4/23 Random Thoughts

–  Apple is announcing their March 2012 Quarter numbers tomorrow, here are 3 significant numbers that MoD will be tracking:

1. Mac Laptop Numbers – This is purely anecdotal but I know of numerous (US based) individuals holding off purchases for the new MacBook Pros. If Mac growth numbers can be sustained in this new product free quarter, then the growth numbers for Q3/Q4 when the entire lineup should be upgraded (Ivy Bridge processors at the very least) could be significant.
2. iPad ASP – Again purely anecdotal but Apple stores in Chicago only inventory issues since launch have been the the 64GB Verizon LTE. The retina display iPad in conjunction with the vastly improved cellular data access could push the ASP higher with the obvious margin impact as well. Since Apple won’t break out sales by iPad versions, ASP is really the only indicator of product mix.
3. Like everyone the iPhone numbers are going to be fascinating to review. How many iPhones can Apple produce a month and what is the real global market for the iPhone? The Pros and Amateurs who track Apple’s earnings and iPhone numbers have a wide disparity in estimates ranging from 33 million to a high of 44 million.

– WWDC Announcement. Based on historical trends, in order for WWDC to hit the June timeframe previously suggested Apple has about 1 week to announce the event. WWDC is important because Apple should announce iOS 6 during the keynote. And iOS 6 release date will almost certainly be in the same time frame as the iPhone 5 launch. June WWDC could mean a August/September iPhone 5 whereas a July WWDC would mean a September/October release. So all iPhone launch speculation is in a holding pattern until we get a WWDC date.

What Apple Should Do For the Next iPhone Launch

So if Apple launches two sizes of iPad, does the other product juggernaut the iPhone also get two screen sizes?

If MoD was running Apple (and we’re all glad that we’re not), this summer/early fall when the new iPhone lineup is refreshed here’s what we would do.

1. iPhone 4s with Siri dropped to free with contract price. iPhone 4s is a very flexible device in terms of manufacturing margin and carrier support. MoD realizes that it’s year early for this kind of price drop, but it would be a bold move that would likely garner significant carrier support.

2. iPhone 5  with a 3.5 inch screen, completely redesigned with an LTE chip set like the iPad 3. Whole new form factor. Available with contract for $99. Why update the 3.5 inch form factor at all? First, LTE will be a huge issue moving forward in the US market, and will also provide a potential carrier in China Mobile on their TD-LTE network. Second, the updated chip set will also provide the fastest GSM 3G connections throughout Europe and Asia. The screen size 3.5 inch has proved incredibly popular, and redoing it can extend the life of that form factor

3. iPhone 5 with a 4 inch screen. New form factor with the new LTE chip set with enhanced 3G GSM support. This bigger form factor will appeal to a whole subset of users. It will answer the one clear feature advantage of Android and Windows Phone devices. It’s the future flagship phone for Apple for the next 2 years at least.

MoD imagines something like this, two new iPhones using the same form factor, iPhone equivalents of the 11/13 inch MacBook Airs.

Small iPad or Large iPod Touch

There’s been a lot of great chatter this week about the smaller iPad with strong comments from Apple heavy hitters John Gruber, and MG Siegler, and others.  This story has been rattling around for months now.

It was quiet on this front, until John Gruber on his weekly podcast with Dan Benjamin “The Talk Show” indicated that “What I do know is that they have one in the lab. A 7.85 inch iPad that runs at 1024×768. It’s just like the regular iPad shrunk down a bit.”   Now, Gruber was clear to mention that right now the product may never see the light of day.

Now Gruber’s test machine represents the Small iPad part of this discussion. Ever since this idea of a smaller tablet has been active, the key question has been small iPad or big iPod Touch. Gruber indicates that Apple is thinking a small iPad that is the same resolution as the iPad2. This accomplishes one main goal which is no further fragmentation of the iPad lineup with just two resolutions to support. Now, the icons are smaller on the screen as are the controls/virtual keyboard but this size certainly appears to be workable. MG Siegler argues that this smaller iPad would make a great ereader as well as running all the other software of the iPad. This smaller iPad would be comfortable to hold in one hand due to decrease in size and weight. In addition, Apple could produce this device for a sweet price point in the $249 to $299. Placing an iOS branded competitor at the Kindle Fire’s price point.

Now while Gruber is suggesting the smaller iPad, Odi Kosmatos on his blog makes a compelling argument for a 7 inch iPod Touch Maxi. Again to avoid fragmentation and assist developers in supporting a new device, Odi suggests that a 7 inch screen is really just four iPod Touch screens and by making the resolution 1920 x 1280, Apple can use the pixel scaling that they use for the retina displays. This is the same argument for a bigger screen iPhone supporting this resolution. The same argument applies for this device. It’s lighter, will be cheaper, and can be held in one hand comfortably for reading. Odi argues that instead of slightly smaller icon targets like the Small iPad, this device will actually have larger icons than the iPod touch.

