This article from the New Yorker brings out several good points about how Apple has lost some of its luster over the past months, but is still in good shape on fundamentals, although it did drop to below $400B market cap a few days ago. As we noted in December, Apple was coming under criticism for not being able to scale to demand for the latest iPhone launch and had several other hiccups to deal with, including questionable worker conditions in China and that its principal manufacturer, Foxconn, was rumored to have begun discussions to pick up the slack by investing in new factories in Brazil.
On the other side, Apple was in a bitter legal fight with Samsung, an important supplier and competitor (frienemy), and could not get an injunction to stick after a lengthy lawsuit. A recent ruling in the case reduced damages awarded to Apple from $1.05B to $600M and the appeals process is ongoing. Another cause for concern in our opinion was that Apple had slipped to 6th place in the China mobile segment (the world’s largest and fastest growing major market), where local manufacturers Lenovo and Huawei were eating up share regardless of how much manufacturing was being done by Apple locally. Samsung leads the handset market in China, underscoring another competitive issue – in Korea, Apple is considered the most prestigious handset and it sells very well in the market, while Samsung is considered a premium brand in China due to early and broad Consumer Electronics investments by the Korean conglomerates; Samsung chief among them. China also has affinity with Korea based on the hope they can emulate the incredible economic growth shown by Korea over the last 25 years.
It was looking a little grim, but as noted at the time, Apple’s considerable war chest of almost half a trillion dollars was adequate to stave off short and medium term threats, however, as the above article notes, competitors are closing the gap and have introduced increasingly sophisticated models, most notably Samsung, with its’ Galaxy S line, which is seen as the strongest challenger to Apple’s technical leadership. Samsung’s newest version, the S IV is expected to be introduced this month, and in an example of raising the bar, is rumored to include “eye scrolling” technology.
The Big Picture
Apple has always been in a market crowded with well-funded competitors. Keeping the OS and architecture closed had major implications to the development of Apple, as seen above Apple never gained more than a 10-12% share of the OS market during the 1980-2000 boom of the PC market, which eventually forced them to accept both MS Office and Intel into their products to remain viable and while keeping a stubbornly loyal following for computing devices. It was really when Steve Jobs applied his design genius to a series of personal mobile devices starting with the iPod, which displaced the Sony Walkman, that Apple found a large enough consumer base to really explode onto the scene. iPhone followed with several versions and then the iPad was introduced in 2010 and the rest is history as they say…
The point here is that Apple became the largest technology company by using high-quality, high aesthetic design principles that allowed it to survive in the PC segment and applying them to a new category in the market: coveted personal technology devices that displace Phone, PC, Camera, Voice Recorder, Wristwatch, GPS, Media Player, Personal Planner, and other single use devices/apps combined into a single, small footprint high-tech productivity tool.
While Apple survived the PC Wars, many (including myself), gave them little more than niche player status and came close to counting them out altogether. The current situation is similar in a couple ways as Apple looks forward, but instead of Microsoft and Intel the arch rivals are Google and Samsung. The chart shows how WinTel dominated the PC segment from 1985-2005, squeezing Apple to 10% of the market. Currently, the rise of Mobile Computing brings hundreds of millions of new devices into the market, passing the threshold where Smartphones eclipse PCs in both volume and installed base within the next few years, creating an Android camp and an Apple camp. This has many implications for Apple, a few of which include:
Innovation: Apple needs to continue to innovate at a rapid pace. In the first 20 years of the PC market, consumers accepted a very high churn rate in both hardware and software categories because each generation was substantially more efficient and productive than the previous one. To prevent a backlash from consumers, Apple and other players are going to have to make fundamental improvements like very accurate voice recognition and new visual interfaces, not just new form factors.
Price/Performance: demonstrated Price/Performance increases in the bandwidth, applications availability and usability for less money will drive higher adoption. Again, looking back to lessons in the Personal Computer market, there was a long period of time where $2,000 was what the market expected to pay for a quality PC, and new models came out at a regular pace with faster CPU cycles, larger memory and storage subsystems, expanded OS and App capabilities, while keeping within the price range. This worked for a long time, until the market became too crowded and some vendors, led by Dell, overhauled their cost structure by cutting out the channel, using direct sales and a more tightly integrated and automated supply chain, giving back to the consumer in the form of lower prices - then it was a race to the bottom. Remember when the hot new vendor was eMachines?. The de-facto premium price-point that has been set for iPhones and iPads in the market is ~$700 and to maintain it there will be pressure to continue delivering more for the same price or less, as the slew of competitors undercut Apple’s premium.
