Wednesday, January 2. 2008
Although pressure from the financial sector caused him to not use it again, Alan Greenspan used the phrase irrational exuberance to describe the tech stock rise that was gathering steam in late 1996. His warning would have been timely if heeded as many discovered less than 4 years later when the tech stocks crashed. To overly simplify the whole tech bubble, investors focussed too much on what revenue a company might generate in the future instead of what they could do in the present.
The same thing is happening again only thankfully in a much more micro scale, so that this time the side effects won't effect the whole market as much. I was astounded though when a company like Bloomberg would repeat the ridiculous statement of an investment advisor that Apple will reach $600 in 18 months. The article at least discloses that Stephen Coleman's investment fund will gain $14M if that happens. Now an item is worth what someone is prepared to pay for it, and Apple's shares are no different, but analysts that blindly predict further growth are gambling on what they think may happen rather than giving guidance on whether the shares are a good investment.
Apple's share price has grown something like 150% over 2007 while its revenue has grown around 26%. It's market capitilisation is higher than IBM and Intel while having less than half their profit and a quarter of IBM's revenue. My question to the analysts is, where is the growth coming from that has not already been factored into their share price? In the same Bloomberg article a Bear Stearns analyst believes the iPhone makes them more than a one trick pony, but they already were. Even then, one initially sucessful product that is in a small segment of the mobile phone market does not give any certainty of continued success.
I have no idea what will happen to Apple stock, but I just can't see the justification for the projections the analysts are putting forward.
According to a comment on a GigaOm report on this, the $600 predictor may be in a bit of strife for other reasons relating to his investment funds. Another reason why it might have been a bit silly for Bloomberg to publish his comments.
Wednesday, December 19. 2007
So the current strong rumour is that Digg is on the market and is looking for $300M. Given the lack of financial information that is available on Digg it is a bit hard to calculate whether this is a reasonable value or not in pure financial terms. There is nothing to date that shows whether Digg is making a profit, but the likelihood is that it isn't. So the question of how much they are worth comes down more to how a company could exploit either its technology or its user base.
The technology is not of great value. While the algorithm that determines what makes the front page and that detects gaming has some definite value, what the site does is not hard to replicate. There are freeware versions and multiple competitors to the user vote ranking system that Digg has. BusinessGeek even has a voting system for posts that was a free add-on to Serendipity. If we can estimate that potentially 2 years of developement for an average of 3 people went into optimising the algorithm, the time and the opportunity cost of that could go as high as $10M-$15M. The API and the predeveloped integration etc could be worth a bit more, but any company that wanted to produce a Digg clone could get one to the same state for less than $30M.
So the question is whether the user base is worth the money? According to Alexa stats (for what they are worth) Digg had a decline in visits and page views at the beginning of this year and has been flat over the whole year. Since the announcement that they had hit the 1 Million user mark in March, there has been no new announcements on user numbers. There has also been no significant change in the number of Diggs an article needs to get in the top rank for a 24hr period. All this indicates that Digg may indeed be flat. There could be a number of natural limits that have caused this, or it could be a function of the lower amount of press that they have received in recent times. Whatever the case, we can probably consider Digg to have about 1 million users registered, and from that probably in the vicinity of 6 million regular visitors.
So would these users be worth an average of $50 a piece? If the advertising revenue to derive this value was possible then this would be happening already. Therefore there needs to be a business that would complement with Digg to achieve the value. Its hard to come up with a business that Digg would complement enough to deliver this. The retention of the majority of the users is also dependant on keeping the smaller proportion of big posting users. If many of the key Diggers were to leave the rest would soon drop off the site as well, which is a key risk in expoliting the user base.
Probably the part with the most value is DiggNation and Kevin and Alex. This as a marketing piece would be the most able to complement another business. Digg would need to stay as the arbiter of the zeitgeist, but DiggNation as a promotional tool and a potential revenue generator as Internet video and Podcast markets take off is a potential boon.
So my feeling is that while it is hard to prove, there is a chance that there could be a buyer at $300M, but it is more likely to be a marketing play than a pure financial deal. The buyer will be looking for the press they get and a way to use Digg to promote its existing business. I would not expect Digg to be bought by an existing Internet powerhouse, but more likely to go to a new entrant or smaller player that is large outside the Internet. One of the media companies that is just now starting to get into online could be a good bet, particularly as a semi-complement to their news or ranking business.
Thursday, December 13. 2007
If you ask any business professor, or read any book on business to find the purpose of a company, you will invariably get the answer ‘to provide a return to the shareholders’. When I did my MBA this principle was constantly reinforced, the prime goal of a manager is to provide a shareholder return. The reasons for this are understandable to a point. The typical business is quite complex and the different facets that make up success are impossible to control or even measure accurately. Using a proxy measurement like monetary return gives a method to at least approximate the quality of management.