So making a giant leaping that Apple will ship such a product, which product is more likely? The beginning of Odi’s argument contains the now famous Job’s quote that folks would need sandpaper to file down their fingers for the smaller screens. Course Apple has frequently denied or even criticized products that they have later created/supported as MG Siegler points out.

Apple could easily do nothing, and continue with the 9.7 inch device only. However, the loyalty impact of getting customers into the Apple ecosystem is not an easy force to ignore. If a cheaper device increases Apple’s sales and increases the Apple halo then Tim Cook has to consider it. Finally, the most compelling argument for such a device is the rationale of be your own cannibal. If you are going to lose iPad sales, then lose those sales to a different sized iPad. There’s room for multiple sizes of devices as the 5 inch Galaxy Tabphone is suggesting.

The most logical option for Apple is the 7.85 inch Mini iPad with a resolution of 1024 x 768 for now, with a future retina resolution version down the road. Once Apple is able to retire the 1024 x 720 resolution specification, Apple can upgrade the iPad Mini and still only support two resolutions support for the iPad. If you think about it, Apple will retire “new” sales of iPad 2 next year when Apple switches to an all retina screen iPad lineup in 2013. Later in the year, Apple could shift the iPad Mini to a retina screen display, and only officially support two resolutions.

Apple to Announce a Monster March 2012 Quarter?

So MoD is far from a financial analyst type guy, but it’s easy to put 2 and 2 together, or put 2 stories together.

Evidence Item 1

Apple due to increased foot traffic volume at their retail stores is allegedly modifying their scheduling rules to increase coverage on Fri/Sat/Sun and increasing the minimum hours for part time employees. If the foot traffic volume has continued to the point of requiring a change in staffing rules, then it seems reasonable to assume that Apple’s stores have continued their amazing numbers in this 1st calendar quarter of 2012. The new iPad has probably boosted that foot traffic.

Evidence Item 2

Cannacord Genuity Analyst Mike Walkley has published a note to investors indicating that the iPhone 4s has been the best selling smartphone the entire quarter on AT&T, Verizon and Sprint. Walkley based on his data believes that the iPhone 4S has been outselling all other smartphones combined on AT&T and Sprint and equal to the volume on Verizon.

So the evidence would indicate that Apple’s momentum is just continuing, what could this mean in terms of reported earnings for the quarter in late April?

Fortune’s Philip Elmer-Dewitt posted his first earnings estimates tracking chart, and right now the Wall Street Pros have Apple at $35.88 billion. The independent analysts like Horace Dediu, Robert Paul Leitao, Daniel Tello, and Andy Zaky  have Apple at $42.68 billion, or a difference of $6.8 billion. If the independent analysts are close to being right, Apple will have had a year over year increase of nearly 72%. For some perspective in  April 2010 Apple announced earnings of $13.5 billion, so Apple could in two years have potentially increased revenue nearly 200% in two years.

How does Apple get close to those numbers according to Horace Dediu?

  • 37 million iPhones
  • 12 million iPads
  • 4.7 million Macs
  • 7 million iPods

So it’s quite possible that Apple’s winter Quarter numbers could come close to matching the sales of their holiday quarter of 2011. Which begs the obvious question of what numbers Apple might hit for the rest of the calendar year.

iPhone (5) March Rumor Roundup

So it’s started, the iPhone 5 rumor chase is on! There may not be a more important product for Apple than this year’s new iPhone. Expectations are high, and Apple’s carrier reach is hitting a high point. Wall Street expects Apple to potentially sell 120+ million iPhones this year.

Some features such as NFC or mobile wallet are dependent upon what’s coming in iOS 6. The biggest issue to be decided is screen real estate. Already this week, we have a rumor of Apple sticking with a 3.5 inch device, and then we have completely different rumors suggesting 4.6 inch or a 4 inch device.

What does the iPad 3 tell us about the upcoming iPhone? The iPad 3 breaks from some conventions of Apple mobile product design. Those dogmatic conventions were thinner, faster, with better battery life. MoD has to wonder if Apple had not pursued the retina display upgrade what would be the possible battery life of an upgraded iPad 2. Did Apple trade a device with 15 or 16 hours battery life for a device that has double the screen resolution? Apple is willing to compromise for a key feature . So far, the screen upgrades looks like a good move, and probably sets the stage for iPad 4 biggest upgrade, a new form factor that is lighter, thinner, with better battery life.

