Realtosh

Apple to Open 50 More Stores - Let's Be Careful, Steve

The writer's concerns are valid, but he couldn't be more wrong. The UWS store will not be the last store Apple opens in Manhattan. The Fifth Ave store is the highest revenue store in the arguably most profitable retail chain in history.

The possible lost revenue at the Fifth Ave and other NY stores (SoHo, 14th) from opening yet another retail spot on the island are likely more than compensated for by recovered lost opportunity business from the other stores being so busy. It is nearly impossible to get a same-day Genius Bar appointment, even if your device (eg iPhone) is dead as a door nail. Next available appointments are usually days out, about a week when I recently checked.

Apple fills all of their stores and all stores add incrementally to both revenue and profit. When that changes or even slows down, then Apple should slow down their expansion.

However, their retail build-out has already been so slow and deliberate, that they are in no danger of over building. If anything, they are losing $$Billions$$ in lost potential sales by not building faster. And I do not recommend that they build faster recklessly. I'm just saying that they are in no danger of even approaching saturation of the market (even in New York) and don't have to consider slowing down their expansion. They are already extremely deliberate and make sure every new opening is properly planned and well executed for long-term success.

Apple has the infrastructure in place to plan, develop, train, and open 50 or so stores a year with phenomenal success rates. I would expect them to open up a number of stores on the higher end of that 20-50 stores range in 2010.

Apple has very far to go before beginning to saturate the market, especially internationally. Apple's process is already deliberate, which is evident by the success. They already take the writer's concerns into account. Further his worries couldn't be farther off the mark. On the contrary Apple is leaving a lot of revenue on the table by being so deliberate. Making sure that every store is well planned, developed, trained and successful for the long-haul; limits the rate of openings and the absolute total number of stores. With Apple's process they will never be in a position to have to worry about the writer's concerns.

Amazon, Rhapsody Gain in Digital Music Market ; iTunes Still Top Dog

Check out Realtosh analysis on the Ipsos digital music service surveys at realtosh.com.

Jonathan Ive: More Valuable to Apple than Steve Jobs?

"Jonathan Ive should be the next CEO of Apple."

Jon would be the worst CEO for Apple. Jon is a designer, not a chief executive. Jon wouldn't want to waste his time managing people and operations, apart from his design teams. Taking Jon out of design would be the worst thing Apple could do.

Apple would run better with Jon heading design and with me as CEO, and I've never run anything bigger than $50m.

Jon loves what he does. i can't imagine he would ever leave Apple. He has the best designer's job in the world. I can't imagine he woulf ever give that up, even o run the shop. That wold just be o below his skill set.

Apple's New iPhone Applications No Threat to RIM's BlackBerry

RIM unit growth will continue for a while. But the rate of growth will slow over time. Most large corporations that are going to get Blackberry systems already have them. The cost of the BES systems make them accessible only to the largest of corporations. Any other business, that must watch the bottom line, installing a BlackBerry server is just out of the question. Those other individuals and companies that have gotten their BlackBerry service from cellular providers are easier targets for the iPhone.

On the consumer and small business fronts, the iPhone is just a better solution and will continue to make inroads in those markets faster and sooner. The iPhone will choke off much of RIM's growth in the consumer space, that the Pearl was designed for.

With the support of ActiveSync, the iPhone will consolidate the smartphone/email space in a way that Mobile Windows devices have been unable to do. Further the iPhone will prevent RIM from consolidating the push email space. RIM will now have to battle Apple in that space. That is a threat in anyone's book; so what is the author of this blog smoking anyway?

Notice that this article was unsigned. At best it was just link-bait, and at worst troll-bait, which is less than I would have expected from Seeing Alpha. I guess they're just after the clicks like every other site out there. Oh well. So much for thinking that SA was any better than any other site. Very very weak analysis.

Will Netflix Survive iTunes Movies?

Your analysis is spot on. It is essential that Netflix rethink their business model this year.

Netflix' greatest asset is also its' greatest weakness. Netflix has an impressive collection of DVDs accumulated over the years. As the party moves away from DVDs and onto the net, they will lose their built-in advantage. As iTunes, and possibly other online competitors, fills in their catalog, there will be shift to online distribution. Netflix’ titles will be in an older static non-HD technology, where on line downloads can adapt more easily.

iTunes will have 2 competitive advantages. These are at both ends of the movie demand curve. First, when a movie first comes out, everyone with an AppleTV can download it the very first day. No running down to Blockbuster and having all copies checked out already or waiting for Netflix to get around to sending you a copy weeks later once the new release demand for that particular title has died down.

