Microsoft Surface vs Apple: DATA – Make your own analysis

Microsoft has introduced its new Surface Pro 3 computer, billed as both a tablet and a laptop. Naturally, they promoted it as the greatest thing, both at the announcement event, and on their website.

Screen Shot 2014-05-23 at 1.49.50 PM

There, under the selection Surface Pro 3 vs. MacBook Pro, they do a comparison with the MacBook Pro. For those who think that comparing the Surface Pro 3 to a MBP is stretching things a bit, below is a list of comparison figures for you to contemplate. Meanwhile, others say that SP3 is really targeting the MacBook Air ( amore reasonable comparison in my view. At Seeking Alpha, Quoth the Raven has a reasonable analysis, although I think he should to examine the real comparison data here.

[click to enlarge]

Screen Shot 2014-05-23 at 7.48.06 AM  Notes:

  1. Processor – I am asserting that Apple’s A7 64-bit SoC is roughly equivalent to the Core i3 in the low end surface. Geekbench data below more or less corroborate that, and the Anand tech graphics data indicates the A7 may have a significant edge.
  2. Graphics Processors (GPUs) are built into the Intel chips. Microsoft did not provide detailed specs with its news release, so real comparisons are impossible to make. Just learned the i5 model is the i5-4300U model with HD 4400 GPU running at 2.5Gz. this is similar to the previous model, so I do not expect the benchmarks to increase significantly.
  3. Prices are rounded up $1 or less to nearest multiple of 10.
  4. Keyboard for the Surface 3 costs $130. A similar keyboard, Logitech Ultrathin Bluetooth for iPad Air costs $70 on Amazon. (Weight = 330 g)
  5. Memory – On the MacBooks, I have included both RAM and SSD (RAM based drive) sizes. On most configurations listed, the RAM can be increased as a build to order option.
  6. Weight – I list here the weight both alone and with the keyboard

Unfortunately there is no way of making an objective comparison Continue reading

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Apple IWatch: What Will It Cost?

26 March, 2014

© 2014 J. M. Manness

The beauty of Apple’s (AAPL), from an investor’s point of view, is that they have, over the last fourteen years created new gadgets that have each become almost a necessity in our lives. For over a year now we have been hearing rumors of a forthcoming iWatch. We hear rumors of sapphire displays, curved displays, biometrics, health sensors, and more. While evidence mounts for some of these rumors, we are all unsure as to what it will bring, if it comes at all. For the investor, however, the specific features are less important than what this new product will contribute to the bottom line. In this article I will analyze what we can expect from price points. In a companion article I will see if we can come up with some idea as to the market for such a device. Samsung (OTC:SSNLF) has recently released its smartwatch, the Galaxy Gear that runs the Android operating system by Google (GOOG). It has a price of $299, which seems like a reasonable price to expect from Apple. Apple is famous for their high margins so let’s see if Apple can match that price given the margins they want. To do so, I have used the build of materials costs as estimated by IHS. The table shows the IHS figures for the iPhone 5s, and my estimates for correlating costs for the new iWatch. iWatch-cost-analysis

 A line by line discussion of the cost structure is given in a separate post.

Processor – A8w

One thing that should be discussed is the processor. I believe that a new processor is being developed to going to this product. I am calling it the A8w. The reason for this processor is that they need a processor which is powerful yet small and has very low power consumption. So this will be produced on the new 20 nm chip processing technology. The regular A8 will be for larger products so the A8w will be a much smaller cousin. In particular, the smaller chip Will have greatly reduced graphics processing systems built in. Additionally, it will be beneficial to have the chip running a 64-bit architecture so that Apple will need only one iOS code-base. (it will, of course, be only a subset of the full iOS.) To my mind, this is one very important reason that the iWatch is not yet out. It is waiting for a processor that is capable and power efficient and small enough for the application. This is one thing Apple does well (at least most of the time): note release things before the proper technology is available.

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Bottom line

As you can see, the total projected cost Will be quite a bit less than the iPhone. Figure I come up with is a total BOM cost of just $71. If we want the same gross margin for the iWatch as for the iPhone 5s (16 GB), then it can sell for as little as $249, fifty dollars less than the Galaxy Gear. Of course, this does not including the development costs which must be exorbitant. So perhaps they will stay with $299 anyway. Of course it maybe possible that there are other expenses than I have not anticipated. Still, this seems a reasonable estimate of what it will cost to build the new iWatch.