For better or worse we have moved away from profit as a measure of shareholder return though, with share value becoming the way most people gauge corporate success. This method develops into an even baser representation of value when it is applied over a short time frame of quarters, weeks or even days. Management and executive reward then gets tied to these poor approximations of performance and we then wonder why some businesses make stupid, uncaring or even criminal decisions. In the end the share price is a function of both the real value of the company and the perceived value. As such, even if you believe that shareholder return is the best measure of company success, share price is a poor indicator to use. We need to get some sanity back into the process.
A company has 4 key stake holders; the shareholders, the employees, the community (customers) and the environment. To be truly successful, a company must ensure that each of these groups are better off, and this can only be measured over the long term. This makes more sense if we look at the real reason companies exist. If we were living in the stone age we would be in a loose family group. Every thing that contributed to a families health, wellbeing and comfort would be produced by that groups direct effort. As humans developed they started to learn new skills that made things easier like cultivating crops; developed tools to make tasks easier and made discoveries like fire and building techniques to make life more comfortable.
The number of tasks became too large for one person, or even one family group to master and trade developed so gaps could be filled. This led to specialisation and commerce. Eventually certain objectives came about that were too complex for a single specialist to do themselves, they required multiple people with different skills to be completed. This required organisation. These tasks could also take some time to complete, so they would need money to finance the task before a finished object could be sold. This all led to the companies we see today. This history allows us to have a better perspective and hence a better definition of what a companies purpose is.
A companies purpose is to serve the community by organising the labour of its members so they can perform tasks they are competent in, allowing them to trade that labour for the goods and services they need and want. To do this it must provide goods that are of value to the community (either directly or indirectly) using the resources available to them (labour, capital and environmental) in the most efficient way possible. The success of this can be measured by comparative levels of price, profit and pollution.
This is not a plea to abandon our current method of company valuation, there is no such thing as a perfect performance measure and I cannot suggest a better one. My purpose here is to discuss the hidden complexity of company performance where all of the stake holders interests need to be in balance.
If you are a manager remembering the real complexity of a businesses purpose will help you make better and longer term decisions. If you are in investor knowing this will help you better judge the potential success of a company. Companies that balance their 4 stake holders may not deliver the spectacular short term returns, but they will almost always deliver a better return over the longer term.
And for goodness sake, please realise that share price is not a good measure of company value. If you want to gauge the true shareholder value created, it is the profit compared to the resources it uses. You can and should get more complex than that but you will often be in a better position than using the share price, particularly if the company has a lot of hype around it.
Wednesday, December 5. 2007
This is not a topic I would write very often, but last night I downloaded the latest update for the Xbox360. I am not a heavy gamer, and a major reason for the 360 was the ability to stream media. Getting music from my PC to my lounge room and being able to more easily show photos from the digital camera were a huge plus. Also I could use my PC as a PVR via the 360 as well. All this in conjunction with the ability for the kids (the big one as well) to play some games made it a good buy.
The disappointment was with the lack of codec support on the video streaming. Once I had everything set up I found I was only able to stream Windows Media Video (WMV) files. The shows I downloaded from iTunes, the web videos that were mostly in a DivX or similar format, were all unable to be streamed. My plan of ingesting some of my more popular DVD's, like the one's the kids watch ad-nauseum, into my PC to stream them (no more unreadable disks due to extreme peanut butter contamination) was also looking unlikely.
Microsoft made their system a whole lot more usable to me when the latest update included extended codec support for DivX, MP4 and H264. Almost all my content now plays on the Xbox and I trialed a burn of my daughters favorite DVD using an Xvid based program and that worked a treat. She doesn't care that I downed the quality a bit to save space. It was a great improvement to a product I already owned that didn't cost me anything.
I can understand why Microsoft did not include this originally, to include a DivX codec you need to pay a license fee. On top of this MS is a very anti-piracy company, and a large use of Xvid (the open source copy of DivX) is for pirated content. In the end they listened to the extreme demand for this support and I am sure they will get more sales from this.
The only thing that stopped it being perfect was that the media center extender that I had been using would not allow the extra content to display. I had to install MP11 and use its sharing function. I now have to go into Media Center extender to play music and photos, and MP11 share to play video's. This is a minor quibble though.
Wednesday, November 28. 2007
I posted in September about SCO's attempt to avoid paying Novell by declaring bankruptcy. During that time they have acknowledged that there is a ruling which says they owe money (which they intend to appeal) but that money is all spent, so Novell cannot be considered a creditor. They also tried to sell off the assets and liabilities to a stalking horse private equity firm, which has since been quashed.
SCO has now been told that they must return to Utah to face the music. The lawsuit they raised against Novell was dismissed some time ago, but the countersuit by Novell was found against SCO. The ruling had been given, but the amount had not been decided before a carefully timed bankruptcy filing halted proceedings. SCO was using bankruptcy law to prevent Novell from proceeding to award, and to avoid having to list them as a creditor.
The asset sale they tried to perform was squashed after every interested party in the SCO bankruptcy case objected vehemently, and now the bunkruptcy judge has ruled that the award part of the Utah trial must go ahead so the amount they owe to Novell can be included in discussions there.