Second, online distribution is also ideally suited to fulfill the long tail of demand for low-volume niche movies in many genres. Netflix was able to exploit this advantage against Blockbuster and other bricks and mortar DVD rental shops, who were unable to stock as many titles as Netflix’ central distribution. iTunes can use the online advantage to outflank Netflix, as can any other online distributor with the resources and resolve to assemble a collection to rival Netflix’ DVD collection. The beauty of online distribution is that as soon as a digital copy of a title is catalogued, you have unlimited copies of that title to rent or sell forever. No lost disks, no damaged disks.

I agree that the cost of set-top boxes is a barrier to consumer adoption of online services. The advantage that the AppleTV has in this overcoming this barrier is that AppleTV also ties into the iTunes/Mac ecosystem. It not only allows movies-on-demand, it does so without the $50 a month or so cable/ satellite bill. $600 a year buys or rents a lot of content.

AppleTV deals with your ease of use concern. Not only will you be able to push a virtual button and watch a movie in minutes as you suggest is important, but you’ll also have easy access to the Apple/ iTunes ecosystem. The AppleTV functions as the iPod connection for the home stereo and TV for their iTunes collection of music, music videos, TV shows, movies, podcasts, and for their photos in iPhoto and flickr, plus access to YouTube and other internet services that will be added over time.

I disagree that the entire movie needs to download in minutes. I do believe that for the movie-on-demand consumer, the movie needs to start playing in minutes and be able to play uninterrupted until end, except for any user-initiated potty break or snack run. Constant interruptions to allow for movie downloading and buffering will adversely impact the quality of the experience, and therefore reduce uptake of the service. With the increasing penetration of broadband, including fiber direct to consumer, this concern will diminish over time.

In addition, with 30 day downloads, some people will download movies in advance for viewing later after dinner, or even download overnight in advance to have movies available for weekend viewing. No need to worry if Blockbuster will have the movie available on busy Friday and Saturday nights. Also, no need to worry about the availability of the next Netflix movie in the queue, or the timing of the postal delivery of the physical DVD.


The rate of uptake of online service vs the Netflix delivery model will be affected by the cost of service and the availability of movies. At the moment, Netflix has the cost advantage vs iTunes for households who consume a large number of titles on a constant basis. They also have the long tail variety of title advantage at this moment. Both of these advantages can disappear when an online distributor, such as iTunes, builds their online catalog and offer a subscription service respectively.

Blockbuster Total Access has similar characteristics to the Netflix subscription model, plus integrates with the bricks and mortar stores to adds bonuses. This battle between the two has led to a price war which gives these subscription services the price advantage but also cuts away most of the profit.

Netflix will be around for a while, but your prediction of 5 more years of substantive growth is overly optimistic, unless as you say, they rethink their business model this year. Apple is monetizing the their community by offering additional services to their installed base. Netflix is failing to do so by not building, on top of their dead-end low-profit commodity business, a community serviced by new original content created to differentiate their brand.

Once, Netflix and Blockbuster move to online distribution, there will be a new level playing field. Each will have little or no advantage naturally arising from a consumer’s experience with the respective entity previous distribution business model. However, users of Apple technology will have an ecosystem of which AppleTV is but one part of the whole.

There is a lot more stickiness to Apple’s business model than that of either Netflix or Blockbuster. I would not own either stock right now. Tower Records had at least as good a customer experience as either of two. It is now a relic of the past because it failed to transition to the net. On the other hand, Apple is down about 35% from recent highs, even after having just announced a record quarter with historically high revenue, profit and cash flow, and with margins that are tending higher. Further, Apple has four businesses with lots of room for growth for at least the next 2-3 years: Macs, iPods/internet appliances, phones, AppleTV/media distribution.

It would be interesting to see if and when Apple gets into the content creation business to serve their much larger community, as you suggest Netflix do. There have been calls for Apple to start a record label. Jobs already did Pixar. It would not be a stretch to think that he could help Apple get into content creation.