Conclusion

Apple’s stock price is stalled. Revenue growth has slowed significantly from earlier years, and many investors do not see Apple as a growth stock any longer. While many argue that Apple is undervalued even for current revenues and income, others see a danger of the iCompany losing even more ground to competition, if not in unit sales, then to decreasing margins. New devices are critical to the stock price. Outside of the leadership, no one knows for sure if an iWatch is in the works or not, and if so then what features or price structure it will have. Here I have shown at least that Apple could produce an iWatch at a competitive price and keep its high margins. A follow up post will cover just how many iWatches we could expect to see sold, and how much that would add to revenue.

UPDATE: 25 Oct., 2014

[I have fixed a few typos above.]

This was, of course, early speculation. I was right about a separate processor (yes I originally meant 64-bit since I said it would be the same.) Of course we do not know if this is true until Chipworks pries it open.

I think my cost analysis is reasonable accurate but only for the electronics. The added costs for the housing, etc. will be additional. Still, I think Apple will not be doing badly with their base price of $349, and higher priced models will definitely contribute to the bottom line. Of course this does not account for development costs which assuredly have been astronomical.

The apparent success of Apple Pay may turn out to be a huge driver for the Apple Watch.

===== Related Articles:

Detailed line item description of iWatch costs

Apple’s A8 — What It Will Be And Why It Matters

Apple – Absurd Report Attacks Tim Cook

Preliminary post

In my article for Seeking Alpha, I outline all the fallacies of a recent report by Global Equities that called for the firing of Apple CEO Tim Cook. Virtually every point they made was at best forced, and at worst totally false.

One point that I make is that is is extremely contrived for them to take Apple’s Sept. 2012 high of $702 as the starting point for all analysis. Here I present several charts that illustrate my point. (I feel that these would encumber the SA article that had several other points to make.)

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This is Global Equity’s chart showing 23% fall from 2012 high. But there are several other starting points that make just as much sense. It is very contrived to insist on this as the only one from which to calculate Cook’s “destruction of shareholder value.” According to the report, Cook and Oppenheimer solely responsible responsible for the decline. (I address other issues in my SA article.)

Screen Shot 2014-03-09 at 11.06.50 PM

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Cook’s first day

One very reasonable date to select as a starting point would be the day Cook officially took office as CEO. From Sept. 12, 2011, Apple’s performance shows a different picture. While it still lags the NASDAQ and the S&P, a 40% rise is not so bad. One could make a good argument that this is indeed a much better judge of his performance.

Screen Shot 2014-03-09 at 10.55.29 AM

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Or how about the last twelve months? This is a common time frame.

Here, up 23%, Apple has not performed that badly at all. It still lags the NASDAQ, but beats the S&P.

Screen Shot 2014-03-09 at 11.31.35 AM

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Competitors

Here we see it against some competitors over past 12 months. Not particularly good, but should an investor complain about a 23% rise, especially with a large dividend?

Screen Shot 2014-03-09 at 11.41.36 AM

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Recent low

In this final chart we look at performance from the low point on June 27, 2013. Since then, Apple has actually led the whole pack, beating even Google with about 38% rise in value!

And why not pick the low point? You may argue that this price is contrived, but is it any more contrived than Global Equity’s picking the high point?

Screen Shot 2014-03-09 at 11.43.56 AM

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Caveat Emptor!

My point is simply this.

Charts are very helpful to illustrate a point, and there is nothing inherently wrong in selecting a particular chart to illustrate your point. That is what they are for.

The reader, however, needs to look at a chart and decide for him- or herself 

    • if that chart is a valid representation of reality, or
    • if it is selected solely on the basis of fitting the argument.

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Apple’s Missed Opportunity

The pundits will go on about the initial weekend sales for the new iPhones, but one thing is clear:Apple (NASDAQ: AAPL  ) has missed an opportunity here.

It’s no news that the iPhone 5s is the new flagship model, with a blazingly fast processor, and breakthrough fingerprint sensor. The colorful 5c models have replaced the previous flagship iPhone 5, with only small changes aside from the plastic bodies.

So what’s been missed? Apple stock dropped after the September 9 announcement that the 5c would be priced just $100 below the 5s. Investors had been looking for a drop into the lower price range. Personally, I agree with Apple that the 5c should be priced exactly where it is.

What is missing, however, is the iPhone 4c.

There should have been another model added that would relate to the 4s just as the 5c does to the 5s, priced $100 bellow the 4s, unsubsidized at $350.