This is a killing blow for SCO. Even though they have declared bankruptcy they are solvent. The only reason i can see why they declared was to prevent the Utah courts coming to an award decision in that trial. Their desperate gambit appears to have failed. The award from the Novell trial will likely be greater than their current assets, effectively killing them. Even though they have a chance to appeal the decision, SCO is bleeding money and would be unlikely to last very long.
Once this award has been decided this will all come back to Delaware. I would not be surprised if at that point the administrator doesn't move to close SCO down and for the court to sieze and sell the assets to be returned to debtors. It is highly unlikely that there will be anything left at the end of this to return to shareholders. I don't feel bad for the opportunists who invested in the hope SCO could strong arm IBM into a settlement, but there are people working at SCO who have had nothing to do with this strategy and may be losing money they can't really afford to lose.
The executives of the company will get to walk away without much impact. Even if they do feel the occasional pang of guilt they will believe that they were acting in "the best interests of shareholders". meanwhile many people will have lost their jobs at a company that could have still been operating, or saleable as a going concern. I wonder if anyone is running a book on the last trading day for SCO. I'll take $10 on April 1 just for the potential irony.
Wednesday, November 21. 2007
There are almost as many different views on what a leader is as there are people, and every culture has different ideals that they look for in a leader. There is no set rulebook that can tell you how to be a leader and the amount of contradictory books on leadership can tell you that there are many approaches that can deliver a measure of success.
My attention was brought to this topic from reading a post from Jason Calacanis on his "community CEO" style of managing. This was in response to a poorly thought out piece on CenterNetworks criticizing Jason for this style. Now Allen Stern is not wrong because Jason is right, he is wrong because his argument is poor. He gives two reasons that the community CEO method is bad; The staff and the customers lose faith in the leader. For both he delivers no coherent argument to back up those claims, only conjecture with no factual backing.
If you are the leader of the ship, be the leader. And the CEO is the leader.
This is not true of leadership today. Leadership is not only hard to define, it is constantly evolving as the focus and complexity of business evolves. There are also differences in style dictated by market, product, customer segment and location, to mention just a few factors. One very clear trend for leaders today is that pronouncements from on high delivered with positional authority are becoming less effective and less trusted. Leaders are expected to engage more with their staff, customers and business partners to understand their needs and ideas. Now this is contradictory to the position put forward by Mr Stern, but can be backed up by actual research. In a 5 year research study by CCL, they found some interesting changes in the requirements of leaders.
Asking leaders to focus more energy on creating an environment where others can help them succeed is another important trend. This becomes apparent when comparing the individual skills deemed most important in 2002 with those expected to be important two years in the future. Participative management, building
When examining an organization’s approach to leadership from the past to the future, we see movement from more individual approaches (i.e., leadership as a position) to those that are more collective (i.e., leadership as a process). Specifically,
In this sense, Jason is doing some very clever things in managing his company. In engaging with his customers and his staff he gets more information about what is truly going on in his company. This is invaluable information that he cannot get without asking, and information that helps him to make better decisions if used properly. He also engages people in a dialog about Mahalo. This engenders a feeling of belonging and of goodwill in those who contribute. People like to have people ask their opinion and actually listen.
In the end it is the performance of the leader that will generate trust. While there are positives to engaging staff and customers, there is a balance to be achieved. If taken to excess it can distract a leader and hinder their focus and decision making. A fortune 100 CEO has large teams to interact with customers and staff and summarise the results. As the leader of a smaller company Jason has luxury to perform this interaction personally. I have not worked with Jason, so do not know how good a leader he is. His track record is fairly good though, and there is nothing inherently wrong with how he is conducting himself at Mahalo. I have written about Mahalo before and think there is some definite promise there. Like most things, time will tell.
Wednesday, November 14. 2007
In the second half of his recent posting Robert X. Cringley talks about Google extending the metadata they collect so they can further refine their targetting in advertising, and continuing to increase the platforms they can supply targetted ads for. In a way this is a promising future, we are resigned as a culture to be regularly sold to and an increase in the relevance of the messages we receive makes the imposition easier to take.
I agree with him that this would give Google the potential to be the most valuable company in the world. In my previous article I talked about the flimsy nature of ad dependant revenue models, however this does not apply to Google. Googles business is not ads, it is information and it is that resource which has value. At this time it uses that information to assist advertisers as its predominant source of revenue. The key difference is the level in the chain that they operate, they sell their services to the companies that want to advertise and make those company's spend more effective and cheaper to manage. They offer a product and service that companies wish to pay for. This is radically different from simply offering a billboard location.
This does not mean that Google at this time is worth its share price. Their advertising management business draws revenue, but the valuation of the company is vastly greater than that revenue. In essence many recognise that the value of Google is in the information. While their current business model does not completely exploit that resource, it still has value. It is no revelation that the management of Google are pretty smart and they realise that they need exploit their resources more fully to justify their value. They are doing so in three ways.