Cutthroat Competition: All of these segments are characterized by intense competition, and with Google’s ownership of both Android and Motorola brands, things become even more interesting in the handset segment. As Apple goes it alone against the whole market, similar competitive issues will appear as they did with PCs; many companies adding applications and value to a standard operating system (Android), diffusing the R&D costs among a whole ecosystem of suppliers while Apple concentrates on staying ahead of everyone by themselves. Ensuring a steady flow of high quality finished goods coming from China, concentrated among a relatively small group of suppliers, could also become an issue as trade friction, consumer backlash and other uncontrollable variables come into play in the global supply chain and domestic market.
As Apple looks to expand into Televisions there is a potential to tap into another ~$120B market, however, this is not going to be like the introduction of the iPhone; the market is mature and growing slowly, ironically dampened by the move to Tablet computers and Internet content, with a lot of heavyweight competitors led by #1 vendor in the world - Samsung. And Google is also waiting in the wings. Déjà vu all over again. If Apple can pull a rabbit out they may be able to add enough value to demand a premium in flat screen TVs, but that is going to be much easier said than done, the brand only goes so far when displayed next to a similar product priced 20% less on the Walmart showroom - Apple's retail success is based on a much different formula. No 35% margins here without the same kind of fundamental improvements discussed above; interface improvements, simple but deep integration with other devices and something like a super green carbon footprint on top of the demonstrated product superiority. Maybe.
Again, Apple proved very resilient as a survivor in the PC wars and many underestimated their staying power. The Market Cap remains near $400B and they have room to maneuver, it will just get harder over time, as it does for every company that gets to the top.
Techaisle Blog
A Techaisle survey of 810 SMBs in the US shows that SMBs would ideally like to see Android applications running on Ultrabooks. Nearly 60% of SMBs that use smartphones have Android based smartphones. On an average, a small business has three Android based smartphones and a mid-market business has 26 Android based smartphones. These SMBs have become used to Android apps and would desire to have the same type of capability within Ultrabook.
Similar desire does not exist for iPhone apps because they do feel strongly that iPhone is a closed environment, whereas Android is open-sourced, hence, a higher likelihood of Android apps becoming available on a PC platform.
Anurag Agrawal
Techaisle
This week, Dell unveiled its Ultrabook, XPS 13 featuring an edge-to-edge glass, near “frameless” display, all-day battery life, and the latest innovative technology for a superb overall user experience. Starting at 2.99 lbs and less than a quarter-inch at its thinnest point, the XPS 13 sports the latest Intel technology, such as Rapid Start and Smart Connect, to enable users to be productive, connected and responsive anywhere.
While Dell did not participate in this year’s CES, Dell’s announcementwas a pre-planned set of announcements by Intel’s OEM partners to unveil their new UltraBook PCs, Intel’s response to Apple’s MacBook Air. What made Dell’s announcement stand out was that while the new ultrathin PCs like MacBook Air have generally been targeted at consumers, Dell has added features and functionalities for businesses, including the ability of IT staff to manage the XPS 13 efficiently and effectively. These include features like standard Trusted Platform Module for BitLocker Data Encryption and optional remote and on-site managed services (i.e. ProSupport after-sales service and Configuration Services such as custom imaging and asset tagging) that allow SMBs to proactively manage their IT
devices and applications, avoid downtime and increase their IT infrastructure availability.
Also while, Dell XPS 13’s starting price point is the same as Apple’s MacBook Air, Dell delivers much more at $999 than Apple does at the same price.
The obvious question that arises is why would Dell adapt a (presumably) consumer-focused product launched primarily at a consumer-oriented show, to also meet the needs of businesses? The answer lies in Dell’s increasing focus on the SMB market since the creation of its new SMB Business Unit a few years back. While SMB business lies under the CSMB group (Consumer & SMB), until recently headed by Steve Felice, SMBs’ needs seem to be getting ingrained into Dell’s DNA.