As you can see, I agree with the market and don’t as much value in Netflix as you do unless something changes drastically. I would be looking to someone in a position to do well in the net sphere, like an Apple or an Amazon. Apple is making a lot of money, their products and business models look good, and their prospects for continued growth are solid. And as a value buyer Apple is back at a level that I can justify getting into.

Apple Needs to Execute, No Longer Innovate

And yes, the stock in now a no-brainer. On second thought, don't buy it, so that I'll have more time to accumulate greater amounts of AAPL for myself at lower price points. One thing that is nearly certain is that Apple will continue to grow revenues and profits for at least the next 2-3 years with their current businesses that they need to execute. Imagine what happens when they inevitably will innovate at least 1 more new business within the same 2-3 years.

Apple Needs to Execute, No Longer Innovate

Let's see what Apple can do WITHOUT purchasing Dell.

Apple Needs to Execute, No Longer Innovate

I agree that Apple needs to execute. They’ve been doing a stand up job no maker what the stock market does. I do understand your concern that Apple strengthen its’ current businesses before going and looking for new ones. They’ll never stop innovating, that’s what makes it Apple. I imagine that you’re hoping that they continue to innovate within their current business segments.

I wonder how you feel about Apple growing and innovating in one particular area – selling to business. Don’t you think that Apple can do a lot of internal organic growth with the $18B in cash on its' balance sheets?

Last month you mentioned the possible acquisition of Dell. It would be a game changer. After digesting Dell, Apple would change the market share game permanently in one swoop - which is probably what you're suggesting. There would be much press coverage and the IB fees involved would be out of this world.

But does it make sense to purchase all of Dell, only to have to shut down many divisions? Even though Dell was worth 50% more 2 years ago, it was still valued at $45B this morning, and trading up all day. Apple has little need to continue producing low-end boxes that contribute nothing to earnings.

Apple and Google are the desirable companies to work for in Silicon Valley. With so many struggling hardware and software companies, some folks likely worry about the long-term prospects of their current employer and/or of their jobs. All Apple need do is hang a Hiring Talented and Experienced Account Reps sign. Apple would get quite a number of interested individuals and possibly teams, especially if they can show they are truly committed to the Business market. Purchasing Dell would show commitment, but doing so is so costly. Surely, there must be some other way to curry favor among their future hires – experienced account reps.

With $18B in cold cash couldn't Apple buy into the channel? There must some way to acquire and/or set up an infrastructure to sell to and service business clients. Smaller, more strategic acquisitions together with internal growth of call centers, distribution centers, and service organization makes more sense. Combined with raiding the staff of other business software and hardware vendors, Apple could create a formidable organization for a fraction of the almost $50B required to acquire Dell, with none of the baggage either.

Spending so much in such an acquisition would have its’ benefits but seems not the most efficient use of funds. Consider that much of Dell’s market share is low-cost, low-profit sales. Dell had net income of $2.5B per year in the most recent quarterly report (3Q08). Apple has over $1.5B in net earnings and over $3B in cash flow in the Dec’07 quarter alone. Cash flow figures give us some visibility on apple’s actual performance; now that Apple hides so much of their revenue and earnings (iPhone, AppleTV) in 24 month installments.

Dell is probably the single largest payer of fees to Microsoft, or close to it. Trying to change that overnight would incur that wrath of the very customers that the Dell acquisition would justify. Alternatively, keeping the Microsoft payment spigot on is not at all strategic for Apple either. Customers would move to Apple more willingly if it were their own decision to do so. Forcing so many customers to make the move en masse to Apple, would create opportunities for HP and others, who would not share in the cost of the Dell acquisition.

So creating the infrastructure to sell to business will take a lot of work. It certainly wouldn’t be easy. But it is both possible and much cheaper than buying Dell. This way Apple could focus their effort on the most profitable segments of the market and cherry-pick the best products to offer and the best customer types to pursue.

Plus growing into the business market through internal organic growth is more consistent with your concern that Apple not over-extend itself. Apple can continue to serve the business market by working up from small to mid sized businesses served out of the Apple Stores. Apple can grow this organization and handle increasingly larger businesses profitably. Apple already has experience with some quite large education contracts. let's see what they can do with purchasing Dell.