1 - They are continually producing new products and looking for ways to derive value from them. With IMAP support and hosted domain email offerings that companies will be willing to pay for, with enterprise search appliances or company website search plugins and with Google Apps potentially becoming a future revenue source. Google are in the enviable position of being able to use their advertising business to supply a revenue stream for these products while they gain a level of acceptance.
2 - Continuing to increase their value by increasing the depth and sophistication of thier metadata. Each new business they enter and each application they create also contribute more information to the pool. Doing so in a controlled way allows Google to further improve their accuracy, and increase the areas in which they can provide relevance.
3 - Using their equity to invest in new business. Even though they do not directly receive money for their value, they can borrow against it, or trade it away for companies or products that can then generate revenue.
Through these methods Google can translate their valuation into value. The strategy is good but the result depends on the execution. Growing competion in the ad provision space threatens their current revenue, sites like facebook looking at managing their own advertising could show others how it can be done. This makes it all the more important that Google can deliver revenue from other products. If Google cannot deliver consistent revenue growth they will lose the enthusiasm from their valuation which will limit their ability to buy. If their revenue declines from advertising or their margins get squeezed it limits their ability to finance their new services through ad revenue. Google's share price is down $100 in the last week(ish). This is partly due to a general tech stock downturn, but the threats to their core revenue's growth plays a part in this.
Back to the increased metadata though, there are two main issues that concern me about Google, or anyone, being able to build a better relevancy filter than they already have. Firstly I have little control over what they use that data for, and current regulations do not offer a level of oversight that increases my confidence. I am happy for the data to exist if it helps people to get me information I might like to have. The flip side is that if the data is not controlled then people have the ability to more effectively spam, con or phish me. Regardless of how good the algrithm is to link ads to terms that are relevant to me, there is little control on who can purchase ads on those terms. The gaurantee of the relevance at this time is to the advertiser not to me. The next big step is relevance both ways, and Google needs to work this out before someone else does.
My second concern is that too much relevance will cause my life to become self refferential. Sometimes ads are useful when they tell you about a product, service or category you hadn't thought of before. I don't go to Digg because they list what I already know about, I go there because they list what other people think is cool. Some of it is not interesting to me, but I find things I would not have come across in my regular travels. Human nature is to defer to what we already know, if we have already solved a problem one way sucessfully, we tend to default to that solution with any problem that even looks the same. Sometimes the unexpected information from left field is what we need to improve. Too much relevance feeds and reinforces our biases. A balance is needed between sorting out the irrelevant and retaining the possibly relevant.
Wednesday, November 7. 2007
The vast majority of new services that have launched in the Web2.0 space depend on advertising fro their revenue. All the major blog sites, social media and services such as Facebook, Digg or Engadget receive no direct revenue from their users. Some services such as SecondLife offer premium content for a subscription, but generally there needs to be a richness of experience or a tangible deliverable to attract direct revenue.
Advertising has long been a stable alternative revenue model. Old media, such as television and radio have been able to survive and thrive purely on this base. This does not directly translate to the Internet medium though. TV and radio advertising has matured over a long period, it knows what it is about, has a good idea of its audience and is relatively expensive. The cost is the most pertinent issue, the expense of a TV spot means that advertising in that medium requires greater thought. This drives both greater quality in the message content, and a greater trust level in the audience.
The difference in price to time slot on television advertising gives a good example of this phenomenon. Take away all factors regarding the product itself and consider the company that is advertising. Are you as a consumer more likely to trust the company with a well produced ad shown in a national prime time slot, or the cheap infomercial playing late at night on the local feed. In the overwhelming majority of cases, the message delivered in the prime time slot will be perceived as more trust worthy. The cost of the spot means that there needs to be a greater return to justify the spend. There becomes a direct correlation between the cost of the ad spot and the chance that the advertiser is reputable.
In the Internet space, ads are cheap and the places to put them are plentiful. Because of the small value per individual impression to a website owner, in most cases it is not feasible to manage advertising contracts directly, this creates the need for the ad buy consolidators. This tactic allows the advertising model to succeed in giving a return to the site hosting the ads, but removes a level of control over what gets shown. This created the vacuum for Google to enter the fray and build a business model on improving the relevance of ads. Using search they are able to link the subject of the ad to the content on the site the advertising appears on, which is better than random.
This does not fix the issue of trust. While there is a greater chance that the product being advertised is related to the viewers interest, there is no accurate method except familiarity to judge the trust of the ad. Even the quality of the ad gives no trust information, a slick ad does not cost much more to produce than a cheap one. There are also techniques to game the system upon which a whole business strategy (SEO) is born. And in the web space the consequences of following an untrustworthy link can be dire, through fraud, trojans and worms, and there is little hope of recourse if you are wronged. If the TV ad is untrustworthy you end up with a crappy product, and the regulators of TV and consumer affairs have power to either address the issue with the supplier or force the ads off the air. If an Internet ad is untrustworthy you could end up with a trojan that records your bank account details and passwords.