Dell has increased its focus on SMBs on a worldwide basis and this is also being reflected in Techaisle’s SMB tracking studies. In Techaisle’s recentstudy on purchase intention of Ultrabooks, SMBs rated Dell as their number 1 choice for Ultrabooks, even before the products were announced. Techaisle expects that at least 3.6 million Ultrabooks will be purchased by US SMBs in 2012, resulting in 1 in 5 PCs (desktops and laptops) shipped to SMBs. With increased mobility, size and weight of mobile PCs have become important factors for road warriors, who want to be able to work from anywhere and everywhere they go. While Ultrabooks are considered more stylish and cool as compared to other form factors, including tablets, SMBs also value their long battery life, lightweight, built in security features, ability to run Windows 8 and fast boot times.
Techaisle Survey showed that Dell had even a better preferred status for the upper mid-market SMBs, that is, from 250-999 employee size businesses which are less price-sensitive than their smaller counterparts. Additionally, 47 percent of SMBs plan to purchase directly from a manufacturers’ website, which gives Dell an added advantage, given its history of success in selling through the web.
The introduction of Ultrabooks by Dell could not have come at a better time. With increasing mobility among SMB employees, UltraBooks fill in the gap between the lighter (but also somewhat limited in their functionality) tablets and the traditional heavier laptops. Ultrabooks can perform all the tasks (and more) of the traditional laptops but with much greater convenience.
Anurag Agrawal
Techaisle
SMBs are going through a Transformation, moving from a building block IT adoption to Flat IT in a virtual era. And within this Transformation, PC is still important in its role as the center of IT universe. SMBs need only buy a PC to get started. However, the nature and use of PC as the foundational block has changed. There is and will most likely remain only one block. An SMB today can start work immediately with a server that resides in the cloud, use smart phone that provides access to corporate information anytime and anywhere, a CRM application that resides off-premises, a communications infrastructure that is cost effective, a line of business application that is plug-and-play. All enabled by a simple credit card payment system and a PC.
Global SMB spend on IT is expected to be US$426 billion in 2011. PCs and Servers spend, core businesses of Intel, will be US$80 billion, resulting in 120 million PCs (Desktops & Notebooks) and 3.8 million servers. Despite the slowdown SMB market is still a very healthy market that requires focus and attention. Based on surveys in numerous countries, Techaisle finds that “Refresh of PCs and Servers” is among SMB priorities.
It is more important now than ever for Intel to hit harder at an SMB strategy and messaging.
Recognize Growing Influence of Retail
Importance of retail is continuing to increase across many countries as PCs increasingly become commoditized. 65 million PCs, half of total SMB PC shipments, are purchased by
1-20 employee size businesses that usually shop at retail stores. There are 186,818 dealers/retailers globally who derive 58 percent of their revenue from selling PCs. The retail channel is continuing to grow in number, especially in emerging markets. On the other hand there are 242,010 VARs/SIs globally who are increasingly moving into cloud offerings as they find their traditional services model getting threatened. Intel should work with its OEM partners to offer business SKU PCs through retail stores. A few of Intel’s OEM partners such as Dell have begun selling business SKUs through retail stores albeit in some countries. As compared to retail, VAR/SI channel derives 36 percent of their revenues from selling PCs. This only enhances the importance and influence of retail within the SMB segment for PCs. Intel should also open up vPro sales through all channels including retail. Similar to the messaging of i3, i5, i7, “with vPro” and “without vPro” will a good value proposition for SMBs and create a differentiation between SMBs and Consumers. As vPro adoption grows, different types of channels including neighborhood repair shops will have the motivation to jump in to provide remote support and services.
Facilitate Managed Services Adoption
Global SMB remote PC managed services is estimated to be US$1.3 billion in 2011 and will nearly double to US$2.5 billion in 2015. With vPro, Intel has a huge untapped opportunity to target managed services market aggressively. The technology has been around for a while and has had some success within enterprises. Selling vPro-based PCs through the non-retail channel to SMBs is certainly useful but selling through retail and white-box manufacturers will only quicken its adoption. The scenario today is similar to what the PC industry saw twenty years ago. To accelerate the adoption of PCs, Intel built a white-box channel and started shipping motherboards to them. Concerns were raised that the move would cannibalize market for traditional large OEM vendors but over a period of time both
OEM and white-box channels have learnt to co-exist. In fact there are 69,412 system builders across the world. Intel should be able build a similar program for white box assemblers with a focus on managed services using vPro. Large format retail channels could create their own NOCs or partner with other MSPs to offer remote managed support services (Techaisle had written about this happening in 2009, BestBuy purchasing mindShift has now happened). For small format retailers Intel should either create its own datacenter or allow OEM vendors to provide NOCs for remote managed support. Smaller system builders could use the data centers offered by Intel, its distributors or other large vendors for providing managed services to their SMB customers.