Model Unsubsidized Price
 iPhone 5s $650
 iPhone 5c $550
 iPhone 4s $450
 iPhone 4c $350

Source: Apple.com and author’s estimates.

Rationale 
Apple iOS’s main competitor is Android, built by Google. Recently they have pushed their global smartphone market share to almost 80%,  largely by dominating the low end market, a segment that Apple does not care to enter – and rightfully so. However, to drop below 14% looks bad. It makes them appear marginalized. A 4c entry would allow Apple to enter a lower tier, and regain significant share.

Features
The theoretical iPhone 4c would sport these feature changes:

  1. Case: colorful plastic
  2. CPU: A5 chip of 4s
  3. Screen: Revert to pre-retina display resolution (163 ppi)
  4. Memory: Revert to 8 GB
  5. Camera: 6 Megapixel

It’s quite possible that Apple could produce such a device for under $150 in hardware and component costs, which suggests that a $350 iPhone 4c could fetch hardware margins of over 57%. In contrast, IHS iSuppli estimates that the new iPhone 5s costs $199 to build after including manufacturing costs, while the iPhone 5c total is around $173.

Sales
With the strongly reduced feature set, I do not think that the 4c would significantly cannibalize higher priced models. This is seen in the new 5s. Reports have sales of 5s outnumbering 5c by 2.4 to one. It shows that the existence of a lower priced model does not necessarily cannibalize the higher priced one when there is significant differentiation.

Fortune’s Philip Elmer-DeWitt wrote a few weeks ago of Apple’s low end opportunity:

In a note to clients Thursday, RBC’s Amit Daryanani used Strategy Analytics’ market research to estimate what a $300 iPhone 5C might do to Apple’s bottom line…

And he quotes Daryanani:

“From an EPS perspective we believe the Company can add $4.00+ in EPS to our CY14E estimate of $39.74, with a successful launch of an affordable iPhone. On a 12x multiple, this would add roughly $50 to Apple’s stock-price. We believe our ~56M unit estimate is conservative given that it represents 12% of the total low-end Smartphone market.”

Granted, he is talking of a sub $300 price point, so let’s round his 56 million units down to 50 million. Even if there was some cannibalization from the 4s, this would bring in more than $17.5 billion new revenue. . This could potentially add over $4.40 in earnings per share.

Margins

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Some would argue that this would only increase Apple’s woes by further compressing margins. But there are two points to make here. First, the gross margin is significantly lower for the 5, but not horrendously lower. More importantly, $17.5 billion is a large number for incremental revenue, and would go a long way to reducing overhead and operations as a percentage of overall revenue, so it is likely that this would counteract the slightly lower gross margin.

Conclusion
Apple has a great game plan and will probably thrive on its new iPhone product line. Still, it seems to have thrown away a great opportunity to expand its reach into the smartphone culture and bring in millions of new customers. This would reach into the growing share of Google’s Android operating system led by Samsung, and Apple could have done this without sacrificing the quality that they prize so much.

Apple will thrive, but I believe they could have done even better.

Mac sales: Response to Asymco

In Response to Asymco’s excellent post:

When will tablets outsell traditional PCs?

One quantitative  assumption that  you make is the growth rate for Macs to continue at 25%. I believe this is a big sleeper and the rate will increase significantly.

While some of that will come from China, that growth will be partially balanced by lowering growth in the more mature USA and Western Europe consumer markets. However, what is not being factored in here is the growth in the enterprise which was recently reported at 40%. Now, since enterprise was such a small percentage of overall Mac shipments, this growth did little to effect the overall growth. But, if it continues at 40% or higher while the consumer market is leveling, then it will eventually become a significant driver of the Mac growth rate. (Note I am talking here not of sales but of the growth rate of sales.)

I think that this year will be the year in which the Mac really turns the corner in the enterprise. I can see it eventually moving to 40% market share of desktop/laptop computers sold. That would be enormous. Recent Forrester research reports had some extremely telling points. (See below)

The 40% enterprise market share  (i.e. of new sales) I see coming in about 6 years in the US in 8-10 years world wide. The ramp up will be an S curve – gradual for the next two years then much more noticeable (maybe 7%, 12%, 18%, 26%, 34%, 40% share). There really is a sea change happening.

Links:

 

New York Times on Apple Job Growth

The New York Times has published a rather silly article in which they claim that Apple has never contributed any jobs to the economy.

Well – they do not put it exactly that way – but their article practically says it outright.