The dynamic and unregulated nature of the Internet significantly reduces the chance that any of these issues can be solved. Changing the Internet to reduce this effect is not realistic technically, and would have negative consequences that outweigh the benefits. This leaves an Internet advertising model where ad trust in viewers
- Cannot be enhanced by the brand of the site it appears on
- Only exists where the Brand is already known (which limits the mediums use)
- Is not enhanced by the perceived quality of the ad
- Is further impeded by a potential real cost
Ads from the Digg homepage
This is a screenshot of the ads displayed on the Digg homepage at the time I was writing this article. The context of these ads is probably determined by the stories on the homepage at that stage. I have no reliable method by which to determine if any of these advertisers represent a reliable or trustworthy company. As these ads are all for a similar service, even if I was interested in the product this has actually contributed to my confusion rather than reducing it.
The way in which Internet and TV ads are similar is that it is the content that brings in the viewers, which in turn enables the advertising to be seen. I believe that this creates the illusion that advertising as a business model can be sustained on the Internet.
The whole Internet advertising paradigm appears to be a house of cards. At this stage there is no stable base on which to rely. That does not mean that it is impossible for one to exist, only that it does not exist now. In this environment a company that bases its whole business model on advertising revenue is on shaky ground. To be certain of any future life then there needs to be a direct revenue stream. This direct stream is also required to ensure that there is a stickiness to the site as well, otherwise the fickleness of the average Internet user can see the revenue of a site plummet dramatically. A user is more likely to stay with a service that they are willing to spend their own money for. This has been very evident in Secondlife where dissatisfied users have stayed and complained when Linden Labs have acted outside their desires. The real money they had spent on the site tied them to it in a very real way. It is only zeitgeist that ties me to Digg, and the lack of stickiness makes their future ad revenue uncertain.
Advertisers of quality product and reputable brands recognise this. They are trying to take the same road that old media has taken; towards product placement as a more reliable means of getting the message out. The result is that site owners like my friend Todd at Geek News Central get barraged by email from corporate PR reps trying to get their product mentioned in his blog. Chris Anderson from Wired recently posted a list of PR people that sent him email. And this was only the subset that did not follow his directions of emailing to the relevant sub-editors.
To give me any confidence of their value, web services need to either provide a source of direct revenue, or to have a level of stickiness for their users that would prevent them from leaving. If these do not exist then I consider any revenue they make or claim to be transitory. I would personally value them on a P/E ratio of 1 or less, i.e. their value is equal to their current earnings. Anything greater than that is pure hype.
In trying to research the actual statistics on the effectiveness of web advertising I was unable to penetrate the barrage of SEO promises. I intend to research this in more detail, and maybe create a research project of my own, no promises. There is a huge business opportunity for the company or individual that can fix the problems of web advertising. Whomever cracks it will earn their fortune as it is not an easy problem to fix. In the meantime I will shy away from over optimistic valuations of companies with advertising revenue as their core business model.
Tuesday, October 30. 2007
After my post yesterday on AT&T's kickbacks to Apple where I estimated the kickback to be around $50 a quarter I have come across other people coming to the same conclusion.
A Gizmodo article today talks about another calculation of teh kickback being $18 per month. At $54 per quarter, this is very close to my $50 calculation which leads me to believe that this is right in the ballpark of the actual figure. They also link back to a previous article of theirs I hadn't seen, which calculates the cost of goods for the 8GB iPhone to be around $280. This is not the true cost price, apples cost of sale averages to 25% over COGS, putting the true cost at around $350.
So with this verification and extra information, the profit from a customer that unlocks a phone is aabout $50, while the profit from a customer that signs with AT&T is around $450-$480. If Apple's actions cause them to lose less than 9 sales for every person that goes AT&T instead of unlocking then they come out ahead (financially at least). This doesn't count any lost sales from Brand damage which Apple probably (correctly) assumes will be negligible.
Gizmodo makes a small error in claiming that the data on the kickback was
According to the Financial Accounting Standards Board.... The FASB just made the rules which forced Apple to report its revenue from the iPhone in a certain way. The calculation was done by an analyst from Piper Jaffray as detailed in the NY Times article Gizmodo sources.
Monday, October 29. 2007
It has been common knowledge that Apple must be getting some level of kickback from AT&T for iPhone usage, why else would there be an exclusive deal? This was made 100% certain this week when after having tried to cripple unlockers with their latest code update, Apple took steps to limit resale opportunities for the iPhone by accepting credit card only and limiting puchase to 2 per customer. It is an extreme step to put restrictions on the sale of your product when that is how you make your money. The only reason for doing so is to enable you to make more money.
With Apple estimating that 18% (250K out of 1.4M) of phones purchased are unlocked, if they hit their target of selling 10 million phones within the year, they are trying to not sell 1.8Million units. At the current price Apple may not be making a huge amount of profit on their phones, similar phones sell for around $150 more. However raw profits on high end phones are expected to be higher. Nokia makes an average 22.6% profit on its mobile phones, but higher end phones like the n95 are likely to be closer to 50% or even more. Whatever the real numbers are, I expect that Apple is still making some profit from their $399 price.