A PC Refresh Messaging – Path to Ultrabooks
Ultrabooks is another potential opportunity for Intel to sell into the SMB segment. However, current price point will inhibit adoption forcing Ultrabooks to be used primarily in corner offices and a smattering of traveling executives. If the price-point does not fall below US$800 this new form factor will follow the swift end like the netbook form factor. Ultra-thin aficionados will continue to adopt MacBook Air series. Initial adoption of netbooks had exposed a burning desire among Small Businesses for a low cost, light weight device with an extended battery life. At the same time huge adoption of tablets by SMBs as an additional device strongly suggests a market ripe for ultrabooks. However, a differentiated PC refresh messaging with Ultrabooks as mainstream notebooks PC is needed in the SMB marketplace. Although some may argue that VDI will replace PCs faster than PCs themselves, however, larger adoption of VDI among SMBs although growing in double-digits still too far in the future.
Cloud – Intel’s Small Business AppUp, Boon or Bane?
Among all of the new priorities that SMBs are driving towards, perhaps the one that most impacts the channel and the vendors is the trend towards increasing adoption of SaaS and Cloud Computing. All leading IT vendors – Microsoft, Dell, and IBM are providing a variety of cloud based platform and application services. Complementing them is a whole host of new companies that are aggressively developing solutions for this space. No doubt over the next 5 years cloud based services will be the new arena of intense competition. In
2011, SMB cloud computing spend will be US$11 billion (excluding spend on cloud
communication services). As SMBs transition investments driven by these new priorities, the impact on the channel will likely be significant. The small business AppUp services rolled out by Intel is certainly noble as it makes available best-of-breed cloud enabling technologies available to channel partners that serve small businesses. And it is easy to see why many cloud enabling technology vendors such as StorageCraft, GFI and many others will add their applications to the catalog. It gives them another distribution outlet. But
their continued commitment remains to be seen. However, Intel cannot just remain a Master Distributor, because it will very soon begin competing with its traditional distributors. More importantly, Intel in its effort to provide cloud services to its channels and small businesses is missing out on a very key issue: best-of-breed applications. No doubt the applications being offered are some of the best in the industry but there are too many of the same category. For example, how many backup and recovery applications will Intel offer before it finds that they are creating more confusion than simplicity? Channels
and SMBs will be forced to once again conduct their own research to sign up and use applications. It should not be a race for numbers but a race for best-of-breed. While its OEM partners may like to be part of the strategy initially they will not benefit in the long run. Within the next 2-3 years Intel’s OEM partners will begin to draw and implement their own SMB cloud strategies, most likely leaving behind Intel’s small business AppUp services.
Transition from IT vs. Non-IT
With growing adoption of cloud computing the role of IT has also been changing. Business departments are making procurement decisions independent of IT, similar to BYOD. In fact, Intel should focus its attention on Mobility vs. Non-Mobility or Cloud vs. Non-Cloud and even VDI vs. Non-VDI businesses. In effect, the old segmentation models do not exist anymore as the work from anywhere, anytime culture gets more ingrained within SMBs. Segments should be defined and labeled based on their business objectives.
Finally
Creating an SMB brand distinction is more important now than ever - a brand that delivers empowering technologies to both SMBs and their channel partners and a set of products and solutions that enable an SMB reach its full potential in the shortest period of time. SMBs will continue to invest in on-premise IT infrastructure while experimenting with, or moving selective applications to the cloud and increasing their reliance on MSPs. As SMBs prefer to procure their IT products and services from same channels Intel should evaluate all of its partners’ expertise areas and create symbiotic partnerships among them with Intel as the broker to serve the SMB customers. At the same time Intel should recruit new retail channel partners to advise, train and thereby help its OEM partners.
Anurag Agrawal
Techaisle
