about clouds they are vapor and it is hard to stand on vapor.

Implications: Apple is having massive problems with the launch of the their new Mobile Me service. Resulting in them having to give months of free service for the errors. Is this a bigger problem?

Analysis: On August 1, 2008 I did a review titled "Is Apple a one at a time Product Company?" In the review I pointed out the lack of engineering depth. The launch of Mobile Me clearly shows that Apple is lacking engineering talent, not in creativity, but in the process of taking something to market and in support of the new concepts.
This confirms the other article and analysis that Apple needs to stop worrying about keeping its large margins and hire a few more engineers to fully develop and test the concepts before they go public. Almost every product is shortly after release followed by repairs, software updates, etc.
It also shows that Apple does not have the ability to launch many new products at the same time. Even Mr. Jobs admits they could have waited to bring out the new product at a different time than at the same time as the iPhone.
This lack of depth will not be missed in the professional circles and will continue to slow any movement by Apple into the enterprise marketplace.

Implications: Apple wants to move into the business and enterprize market to have real growth, can they, are they capable, do they have the resources? If not are they a toy company as stated in this article?

Analysis: Apple makes fantastic products, some universities link together 100's of computers to build low cost super computers, etc. But for those of you that have consulted with me you know I have always stated one of the major problems is the lack of depth of engineering. This article calls Apple a toy company and one of the primary reasons is that lack of engineering if needed. Last year when the iPhone was first released, Apple pulled engineers from OS development to work iPhone software issues. The release of iPhone 2 software followed in days by 2.1 shows it was not ready for real release. Once again engineering is not deep. Maybe Apple should stop hording all its cash and hire a few more engineers. Or forget enterprise and keep just making fun great products.

Implications: By moving to a specialize chipset Apple may be trying to do something outside of what is obvious.

Analysis: The article I believe is missing the entire point of why Apple might be exploring a specialize chipset while continuing with the Intel CPU. Currently Apple is having a problem with small companies using its OS with non-Apple computers and thus threaten its computer sales. If they continue with total Intel systems that threat becomes even more real and could lead to a MacDell.
Most people looking at Apple do not fully understand the thinking within the company and how they react to this type of threat. My first thought was this is to counter the clones. By having specialize chips they can write the OS to only work in that environment and stop any clone attempt dead.

The concept that Apple has nothing to gain, as stated in the article, is totally false. They have the entire computer hardware line to continue.

Implications: Verizon reported for the last quarter nice results and made the statement that the iPhone has had minimal impact. But...

Analysis: The impact might have been minimal in the last quarter but that statement could also be highly misleading. During the last quarter the iPhone was in decline, in fact during last weeks of the quarter you couldn't buy one if you wanted too, they were out of stock waiting for the new 3g iPhone. Fast forward to this quarter when the new iPhone went on sale and people were once again standing in line.

Any Verizon impact would be this quarter not last.

Implications: A 54% surge in sales of game consoles, more smart phones and people will get tired of today's games and will want new ones tomorrow and more new ones the next day.

Analysis: When computers first came out, a few games existed and with time they grew to the point where the game consoles took on a life of their own. Now with the new generation of consoles and the realist games they have surged in sales.

What is very interesting is that Sony sold 405,000 units of Play Station 3 but sold 774,000 "Metal Gear Solid 4" in one month. That is almost 2 units of software for each Play Station. While older Play Station may account for the higher sales it shows the potential for these players. Don't forget that was one game, how many different games will an owner buy, and lets not forget the sales when version 5, then 6, then 7... come out.

On top of the games for consoles are games for the iPhone and others. If games keep up in popularity watch Apple due very well with the iTunes store for the iPhone where Apple gets a 30% commission for each program sold.

Whoever has a high selling console is going to have a very high selling follow-on software sales.

Implications: Apple latops have been doing very well in the marketplace. But with Apple its always a guessing game on what's next in the product line. My guess new laptops.

Analysis: When IBM supplied chips to Apple it was harder to spot new products coming to market, with the switch to Intel one of the secrets is always out because Intel is not a sole supplier to Apple. And Intel has released new chip and more laptop processors are coming shortly.

Apple is also a company that in most cases works on one product line at a time for a new release. The iPhone is out so it is time for the next product.

It is also a company of habit. Last August for back to school it released new laptops.  The rumor mills over the last few weeks showed pictures of a new laptop case that looks like a thicker MacAir.

Conclusion - a new laptop is coming very soon.

Implications: Selling a record player is nice but selling the records is more important. Apple has found another gold mine.

Analysis: While selling one million iPhones is very impressive don't overlook what can be even more important in the long run. Revenue sharing is gone, so the belief that a stead stream of funds from the sale of a phone is gone has now been changed. The real winning was the downloading of 10 million apps for the iPhone. Even if many of those were free one, it got people into the mode to download, and once they get over the free downloads they are goiing to start buying and then later will buy again, a new game, a new feature -- buy again. By selling at a ratio of 10 to 1 during this initial period showed that the process is working and that Apple will reap large benefits. It will also get more developers interested to make additional apps.