To see if I could get some sense of what level of kickback Apple might be getting I turned to Q4 sales data which nicely splits out iPhone revenue. The number here is stated to include accessories and carrier agreements, so kickback proved, but not how much. The numbers on this table suggest that the average revenue per iPhone is only $105. While this doesn't make much sense, we need to look at the more detailed financial statements. On the last page you can see that Apple has deferred revenue across at least the next two financial periods. While the numbers are a bit contaminated by Apple TV figures, my back of the envelope calculations give me an minimum revenue per iPhone of around $525.
To work out what the direct revenue is entails some guesswork. Many 8GB sold for $599 while the rest sold at $399. All of the 4GB sold at $399. A portion of the early purchasers, although probably not all, would have claimed the $100 refund as well. Also taking into account the 18% that never signed to AT&T, my estimate is that the average sell price will probably come to around $475, but to be safe lets call it $500. This suggests that at least $25 per phone sold came from AT&T. While I have no way of knowing the details of the contract, I would presume that AT&T would try and avoid signing bonuses and pay on contract revenue. The iPhone has been on sale for one quarter at the time of these financial statements so this quarters figures contain almost all the payments. The economics trick to calculate a progressive payment over a growing install base is to take half the growth, in this case half the install base, as the base figure. Without going into boring sums, this translates to the actual revenue per phone from AT&T calculating to $50 per phone.
Considering that the average plan price for AT&T is $80 per month, $50 per quarter to Apple does not seem an unfeasible sum, a 20% kickback. This is also a bigger number than the maximum amount of sales Apple could lose by curtailing unlocked phones. Realistically they know they will reduce but not eliminate this, and taking action will keep AT&T on side. Even if they lose 10% of their sales revenue, the 20%+ kickback from AT&T is more valuable.
Now researching this made me wonder why Apple is deferring revenue for the Apple TV? The reason to defer revenue is if you have not delivered the entire product or service, i.e. you have an obligation in the future that is created by the sale. Often a warranty portion of revenue is deferred in order to match it with the cost of that warranty, however the Apple TV has the same warranty as the iPod which does not defer revenue. Another common reason is if the product/service involves a subscription or future service that must be delivered. From the descriptions of the product this is not the case. There is a YouTube access portion that may have a license cost they need to cover, however this didn't start until the end of June and there is deferred revenue for the quarters ending March and June. I have no answer to this, but my curiosity is piqued.
The audited financial statements for the year will probably not be released until the end of December, and those should give a lot more information than the interim quarter results statements do. These may not go to enough detail to achieve certainty about these figures, but I will be looking at these as soon as they come out. I'll update the figures from this post then.
Thursday, October 25. 2007
In case you hadn't seen seen it yet, Apples stock price continued its steady climb to pass $187 per share, which in market capitalisation terms makes it worth around $162 Billion. Unsurprisingly there has been some noise about this in the Apple blogs (iphone-tools, tuaw.com, B&T Wireless) talking mainly about how they are now worth more than IBM and Intel and in fact any other PC maker. This is all well and good, and the analysts are impressed. Mac Daily News even ranks the new analyst target prices, encouraging the support of the $243p/s target price from Bear Stearns. It is always tempting to think of numbers like this as proof of superiority however this actually shows the value of hype over substance.
I should say that I like and use Apple products, and although I wouldn't use an iPhone (here's why) but there is an iTouch and a new MacBook Pro in my future. They make good products (arguably better than IBM) they market well and have great design. They do not have the numbers to make them worth more than IBM and Intel though.
The above table is based on each companies last reported quarter. If we look at the raw numbers of the companies we see that Apple are dwarfed by both Intel and IBM, if we ignore revenue and look just at profit both are more than double Apple's size. While Apple has a larger growth rate for the latest quarter, there would need to be an argument that this rate will be constant over the next 15 years to justify the price.
The mobile phone market is not going to do it, Nokia has quarterly revenues from phone sales of US$8.5B and they get this by having global coverage and hundreds of models in different price brackets. The iPod market is already saturated by Apple. While the PC market will continue to grow for them, Apple has no Enterprise products or penetration and are not geared to compete for the business IT spend.
Looking at a different set of numbers still doesn't show anything that would rate Apple as a $200+ stock. They aren't as heavily leveraged as IBM, but are more reliant on debt than Intel. They have good cash flow at the moment, and there is an investment war chest, but not so huge that it would change the story without looking more deeply into the cash situation (which I will not do here). For a company that makes its money from selling manufactured goods, a P/E ratio of 47.35 is high. Even if you outsource the infrastructure, shifting to follow market trends and launching new product ranges is capital and time intensive, and risky.
I cannot see any good reason to value Apple this highly, hype is great for a company but is always transitory. A single hiccup can remove a lot of exuberance from the market and Apple's market cap will be re-evaluated by its shareholders. While it may look good to some Apple fans for the price to be so high, it puts a great pressure on the management of the company to make no mistakes.