I will agree with the quote:

… said Gary P. Pisano, a professor of business administration at Harvard Business School. “It’s hard to say the exact size.”

I agree as well that the methods used by the company they hired could be the subject of legitimate debate (as long as that statement is NOT interpreted as an innuendo that someone was dishonest.)

However, the following quote is a bit odd:

David Autor, an economics professor at the Massachusetts Institute of Technology, said via e-mail that the “entire business of claiming ‘direct and indirect’ job creation is disreputable” because most of the workers Apple is taking credit for would have been employed elsewhere in the company’s absence.

They go on to note:

Mr. Cappelli said. “If you say, ‘If there had been no Apple, those people would not have jobs,’ that’s not true.”

Of course it is not true that every single one of those individuals would be jobless, but if there were no Apple and engineer X took a job at HP then there would be some other engineer who would not have a job.

According to the logic provided, then no business anywhere creates any jobs at all. Everybody else would have been working somewhere else. This is – of course – utter foolishness.

I will admit that they do conclude with the statement:

Apple is, however, an innovative company that created a market for tablets and radically increased demand for smartphones.

In reality – the smartphones existing before the iPhone are not today considered smartphone. Additionally, the app business was relatively nonexistent prior to the iPhone, so perhaps they should be credited with ALL the apps developers (snicker).

As for people buying alternative products if Apple did not exist… sure they would be buying Asus and Lenovo computer that are totally designed, engineered, and built in China in factories with absolutely NO oversight at all. And…

They would be running DOS 12.1. (What a pleasant thought.)

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Samsung loses in Australia – FRAND Explained

Samsung loses in Australia – Temporarily

Question: So Apple wins in Australia and Europe but Samsung is also suing in Europe against the new iPhone 4s, aren’t they both stealing from each other? And if so, then what is the point?

 The simple answer is NO, these are not equivalent cases. Whereas Apple is bringing suit on “unencumbered” patents,  Samsung, according  to Florian Mueller,  “largely relies on standards-essential, FRAND-pledged patents against Apple.”  HUH? What is this?

FRAND Explained

To understand the claims and counter claims of these law suits, it is imperative that you understand this one concept. It really is not difficult.  For cell phone systems to work (and other systems as well) there needs to be agreement in advance as to the technicalities of how they all will work, e.g. the electronic protocols by which the phone will communicate with the tower and back again. All these methods of electronic communications involve various inventions by many companies. In order to create one and only one methodology, the companies participate in Standards Committees, which decide on the definition of a particular communications system – the technical details of how it will work. These Standards Committees look over various proposals for a given technology (such as the new fourth generation LTE) and create a set of definitions that all agree on to make the new system work.

 This set of technological  definitions typically uses inventions or Intellectual Property (IP) from several different companies. Obviously, once the standard is implemented (towers are built, communications chips are designed and built) any user will need to license each of the patented technologies that is part of the new system. There is a potential problem here. Theoretically, any single company that has patented technologies could turn around and “hold hostage” any other company that wanted to use the new standard. This would cause chaos in the industry, which would not be good for anyone.

 Therefore, to make sure that this does not happen, the standards committees have a policy. If you own patented technology that you want incorporated into the standard, then you must agree to license that technology, that IP, according to FRAND:

 On a Fair, Reasonable And Non-Discriminatory basis.

 In other words, you cannot gouge one customer just because you do not like them. The technology needs to be licensed to all on an equal footing.

 So, Apple is saying: “You Samsung, have infringed our patents that have to do with totally independent inventions that have nothing to do with any standards agreements,” but Samsung is saying “You Apple are refusing to pay our outlandish, and illegal demands on patents that we have already agreed to license on FRAND terms.” (At least this is Apple’s contention.)

 So, basically, Apple’s contention is that Samsung is trying to use FRAND patents to extort free usage of Apple’s unencumbered patents. Or in Apple’s words:

  • “[The rules of a standard-setting organization] are designed to protect the telecommunications industry from the sort of anticompetitive ambush Samsung has perpetrated here.”

Other Issues

  1. It is important to be aware that there are both design issues and technological issues. Designs are also protected to different degrees in different countries. But these issues are quite different from core technology issues (“Utility Patents” in the U.S.).
  2. The legal technicalities differ in different countries.
  3. There are “fast-track” or preliminary injunction portions of law suits, and also more detailed, though slower to come to court “main proceedings.” Often the request for a preliminary injunction does not include all the infringement claims of the main proceedings.