The iPad 3’s cellular chip set and energy efficiency of that chipset would seem to indicate that LTE is given for the next iPhone. The 3.5 inch screen status quo’s best defense/defender is John Gruber with the explanation that increasing the screen size would lead to a different resolution size needed. Supporting multiple resolutions leads to fragmentation and creates the kind of issues that drives developers crazy. So Apple stands pat screen size wise, but overhauls the overall design of the 3.5 inch iPhone and adds LTE which is needed by AT&T and Verizon and for Apple to sign a deal with China Mobile which uses a proprietary TD-LTE standard.

What could Apple do instead? The Verge in the linked article does an excellent job laying out the possibilities. A 4 inch screen could have a resolution of around 1080 x 720 and it would still be a retina display. The Verge indicates that would create 3 different resolutions with one that is not a simple double. The Verge’s best suggestion which corresponds with Apple’s overall strategy is making the resolution 1920 x 1280 (or 1080P HD/Blu-Ray resolution the reported resolution of Samsung’s next Galaxy flagship phone). This new resolution standard is again a simple double of the current retina display on the iPhone so while it’s 3 resolution types the image math is easy for developers. It would be even easier if iOS 6 was limited to iPhone 4 or higher, but with iPhone 3GS still being sold that’s unlikely.

It’s entirely possible Apple has not made a final decision on the form factor of the next iPhone. The rumors indicating no change or a big screen size could both be based on access to prototypes on trial. Apple is probably targeting either a late August or early September launch to get the a full Q4 out of the new phone. With that schedule, it’s possible that a final design decision has not yet been made. Or an iPhone 4 chassis could be used to test new internal components while hiding the new form factor.

If MoD was betting, we’d place our money on a bigger screen iPhone 5 using a 1080p resolution. The resolution Pixels Per Inch is overkill, but does give Apple room to grow. The extra physical space will provide the necessary working space for the battery life needed to provide the kind of working time with LTE that Apple wants. It will allow Apple to provide create a new iPod Touch, and could also be the resolution frame work for a larger iPod Touch/iPad Mini.

Could Apple also release an LTE version (using the new chipset similar to the iPad 3 would seriously extend the bands/standards for the device) of the iPhone 4S? Normally, MoD would say that’s a crazy idea, but at $99 with LTE an iPhone 4″+” would have a definite market in the US. And two TD-LTE devices for China Mobile certainly has some appeal.

AAPL hits $600, iPad (3) hits 3 Million, iPad (3) costs…

So some number topics to discuss.

First, AAPL just hit 600 today fresh off the announcement of a dividend and a repurchase of stock program. The stock shows no signs of slowing down and now that Apple has provided some answers on dispensing of their cash that issue is also resolved. The dividend also opens up AAPL to a whole new class of investor further increasing the interest in AAPL. Dec 31st 2011 AAPL was at 405, now it just went over 600. To quote Tim Cook “the pipeline is full”, new laptops are coming (Retina Screen MacBook Pros?), the new iPhone (5), and perhaps the iTV product.

Apple in their press release stated that they have sold 3 million iPads over the weekend. That number probably represents sales at all retail locations sales and pre-orders delivered on Thursday/Friday/Saturday. In terms of comparison, Apple was projected by analysts to have sold 1 million iPad 2 last year. Apple’s supply and manufacturing teams were ready for this launch with the kind of inventory numbers that were not available last year. In addition, Apple’s launching in more countries faster than ever with their best equipped/most standards compliant 3g/4g/LTE device ever. Apple was only able to sell slightly over 4 million iPads last year in their product version transition quarter. If Tim Cook has the supply chain able to ramp up quickly to provide significant inventory, it bodes well for Apple’s numbers all year long with a calendar full of potential new launches.

A couple of small notes. One, at the two Apple Stores I visited the stores had inventory save for 64GB LTE versions, or Apple’s highest margin product. Two, 4G LTE versions seems to be far more popular than their previous 3G counterparts. Still, not as popular as the WiFi only version but it looks like the percentage is narrowing and there’s significant margin/revenue there for Apple as well as making Apple very popular with Verizon and AT&T. Also, the rumors sourced from repair facilities receiving spare parts of the new iPad were all on target. When all the hype starts around the iPhone 5, this will be MoD’s benchmark for tracking this rumor. Also, as we have speculated before the supply chain for the iPhone may be so massive that Apple will really has no chance of unveiling a legit surprise. And it doesn’t need to, it’s far more important that Apple has 20 to 30 million iPhone 5s ready in the pipeline at launch.