All financial data gathered from SEC filings by the relevant companies sourced from their investor websites.
Monday, October 22. 2007
I was reading the Mashable blog and was drawn to Peter Cashmore's article on internal linking. I myself rarely link to previous articles in my postings, mainly because there seemed to be a negative stigma about blogs that do so. It was good to see the perspective of a much more experienced blogger on how he deals with the issue.
This problem stems in large part from the lack of good statistics coupled with the amount of money that is starting to appear in the blogging space. If we look at the demand side of web advertising, very large amounts of impressions are being recorded, which if even remotely true are a potential windfall of marketing dollars available for blogs to attract.
Without access to the server logs it is not possible to get accurate numbers of how many visitors a site actually has. And with RSS readers it is hard to know whether your subscribers actually read you, or if they more likely only read articles that interest them. In this situation the good marketers will take effectiveness into their own hands. Running small test campaigns that track the actions rather than the 'impressions' allows them to build up a picture of the effectiveness of a blog in reaching people. But this does not help the blogger as they don't see this information.
We then see how Google can be so successful. They can offer a sales method where the payment can be based on an action rather than a nebulous viewing of an ad. They can aggregate demand and still put some context into the ad placement by applying their search capabilities. While this is great for Google though, marketers would be better served in having greater control of their ad placements, and bloggers would be better paid if advertisers dealt more directly with them.
This is not going to happen anytime soon, the technical problems are hard to solve and the vested interests are too great. I'm going to feel more relaxed about linking internally though, but only if there is a point. I posted in August about how unreliable my web-stats were.
Monday, October 15. 2007
I have been getting familiar with Mahalo recently, as the possibilities of moderated search are interesting. Lead by CEO Jason Calacanis the tagline of the site is “We’re here to help”. This sums up completely the appeal of a moderated search engine, having someone to clear out the extraneous sites for me. The other important benefit that can be added by Mahalo is the provision of context for the results of a search. An editor can provide a level of summary about the intent and feel of a discovered site that can not be achieved with robot generated search results.
To analogise this, it is like finding a hotel in a new city you are intending to visit. You could get a copy of the Yellow Pages business directory for the city and look up hotels. A better solution is to get a Lonely Planet style guidebook and find a short list of recommended hotels with a summary of the feel and style as well as the features. The latter method not only makes it easier to make a decision, it also allows you to be more certain about that decision once made.
These key differences dictate to Mahalo the direction they should take to offer most benefit to users, and this is the area that I do not think the team has put enough thought into. While my information on their business plan is limited to what I see in the Mahalo and Calacanis blogs, what I see when I go to the site leads me to my conclusion. Let me talk about where they should be and then look at why they are a little off track. I will do this by looking at the two key benefits of moderated search and where these best fit
Summary of best sites: In most cases not being able to find relevant results in an Internet search is due to specificity. If I cannot produce a descriptive enough search string then I will get too many, mostly useless results, however there may be very good reasons why I can’t. If I am not knowledgeable enough about either the search methodology, or the topic I am searching then searching on the Internet will be either frustrating, fruitless, time consuming or any mix of these. A moderated search can help me here, but the areas where this is likely to be relevant are specific.
To illustrate, if I have just purchased my first SLR camera and want some tips on how to best us it. A Google search turns up 123 Million results. A lot of the results on the first page are probably relevant but not certain. A Mahalo guide by contrast gives me a good set of starting sites categorised so I know which are likely relevant to me.
Context: What the Mahalo photography guide gave me that was more important was context. It groups and labels the results so that I know what to expect from the link before I follow it, and I have a level of confidence in this information because it is the editor, not the site owner that has provided the contextual information. In the how to section I can see an “amateur” label which gives me direction to a beginners site, and in the “sharing communities” section I can see where to see examples of others work.
This directs Mahalo to concentrate towards subjective subjects. If my question has a concrete answer, then a regular search engine will do as well. If, however the answer is relative to my environment, point in time or intent then providing context helps me. This is the more powerful hook of the two advantages of moderated search.
As to why I am uncertain whether Mahalo is capitalising on through looking at their site. If I look at the front page it is dominated with pop culture, current events/people and zeitgeist. These topics have wide coverage with little variation so finding them through alternative means is trivial. For example, if I want to see the video of Andrew Meyer being “tase’d” Mahalo offers no greater relevance or speed to my search than Google, Yahoo, Live, etc.
The front page appears to be determined by popularity of searches, and if so this would match with what the Top 50 search terms show, which is mostly Halo searches. While Mahalo cannot directly control what its users search for, if they are going to succeed it will be if search terms they offer extra value on become more dominant. If Mahalo do their job well and give that value, then the top search terms will change as it attracts the users that derive value.
Jason has stated that his main goal is to work out how to achieve breadth of coverage. My suggestion would be to work out the subject areas and topics where Mahalo offers the most benefit over standard search and concentrate on getting that the best it can be, then expand to further topic areas that make sense. On the site and in Jason’s blog the stated goal is to cover the “top 20,000 search terms”, but popularity of search term is not the prime selection criteria if the goal is to help.