Don't forget the very important factor Apple get 30% of the selling price and has very little invested in this product showcase. Almost all the risks are taken by the developors and none by Apple.

So once again Apple has shown us how to dig a small hole and find gold.

Implications: The long awaited iPhone 3G has arrived on the scene with lots of fanfare and is selling out in some areas. Is it doing better than expected and what happened to the servers.

Analysis: The estimates of iPhone sales are all over the place, and why not, no one really knows so you can make up wild numbers and predications and in time no one will remember if you were right or wrong.

Overall you have to assume that sales are doing very well, one of the factors are sales at the ATT Stores where many have sold out. Knowing Apple they supplied those stores based on the sales when the initial iPhones came out. Since they are selling out it would appear that sales are exceeding the first go around, then came the server overall. I would not read too much into this as other factors could have caused the overload. Apple not only used the system for activation but also upgraded a number of software packages.

People would have to go to these same servers for upgrades, so anyone with an original iPhone would be upgrading as well as iTunes and the conversion of .mac to .me. Then to add to the mess was an OS upgrade.

Will the turn away of people have any long-term effect – no? People wanting this phone will go back and get in either over the weekend or in the next few days. It’s not like just wanting a new phone. It’s wanting for an iPhone.

Reports from overseas are also showing brisk sales, with the expansion into many other markets, this launch is going to very successful.

On the negative side two technical items have appears concerning the iPhone on many of the blogs and web sites. One concerns a yellow tint tot eh screen, which Apple has responded immediately, that it is done that way on purpose. It is unusual for Apple to respond that fast, maybe they are getting better at customer relations. The other is that when you remove the headphone jack you may lose the call. No response yet, but some on the blogs say there is a fix and provide details. But this appears to be very minor.

Implications: At $199 the iPhone with iPod capabilities looks like an iPod killer. Will Apple kill off its own golden goose or is it planning a new product to move the iPod back up the ladder. Have we overlooked something in the long term of iPhone vs. iPod?

Analysis: With the iPhone at $199 many articles have been written that the iPod killer is finally here with the new iPhone, after all it can be the same as an iPod. But over looked is the real the real cost of the iPhone is not truely $199.00.
The real problem is that the iPhone has a $325 payment made
against the purchase price by the operator and you a hidden payback
each month. Any iPod you pay the full price up-front. The selling
factor – you don't pay $70 a month. So over a two year period you are paying $1879 plus any extras. But, if you purchase a new iPod you are paying the purchase price of the iPod and that's it. Since Apple is no longer getting revenue sharing on the iPhone they are going to want to sell as much hardware as possible. All indications are a new line up of iPods for this fall that look very much like an iPhone missing only the telecommuncations part.

iPod sales have been drifting downwards, a new sizzle product is what is needed to reverse this trend. Look for a fall introduction of a new iPod.

Implications: Assume the iPhone only sells 10 million phones next year, that's one profit number. But what if they sell twice that amount and what happens to the iPod?

Analysis: iSuppli: iPhone 3G costing Apple $173 to build, but that is only part of the story. While the iPhone is selling in most cases for $199.00 it would appear on the suface Apple is not making much. But the actual sale price is more like $499 due to the subsidy from the operators. Also assume that iSupply did not include all costs such as some of the R&D, advertising and marketing. Round the total cost up to $225. If Apple sells on the low estimate of 10 million phones that is $2.25B.
 
On the high side some estimates have stated 26-27 million phones and with that type of production run the costs would drop. With the expanding marketplace to worldwide, it is very possible that Apple could achieve the much higher sales levels. That could raise possible profit to over$6B.

The only current negative to this is the loss of sales to the iPod line as more people use the iPhone as both a phone and pod.

I believe this fall Apple will introduce a totally new line of iPods to bring the sizzle back to the iPods.

Implications: 6 million already sold, 10 million by the end of the year, another 10 million plus next year.. A very smart man told his children as they were about to move to America - "When it rains stand on the corner and sell umbrellas, but if you can think of something everyone can use, make it and sell it and remember you only have to make a penny on each one, because in America you will sell millions and millions of pennies is a lot of money."

Analysis: 10, 20 million iPhones is a lot of product that needs to have accessories. But one thing that is missed in this article is that the new phone is also an iPod. Look to companies that make accessories for the iPod to jump on the iPhone bandwagon.  While the articel does talk about a few copmpaies it leaves out those that directly support the iPod to a major degree. Looking at Bluetooth is fine but what about a low cost dock for both home and office use. That would be two sales for one phone - two more pennies. So maybe the real winners will be Belkin, and Griffin Technology. All those small companies that are going to make millions of pennies.
Hint - Google -- ipod accessories

Implications: The concept of virtualization is the simulation of hardware to allow an unmodified "guest" OS (one designed for the same CPU) to be run in isolation. Every since Apple moved to Intel processors people have been toying with the concept of running the Macintosh Operating System on machines other than Macintoshes. Since Apple have a much higher price tags what would happen if someone can accomplish this task?