So how did Apple add a Retina display, better camera, bigger battery, and better processor. iSuppli has done their usual thorough job at estimating the cost of the device and estimates that Apple is going to take a margin hit on the new device since it will cost 30% more than the iPad 2. The older iPad 2 WiFi according to their projections cost $245 while the new iPad 16 GB WiFi is $316. While it’s understandable that the new screen is going to cost Apple more, you have to wonder if iSuppli can accurately project what Apple is paying for solid state storage or what Apple is paying for the 5 MP camera parts (same camera part as the now 2 year old iPhone 4). And if the Retina display and LTE lead to a higher mix of 32 GB + models with LTE, then Apple can easily offset the costs with the higher margin versions.

Now, if we take the iSuppli data at face value, it presents a bigger problem for Apple’s competitors. Apple has better component buying power than any competitor save for Samsung, so hitting a lower price point on a similar equipped retina screen iPad is going to be difficult. But let’s say that for arguments sake a competitor can match Apple’s price point, same hardware overall specs. In order to have a significantly cheaper product than Apple, the competitor would probably need a $399 price point matching the iPad 2 price with higher specs to really dent Apple on price. Factoring in retail markup of about 10%, a manufacturer is going to have to survive on about 40 bucks or 10% margin on the product. Again, no one has been able to match Apple’s pricing on components to date (last year’s XOOM was more expensive than the iPad2 according to iSuppli), and the new display requirements may only increase that gap.

iPad Resolutionary Event Recap

It’s funny reading some of the comments about the event today. So many writers/tech bloggers completely missing the point of the event and Apple’s overall strategy.  So what should they be talking about?

1. Doubling the screen resolution while holding the line on price is absurd. According to iSuppli for the iPad 2 the screen is almost 38% of the total cost of the iPad 2. So for Apple to have “innovated” in their production and supply chain to source this new screen and not increase price is amazing. Sarcasm intended. If Apple is able to move the MacBook Pros to Retina type screens at the same price, media members would be going crazy with praise.

Tech folks should NOT underestimate the impact of this new screen. This screen update is equal to a brand new form factor design with a brand new operating system. It’s that big a selling point.

Also, Apple’s main competitors are all spec followers/spec junkies. Other than maybe Samsung, the competitors are going to have a incredibly hard time matching $499 with no contract and a Retina Display. It’s also going to be a problem for Windows tablets, but more on that later

2. The new iPad’s WLAN/Cellular data chipset with support for almost every communication standard is a clear sign of the capabilities of the upcoming iPhone 5. It will have LTE in the US. It will support every version of 3g GSM in Europe and elsewhere. The new iPhone could support T-Mobile if an agreement can be reached. It will support powerhouse carrier China Mobile’s proprietary LTE/CDMA standards. Basically, Android will have no carrier safe havens any longer. Both LTE and the new chipset are getting a test run in the new iPad before the global iPhone 5 launch.

3. iOS 6 was never mentioned once. It’s out there. It’s in development. Apple is a dual headed monster of hardware and software. We just got the hardware part. The software part is coming.

4. He’s not Steve, but in his own way Tim Cook did an excellent job handling the event today. Apple is featuring more of key executives like Eddy Cue, but Cook handled the bulk of the event.

5. Android tablets have to little to no momentum right now. Apple just moved the benchmark in hardware, and the tablet software market is only becoming more and more dominated by Apple.  Android tablets manufacturers seem to still be hoping that the carriers can sell devices with contracts. The tablet market though is very different than the smartphone market.

6. Apple probably has 6 months of free reign until the first Windows 8 ARM based tablets are released with Metro based (tablet/touchscreen) apps. Windows 8 tablets seem like the only thing that can stop the iPad juggernaut. We still have not seen a single estimated price of a 10 inch ARM or Intel tablet (and I suspect the Intel versions will be more expensive with perhaps worse battery life). Still the MS brand and MS Office are familiar safe places for corporations and could slow iPad adoption in the enterprise.

7. Horace Dediu on his podcast today talking about the keynote made an interesting suggestion. Rather than the alleged 7 inch device being an iPad Mini, it will be an iPod Touch HD or XL. The iPad will always be 9.7 inches/10 inches. But Apple to counter the cheaper small market, will instead market a new expanded iPod Touch. It will run iPhone not iPad apps. If Apple increases the screen size on the iPhone 5, then Apple will need to figure out a second resolution/size for iPhone apps, perhaps Apple can figure out to support a 3rd screen size/resolution as well. A $299 iPod Touch HD along with bigger screen regular iPod Touch (mirroring the screen format of the new iPhone)  at $199 would place great pressure at the low end. With the older generation iPad working as a $399 barrier at the other end. Seems unlikely, but Apple did not update the iPod Touch at all last year so Apple could take the product in a radical change of direction.