Needless to say I am very interested in how Mahalo develops over the coming months.
Scott Carp on Publishing 2.0 posted a piece on Facebook’s lack of potential as a business application. I agree with his point inasmuch as large corporations are not going to embrace the Facebook service as it stands. The potential of the technology as it stands, and in fact many Web 2.0 technologies, is very high within business. In fact, I would contend that this is a major reason why Microsoft is so interested.
One of the challenges for businesses as they grow is to maintain communication flows within the organisation. It is no wonder that email has become one of the most important applications to most business’, it is the primary tool for communication between staff. I would safely say that every company I work with would like to have better knowledge sharing, which is why Knowledge Management applications are a growth segment of the software market.
A Facebook style interface would work fantastically as a front end to corporate communications and knowledge management.
So the same way that Facebook maps out your social connections, a Facebook style front end could map out your intra-company connections, and could probably be extended into partner organisations. It could provide an easy to use interface on disparate information systems, and this could help to increase the adoption of their use. This type of system also provides a tangible map of the companies information network. The business can also track what type of information is being sought in a better way and increase communication and interaction with line staff.
Even just looking at some of the applications that are available on Facebook at the moment. I’ve stated before that I have yet to see any that I would classify as a ‘killer app’. If I look at their potential in a business context though, the opinion changes. If you are on Facebook, check out one of the many TV show fan applications (e.g. “Addicted to The Simpsons). These apps have tabs for news, forum, quotes, trivia and a home-page. This format would translate fantastically to a product training page. News and forum stay the same, quotes changes to success stories, customer quotes, etc. and the trivia page could easily be reworked to a training page.
Other applications, like some of the Myers Briggs style personality tests could be used to map things like knowledge levels, opinions on products and strategy, or varied things of HR interest across the organisation. The nature of the application allows this data to be easily collated across different networks and groups within the company. Like any knowledge management or communication tool, the results are defendant on the level of adoption, however this is not a unique problem to this style of application. The ease of use, and a few social and/or fun apps being allowed in could help a Facebook style app to have better adoption rates.
In short I can see a clear way that Facebook could be used in a business setting, which is one reason I am confident Microsoft won’t blow any money they spend on them. I briefly thought about how I could build and sell this type of application myself, then realized that Microsoft already have one that is close – Sharepoint. Sharepoint has most of the individual components, but in my opinion is missing the glue that makes it really usable. Could this be why MS are so interested? I would confidently predict a Facebook style front end to Sharepoint in the very near future. If Steve Ballmer has his way, they will build it rather than buy. Even if they don’t use the Facebook code though, a business relationship will be very helpful in negotiating those tricky IP licensing issues.
Wednesday, October 10. 2007
If you are a GNC reader you would have seen Todd's link to this article already, if you haven't and are interested in the music biz it is a great read. It is also a great example of a well put together presentation. Presentation skills are one of the best business skills you can have. Even if you are the most brilliant person in your company, club or society and have the idea that will solve world hunger, without the ability to inform others you will not suceed.
What Ian did really well with this presentation
- Had a simple and well defined message.
- Only included points that built to his message
- Did not include more content than the audience could digest, usually no more than 3 ideas
- Simple slides without exposition that summarised what he was saying
- Graphic examples to highlight particular points
- Could have included a lot more points, but limited himself to the key points that built to his specific conclusion
- Ended with a call to action.
- He knew his audience well and tailored his message to them, including using points that were most likely to get their attention (revenue)
A strong introduction that states the conclusion is the one structural element missing that would ideally be there. The best way to get your main point across is called the 'three tells'. Tell them what you are going to tell them, tell them, then tell them what you told them. Giving the conclusion at the beginning causes the audience to frame their own conclusions in the context of yours. Without this step you lose some control of how your message is interpreted. When you then deliver your conclusion, audience members that have followed your logic to a different end point will feel conflict with your conclusion and devalue your points by association. You can limit this by stating your conclusion at the start.
I wouldn't mark Ian down for missing it in this case though. Part of understanding the rules is knowing when to break them. Considering the conclusion of his presentation (in the bluntest of terms) is "You are a pack of idiots and I don't want to work with you until you come to your senses", stating this up front may have been worse than any logical drift in the audience. If you know your audience well you can build a better presentation.
Some key points when building a presentation
- The three tells
- Start with the conclusion, what is the statement you want your audience to walk away with
- No more than 3 key takeaways, the audience won't remember any more
- Simple slides, as few words as possible, they are meant to highlight the key words not give your audience reading material.
- The right pictures are often better than words
- Throw away anything that does not directly support or build to your conclusion
- Know your audience and include points that are relevant to them
- Do a course, Rogen, Toastmasters, or a variety of others can help you build your skills and point out problems you didn't know you had.
A couple of web resources
Presentation skills on Managementhelp
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