Analysis: In April of this year Psystar announced the development of a $399 Macintosh clone (see: http://gizmodo.com/379717/mac-clone-maker-psystar-says-apples-eula-violates-monopoly-laws-wants-to-challenge-it-in-court)
by loading a valid copy of the Mac OS on an Intel based machine. So far Apple lawyers have said nothing. Now a company EFiX  is planing a release on June 23 of a hardware add-on that will allow you to install a legal copy of the Macintosh OS on a regular PC. If the Apple legal team does not stop this there is the protential for a drop in Macintosh hardware sales.

Look at the basic numbers: A PC is 1/2 to 1/3 the price of Macintosh, A low end MacPro with a 23 inch screen is $3198, while a similar Dell with a 24 inch screen at Costco is $1399.00.

In the notebooks area I had a problem finding a notebook to compare on the low end to Apple's 13 inch notebook which is $1099. Dell, HP Acer didn't have any that small. The prices for most low end were $899 or less and even down to $499. for an Acer 15 inch model.

The cost of the MAC OS is $129.00 so even if this "dongle" is $199 could many people who were thinking of buying an Apple opt out for this lower cost alternative. If the dongle / OS combination is effective and works as if the end unit were a Macintosh, I firmly believe Apple will start to lose a great deal of sales.

Implications: Is this the end of the five year deal between Apple and ATT? It appears so.

Analysis: Apple's revenue sharing plan when it hit the streets two years ago was a major change in the telecommunications world and everyone wondered if it would become the new plan? It didn't and Apple has had to pull back and move to the standard sell cheap, give away free phones by the telecom providers. Apple was falling short of its predication of 10 million iPhones and falling US sales rate. The overall high cost of the phone and usage costs were to blame. After the "I have to have" crowd left the buying field the iPhone had to compete with the other phones on the market and the other providers that did not sell the iPhone.
ATT as the sole provider had a big benefit in that even people who found the iPhone too expensive, after a visit to an ATT store, were more apt to buy a different ATT product. Thus ATT had a surge in potential customers and witnessed an increase in lines. It also forced ATT to improve its network for iPhone II. Which in the long run is good for ATT.
Overall Apple still is not meeting its goals. What will happen July 11, when the new phone goes on sale. ATT at that point in time will still be the only provider in the USA. But will it last? I doubt it. Apple has in some overseas markets allowed two providers in the same country. They will be watching the sales trends very closely.
Apple is requiring customers to still only use the ATT network, but we need to watch and see if people start to break the contract and switch to other providers. Also if non-contract sales overseas increase with those phones showing up on gray markets in the USA and on the T-Mobile network.
Both Apple and ATT will see a major surge this summer as the low cost iPhone brings in more customer. But in the long run I see Apple once again changing policy and moving away from ATT to a sell to anyone.

Implications: A primary factory in many products from phones to computers and all the hand held devices in-between is memory. What could be the effect of this report.

Analysis: It is interesting to note both DRAM and Flash are moving upwards. Part of this could be an increase in demand from Apple for the new iPhone that is now shipping to dealers worldwide. This new phone would be a large user of DRAM, then Apple also move up production of iPods as they will be using them for a back to school promotion. Both HP and Dell are doing well. Then another is that some of the supplies have closed down lines.

It is the end result that is of concern. As Memory moves up, the cost of manufacture moves up and therefore, profits move in the opposite direction. Also noted in the article is lead times are starting to move outward. While still short as they move from 2 to 3 weeks, it is another indicator of the demand cycle and the possibility more pressure on prices in the near future.

Implications: You could have the best hardware in the world, the best computer, but if you had to use dial-up, it would not do you much good.

Analysis: Without a question the iPhone was the best phone introduced in the past year, but why didn't it get 100% of the market? One of the reasons was the ability to communicate over a high speed network. The new iPhone is designed for a 3G network and should take care of these problems resulting in a much better communications device. But, Apple does not control the network, in the USA its ATT, the rest of the world all kinds of operators.

iPhone sales in the USA have been found to slow, in part because everyone who had to have an iPhone got one. Now we get to the people who look at the product and determine what is best for them and not run with the crowd.

When the new iPhone is released next week, look carefully at the operation of the iPhone over the ATT network not only at the iPhone. In the real world of wireless communications its a buddy system.

The other part is how will the iPhone operate with other 3G networks all around the world. They are not all the same and the iPhone was not designed to change to meet the specific needs of any one network. Its the  same problem each phone manufacturer has. The networks will be one of the main keys to success of the iPhone.